Losing Your Shirt, er, Losing Your Fear of Flat Fees

Vol. 3, No. 12

Peter Roberts is a management consultant for lawyers, and is the former practice management advisor in the Law Office Management Assistance Program (LOMAP) of the Washington State Bar Association. He can be reached at 425-418-9771.

 

Flat or fixed fees now demand your attention more than ever for three persuasive reasons: clients’ expectations, the technology in your office, and your ability to prosper.

 

The Reasons

The first reason is that other products and services a client buys are consistently at a fixed price. An oil change, having teeth cleaned, seat on an airplane, someone to mow the lawn, or buying produce and groceries (wherever they come from). Amazon offers free shipping no matter where you are. Ask your clients (or ask yourself) and they will tell you they prefer knowing what something will cost. Bidding prices on the Internet for services and products underscore the mindset of the general public concerning pricing. The “general public” I have in mind are the middle class, lower middle class, and working poor. Offering a fixed price will be well received and preferred to an unknown amount, particularly when the result sought is well defined. An unknown final legal fee that all agree will be in the thousands of dollars is not a pleasant state of affairs, particularly if your client is already nervous about using legal counsel.

The second reason is the technology in a law office means you accomplish research, writing, and communication tasks in less time than in the past. Has the value or importance of these tasks declined as well? I do not think so. If you are particularly facile with technology, you do these tasks in even less time! What is wrong with this picture if your fee agreement is based on an hourly rate? Another question to ask is whether your client is buying your labor, or buying the value or the result or the effect of your work in solving your client’s problem. Think about this dichotomy when you are telling the potential client what she needs done.

The third reason is your prosperity beckons. You possess the incentive to be efficient in accomplishing your tasks because you get to keep the difference between the time value it takes (Yes, you will keep track of your time!) and the fixed price. The ABA Model Rule 1.5 Fees mandates the fees and costs shall not be unreasonable, not that you are not allowed to keep the surplus.

 

The Details

Think carefully about what routine tasks are necessary for your matters. Review prior files within the same practice area to measure variations in the tasks and why. Then consult the Uniform Task Based Management System (www.utbms.com) that describes what a lawyer does. While this helpful resource is meant primarily for consistent electronic billing, I value the code sets as tools to assist with estimating flat fees.

List the tasks and apply a time value and then multiply this time value by your hourly rate to monetize the time. But also add a percentage to this result. Why?  Because you assume the financial risk of completing the matter within the price. That is added value for the client. The percentage also helps protect you from “scope creep.” Scope creep is more work than you estimated but not really a change in the scope of representation. You may have forgotten to include a task. But identifiable major changes in the scope of representation must be described in your fee agreement as necessitating added fees that ideally had been described in dollar terms in the original fee agreement.

I am not advocating a fixed fee for any legal matter regardless of practice area or scope of representation. If the client resists the price by saying another attorney can do the work for less, think about the work and what best meets the goal of the client instead of your own belief of what the client should have. Can the matter be unbundled? Be prepared to turn away this potential client because you cannot do adequate legal work at a loss and make it up on volume. Your reputation is all about doing solid legal work at a fair price that best meets the needs of your clients. Physicians turn away patients. Does this mean they are less of a physician?

 

Keeping Score

First, a time and billing software application is essential for managing your fixed fee arrangements as well as for managing the rest of your practice. Each fixed fee matter is a “bet” that the value of your time will under run the price. You will not under run the price in every matter with a fixed fee. No one bats 1.000 in anything! Free yourself from that expectation because that does not matter.

What matters is that you will win the “bet” in most of your fixed fee matters. In fact, your average success rate should improve over time as you become more experienced with your estimates and more facile with the work. You will realize an effective hourly rate above your nominal hourly rate by running a report that totals all of your fixed fee collections for a time period and dividing that number by the total hours charged to all of those matters.

And remember the percentage you added to the basic time values help reduce the financial impact of the “lost bets.”

What about costs? It is an important decision whether to include costs within the quoted fee or are in addition to the quoted fee. Consult your jurisdiction’s Rules, Opinions, and perhaps inquire of ethics counsel about how to properly account for the costs in either instance. If quoted separately, the amounts typically must be deposited in your trust account. The fee, if unearned, must be deposited in your trust account but your jurisdiction may have another option, as Washington does at RPC 1.5 Fees (f)(2).

What about refunds? You concluded a matter where your time value charged to a fixed fee matter was less than the price by a significant margin yet you accomplished all of the tasks, kept accurate time, and achieved the desired result. Or maybe your client is simply asking for a refund. The answer “depends.” I am not opposed to a refund if the amount of the refund is modest and the circumstances warrant a refund. A refund that is too large tells the client that you overcharged. An argument against a refund is that the client agreed to the fee at the outset, and you assumed some risk of not achieving a successful outcome.  Or perhaps you thought of a strategy or novel approach that deserves an intact fee.

Another consideration is what I call “the refund unbeknownst.” You decide to send a check to the client, described in a cover letter or in your closing letter as a reduction of the fee without providing the client with prior notice of the check. Things went exceedingly well and the client is more than satisfied. Is that client likely to extol you to others? I certainly would!

 

Back To Your Shirt

Losing your shirt? Of course not, as long as you pay attention to the scope of representation, calculate realistic pricing, and have a fee agreement that is explicit about added fees if the scope of representation changes. And your practice will continue to benefit from your hourly rate matters with uncertain scopes of representation, emotion, and opposing parties who have little regard for the cost of litigation to your client.

 

Note

This article was originally published in the June 2014 issue of Law Practice Today. Reprinted with permission.

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