Billable Hours, Money, Small Law Firms, Solo Practitioners

6 Ways To Avoid Paying A Price For Using Fixed Fees

These suggestions may help lawyers contemplating fixed-fee billing get started, or convince those who’ve tried flat fees unsuccessfully to reconsider.

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These days, fixed fees (also known as flat fees) are all the rage in the legal profession. Long employed by solos and smalls for practice areas as diverse as estate planning, business incorporation, trademarks, bankruptcy, and criminal defense, today, flat fees are gaining traction  even with the big boys at Biglaw.

While the benefits of flat-fee billing, including cost certainty, increased efficiency, and administrative simplicity are well documented, there’s not much guidance on how lawyers can implement fixed fees in practice. As a result, many lawyers shy away from fixed-fee billing, fearing that if they charge too little, they’ll be stuck working for free if the case winds up taking more time to resolve than originally anticipated.  Meanwhile, many lawyers who experiment with fixed-fee billing claim that it doesn’t work — largely because they haven’t implemented it in a way that benefits the lawyer as well as the client.

So below are a half-dozen tips to help solo and small-firm lawyers implement fixed-fee billing without paying the price. Though not exhaustive, these suggestions may help lawyers currently contemplating fixed-fee billing get started, or convince those who’ve tried flat fees unsuccessfully to reconsider…

1.  Define the scope of the work that you’ll perform.

Perhaps the most important step in fixed-fee billing is defining the scope of work — specifying in your representation agreement both the services the flat fee covers and those that it doesn’t. So for example, if you’re handling a driving under the influence (DUI) case, you’d state that the fee includes all work related to resolution of the charges up through trial but not any appeals. For a contract drafting or negotiation, you might specify that your fee covers up to three rounds of drafts and review, but that any additional changes would be subject to additional fees.  For practice areas like family law or litigation which are unpredictable, lawyers can break the scope of work up into different phases as described by North Carolina family law attorney Lee Rosen.

2. Don’t confuse fixed fees with capped fees.

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Some lawyers wind up on the short end of the flat fee because they confuse fixed fees with capped fees. As Lawyerist’s Sam Glover describes, a capped fee is one where a lawyer might “offer to bill $200 per hour but no more than $10,000 total.” So if the lawyer bills fewer than 50 hours, he’d be paid the same as if there were not cap — and if he bills for more than 50 hours, he’s essentially working for free. In short, the lawyer never wins.

By contrast, with a true flat fee, the lawyer earns $10,000 whether he spends 10 or 50 or 100 hours to resolve the matter.  Over time, if the lawyer has set fixed fees appropriately, each $10,000 fee that requires 100 hours of work will be offset by five or ten $10,000 fees that can be dispatched in 10 hours. If the lawyer discovers that most of his $10,000 matters take 100 hours to resolve, that doesn’t mean that the fixed fees don’t work, but rather that the fixed fee needs to be increased.

3. Don’t base your pricing model on volume.

Some lawyers also lose out on fixed fees by lowballing prices to beat the competition, figuring they’ll make it up on volume. So a lawyer might charge $750 for a misdemeanor to lure business from the firm down the road that charges $1000 for the same matter. Trouble is, if you set prices so low that you’re not turning a profit, taking dozens of cases won’t fix the problem because dozens of cases at zero dollars still amounts to zero.

Still, since fixed fees makes it easier for clients to compare prices, how can lawyers compete — particularly with non-lawyer services like Legal Zoom which charge bargain basement flat rates? Several ways. First, if you decide to charge more, you can also offer more. With Legal Zoom, that’s not difficult — since clients receive the benefit of lawyer-prepared documents, not to mention the benefits of attorney-client privilege and malpractice coverage. And even when competing with other lawyers, you can provide extras like 24-hour turn-around on documents or a “legal check-up” a year down the line to determine whether the documents you’ve drafted might require updates in light of changed circumstances or new laws.

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4.  Track hours for reimbursable fees.

Many flat fee purists urge lawyers to trash the timesheet, reasoning that time is an irrelevant metric.  While lofty in theory, in practice, failing to track hours even while you charge flat fees can have devastating consequences in matters where your client is eligible for attorneys’ fees. Virtually all courts evaluating claims under fee-shifting statutes require attorneys to document hours spent on the case, and may deny recovery of fees in the absence of time sheets. So hold onto those time sheets at least in matters where you anticipate that your client may be entitled to fees.

5. Use your engagement agreement to avoid tying up flat fees in your trust account.

In some jurisdictions, pre-paid flat fees are considered earned on receipt and may be deposited directly into a firm’s operating account.  In other jurisdictions, such as Oregon, pre-paid flat fees will be considered earned on receipt provided that the lawyer’s representation agreement so specifies.

However, a growing number of jurisdictions such as Washington, D.C. take the position that pre-paid flat fees are not deemed earned until all of the work is done. As such, advance flat fee payments, like all other advance retainers, must be placed in the lawyer’s trust account and withdrawn when the matter is complete. That poses a problem for lawyers who charge flat fees in criminal defense or civil litigation matters which might not conclude for years.

The solution? Establish milestones in your representation agreement that define when a fee is earned so that you can disburse funds from your trust account as the case progresses instead of waiting months or years until the case is finished to collect. You can set your milestones much in the way a home improvement contractor might — for example, in a criminal matter, 30 percent of the fee is deemed earned after initial intake and file review, another 50 percent deemed earned after the the preliminary hearing, and the remainder due after the case is resolved to the client’s satisfaction or after trial, whichever comes first. (By the way, if you’re interested in “drag and drop” clauses for implementing flat fees, check out my ebook, the Art, Science and Ethics of the 21st Century Retainer Agreement ).

6. Recognize that sometimes, flat fees won’t work.

When it comes to fee agreements, there’s no “one size fits all.”  In some cases, a fixed fee quote may be so high as to scare off even those clients with the ability to pay.  A few years back, a colleague shared with me her experience handling a contentious divorce proceeding where over the course of three years, she collected close to $100,000 in fees. When the case was resolved, she asked her client if he would have paid an $80,000 fixed fee up front if she’d quoted that amount at the outset. The client replied no — he didn’t have the full amount as a lump sum plus, he simply didn’t believe when the case began that it would cost as much as it did.

In other cases, a client might present a matter that is so unique that you don’t feel comfortable with an hourly estimate. And sometimes, the client simply might not purchase the scope of services offered under the flat-fee arrangement. For example, in my practice, I offer a fixed-fee service where I’ll track several regulatory proceedings of interest to a client and prepare a monthly report. But many times, the client would rather call as questions arise and pay by the hour instead of paying more for an ongoing service.

As clients become more educated about legal services through the web, many will begin to ask lawyers about flat fees for legal services.  Instead of begin caught flat-footed, lawyers should begin developing and experimenting with flat fees today to serve the clients of tomorrow.

Carolyn Elefant has been blogging about solo and small firm practice at MyShingle.com since 2002 and operated her firm, the Law Offices of Carolyn Elefant PLLC, even longer than that. She’s also authored a bunch of books on topics like starting a law practice, social media, and 21st century lawyer representation agreements (affiliate links). If you’re really that interested in learning more about Carolyn, just Google her. The Internet never lies, right? You can contact Carolyn by email at elefant@myshingle.com or follow her on Twitter at @carolynelefant.

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