What is wrong with an Hourly Fee?

4 Comments

The greatest reward for a client in working with a value priced fee is the certainty and transparency that occurs. If the fee does not sound right or fair, the client can walk away, or at least can consider the quoted fee to determine if there is enough value to the client to pursue the legal matter in exchange for the fees to be charged.

If a legal representation is quoted at an hourly rate, the client will have little indication of what the final cost will be. In an hourly rate fee there are two components to the final fee, the rate times the time spent on the matter. If the lawyer will not cap the total fee, the client is taking on the risks of trouble. And when the client has paid more than the case may have been worth to the client, and the case is not over, there are no good solutions. Dropping the case does not seem appropriate, after all the sunk costs, and then losing is a hard choice. But pushing on may make no sense either.

The legal matter will determine the number of hours invested by the lawyer, and paid for by the client. Drafting common documents or reviewing documents that have been prepared by another lawyer should be easily estimated. Negotiations on document is not easily estimated due to the nature some lawyer have of arguing every jot and tittle of a document. (One party to a transaction accused the lawyer of spending time grading each other’s documents – which I found in that matter to be pretty perceptive.)

The per hour fee is a measure of some worth, one that for the most part indicates the lawyer’s own sense of self-worth. I think too many lawyers suffer from a lack of self-worth for the real value they provide to clients, and will discuss that more in a future post. For some lawyers it is important to be the highest hourly fee in the community, for others it is critical to not be the highest priced. There are lawyers in our community that are worth more than the fee they currently charge, and others that are not worth the fees they charge. Calculating that on an hourly basis, rather than a case by case basis is not possible.

Is the work being done worth a premium price to the client? If a Yugo does the job for the client, then why should the client pay a Lexus price? But if the client is in a serious legal situation, whether business, estate planning or criminal, a Yugo value legal representation will not accomplish what is needed. And that is true of either a value priced fee or an hourly fee. To some extent, the value of the client’s services are a reflection of the client’s self worth as much as the attorney’s.

There are some good things about hourly fees. It is quoted in bite sized numbers. A three figure number is easier to hear than a four or five figure amount. It can be counted, whether in 3, 6 or 15 minute segments. The sticker shock of how much this problem will cost seems less, if only for a while. And if everything goes well in the case, the number will be smaller than if everything goes wrong in a case.

You may be able to get the lawyer to estimate the number of hours that her experience tells her that this kind of case has taken before. But when you do that, you in essence are asking about the cost of a value priced case.

On several occasions estimating a range of fees (rate x time anticipated for quick results or for slow) resulted in an angry client – when the fee was not the bottom figure quoted in the range. My description of the variables (if we don’t have to file a suit, if the prosecutor takes our offer,. . .) never stuck as firmly as the bottom number of a range of numbers. The client then blamed me for a higher fee, even when I had told him of the variables and put them in the engagement letter, I still seldom collected more than the lower fee. The anger over the fee turned the client from being on the same side as I was, to putting me on another side from my client over the fees. That is not where I want to be in relationship with my client.

If the lawyer is the professional, shouldn’t she show it by setting the fee at a price where the lawyer makes a good living, but the client can live too? More on this later.

Advertisements

What are the client incentives for a Value Priced fee?

Leave a comment

Potential clients need to know that lawyers have a variety of incentives to help clients with their legal problems. Among the incentives is the chance to make a living as a lawyer. Lawyers have college (four or more years) plus law school (three or more years) of education, study and postponement of their earning years invested in preparation to be available to help our clients, whatever the legal matter is.

The types of incentives can be the feelings of satisfaction in helping a person resolve a legal issue, or the improvement of a professional’s reputation in a case which gets the kind of notice that affects the reputation and esteem of the lawyer. Some lawyers are reported to enjoy getting paid for their efforts at helping clients. Lawyers who over a long period do not regularly get paid usually stop practicing law.

Clients also have incentives for engaging legal services. The client may have recently been sued, been involved in an accident, been charged with a crime, or may have decided to take control of a situation by obtaining business counseling or planning their estate. Whatever the triggering event, the lawyer will appreciate the call (if not, call someone else) as it allows the lawyer to show the skills and experiences she has worked for years to acquire to you as a potential client, and if hired to use those skills for your best interests.

To make all that come about the lawyer and client need to come to agreement on the compensation to be paid for the lawyer’s (or law firm’s) services. Lawyers operate under a rule on legal fees based on the American Bar Association’s Model Rules of Professional Conduct. All states, except California use the rules or some variation of them as their code of ethics. Rule 1.5 governs Legal Fees, and this is Indiana’s version. The primary factor in the rule is that a lawyer shall not charge a fee that “is unreasonable.” There are eight other factors listed, which cover 14 actual factors.

As long as the fee arrangement fits the Rule 1.5 guidelines (and several cases that interpret the Rule) the lawyer and client are permitted to enter into any fee agreement they can work out. The three syles of fee agreements are described in the link to an earlier post.

The structure of a fee agreement can shift the risks in the case from the client to the lawyer, so long as both parties understand what is happening. With a risk shift to the lawyer, there are possible rewards and penalties which follow to the lawyer. As the lawyer accepts risks, the risks to the client diminish. Most clients appreciate a reduction in the risks of legal work.

So, why are value priced fees appropriate for clients in so many types of cases, and why not in all cases? The risks for each side changes with an agreement for flat fees. for instance in a personal injury case, lawyers who skillfully choose their caseload will accept a percentage of the recovery as a fee. If there is no recovery (the legal outcome that fulfills the scope of services offered), the lawyer takes no fee. If the case settles promptly, the full fee will be taken by the lawyer, as agreed.

In these and other types of legal matters with a value priced flat fee the potential client gets the advantage of knowing the scope of services or outcome that will be provided, and the total fee to be paid. That means that when the scope of services is completed, the lawyer is done and gets paid or keeps the fee. It also means that if the scope of services changes in a manner not foreseen, or agreed to when setting the fees, the fees may change (properly with a Rule 1.8 explanation and opportunity). Finally, if the lawyer does not complete the scope of services, some or all the fee shall be refunded if prepaid.

The flat fee establishes that it is the lawyer’s incentive is to complete the services quickly for the benefit of the client, and also for the lawyer. The lawyer loses any improper reason to create or increase unnecessary conflict with the opponent or her lawyer, as it will not help to increase the profit for the lawyer, since time spent is not a variable in the fee equation. But the fee needs to be based on a proper value pricing analysis, since a lawyer who consistently quotes a fee that is inadequate for the scope of services finally provided will not stay in the profession too long.

The greatest reward for a client in working out a value priced flat fee is the transparency that occurs. If a legal representation is quoted at an hourly rate, the client will have little indication of what the final cost will be. In an hourly rate fee there are two components to the final fee, the rate times the time spent on the matter. There is no protection for the client from unnecessary expansion of the dispute in order to build hours to bill.

We can discuss the components of an hourly fee in an upcoming post. I look forward to your comments.