The pros and cons of the fixed fees issue

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Ed Poll
Daily Record Newswire

Is it possible for lawyers to embrace some other type of billing besides hourly billing? In particular, is it possible for lawyers to embrace fixed-fee or task-based billing, in which a fee for a specific task is determined before the engagement?

Let’s look at the major pros and cons of this thorny issue.

Pros

Time: One of the best aspects of fixed fees is that there is no energy wasted on preparing and reviewing bills and overall time accounting. However, it’s still a good idea to do some time recording to see if the fee was set correctly. This is how you learn whether you underestimated or overestimated so that you can adjust your fees the next time around.

Economics and profitability: Clients can budget and control their costs and avoid the uncertainty of time-based billing; there are no surprises for the client.

For the lawyer or law office, fixed or flat fees encourage efficiency. The use of systems, delegation, and technology can help to minimize the time the lawyer or law office spends on a matter. The less time spent, the higher the profit potential as long as the estimated cost exceeds the actual cost of providing the service.

Communication and the client: A fixed-fee arrangement encourages initial communication and forces agreement between the lawyer and the client, two things that are sometimes in short supply. Also, any incentive by the lawyer to prolong the work, which has been one of the strongest complaints by clients about legal work done on the clock, is eliminated with fixed fees.

Cons

Time: One of the few downsides to fixed-fee arrangements in terms of time is that they require more of it in the initial stages. However, this stage is usually streamlined with experience.

Economics and profitability: The flip side to the increased efficiency is that outside counsel may have an incentive to reduce the level of competence to perform a task; quality may suffer in terms of the breadth or depth of analysis or strategic and tactical approaches. The likelihood of lawyers cutting corners increases if economics prevail over quality.

Communication and the client: In many cases, fixed fees reduce the amount of direct contact between outside counsel and the client after the initial increase in communication as the details are discussed and decided.


What if things change?

One of the things that frighten lawyers about a fixed-fee arrangement is underestimating the amount of time needed for a task in such an arrangement.

Let’s say that A sues B and the fee has been set based on the lawyer’s belief that there will be five depositions. However, in the process of doing the discovery, the lawyer finds out that there are actually fifteen people, not five, who have information about the case. The lawyer now has to depose ten more people; and, if the fee arrangement doesn’t change, the lawyer will possibly lose money on the case.

Clearly, things do change! However, the fixed-fee arrangement does not have to be a potential financial downfall for the lawyer. In creating a fixed-fee agreement, the lawyer has to be very clear about the major assumptions that both the client and the attorney buy into. Furthermore, the agreement has to have some mechanism for renegotiating if those assumptions prove to be incorrect. In other words, there needs to be a certain amount of flexibility built into the fee arrangement to accommodate a situation in which the project evolves or changes significantly.


Conclusion

A fixed-fee arrangement between a client and an attorney can be a beneficial one if the lawyer’s eyes are wide open. The more the lawyer knows going into the fee negotiation, the lower the risk of underpricing. With efficient law office management and with experience, fixed-fee billing can be a boon to lawyers.

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Edward Poll is the principal of LawBiz Management. He coaches lawyers and is the creator of “Life After Law,” a program that helps attorneys plan for profitable exits. He can be contacted at edpoll@lawbiz.com.

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