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Legal Fees 101 – Review Chart

The following chart summarizes basic pros and cons and common use scenarios of fee types frequently utilized by law firms.  Although not an end-all-to-be-all guide, it should serve as a useful summary.  The chart is presented from the client’s point-of-view.  As you know, the possibilities for creative thinking on fee arrangements are extensive.  Two or more elements are often used together in the fee arrangement for an engagement.

Law Firm Fee Types

Note two items. First, this chart does not delve into the use of fee collars.  These can be used to mitigate upside or downside pricing risk on an engagement in a wide range of manners and with any type of fee method (although they are often linked with fixed fees).  Second, if you select counsel via a competitive RFP process or not, obtaining a detailed, proposed budget for significant engagements is a good idea.  A budget gives the law firm an upfront expectation regarding how the engagement is expected to be managed.  It goes without saying this can be a useful tool for dialogue between the client and the firm as the engagement unfolds. 

A good budget typically provides information about how many hours various staff members are expected to work as well as an understanding of what the work would cost using standard hourly rates.  Having this information enables the client to discuss variances in actual work from what was expected with the law firm.  A budget also enables a better understanding of drivers behind fee proposals that are not based entirely on hourly billing rates.  For instance, if you are offered a fixed fee for part of the engagement, you should understand what “risk premium” the law firm is putting into its proposal to absorb the potential the work is more complicated to complete than expected.

Fee Type

Basic Definition

Pros and Cons

When Law Firm More Willing to Use

Standard Hourly Rate

The firm charges a fee for each hour an individual works.

Pros – None really.  The law firm receives their standard pricing.

 

Cons – Law firm not encouraged to be efficient.  Low level of predictability on final cost.  Risk of poor results and cost overruns is entirely with the client.

Almost any type of engagement.

Adjusted Hourly Rate

The firm charges a fee for each hour an individual works which is at a discount (or premium) to the individual’s standard hourly rate

Pros –Often a cheaper rate than the Standard Hourly Rate.

 

Cons – Like Standard Hourly Rates, does not encourage efficiency.  Low level of predictability on final cost.  Risk of poor results and cost overruns is entirely with the client.

Almost any type of engagement.

Blended Hourly Rate

The firm offers the same hourly rate for two or more individuals who normally are billed at different hourly rates

Pros – More predictability on costs than other hourly rates since multiple attorneys are billed at one rate – mitigating pricing risk based on mix of hours worked among attorneys.

 

Cons – Still an hourly rate that does not encourage efficiency.  Law firm encouraged to use attorneys whose Standard Hourly Rate is below the Blended Rate, which can be inefficient and thereby increase costs and can also result in lower level work product.  Still a low level of predictability on final cost.  Risk of poor results and cost overruns is entirely with the client.

Matters that don’t require a wide range of expertise and where the expected work tasks are well known.  The law firm may be reluctant to offer a blended rate when the mix of hours between senior and more junior personnel needed to complete a project is hard to predict because hours billed by more senior personnel are often at a significant discount to their normal rates.

Stepped Fees

The firm alters all or some portion of the fees it charges when certain events occur (e.g. if a certain number of hours are worked, then all future hours are billed at a premium or a discount to previous applicable rates)

Pros – Encourages law firm to be more efficient if the step moves the fee rates down.

 

Cons – May encourage use of lower cost attorneys to do work, which can be inefficient or result in lower level work product.  Still a low level of predictability on final cost.  Risk of poor results and cost overruns is entirely with the client.

Engagements where the volume of work may be more significant than expected.  Note that depending on the circumstances a firm may be inclined to propose a step up or a step down on the subject fees.

Fixed Fee

The firm offers to provide all or some defined portion of its services on an engagement for a specific amount regardless of the time necessary to complete the designated work.

Pros – Predictable cost.  Encourages firm to resolve and complete matters efficiently.  Risk of cost overruns is with firm.

 

Cons – Law firm encouraged to overestimate actual costs and may receive a windfall.  Law firm concerned about exceeding fixed fee may ask counterparty’s firm to do tasks it would normally lead (e.g. draft documents, etc.)  Law firm may be tempted to use less experienced (lower cost) attorneys to complete work, especially as time invested increases on engagement.

Engagements where the firm has significant expertise and experience or engagements where the client can costs of similar past projects.  Firms may otherwise be reluctant to propose fixed fee because they are taking cost overrun risks.

Fee Cap

The firm places a limit on the fees it will charge for all or some defined portion of its services on an engagement regardless of the time necessary to complete the designated work.

Pros – Predictable cost.  Encourages firm to complete matters within budget.  Risk of cost overruns is with firm.  Unlike with pure fixed fees, law firm does not receive a windfall if work is done for less than the amount of the cap.

 

Cons – Law firm encouraged to use less experienced (lower cost) attorneys to do work, which can result in a lower level work product.  Law firm encouraged to overestimate actual costs and work towards the cap without exceeding it.  Law firm concerned about exceeding cap may ask counterparty’s firm to do tasks it would normally lead (e.g. draft documents, etc.)

Engagements where the firm has significant expertise and experience or engagements where the client can detail the cost of similar past projects.  Law firms will be more reluctant to offer fee caps if they aren’t confident there will not be cost overruns.

Success Fee or Contingency Fee

The firm proposes that it be paid either a specific amount or at an increased rate in the event all or some portion of the engagement derives a specific set of results.

Pros – Promotes risk sharing between client and law firm with respect to result.  When coupled with hourly rates or fixed fee arrangements, this fee method encourages the firm to lower rates in return for additional payment if matter is successfully resolved.  If a contingency fee, the client pays nothing unless a given result is achieved.

 

Cons – Requires significant trust between client and law firm.  If result is achieved very quickly or efficiently can lead to sense the law firm received a windfall.

Can fit almost any time of engagement but is more frequently associated with disputes.

About the author – Dave Sampsell is a 20-year lawyer with extensive experience managing large, complex legal engagements and overall corporate legal budgets.  He presently serves as General Counsel of a NASDAQ-listed company and is a Founder and Principal of BanyanRFP.  BanyanRFP saves companies time and money through an easy-to-use, private and secure online application for the creation and processing of legal services RFP’s.  For more information, visit www.BanyanRFP.com .

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