A Flat Fee Is Really a Guarantee

Published September 16, 2008

In a previous issue of LawBiz® Tips, we talked about approaches lawyers can use to guarantee quality in the services they provide, and noted contingency fee billing as an example. In fact, virtually any form of billing other than an hourly rate offers clients a degree of certainty suggested by a guarantee. Rather than setting price by a standard unit of time, billing alternatives focus on actions taken to benefit the client, beyond the time of how that value is applied. Take, for example, charging a flat fee at a volume discount. The billing rate is determined and stipulated in the engagement letter, before the assignment even begins and will not vary by time or result.

For the client, this certainty is a benefit; for the lawyer, it’s a two-edged sword. If the flat fee is high enough, it encourages use of technology so that the lawyer can do the work faster and increase the effective hourly rate. However, strictly speaking, it’s not possible to make more money while charging less, unless the client is more willing to send more business to the lawyer, assuming that the fee charged is above the firm’s break-even level.

The challenge with flat fees is that lawyers, generally, don’t know their costs of operation. Thus, the fee figure chosen often is a “by guess, by golly” fee, not one based on a cost benefit analysis. Your firm cannot aspire to set an accurate flat fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm’s billing structure, and how each attorney determines firm profitability. A flat fee is only an acceptable billing alternative [Click to hear podcast] if the attorney knows the cost structure behind it, and if the client accepts the value that the fee represents.

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Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners