Fixed fees under discussion again

I came across a post on MyShingle about a discussion about the benefits of fixed fees and a view about who bears the additional cost if the original estimate proves to be insufficient.  One view is that a quoted fixed fee is based on an estimate of the time involved in a matter and its complexity and if the estimate proves to be inaccurate because the matter is more involved that was originally anticipated, then the client must bear the additional costs over and above the quoted fixed fee.

Carolyn Elefant disagrees (and rightly so, I think).  As she puts it:

Where I do take issue with Chris and other proponents of fixed billing is on the question of who bears the burden when a lawyer underestimates the fee, or where a case takes longer than expected.  Chris and many other proponents of flat fees seem to think that the client ought to pay the overage.  But I disagree.  When I give a flat fee estimate, I will eat the cost unless the extra work is caused by the client (e.g., client lies about material issues in the case) or created by unforseen events (e.g., change in a 50 year precedent that leads to multiple appeals).  My feeling is that as the attorney, I am the expert on estimating fees, so I should bear the risk of an inaccurate estimate. Giving flat fee estimates and then charging clients for extra work puts all of the risk of the inaccurate estimate on clients.  Maybe that’s what’s considered good business for lawyers, but I just don’t think it’s fair.

This is perhaps the biggest challenge in working out a fixed fee schedule for legal services, particularly litigation services.  There are many attendances which take varying amounts of time and are therefore difficult to quantify.  That being said, a fixed fee should take into account the possibility that the matter itself may exceed the anticipated parameters of the fixed fee and the attorney may take a knock.  I agree with Carolyn that an attorney takes a risk when he/she sets fixed fees and that the fee should be carefully considered and set to take these risks into account.

Christopher Marston’s firm, Exemplar Law Partners prides itself in being a “next generation” law firm that works exclusively with fixed fees.  Their motto is “No hourly bill.  No hourly bull.”.  Quite catchy, actually.  Marston considers the question why everyone doesn’t use fixed fees if its benefits are so well known on his blog:

One of the most amazing things about Exemplar’s fixed-price model is that everyone finds it to be so intuitive. It is so obvious that customers prefer it (even lawyers — just google the words “billable hour” and see what you get. . . everyone hates it. If you find a positive comment on it let me know!) that everyone asks me why everyone is not already doing it. I have had the pleasure of speaking with many attorneys in practice under the “old” model and I consistently hear them say “well, I just don’t know how long it will take.” Curiously, I ask them how much time they spend at the very beginning thinking about how long it might take so they can give their clients some guidance and most say “well, none really, because then I would not have the time to get the work done and plus, I can’t bill them for my effort!” I don’t know about you, but that sounds pretty lazy to me (not to mention a feeling of entitlement to get paid for every single minute of time spent on an activity). What kind of statements does that make about our industry? What does this say about how service minded we are if we operate under that model? Do you think I would ask you questions I did not know the answer to already?

The next most frequent response I get is “what if it gets out of hand or the project goes in a different direction. . . I can’t price something if I don’t know where it might go.” This is where I take the axe to the linear thinking log and remind them that customers do not expect their attorneys to have a crystal ball and tell them the future. They are not asking us to put a price on all of the uncertainties. They DO expect a price on the things that are certain and even likely to happen. They would not be hiring you unless there was at least a certain amount of legal work that is certain or likely to happen. Therefore, there is no excuse for being lazy and billing by the hour when you know that a certain amount of work will occur, and you need only care enough about your clients to actually take a moment to tell them how much that will cost (it is the least you can do, really!). Then, there are no surprises. If the work goes outside the scope of what is known, your customers will understand that more action needs to be taken at an additional charge. With good communication and clarity as to the work being performed, you can give your customers what they deserve (clarity) and free yourself from counting every 6 minutes of your life. Exemplar Law Partners has not had a single customer ask us to bill them by the hour (that is telling) and our people certainly enjoy focusing on building relationships rather then building a timesheet.

I confess it is a tough one.  I have been thinking about it some more lately after two discussions I had recently about fees, one with a colleague who disagrees with much of what I have said about billing and the other with a client’s agent about aspects of my billing structure.  I still believe that developing a more complete fixed fee structure is so important it could be considered vital.  The difficulty is calculating that estimate accurately enough to satisfy my client’s requirements for certainty and value and my own desires to run a sustainable and feasible business.  As JD Hull puts it:

In implementing a new fixed price scheme, there are issues and pressures. You still have to make a buck and keep the doors open. You must survive. And cultural difficulties, too. Clients are wonderful but mercurial creatures. You’ve got to sell this to the very people who say they’ve wanted it along, but maybe never thought it through. Are corporate clients really ready for it? Will they think they’ll be getting less?

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