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Fixed Fees for Legal Engagements: The Basics

There has been a trend in the use of fixed fees for legal engagements.  Let’s take a moment to review the benefits and potential pitfalls of this fee methodology and when it is most commonly utilized.

Cost Certainty:  Obviously fixed fees provide certainty of cost for an engagement and cap legal fees.  And this certainty is a welcome benefit for those responsible for managing legal budgets. A bird in the hand…

Windfall Potential:  Fixed fee engagements also can provide windfalls to law firms.  If a matter is completed well below the number of hours anticipated by the law firm, it can stand to make a significantly higher profit than normal for the engagement.

Cost Overruns and Their Potential Consequences:  Law firms absorb the risk of all cost overruns associated with a fixed fee engagement.  In turn this can have a number of consequences for the way your engagement is processed.

Budget Cushion:  Law firms are likely to put cushion in their budget to absorb the risk of potential cost overruns.  Beyond the potential windfall associated with an engagement that is significantly easier to complete than expected, this too can subject the client to paying more than normally required to process the engagement.

Staffing Pressures:  Law firms may be inclined to utilize lower cost, less experienced attorneys disproportionately to engagements that are subject to a fixed fee arrangement.  This becomes especially true as the time they invest in prosecuting the engagement increases.  So getting a budget that details how the matter is expected to be staffed is a good practice.

Ceding Work to Counter-party Counsel:  Law firms are more likely to allow counter-party counsel to take the lead on time intensive tasks (e.g. agreement drafts) disproportionately to engagements that are not subject to a fixed fee arrangement.  This, too, becomes especially true as the time they invest in prosecuting the engagement increases.

Requests of Adjustment:  When a law firm significantly exceeds its budgeted hours for a fixed fee engagement, it is inclined to request an adjustment to the agreed fees.  Customers should be mindful of fixed fee proposals that are presented subject to a series of assumptions.

Mitigate and Manage

There are a number of steps that can be taken to mitigate and manage the risks associated with fixed fee arrangements.

  • Require a Detailed Budget:  When clients require the law firm to submit a detailed line item budget in advance of the engagement, they can mitigate many of the potential drawbacks of fixed fee arrangements.  The budget serves as a guidepost for the law firm’s expectations about how the engagement will proceed.  Rarely does any engagement follow all expectations.  But having a budget enables you to question significant deviations from initial expectations and why such deviations occurred. A detailed line item budget (click here to read about basics of structuring a request for proposal) will delineate how many hours the law firm expects staff members of different experience levels to work on the engagement.  This allows the client to hold the law firm accountable in the event the mix of hours among staff members varies significantly from that projected.  Assuming the budget delineates among significant work flows within the engagement, it can also indicate if the law firm has advocated work tasks it budgeted to its counterparty on the engagement.
  • Require the Presentation of Bills on a Time-Based Basis:  When coupled with a comparison of a detailed budget, the presentation of invoices on a time based basis (using the firm’s standard hourly rate or other agreed hourly rates) can determine the potential validity of requests for billing adjustments from the law firm because of unexpected circumstances.
  • Use Collars:  Many legal consumers employ a collar that bounds the fixed fee within a range of outcomes.  There are a variety of ways the concept can be utilized.  Depending on the exact terms of the collar, it mitigates both the risk of a windfall or loss of profits to the law firm if the work necessary to complete the engagement fall well short or well in excess of expectations.

When are Fixed Fees Commonly Used?

While law firms often speak about embracing fixed fees, many don’t like them because of the inherent risks of cost overruns caused by factors beyond their control.  Because of this, fixed fees are commonly associated with engagements that involve predictable processes the firm routinely covers.  They also are used when the firm is accustomed to working with the client on similar engagements or where the client is able to produce significant data about past legal expenses for similar engagements.

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 Director 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 RFPs.  For more information, visit www.BanyanRFP.com

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