In recent years, law firm clients have become more sensitive to the high prices of legal services and are demanding alternatives to the traditional billable hour. When you’re a general counsel paying close attention to your company’s bottom line, one of the most popular fee options is flat-fee legal services.
As you can imagine, engaging a flat-fee lawyer has its pros and cons:
Flat-Fee Legal Services: Pros
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Predictability. You’ll know upfront what the entire project will cost – no surprises. This simplifies your budgeting and creates certainty, avoiding the risk of a huge, unanticipated bill landing on your desk.
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Speed and efficiency. The traditional billable hour creates the perverse incentive for attorneys to work slowly (which at many law firms is compounded by the associate bonus structure, also often based on the number of hours billed). A flat-fee lawyer can correct this misalignment of incentives; your legal service provider is now best served by coming up with more efficient strategies for handling the project. The only incentive is to deliver the promised service (whether it’s a document or a result) in a shorter period of time to take advantage of the margin. Such strategies can include systems, delegation or technology that can all benefit you as the client.
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Cost savings. The margin can also swing in your favor. If your negotiated price is lower than it would have cost at an hourly rate, you’ll end up saving money.
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Fewer fee disputes. Since you’ll know exactly how much you’re paying ahead of time, you’ll save a lot of time and energy by not haggling down unexpected attorney fees that could crop up on an hourly model. Save your attention for more important business matters.
Flat-Fee Legal Services: Cons
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You might overpay. If the firm resolves the matter more quickly than expected, your company will end up paying more than if you had been billed at an hourly rate.
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Speed may come at the expense of quality. Flat-fee arrangements can put law firms under pressure to turn work in the shortest amount of time, so the firm can profit off the spread between the price commanded and the cost of labor required. However, a good law firm will recognize that only high-quality work will keep the client coming back for future engagements. It is important that you emphasize to your flat-fee attorney that your continued patronage depends on the quality of their work.
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It’s only suited for certain types of matters. Flat-fee legal services are usually most appropriate in situations where the company and its outside law firm will work together on a repeat basis, so they’re both familiar with the work required and how much it would usually cost. For this reason, flat fees are more often used for transactional work than for litigation. Flat fees might not be suited for matters that could have more layers or nuance to them than originally anticipated. Fee agreements often include a provision for renegotiation of fees if additional unexpected work pops up, for example if a case “blows up” and takes much more time or work than expected when the fees were set. To avoid this situation, you should clearly define major assumptions about what the project will encompass when entering the engagement. Being open about business and cost considerations can also alleviate the worry that law firms are incentivized to deliver a good result by winning at any cost, without regard to the client’s budget.
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You may lose transparency around where your costs are coming from. If you can no longer see the details behind the bill because you’re paying a flat fee, then you can’t analyze the tasks, rates, etc. across how the law firm handles your matter. However, attorneys will likely still be billing their time, so you can request the underlying task-based bill to check the accuracy of your fee estimate for future modeling.
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As a client considering a flat-fee lawyer, it’s important to remember that you’re not looking for the cheapest way out – you’re looking for the same value at more modest prices. Instead of just trying to drive down attorney fees and get the lowest estimate possible, look for a win-win situation to maintain a proper alignment of incentives.
By utilizing flat fee legal services where appropriate, you can increase reliability, mitigate risk and save money for your business. However, it’s essential to make sure incentives are properly aligned and that the attorney understands if the matter goes well, this will be a continuing relationship.
