Why Capping Hourly Fees is Usually a Bad Idea

fire-hydrant

As flat fees become more popular, one of the ways lawyers often “try out” flat fees is by offering to cap their hourly fees. For example, a lawyer might offer to bill $200 per hour for a small lawsuit, but no more than $10,000, total. This is a rookie mistake. If the lawyer bills 50 or fewer hours, he will merely be paid for his work the same as if there were no cap on fees. But if he bills more than 50 hours, he gets the short end of the stick.

Contrast this with a true flat fee where the lawyer charges $10,000 whether she spends 10, 50 or 100 hours on the representation. If she spends only 10 hours, she has come out ahead. If she bills 50, she has come out even. And if she bills 100, she has gotten the short end of the stick.

Capped Fees Are a Lose-Lose Proposition

With a flat fee, the risk is more or less evenly distributed. The client’s risk is that the lawyer will be more efficient than an estimate based on hours worked. The lawyer’s risk is that she will be less efficient.

With a capped fee, there is no upside for the lawyer. The best-case scenario is he gets paid for exactly the hours he worked. The worst-case scenario is that he works more than 50 hours and does not get paid for all that time. The client can’t lose, and the lawyer can’t win. He can only tie, at best.

With Capped Fees, the Client Always Loses

Ultimately, if the lawyer “loses” in a capped-fee situation, so does the client. A lawyer who blows past the fee cap may start losing interest in a case he is no longer getting paid for, and start looking for an easy way out.

The same thing could happen in a flat-fee scenario, but it is less likely. First, billing flat fees means separating time and value. While time absolutely factors into value, it is not the measure of value. Lawyers who charge flat fees generally give up on tracking time, or at least worry less about time. The concept of “going over” the fee does not really apply.

Second, the lawyer’s upside is also an incentive to find a more efficient way to handle the representation. Assuming a moderate level of legal competence and creativity, a lawyer charging flat fees should be able to come out well ahead of a lawyer billing by the hour, even while delivering greater value to flat-fee clients.

RelatedConsider Alternative Fee Arrangements, but Don’t Give Up On the Billable Hour

Third, charging flat fees also means carefully defining the scope of representation. If a case blows up in your face, you should be able to go back to your client for more money. That way the fee remains fair to everyone, and nobody gets screwed.

But it also bears repeating that flat fees should just be one tool in your billing toolbox. The point is to deliver greater value to clients and do a better job of aligning incentives. If you cannot do that with a flat fee in a particular matter, don’t use one.

When Capping Your Fees Might Make Sense

One caveat.

Many smart lawyers offer capped fees all the time, and are perfectly happy doing so. But there is an important difference in the way they cap their fees. They are not capping fees as a way of trying out flat fees. They are capping fees as a way of reassuring the client that legal fees will not spiral out of control.

Here is the difference. A lawyer capping fees as a way of trying out flat fees will cap fees at the estimated cost of the representation. If the lawyer and the client believe a Series A financing round should take about 50 hours at $200 per hour, the lawyer will cap his fees at about $10,000 — maybe with a slight cushion, just in case. A lawyer capping fees as a way of reassuring the client will cap the fees at $15,000 or $20,000, instead. In other words, she will pick a safe cap that she is extremely unlikely to run into. It is more like a backstop.

The risk technically remains entirely on the lawyer, but there is a different reward: the client feels reassured, and signs the retainer.

With this one exception, capping fees as a way of trying out flat-fee billing is a pretty bad idea — for lawyers and clients.

Featured image: “Open 5 inch butt of an industrial fire hydrant” from Shutterstock.

Practice Management

, ,

  • Jonathan Kleiman

    If it’s a good enough client, it may be enough to say “I billed you X last year, but here are my hours. You paid X for Y. Congrats. If you want to work together again, it’s going to have to be at least Y-Z, or we can go back to hourly”

    For some businesses, the ability to budget legals is worth a premium.

    • Gd

      Can you say that again in fractions

      • Jonathan Kleiman

        12/10 becomes 14/12

    • Raj Jha

      Absolutely true. Clients will pay a premium for certainty. Better than hours, if you price for value (which has nothing to do with the time it takes), and give a fixed fee, everyone can win.

      • Jonathan Kleiman

        Agreed. 90% of my bills are fixed fee. It’s mostly for the purpose of sales.

  • Avram E. Frisch

    Both capped fees and flat fees are pretty awful for litigation or complex deals that aren’t simple to determine in advance.

    • http://samglover.net/ Sam Glover

      It really does depend on the kind of litigation. I litigated with flat fees for years, and it worked great for me and for my clients. But these were all very similar, predictable cases, and my flat fee did not include trial.

      But yes, if you’re facing a complex matter that isn’t easy to predict in advance, a flat fee might not be the right billing structure (hourly might not, either). Nothing in this post is meant to suggest that flat fees are the be-all and end-all of reinventing the future of law. If I have anything to say about that, it is that using only one fee structure for every matter and being unwilling to consider others is bad for both lawyers and clients.

      Flat fees, hourly fees, contingent fees, unbundled services, fee “menus,” and other billing structures are all worth having in your toolbox. Lawyer should be willing to look further than the billable hour when another fee structure might better allocate risk and align the lawyer’s incentives with the client’s.

      • Avif

        Sam, I totally agree with you on this. I have used all of these at times, but for the complex matters, hourly fees, as noxious as they seem to clients, really generate the best results, at least for me. The advantage of being solo, is that in the right circumstances I can offer the flexibility of alternate arrangements.

  • Paul Spitz

    Even hourly billing is fair and ethical once you remove the billable hours requirement that so many law firms impose on their associates. Without a minimum billable hours requirement, the lawyer is more than likely actually billing his or her time, rather than billing to keep from getting fired.

  • Marshall T.

    What about paying by the percentage of a settlement?

    • http://samglover.net/ Sam Glover

      What about it?

      • Marshall T.

        This article only talks about caps on fixed amounts–whether it’s on an hourly base or a total set amount. The conclusion is that it’s almost always a bad idea for both parties. This article, however, doesn’t talk about paying a percentage of settlement money in a lawsuit. Should I rather pay my attorney a fixed amount, hourly rate or a percentage?

        • http://samglover.net/ Sam Glover

          Contingent fees are a whole other topic that’s not really related to capping hourly fees. If you want to start a discussion, our forum would be a better place for that: lab.lawyerist.com

        • Jonathan Kleiman

          This is off topic. You’re saying “capped fees might be better if you also get a contingency fee” which is sort of meaningless given that contingency fees alone are often satisfactory

  • Raj Jha

    Well said. There’s no reason to cap a fee. If you’re going to bill hourly (a mistake in and of itself, regardless of your practice area), then if you did the work at least get paid for it. Or, just avoid the entire mess and spend time figuring out how to do flat fees the right way, which has nothing to do with hours – and everything to do with giving real value and getting rewarded (handsomely) for it.

    • Jonathan Kleiman

      I think it’s for the purpose of closing the deal. For solos and small firms, there are lots of tire kickers, and sometimes you have to use your gut to decide what’s needed to close the deal and what is worth it for the money

  • Jonathan Kleiman

    I’m pretty sure that people who use capped fees are just dressing up their flat fees in BS and intend to bill as close to the cap as possible