You have probably heard that the practice of law is changing. A lot of those changes are beneficial to business owners – consumers of legal services. One change, in particular, is the rise of alternative fee arrangements. Alternative fee arrangements are any payment arrangements other than the standard billable hour. Alternative fee arrangements include contingency, flat-fee, value-based, and bonus billing arrangements.
Flat-fee billing is a simple concept. Instead of ordering legal services based on hourly billing and without a set budget, with flat-fee billing, your attorney commits upfront to a fixed project fee. Generally, the lawyer assesses how long the project will take, multiplies the number of estimated hours by their hourly rate, perhaps adds a little bit of buffer for the unknown and, presto, there’s the flat fee. If it takes a little less time or a whole lot more time, you only pay the flat fee, provided the project stays within the expected original scope.
Benefits of Flat-Fee Billing
Flat-fee billing may help a client to make smarter purchasing decisions. In law, as in life, some things you have to do and some things you choose to do. Some legal tasks are necessary – your company absolutely must have them. Others are nice-to-haves and you need to weigh the cost of the service vs. the benefit to you right now. Flat-fee billing gives you certainty regarding cost, which makes it easier for you to decide whether to get something done or not.
Second, flat-fee billing allows clients to budget accurately. We understand it’s frustrating to not know how big the legal bills are before they arrive. In a small or even medium-sized business, cash flow is critical and the way you manage cash flow is by budgeting. With flat-fee billing, you know what the bill is going to look like before it arrives. Lastly, flat-fee billing better ensures you and your lawyer are on the same page and avoids billing disputes later. In order to bill on a flat-fee basis, you and your lawyer need to spend more time upfront figuring out exactly what needs to be done. This is positive. It avoids miscommunication and misunderstandings about what you really wanted. And, flat-fee billing forces your lawyer to dig in and really determine how to most efficiently deliver to you exactly what you need.
The Drawbacks of Flat-Fee Billing
While we support the continuing evolution of legal services, including the use of innovative, alternative fee arrangements, we believe the optimal approach for billing for professional service remains hourly billing. We think hourly billing best aligns the incentives of the lawyer and the client. If you have an attorney you trust and who understands you and your business, it works great to let them do what they believe needs to be done and pay them accordingly.
Ultimately, flat-fee billing ties back to a billable hour. At the beginning of this article, we explained how a flat project fee is derived — it is based on the estimated number of hours your attorneys will spend on your project. Lawyers, like other professional service providers, only have time to sell. They must value that time and it makes sense to value it hourly. There is no getting away from that. With flat-fee project billing, though, the attorney estimates the hours the project will take and hopes to estimate well. Someone, though — either the lawyer or the client — will get the “wrong side” of the deal each time. It is nearly always us when we do flat-fee billing projects. And, if that is what it takes to establish a relationship and gain a client’s trust, that is acceptable to us. Still, once we have a relationship with a client and mutual trust, it is much simpler and fairer and best aligns incentives if we work on an hourly basis.
Some clients think we have an incentive to do more work than necessary when we are paid hourly. In theory, that would be true. In practice, we are far too busy to do anything on any file that does not need to be done. Most good attorneys we know are in the same position. There is plenty of work out there and no need to drive the cab around the block to run up the meter. We are not naive and know that likely happens, although I think it is way more likely to happen at a huge law firm with lots of associates who are pressured to make their hours and, just because of how assignments ebb and flow, may not have a ton of work. That is not the case at Cenkus Law. Also, it is unethical to run up the meter and lawyers are held to a high ethical standard. Of course, as with any profession, there are unethical attorneys. However, we believe most attorneys are ethical and would not intentionally run up the meter even if they had an incentive to do so.
The reality is, aside from certain small projects (e.g., a solo founder formation) with few moving pieces and no negotiations with third parties, most corporate legal projects are difficult to scope in terms of time. We work on $1 million M&A deals where the client spends $8,000 and others where the client spends $25,000. We can assure you that the difference is not because we sometimes decide to do a whole lot of unnecessary work. M&A deals, raising capital, joint ventures, and even partnership agreements if done properly are unique projects that call for significant custom advice and drafting. They also entail significant negotiations with third parties. And, clients have very different needs and desires. So, beyond very simple transactions, the amount of time we spend on projects varies considerably and the higher fees on one M&A deal vs. another are perfectly understandable in context.
And, hourly billing does not need to carry with it the risk of crazy surprises. Your attorney should set a realistic budget and communicate with you often to manage your expectations and help you understand what services are being provided for you and the fees that you have incurred.
We Still Offer Flat-Fee Billing
If it is important to a new prospective client, we still generally will offer a flat-fee option. For complex transactions, such as mergers and acquisitions, we need to build in plenty of room for contingencies. Flat-fee billing is about certainty and sharing risk, not passing it all to us. Therefore, it is not the holy grail some clients initially think. That said, it can work and we are always happy to talk about it and see if we can make it work for your project if certainty is important to you. In return, we ask clients to be open-minded and fair if it’s necessary to talk about work on a project that is “out of scope.” That happens. Sometimes projects morph or change entirely and, with flat-fee billing, we commit to always being fair and not immediately trying to reprice the deal and, in return, ask our clients to be fair if it’s necessary to talk about a change to pricing. That does not happen a lot, although it happens sometimes.
If you want to talk more about flat-fee billing or explore the anticipates costs of your project, please give us a call at 888-979-9812.