12 Reasons Attorneys Should Charge Flat Fees
Flat Fees Align the Attorney’s Interests with the Client’s Interests
Flat Fees Align the Attorney’s Interests with the Client’s Interests
This past December, a Canadian appeals court judge commented on the billable hour model in refusing to approve a court-appointed receiver’s fees:
- "A person requiring legal advice does not set out to buy time. Rather the object of the exercise is to buy services. Moreover, there is something inherently troubling about a billing system that pits a lawyer’s financial interest against that of its client and that has built-in incentives for inefficiency. The billable hour model has both of these undesirable features."
I will never understand how a model that “pits a lawyer’s financial interest against that of its client” has survived for so long. Attorneys are not supposed to have conflicts of interests with their clients. Yet this model produces an ongoing conflict throughout the representation: It incentivizes the attorney to spend as much time as possible on a matter, while it creates the opposite incentive for the client (i.e., to limit the amount of time the attorney works). The more time an attorney works on a matter, the more he or she can charge the client; however, the more the attorney charges, the more the client must pay. This conundrum creates a runaway train of billing that only the client can stop. Stories of attorneys “padding” a bill are not far-fetched. Few clients, however, know how to manage this system. It produces large monthly bills that shock clients and strain relationships.
In contrast, a flat fee structure aligns an attorney’s interests with those of the client. Once a flat fee is set and agreed upon, the attorney’s sole incentive is to complete the work. Meanwhile, the client no longer must worry about how much time the attorney is spending on the matter. The attorney works efficiently (see #3 below), the client gains predictability (see #2 below), and the value of the work (rather than the attorney’s time) becomes the focus of the engagement (see #4 below).
Flat Fees Create Predictability for the Client
Flat fees may not be cheaper than traditional hourly billing. However, they create predictability for the client.
The worst feature of hourly billing is the monthly surprise a client experiences upon receiving and reviewing a bill from an attorney. Often, an attorney will not provide a client with a budget. Even if a budget is provided, attorneys routinely exceed those budgets. As a result, these relationships produce a lot of uncertainty for the client regarding how much the representation will cost. For business clients, in particular, this uncertainty makes it very difficult to budget, allocate, and control costs.
To put this problem in perspective, would you ever agree to buy a gallon of milk at the grocery store before you lifted it off the shelf if: (a) you did not know what the total price of the gallon of milk was while it was on the shelf; (b) you did not know whether the price might skyrocket in between the time you lifted the gallon container from the shelf and the moment you arrived at the checkout counter; and (c) if the price did skyrocket when you arrived at the checkout counter, you would be obligated to pay for it regardless of the price?
Most – if not all – people would answer this loaded question with a resounding “No!”
Yet attorneys use this exact same billing model to sell their services.
Flat fees eliminate this uncertainty. If an attorney quotes a client a specific flat fee for a task, and promises the client that that fee will not change for that engagement (even if the work proves more difficult or requires more time than anticipated), the client can now predict what his or her costs will be, and plan accordingly. A business client can now budget properly and control its costs. This model reinforces the “peace of mind” that the attorney-client relationship generates for the client in the first place.
Flat Fees Incentivize the Attorney to Work Efficiently
While flat fees reduce uncertainty for the client, they provide benefits for the attorney as well. Specifically, they help an attorney work more efficiently.
A flat fee structure incentivizes an attorney to work quickly and find the most direct route towards completing a task. Under the hourly billing model, while attorneys in general may not intentionally take as much time as possible to complete a project, they work with the comfort of knowing that every second they spend on the matter will likely be compensated.
In contrast, under a flat fee model, attorneys must get creative, avoid duplicating effort, and – like most businesses – work against a “bottom line.” If the attorney spends too much time or plans poorly, he or she will undervalue the services being provided and risk losing opportunities to work on other, more profitable work.
Working efficiently also produces long-term benefits for attorneys. It helps them develop effective strategies for approaching future tasks and allocating their effort appropriately. It forces them to develop “systems” for addressing and completing specific tasks. It also helps them learn when and how to delegate work to an associate, paralegal, or other professional.
Flat Fees, in Some Instances, Save the Client Money
As mentioned above, a flat fee structure isn’t necessarily a more affordable model for clients. There is no dispute (at least from this writer) that attorneys cost money. (“Peace of mind” is a valuable commodity.)
That being said, flat fee billing creates opportunities for attorneys to save their clients some money. For example, there are many documents attorneys draft that are used frequently. In litigation, portions of discovery requests and responses, motions, and other briefs can be saved as “templates” and re-purposed for similar documents in other matters. Similarly, in the transactional world, large portions of documents like purchase agreements, arbitration agreements, license agreements, non-compete agreements, and workplace policies are the same from document to document. This content can, too, be saved in templates and re-purposed when the need arises. Instead of drafting one of these documents from scratch each time, an attorney can pull relevant portions from the “templates” that have been stored and save time in preparing it. The attorney can then, in turn, pass those savings on to the client.
I have heard some attorneys complain that this feature of flat fee billing forces them to sacrifice profits. This is inaccurate (and ignorant). Companies like Apple routinely increase their profits while continuing to lower the costs of their products. How can these companies stay in business? They get better at producing their products by finding efficiencies and saving money. This, in turn, enables them to find additional customers, develop new products, and ultimately create new revenue streams.
Attorneys can – and should – adopt the same model. The profits their newfound efficiencies might force them to sacrifice can be recovered in future engagements when other clients pay the same flat fee for the same service. In addition, the time attorneys save can instead be used in other matters or to market to new prospective clients.
Flat Fees Emphasize the Value of the Attorney’s Work, Instead of His/Her Time
Time is not a good way to measure value. You could spend an hour trying to fix that leaky faucet and fail to make any progress. Does the fact you spent an hour of your time mean you generated any meaningful results? Of course not. The time alone that you spent means nothing. What matters is whether you fixed the problem.
Hourly billing places a disproportionate emphasis on an attorney’s time rather than the service being rendered. Clients naturally want to limit the amount of time an attorney spends on a matter. I have seen this first-hand. I have been in situations where a client will not want to spend too much time with me on the phone or forego having an in-person meeting to discuss a particular issue because they fear the “meter” will be running, and these activities will cost them a lot of money.
This hesitation by the client can negatively impact the representation. For example, in litigation, clients need to be open and transparent with their attorneys and provide them with information they need either to prosecute or defend a claim. This effort requires frequent communication with the client. A client’s unwillingness to communicate could hinder this effort.
A flat fee structure, however, emphasizes the value of the service. By knowing how much a particular project will cost, a client can focus instead on working collaboratively with his or her attorney to achieve the desired result. In addition, a client will appreciate that result a little more instead of dreading what that final invoice (that he or she has yet to review) has in store.
Flat Fees Produce Fewer Fee Disputes with Clients
Billing disputes or just general tension often permeate an attorney-client relationship that is based on hourly billing. This model produces long invoices containing a list or spreadsheet of dates on which certain tasks were performed, which attorney worked on that task, the amount of time spent on it, and the monetary charge for that time. The identification of the task often includes a long narrative explaining what the attorney accomplished (e.g., “Telephone call with Mr. Jones; internal meeting with Attorney Smith; compose letter to Attorney Sanders,” etc.). In addition, the amount of time is billed in tenths of an hour: If an attorney spends six minutes on a phone call, the bill will show 0.1 for that work; if the time spent at a hearing is 30 minutes, the bill will charge the client 0.5 hours for that effort.
A client who has the time or wherewithal to review these invoices might scrutinize the entries in them and question whether a particular task really took six minutes or 30 minutes, whether the attorney could have spent less time, or whether the attorney really did spend less time but padded the bill.
Some savvy clients might require their attorneys who bill hourly to stop work on certain tasks when they reach certain thresholds, or to provide daily or weekly budgets or estimates of the work being provided. Clients often believe these requirements will control runaway attorney bills.
Unfortunately, they are mistaken. Attorneys who have a sufficient client base will begin turning away these types of clients because they hate doing this: They are taking otherwise productive time they could spend on billable work and dedicating it to non-billable administrative duties their clients are requiring of them. Moreover, these budgets and estimates do not solve the underlying issue: hourly billing and its inefficiencies. Instead, they provide clients with the misguided illusion that they are in control.
Flat fees eliminate these disputes and help attorneys and their clients avoid unnecessary tension. Because flat fees provide clients with predictability, contain inherent controls, and incentivize attorneys to work efficiently, there are fewer instances where disputes may arise.
Flat Fees Ensure an Attorney Can Withdraw from a Matter More Smoothly
A traditional engagement agreement between an attorney and a client only briefly identifies the scope of the representation. If the matter is a litigation, it will explain that the attorney has “agreed to represent CLIENT in connection with legal claims asserted by PARTY X.” If the matter is transactional, it might state that the attorney has “agreed to assist CLIENT with the purchase and sale of PROPERTY X.”
Such general language creates unnecessary risks for the attorney. He or she may not be able to withdraw if the client refuses to pay for the attorney’s services. Depending on the stage of the representation, a attorney who attempts to, and successfully withdraws, could risk exposure to a malpractice lawsuit or a disciplinary complaint. Neither recourse is pretty. Further, if the matter is a litigation, an attorney may often need to file a motion with the court requesting permission to withdraw from the representation. Again, depending on the stage of the case, a court may not be so sympathetic. There are numerous instances where a court will require the attorney to remain in the case – and continue representing the client – despite the client’s refusal to pay. This is . . . awkward, to say the least.
In contrast, a properly-quoted flat fee structure will identify the specific tasks being performed and the price for each task. I use the word “properly” here because some attorneys may not quote a flat fee structure appropriately. The best way to create such a structure is to break down the representation into detailed, component parts, and then assign a price to each component. I recommend this structure over quoting one price for the entire engagement.
When the structure above is implemented, an attorney can then withdraw more smoothly if a client refuses to pay for a specific component. The relationship is much clearer and compartmentalized. Of course, the attorney should include language in the engagement agreement that states that, if a client fails to pay for some portion of the representation, the attorney may withdraw.
This structure is not a fool-proof remedy to the traditional difficulties of withdrawing from a representation. It does, however, improve the relationship – and the expectations associated with it.
Flat Fees Alleviate Attorneys from Tracking their Time
The complaint I have heard most frequently from attorneys is that they despise having to track their time. It is a burdensome obligation. If working 10-, 12-, or 14-hour days wasn’t enough, attorneys who use hourly billing must also track what they do on an hourly basis. This information is then used to compose the invoices these attorneys send to clients. If an attorneys does not accurately track his or her time, he or she risks over-billing or under-billing a client. (If the attorney under-bills the client, revenue is lost. If the client over-bills the client, he or she is defrauding the client. Not good.)
Flat fee billing, in most instances, liberates attorneys from having to track their time. This freedom helps attorneys focus more on the work at hand and allocate the time formerly spent tracking hours on other productive endeavors.
Flat Fees Force Attorneys to Assess and Evaluate a Matter Early
When an attorney who uses hourly billing first takes on a matter and enters into an engagement agreement with a client, the attorney will usually try and get to work right away without assessing in some detail the merits of the engagement, what pitfalls may develop, and the likelihood of success or the result the client desires, (because this effort may not be compensated beyond that initial one-hour free consultation). This lack for foresight may create headaches later in the engagement, particularly if the attorney provided a budget, and some unforeseen circumstance consumes a significant amount of time and blows a hole in that budget.
A flat fee structure, in contrast, incentivizes an attorney to assess the entire engagement, review and evaluate each known step in the process, and determine how much work will be required and what, if any, contingencies may arise. This extra effort will produce a quote that more accurately reflects the work involved and the value being provided. A more accurate quote, in turn, will create predictability for the client (and no scenario in which the quote will need to be revised), and protect the attorney from falling in the “red.”
Flat Fees Incentivize Attorneys to Work on Projects That Help Progress a Matter
Under an hourly billing model, attorneys have no incentive to pick and choose which tasks will “advance the ball” on a particular matter. Instead, they might try and perform every known task associated with a given project regardless whether that task will accomplish some meaningful step towards the end result.
In litigation, for example, an attorney might command an associate to spend hours researching an obscure issue (often without prior approval from the client) despite the likelihood that that effort will produce no helpful guidance.
In practice, this makes no sense whatsoever. When working on anything, would you spend time on something that you thought (or someone told you) would not produce any results or advance you closer to your goal? Of course not.
If, instead, the attorney above was operating under a flat fee model, he or she would likely assess whether or not the research will be productive before assigning it to an associate. At a minimum, the attorney might instruct the associate to spend a limited amount of time on the research and report back on his or her initial findings before spending further time on it.
A flat fee model enhances the attorney’s expertise in making these judgments. Because the attorney frequently works in these areas, he or she is often in the best position to make these types of evaluations. A client who normally is not a consumer of legal services would find it difficult to determine which projects are more important or productive than others.
Flat Fees Teach Attorneys How to Run a Business Effectively
If it wasn’t obvious already, a flat fee structure – with its incentives for efficiency, effectiveness, and cost-savings – teaches and forces attorneys to run their practices like effective businesses. I am not saying attorneys don’t know how to run a business. They do. After all, a law practice – whether a solo practice or a 2,000-lawyer firm – is a business. However, many law practices – particularly large law firms – operate with a lot of waste. As demonstrated above, they spend money and effort on many areas to which non-legal businesses would not give a thought.
Flat fee billing helps attorneys evaluate and budget their costs. The argument that attorneys could lose their shirts with flat fees is a myth. If a car manufacturer can anticipate numerous variables and place a flat price tag on a vehicle, attorneys can perform a similar analysis, anticipate (the far less numerous) variables inherent in a given service, and provide a client with a specific flat price for that service. There is no reason attorneys cannot follow a similar model; they just need to spend more time learning how to do it.
The skills attorneys will develop from implementing, and succeeding with, a flat fee billing structure will also help them operate their entire practices more efficiently and effectively.
Attorneys Can Use Flat Fees as a Competitive Advantage
Since the majority of attorneys continue to use hourly billing – or some variation of that model – to charge clients for legal services, the minority of attorneys who embrace and offer flat fee billing can gain a competitive advantage over other attorneys.
It is difficult for attorneys (particularly new or young attorneys) to differentiate themselves in the legal industry. Recycled marketing slogans on law firm websites (“Our experience is our expertise” or “We are your trusted advisors”) do not provide that much-needed differentiation.
Flat fee billing can offer attorneys a unique marketing opportunity to sell their services in a crowded market. It will help these attorneys demonstrate an understanding of what clients need and sympathy with the needs of their clients’ businesses. It helps them communicate to clients that their interests are aligned.
Meet the author: Robert Fojo
Robert assists clients with business and commercial transactions, civil litigation, and complex dispute resolution. He helps businesses defend themselves when lawsuits are filed against them and prosecute their own lawsuits when they have been wronged. In this regard, Robert handles a wide variety of legal issues, including general commercial disputes, construction matters, class action lawsuits, real estate disputes, disputes concerning the competitive bidding process and government procurement and contracting, employment claims, and appellate litigation. Robert also assists small-to-medium size privately held businesses, venture investors, and entrepreneurs with cost effective legal solutions that address their specific business needs.