If revenue is the lifeblood of a law firm, the billing function is its beating heart. Whether you specialize in billing or juggle many administrative duties, the questions you ask when opening a new file set the stage for successful billing and collections.
This guide offers a deep dive into definitions and fee structures. It wraps up with a list of questions to help you navigate any billing setup, no matter how complicated. Part 2 of this series will delve into how to bill for various fee structures.
Note: While this guide is software-agnostic, Tabs3 Billing users can get how-to information about each of these methods in the Billing Methods Guide.
An overview of billing terminology
Fee structures are broad categories of legal fees, like hourly, contingency, flat rate, or hybrids.
Fees compensate the firm for its legal work, like appearing in court or preparing a document. The most common fee structure is hourly. For an hourly matter, the fees are the number of hours each timekeeper worked, multiplied by the timekeeper’s rate.
Costs compensate the firm for its expenditures, like copying files or paying court filing fees. Costs are divided into expenses and advances. Expenses represent a portion of the firm’s overhead, like copying files on the firm’s photocopier. Advances are actual payments the firm makes on behalf of a client, like filing fees paid to the court.
Discounts reduce the bill. They can apply to the entire bill, or a partner might write down (not charge for) part of the fee.
Nearly every matter has a written fee agreement, which says how the fee will be calculated, who is responsible for costs, the billing cadence, and other agreements about representation. It may also be called an engagement letter, engagement agreement, fee contract, etc.
Depending on your firm’s size and file-opening process, you may get the actual fee agreement when you are setting up a new matter or only the information related to billing.
Fee structures can be simple or complex
The most common fee structures are hourly, contingency, and flat fee. But there are also hybrids that include any two of those fee structures, or even all three.
Hourly fee structure
Most transactional and defense litigation matters are billed hourly, as are most family law and criminal defense cases. Timekeepers track the number of hours they spend on a matter, and the fee is the number of hours multiplied by the appropriate rate. Clients are usually billed monthly for the fees incurred in the prior month.
For instance, if Attorney A records 5.0 hours at $250 per hour and Paralegal B records 6.0 hours at $150 per hour, the total fees are $2,150 ($265 x 5.0 plus $150 x 6.0).
Tips and tricks for hourly fee structures
- The client is almost always responsible for costs in hourly matters.
- Most discounts are write-downs by the reviewing attorney during the statement review/pre-billing process.
- While the billing rate is set by the fee agreement, you may not have access to the actual fee agreement. Some firms assign multiple rates to a single timekeeper, or set rates based on role/seniority. You may need clarification to choose the correct rate.
- Some matters may have contingency fees or flat fees in addition to hourly fees, so it might make sense to double-check whether an hourly case is purely hourly. For many firms, however, it is rare to see anything other than straightforward hourly billing.
Contingency fee structure
Contingency fee structures are most common in plaintiff-side litigation, like personal injury or civil rights. In a pure contingency case, the firm is only paid if the client recovers money, either through settlement or winning at trial. These cases typically give the attorney a percentage of the recovery, like this:
A schoolteacher experiences sexual harassment at work and engages the firm. The teacher and the firm agree that the firm will initially pay for all costs and will not charge an hourly rate. If the teacher’s claim is successful, the firm will receive 30% of whatever she was awarded and she will reimburse the firm for costs. If she recovers nothing, the firm will not bill her for fees or costs.
After six months of work, the case settles for $100,000. The firm has incurred $5,000 in costs. When the firm receives the settlement check (and it clears), the firm deducts $5,000 for costs plus $30,000 for the contingency fee. The rest, $65,000, goes to the client.
Tips and tricks for contingency fee structures
- Nearly every state prohibits contingency fees in family law and criminal defense matters.
- Some states allow lawyers to create hybrid arrangements that include both contingency and hourly/flat rates. For instance, the client and firm might agree to a discounted hourly rate plus a bonus if there is a good outcome in the case.
- Sometimes the firm covers costs if the client does not recover money, and sometimes the client must pay for costs no matter what the outcome is. If the client is responsible for costs, the attorney might want to bill for costs monthly, once they hit a certain dollar threshold, or at the end of the case.
- If you are billing periodically for costs, the attorney may want to include fees on the statements, even though you will not be asking the client to pay them. Even if you are not billing for costs, the attorney may want to send periodic fee statements. This can reassure clients their case is being worked.
- Even if you do not bill the client for fees, you may need to prepare a fee report for settlement negotiations or when the firm is filing a fee petition. (A fee petition asks a court to make the other side pay the firm’s bill.)
Flat rate or value fee structure
Instead of billing by the hour or retaining part of a settlement, the firm can set an all-inclusive rate for the work. Typically, the client is also responsible for the costs. An example of a simple flat fee engagement:
Jane is forming a corporation. For $2,000, Attorney A agrees to prepare and mail the necessary paperwork with the Secretary of State’s office. Jane must pay $2,000 up front. She will also be billed for copies, postage, and the filing fee at the end of the case (when the costs are known).
Flat fees can also be recurring. For instance, a small business might pay a flat fee every month to have an attorney on call to help with any business problems that arise. Or a large matter might include multiple flat fee payments, with each one due at a certain stage of the project.
Tips and tricks for flat or value fee structures
- Flat fee arrangements can include hourly or contingency fee. For instance, a firm might offer a flat fee on outside general counsel services, but agree that if the client uses more than a certain number of hours per month, the excess time will be billed at an hourly rate. Or a client might agree to pay a flat rate plus a percentage of money recovered in a contingency case.
- Costs might be included in the flat fee, or you might need to bill for them. The attorney may want to bill at the end of the matter, monthly, or when a certain threshold is reached.
- It is usually a best practice to include fee entries when billing costs, even though the client is not paying hourly. This demonstrates the value the client is receiving.
Discounts, write-downs, write-ups, and write-offs impact totals
Reductions or increases in the bill are the last piece of the puzzle. Firms use a variety of words for these concepts, but the concepts themselves are the same across almost every firm.
- A discount means a reduction of the entire bill, usually by a percentage. Discounts can be one-time or recurring.
- A write-down means reducing the amount of time billed for a task, or removing certain time entries completely. Partners typically do this during statement review/pre-billing. It can also happen during collections, in which case you may need to create a revised statement. You may also be asked to run reports about write-downs, because consistent underbilling can undermine cash flow and reduce partner compensation.
- A write-up means increasing the amount billed beyond what is included in the work-in-progress. This might come up in contingency cases, where the firm is entitled to a certain percentage of a settlement even though it exceeds the amount the firm would have billed on an hourly case.
- A write-off means forgiving an unpaid bill (or part of it). Write-offs have tax consequences, so deciding to write off debt is a strategic decision.
Questions to answer when setting up a new case
The following questions can help you get prepared to set up a new case. Depending on your firm, you might get this information from the fee agreement, from someone in your department, from the attorney, or some combination of those. You may want to add other questions that reflect your firm’s unique file-opening process.
For all matters. Detailed questions are in the following sections.
- What is the fee structure for this matter (e.g., hourly, flat rate, contingency, or hybrid)?
For matters with hourly fees.
- What timekeeper rates should be used?
- Do you want to bill monthly, or at a different cadence?
- Should costs be included in every bill? If not, when (e.g., when a threshold is met, at the end of the matter)?
For matters with contingency fees.
- Will costs be billed to the client? If so, when (e.g., when a threshold is met, at the end of the matter)? Should cost invoices include fee entries?
- If we are not sending regular cost invoices, should the client get regular informational statements showing fee entries?
For matters with flat fees.
- Will costs be billed? If so, when (e.g., monthly, when a threshold is met, at the end of the matter)?
- Is there just one flat fee, or multiple flat fees? In either case, when should the flat fee(s) be billed?
- Should we include the unbilled fee entries on the flat fee and/or cost invoices?
Tabs3 makes every fee structure and billing methodology easier
If your firm is not using Tabs3 Billing yet, we would love to show you how easy even complex billing can be. The platform offers virtually unlimited billing options, with smart shortcuts to save you time. You can even handle the statement approval process entirely within Tabs3 Billing with our pre-billing feature. Set up a personalized demonstration with our experienced trainers today.
Ready to learn more? Stay tuned for Part 2 of this series on how to bill for any fee structure.