The largest concern when someone wants to hire your law firm is always fees and costs for services. Most people immediately think, “there is absolutely no way I can afford an attorney!” However, if you’re positioned as a solo or small firm practitioner, you can adjust your firm’s fee structure to better serve your ideal clientele. There are three primary ways that solo and small law firms take payments: hourly fees, flat fees, capped fees, and contingent fees. Let’s break these payment options down to see what would work best for your business.
Hourly fees are the most common payment method for small firms. In most cases, it’s hard to determine exactly how long it will take to complete your services. For example, say a client would like your law firm to negotiate a settlement. This could potentially be completed in two hours or two full workdays, depending on the amount of back-and-forth with the opposing side. Or say your client needs a custom contract, which may take four hours to complete or two weeks to make sure all of the contractual language is correct, especially if your client requests extensive edits upon seeing the first draft.
The biggest issue for people when they hire an attorney at an hourly rate is the unknown. How much is your client really supposed to budget for? With the national average for lawyers’ hourly rates around $306 (Clio 2021 Legal Trends Report), legal work can become expensive pretty quickly for your clients. This is also subject to an increase depending on your practice area. For example, immigration lawyers often charge a higher hourly rate than family lawyers. And, if you have more than ten years of experience, you’ll most certainly have a higher hourly rate than a recent law school graduate just entering the workforce.
Obviously, charging hourly rates is almost always the best-case scenario for your firm because it ensures your time spent on client work will be compensated by the minute. The only exception to this is that your earnings will always be capped by your available time. Unfortunately, many legal clients are now looking for attorneys to bundle services together at a flat rate in order to better budget. Thus, it may be worth considering an alternative fee structure.
Flat fees—also known as “fixed fees”—are a great way to position your firm to be more client-centered because it allows for one flat price per project. This is a great option if your firm has specific tasks related to certain projects, such as filing a trademark registration, drafting wills, standard DUI cases, or simple contract drafting. Flat fee costs should be set on the basis of the project, the amount of time needed, your expertise, and how “routine” the legal task is.
There are some drawbacks to flat fee projects. First, you have to be aware of the general time frame it takes to complete certain projects. If you’re an experienced attorney, a flat fee arrangement is a great way to reward your experience; you can charge a flat amount and maximize your time because it likely takes you less time than an inexperienced lawyer to complete the overall project. However, if you’re a newer attorney, it’s difficult to determine what amount the flat fee should be because you’re not accustomed to the work. This could lead to a reduced profit margin, so be sure to adjust your flat fees often under this model until you develop a better sense of how many hours it takes for you to complete an entire project from start to finish.
A capped fee is a way of charging your hourly rate but having the work capped at a predetermined limit. With this fee structure, it’s easier for the client to budget. The client can either pay a set amount of the estimated hours it will take to complete the project (e.g., the client pays 50 percent of the allotted hours up front), or you can simply invoice the client when the project is completed. The main drawback of this pricing structure is that you could thwart the client’s expectations if you aren’t able to complete the project within the number of hours you initially quoted. Clients want and expect you not to charge them more. So, be aware that if you do have to put in extra hours to complete the assignment, you may have to do the work unpaid in order not to have a disappointed client.
Contingency pricing is typically used when representing plaintiffs in litigation. If you are often representing plaintiffs in disputes against insurance companies or bigger businesses, this type of fee structure is worth considering because you can significantly increase your overall revenue beyond that of set hourly fees if you win the case. This is where you take a certain percentage of the monetary settlement or damages your client receives, usually 30 percent to 40 percent.
Obviously, the best way to utilize contingency fees is when the client is unable to pay anything up front but you know you have a solid, legitimate case that may be ripe for a quick settlement. (Be cautious about using contingency fees if you’re a family law attorney; ABA Model Rule of Professional Conduct 1.5(d) prohibits the use of contingency fees for divorce cases where the fee is contingent on securing the divorce or getting an amount of alimony, support, or property).
Clients make the ultimate decision on settlement, so don’t fall prey to setting unrealistic goals in a case. Clients may want to go to trial instead of settle, which means you’d have to put in countless hours of work without pay with the uncertainty of the contingency fee actually “paying off” in the end. Hence, if you decide to go with a contingency agreement with your clients, you should be confident the case will result in a settlement or a court award.
The most important thing to remember as a solo or small firm practitioner is that the type of fee schedule that works best for you may be different than what works best for your colleague down the street. Don’t just do what someone else is doing because they told you it’s a great way to charge clients. Try out a couple of different payment options to find the optimal structure for your specific firm and clientele. To safeguard your business from facing financial hardships, budget a little extra time and overhead expenses into your schedule if you’re planning to take on clients on a flat fee or capped fee structure. Oh, and one last thing: You can and likely will change your fee structure multiple times! That’s the beauty of running your own law firm and figuring out what works best for you.
