How do you bill for a contract attorney? Very carefully...

Until well into the post-World War II era, legal fees were based not only on the time spent, but also the nature of the service, the result achieved and the amount at stake. Charging an appropriate legal fee was a matter of professional judgment.

That changed in the mid-1960s when clients began demanding detailed billing statements and lawyers used time records -- reflected in hourly billing rates -- as a management tool. Because that approach doesn't address value and benefits, clients have increasingly nudged firms to turn to outsourcing as a new form of value. USA Today recently carried a "snapshot" stating that 47 percent of legal service firms have outsourced a portion of their business.

The principle of outsourcing is fundamental: Do what you do best and let others do what they do best, most efficiently and at least cost to both you and the client.

Many firms, both large and small, thus use "contract lawyers" to provide legal counsel at reduced cost. Contract attorneys can contribute to work and cost efficiencies if used correctly as a transparent resource (thanks to technology) that offers a win-win solution for firms and clients.

Yet one crucial question determines the extent of cost savings: When you have a contract attorney work for you, how do you bill your client?

This issue has been litigated and the conclusion is that the contract attorney is not an out-of-pocket cost for billing purposes. Firms are not required to bill the client at the cost to them for the contract attorney's time. They may bill at an "attorney's rate," a standard flat rate, or any rate that is established in the engagement agreement and is acceptable to the client.

The rate can be high enough to cover "overhead" expenses of the firm's own staff, such as secretarial help, paralegals, word-processors and so on. The rate can also be higher than merely covering overhead; a profit element can be included. It is all a function of the agreement between the firm and the client.

Such an arrangement can carry the perils and pitfalls of "fee-splitting," and thus be covered under the Code of Professional Conduct. Model Rule 1.5 declares that fee-splitting is acceptable if both lawyers involved contribute something of value, if the client agrees in writing, and if the total fee is reasonable.

This is distinctly different from a situation where you outsource a service such as photocopying; in the contract lawyer arrangement the outsourcing attorney contributes (presumably) oversight of the outsourced legal work and interfaces with the client on how that legal work is applied.

A second, equally obvious concern can be surprisingly overlooked: The attorneys involved should have their own arrangement down in writing. Courts across the country have ruled that referral or split fees cannot be collected in full if there is not full documentation from either the client or the attorney side.

Attorneys who don't get written confirmation of an outsourcing agreement are like the cobbler's children who go without shoes. They obviously have been ineffectual in taking care of themselves if their only recourse to secure an undocumented referral fee is to sue.

And when there's money involved, even lawyers can have selective memories.