Pro/Con: Flat Fees

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Most of the legal industry is still firmly in the grip of time. With a few exceptions, lawyers track time, bill time, and judge performance based on time.

A vocal minority of lawyers — myself included — think flat fees offer some compelling advantages for lawyers and clients. But flat fees are not necessarily best for every matter, and many lawyers simply dismiss them out of hand. Perhaps that is why flat fees don’t seem to be catching on.

In this Pro/Con, I will take a look at both sides of flat fees.

Pro

It should be pretty obvious that tying compensation to time discourages efficiency. When billing by the hour, the longer something takes, the more you make. Stories of lawyers padding time are pervasive, and it is true that hourly billing mis-aligns the interests of attorney and client.

Flat fees, on the other hand, are fairly neutral. If you quote a fee and the client agrees, your only incentive is to deliver the expected service, document, result, etc. as efficiently as possible. Although I have never intentionally taken the long route to a result while billing by the hour, I have definitely come up with efficient strategies I might have overlooked if I did not have a flat fee as an incentive to get creative. When you do this, you can lower the cost to your client, reap the benefits of your increased efficiency, or both.

Besides, time is not often a good measure of value. This should be obvious especially for often-re-used documents like purchase agreements, which lawyers may be able to provide without putting in much time, but which probably have greater value to the client than .2 hours. Similarly, if you are creating a new document that you know you will be able to re-use, you can charge your client less, while making up the difference when future clients pay the same amount.

Lawyers and clients alike can appreciate the benefit of certainty — knowing what something will cost. I think good lawyers give a degree of certainty even with hourly billing by making estimates and keeping the client advised of any changes during the representation, but estimates don’t deliver the same certainty as flat fees. (Some lawyers attempt to deliver certainty by capping fees, which is just wrong-headed, since it places all the risk on the lawyer, and none on the client.)

Finally, for some lawyers, it is advantage enough not to have to track time any more.

Con

One of the largest obstacles to the adoption of flat fees is that they require lawyers to re-think the way they measure value and performance. This is especially difficult where hourly billing is deeply entrenched. Consider firms where billables are used to measure performance, set year-end bonuses, adjust salary, and determine advancement. Those firms cannot switch to flat fees without restructuring their entire compensation model, which they may not be willing to do.

Part of the difficulty moving away from hourly billing is the concern for cases that “blow up” and take much more time or work than anticipated when setting the fee. This is a real possibility, although the risks can be mitigated by carefully drafting the scope of representation, breaking the representation into smaller chunks, and so on. Even so, it is possible for a case to get out of hand. Family lawyers are often the first to express this concern, presumably because family matters have a tendency to get out of hand.

Using flat fees requires a carefully-drafted description of the work to be performed. For simple transactional tasks, this is usually easy (“draft residential lease”), but for litigation, this can get complicated, especially if you are trying to break the representation into smaller chunks or use a fee “menu.” (Also, not all courts allow this sort of “unbundling.” Bankruptcy courts, for example, are unlikely to allow attorneys to handle the filing but bail out if an adversary proceeding is filed.)

In short, switching to flat fees introduces obstacles. Some require a re-wiring of the way lawyers and law firms think about compensation. Others involve shifting the risk of a representation — and anticipating future shifts in that risk as the representation evolves.

Should you implement flat fees?

Often, those discussing flat fees vs. hourly billing treat the issue and black and white, either-or. In reality, flat fees are simply another way to bill. Sometimes, hourly billing makes the most sense, yet many lawyers insist on fitting every representation into an hourly fee structure. Sometimes, flat fees make the most sense, yet some lawyers insist on applying flat fees to every representation.

I think it makes sense to look at flat fees as just another tool to be used when setting fees. For example, it might make sense to charge a flat fee for a contract you can re-use, but an hourly fee for phone calls related to ongoing representation. In litigation, you might charge a flat fee for an appearance, but an hourly fee for researching and writing a novel issue.

The best use of flat fees, then, is a balanced, holistic approach to setting fees. That means using hourly billing, flat fees, contingent fees, and hybrid arrangements to suit each matter best. A lawyer with a larger toolkit is better able to distribute the financial risk of a representation equitable between attorney and client.

(photo: http://www.flickr.com/photos/telstar/1349810312/)

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  • I have been using flat fees for divorces for about six months now and love it. I break down the representation into categories: Pleadings, ICMC, Temporary Hearing, Discovery (formal / informal), Trial / J&D, and Misc. Motions with a set amount due for each before I perform each.

    The client gets a road map of the procedures ahead and a set amount that will be owed. If we go straight from Pleadings to J&D, the client only pays the flat amounts for those two. Just like in my criminal law practice, some cases take more time than I anticipated and some take less.

    BSE

  • shg

    An orthogonal perspective. As you probably know, criminal defense lawyers have historically charged flat fees, although for a different reason. As a result, we have to be pretty good at predicting what will be needed for a case or we can go broke. On the other hand, a low flat fee can be a dead giveaway that the lawyer has no intention of anything more than copping the first plea available.

    That said, when I am being paid by a corporation, they love the concept of flat fees, but hate the execution. They can’t bear not knowing what they’re paying for, and want hourly charges/explanations. When I explain that a flat fee means they don’t get bills, they can’t stand it and demand that I charge hourly so they can see what I’m doing to earn the fee.

    The irony is that I make more by charging hourly, yet they love me because despite my hourly rate, I tend to perform tasks much faster than either larger law firms or less experienced lawyers, I bill accurately and still cost less than other firms involved in the case while (usually) producing better results.

    I like working for corporations. I like flat fees. I love hourly billing of corporations. And they love it too. Go figure.

    • I have had, more or less, the same experience in my transactional practice. Flat fees are often more appealing to individuals and smaller businesses while hourly fees are often more appealing larger businesses.

      I think this dichotomy exists, at least partially, because individuals and smaller businesses may reason that the best time to make a “bargain” is before the representation has commenced, while larger businesses may reason that the best time to make a “bargain” is after the representation has commenced. I could be wildly off-base here, but I think this is somewhat plausible.

  • Mark

    While the answer to this question may differ by jurisdiction, when you charge a flat fee when may you consider the fee earned?

    • It definitely differs (and is complicated) by jurisdiction. I think that in some jurisdictions, flat fees have to go in the trust account until the work is completed. In mine, it can be earned immediately, but the client is still entitled to a refund if I don’t perform the work.

  • Barry S. Edwards

    My flat fee retainer for dissolutions spells out exactly what service, filing, or other action completes the task. I get paid for the next stage before I start it, and I hold the money in trust until the task is completed.

    • Dan M.

      I don’t practice family law, but I’m married to a lovely woman that does, and I know from experience she gets calls constantly (& at all hours) from clients who are upset about their ex’s recent Facebook post, voice message, etc. Just curious, do you ever run into the problem of a client that, since they are paying a flat amount based on completed tasks, does not value (unintentionally, of course) your time?

      • I would never ever ever include unlimited phone calls in a flat fee agreement in a family law matter without setting up some expectations about when I would be available to answer and return phone calls. (I’ve always liked the idea of a flat fee per after-hours call of $750 or so, which I would waive if I think the call was an emergency. That ought to discourage abuse.)

      • P.S., You are thinking very narrowly about flat fees. Just like scope of the representation itself, the fee doesn’t have to be all-or-nothing, whether or not it is a flat fee. You can charge different hourly rates for different tasks, and different flat fees for different tasks.

      • Catherine Tucker

        This is when a good receptionist comes in handy.

        Although, I too would notagree to unlimited calls in a dicorce matter.

  • Stephen Jenei

    I left a large law firm to start my own practice and love flat fees because I want to agree on the cost up front, not after I’ve done the work.

    In general, I have found this system to be far more favorable to clients than hourly billing. It’s not because of “padding” but because the pressure to meet billable hour goals means billing for every little task which adds up to large sums over time.

    So, what’s the problem? Clients are often too busy/distracted to take the time to understand they are really getting a great deal. I’ve given quotes of, say, $4-5000 and then had clients come and say “But this other lawyer said it would only be about $1500.” But the other lawyer is billing by the hour with no promises.

    Clients often can’t see that there is no way to get an adequate product at the prices mentioned — if they really billed just the $1500 — and that in reality, the other lawyer bills for every task so that over the long run the bill becomes much, much more.

    For me, the main issue is that when you give a quote for the whole project up front, the amount can seem large and shocking because it’s the whole amount in one large figure. The hourly lawyer is able to hide their shockingly larger bill by doling it out over many invoices over many months.

    I recently had a client transfer work to me after using one of these other lawyers with lower prices. They were told it would be about $2000. They ended up billing $8000 over the course of the project.

    It’s frustrating, I wish I could get clients to take the time to understand the apples-to-oranges comparison they’re using.

    Stephen

  • Dan M.

    I agree with the blended, no-one-size-fits-all approach. Transactional issues are (IMHO) usually better suited to flat-fees, whereas issues involving litigation are not. If a client needs a lease agreement draw up, I think most of us can approximate how long it will take to draft and then factor in some additional time for client revisions or negotiations with the lessee. But, in the case of litigation, where issues may not surface until after suit is filed or depositions taken, providing a flat-fee quote at the beginning of a case is (again, my .02 cents, here) potential suicide. Litigation just has too many moving parts to make estimates at the outset of representation anything but a guess; either you are hurting your client with a flat-fee quote that is too high, or hurting yourself with one that is too low. If you are lucky, and you guess correct, you hit the middle where it is neither harmful to you or the client — meaning you are paid for the time invested and the product produced — and isn’t that kind of getting back to hourly billing anyway? Look, if you take three hours to draft discovery and you think, “man, that was a lot of time spent on discovery,” then knock some time off on your billing. At least with hourly billing you have the flexibility to say, “gee, that blew-up and we needed to spend more time on that brief,” or say, “man, that took a long time to prepare for that hearing, I’ve got a good client that always pays on time, I think I’ll write that time down and give the client a discount.” I understand that flat-fees offer a client a “definitive-ness” that is lacking in hourly billing, but applying “definitive-ness” (aka flat-fees) to a situation that is in its nature variable (litigation) is either a disservice to the client or to me. I’m not saying we can’t be creative in coming up with alternative billing options, I use them frequently on the business transactional side of things, but not in cases involving litigation.

    • Having successfully used flat fees almost exclusively for litigation for years, I can assure you that they can make sense in litigation. It all depends on the kind of litigation.

      • Dan M.

        Don’t get me wrong; I’m all for modernizing the traditional (read: outdated) aspects of practicing law, and I agree that time is often a poor measure of value. My concern with using flat-fees in litigation (and I struggle with this, and perhaps my definition of litigation was not clear – I’m thinking full blown discovery, depositions, dispositive motions, trial, etc. here, not a simple collection case or landlord-tenant case) is that I am trying to anticipate how much time I’m going to spend in a case (or in portions of a case) before it has even started. After we file suit, maybe the other side hires the most obstructionist lawyer in town, and now I’ve told my client at the outset it will cost X amount to serve discovery or to take a deposition (if I’m doing a “flat-fee menu”), only to either tell them (after the obstructing starts) they need to purchase another “menu item” or I take a hit. I think you are correct, though, that it may depend on the type of “litigation” and that flat-fees are just another tool in the toolbox to help complete the job for a given client.

  • Definitely agree that it’s tough to implement fixed fees on any serious scale without completely revamping associate compensation. In a firm with billable requirements for bonuses and without a good way to drill-down on billings from associates per project in real time, client oversight (or the expectation of it) is often the #1 controller of costs. Associates won’t take their time because they know the client will at some point balk, and then the partner will hound them.

    Fixed fees remove the client as cost overseer. S0 without the firm itself stepping in to better police time or even revamp the bonus structure, associates have every incentive to take forever on projects – because the cost is now shifted entirely on partners.

  • Orlando

    I have been using a combination of flat fee and hourly billing, with a preference for flat fees. As a newer solo, some things may take longer for me to do than it would for a more experienced attorney, so I don’t feel it is fair for me to “learn” on the client’s dime. However, there are some things I can do fairly well, like evictions, where I am comfortable charging a flat fee because I can fairly gauge the amount of work and time each one will take.

    What I am doing now is keeping track of my time on all matters and try to come up with an average so the next time a similar matter comes up that I charged on an hourly basis, I may assess flat-fee billing. I might short-change myself from time to time, but then I chalk it up as a learning experience and know better for next time.

  • William Day

    I firmly believe that legal services provided on a flat-fee basis is
    practical for more situations than most lawyers and law firms
    realize–including litigation. Invariably the first question asked by
    most clients is, “how much is this going to cost me?”

    After many years and several hundred different cases and trials under
    my belt I analyzed the billable hours and realized that for amounts in
    dispute of $30,000 or less in the State of Maryland the cases averaged
    about the same number of hours worked. The cases ran the spectrum of
    civil litigation but with Maryland’s limited discovery and pretrial
    motions the hours were about the same. In 2011 I pushed the partners to
    try a fixed-fee system for amounts in controversy of $30,000 or less
    but they were not interested. So I decided to start my own practice and
    focus exclusively on fixed-fee legal services. I just launched
    http://www.fixedfeelegal.net and will only be taking a pre-negotiated fixed fee
    for legal services that I provide. Now the client can call me anytime
    and not have to worry about how much that phone call just cost.