Value-based or hourly, contingency or flat fee? Lawyers are no longer tied to the billable hour when billing legal services. What are the pros and cons of the various billing options?
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I’ve been practicing law for several years, both as a solo and with a firm. During this time, I’ve tried different billing arrangements with varying degrees of success and learned plenty of lessons (often about what not to do).
Flat Fee Billing Arrangements
Flat fee billing is where a law firm charges a fixed fee for specific services, regardless of the time spent on the matter. Lawyer flat fees fall under the alternative fee arrangement (AFA) umbrella, and are also known as fixed fees or value-based pricing. With a fixed fee, the client pays one fee for the whole job. This can include multiple tasks and services so both lawyer and client know exactly what the total cost will be. Flat fees are typically used for more predictable legal matters, such as a simple will or uncontested divorce. For example, a law firm might charge a flat fee for drafting a contract, handling a trademark application or providing advice on a specific issue.
While charging by the hour remains the default for legal pricing, the legal industry is increasingly adopting flat fee billing or hybrid billing — where lawyers charge a flat fee but bill hourly for additional legal services. It’s an attractive billing option for clients who need to budget legal costs. In fact, more corporate clients request alternative fee arrangements and are willing to pay a premium for them. Paying by the hour might cost them less in the long run, but they value the certainty flat fees give them.
How Flat Fees Work
In a flat fee billing arrangement, the law firm and client agree on a fixed fee for a specific legal matter or service. This fee is paid upfront or in installments and covers all the work required to complete the job. This can apply to all types of legal services including transactional work and advisory services, while litigation is a bit trickier.
Depending on the type of practice you have, charging a flat rate or fixed fee can simplify billing and collections. Some attorneys even find that a fixed-fee billing structure brings in more revenue compared to traditional hourly billing. In addition to charging a fixed rate for individual matters or transactions, some law firms bill clients a monthly flat fee that covers a certain number of hours for transactional or advisory services.
Of course, just like hourly rates, flat fees must be reasonable. (Read: “Ethical Considerations for Flat Fee Billing” by Mark C. Palmer.)
When I was a solo practitioner, I used flat fee billing for almost all of my work. I did not lift a finger on behalf of a client until I had a signed engagement agreement and their check cleared. My engagement agreement stated that legal fees were earned on receipt, so I could deposit them directly into my operating account and bypass the trust account.
Flat fees can simplify the billing process, but they also come with challenges—such as accurately estimating the scope of work.
Pros:
I got paid in full up-front. I didn’t have to chase clients for money.
Clients like it. They paid one flat fee and that was it for the project.
I could set the fee based on the value I was bringing the client — i.e., value-based pricing — not how much time I spent on the matter.
Fixed fees offer clients predictable pricing, alleviating concerns about project scope and costs.
Lawyers can differentiate themselves by offering the benefit of a clear and predictable pricing model.
When I used flat fee billing (notice the past tense), the majority of my work was transactions: copyrights, trademarks, and contract drafting and reviews. I’ve heard that some criminal defense attorneys also charge a flat rate for run-of-the-mill matters that tend to be formulaic.
Cons
I didn’t earn more money if the matter took substantially more time than expected. With a flat fee, it’s easy to quote a price based on how simple you expect a project to be.
Flat fee billing has limited uses. I learned the hard way not to use it when negotiating a settlement, for example.
Flat fees can also carry the risk of underestimating the work involved, leading to potential financial losses for the lawyer. I made the mistake of quoting a low price for someone who wanted a simple contract. He asked so many questions and nitpicked everything I wrote, so by the end, my hourly equivalent was painfully low.
Flat-Fee-Plus Billing and Other Hybrid Fee Arrangements
What I refer to as “flat-fee-plus” is a hybrid fee arrangement where a flat fee is charged for a project with a limited scope, and then the client is billed at your hourly rate for any work performed beyond that. This is what I currently charge to file a trademark with the USPTO — a flat fee to do a trademark search and submit the application with up to $225 in filing fees. The client is responsible for all additional filing fees (approved in advance), and they pay my hourly rate for any interactions with the USPTO after I submit their application. This may include everything from a simple conversation with the examining attorney to an opposition.
In addition to flat-fee-plus, some law firms also use hybrid contingency fee arrangements and even hybrid “success fee” arrangements. In a hybrid contingency fee billing model, the law firm charges a reduced hourly rate in exchange for a lower percentage of the final settlement. While typically used in business litigation, hybrid contingency billing can also be by lawyers who represent plaintiffs in personal injury cases. This might be attractive to clients who can pay a little upfront in exchange for receiving a larger portion of the final settlement.
In a hybrid success fee arrangement, the law firm gets paid upfront for a portion of their fee and the remainder is only paid if the matter has a successful outcom.The client and firm agree on what constitutes “success” in advance, whether closing a deal, winning a trial or settling early.
Pros:
You’re more likely to be paid the full value of the work you provide to a client.
Clients understand that if they want more, they pay more.
Cons:
You must collect payment from clients if the work goes beyond what you provide for the flat fee billing.
There is less certainty for the client regarding how much the work will cost.
Administrative costs, including overhead, office supplies, and legal research tools, can add up. Overlooking these expenses can impact overall budgeting and service delivery.
Although clients have less certainty about legal costs, the flat-fee-plus billing method is a good strategy when you, too, have less certainty about how much work you will have to do. I have used flat-fee-plus billing with some contract drafting. I charge flat fee pricing to draft a contract with one set of revisions if requested within seven days, with all other revisions billed at my hourly rate.
Hourly Billing
Billing by the hour is the classic model for pricing legal services, exchanging hours for dollars. I recommend hourly billing instead of flat fee pricing for any matter that involves an opposing party. We can’t control how much work we will have to do because of the opposition, and a retainer fee, which acts as a down payment for future services, can help manage the unpredictable costs of civil or criminal litigation.
With hourly billing, it’s important to ask clients about their budget (though some will refuse to give you one) and to set expectations from the start. I tell my litigation clients to expect their matter to cost $5,000 to $10,000 each month for the duration of the dispute. On the flip side, I have a handful of clients who have run up substantial bills and only some of them are diligent about paying it down each month.
While there are many reasons to deplore the billable hour, when you’re working long hours, you can at least take solace in the idea that you’re being well-compensated for your efforts. On the other hand, for solo practitioners and lawyers who work in small law firms, it is difficult to put in enough billable hours during the week while juggling the demands of running a law office on your own, and write-downs can kill your profits.
Pros:
You can get paid what you’re worth — as long as you set your hourly rate to reflect your experience and expertise and are smart about raising your rates.
There’s less risk if you get a substantial retainer fee upfront, especially if the client replenishes it as needed.
With all the work involved in litigation, hourly billing can be quite lucrative.
Cons:
You may end up chasing clients for payment, or even wondering if they’ve put you in a situation where you might consider filing a motion to withdraw due to nonpayment.
The client faces uncertainty regarding how much the matter will cost.
You have to manage unearned fees with the firm’s trust account.
There is little or no incentive for lawyers to find ways to be more efficient, possibly encouraging them to “drag their feet.”
There’s No One Way to Bill for Legal Services
Whether you bill hourly or prefer a flat fee billing structure, your engagement agreement should clearly state the requirements and expectations for payment. My best advice is to respect the value you bring to clients and charge accordingly.
Additional Information on Legal Fees and Billing Models
Looking for More Profit in All the Right Places by Peggy Gruenke
Take the Guesswork Out of Flat Fees: Five Questions to Ask by Peggy Gruenke
Is Your Practice Area a Good Fit for Flat Fee Billing? by Erika Winston
Wise Up Before Value Billing by Toby Brown
Getting the Fee You Deserve by Bob Denney
FAQs About Legal Billing Arrangements
What is a fee arrangement?
A fee arrangement or fee agreement is an agreement between a lawyer and a client that describes how the lawyer will be compensated for legal services and the terms for payment. Depending on type of case or legal matter, the billing model may include hourly rates, flat fee pricing, contingency fees — or a combination. If a retainer fee is required, this will also be spelled out in the fee agreement.
What determines the “reasonableness” of legal fees?
When lawyers consider how they will charge for their legal services, the paramount benchmark is ABA Model Rule 1.5(a): “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” ABA Model Rule 1.5(a)(1)-(8) outlines factors to consider in determining the reasonableness of a fee.
What is a retainer?
A retainer fee is an upfront payment made by a client to secure a lawyer’s services, typically held in a special account, such as a client trust account, and drawn upon as legal work is performed. Strict ethics rules, overseen by state regulators, must be followed when handling client trust accounts. (Read “Would You Pass a Trust Account Audit?”)
What is a contingency fee?
A contingency fee is a payment arrangement in which a lawyer receives compensation only if the case is won. Typically, the lawyer receives a percentage of the settlement or judgment awarded to a plaintiff. In a contingency fee arrangement, the client does not pay the lawyer a fee for legal services if the case is lost, although the client may pay some expenses.
What is a referral fee?
A referral fee is a payment made by one law firm or lawyer to another for directing a client to them, in accordance with ethical rules governing such arrangements. Referral agreements should be in writing and signed by both parties. The agreement should outline the terms and conditions of the referral including the referral fee percentage and payment terms. It should also state the scope of the referral and the responsibilities of each attorney involved. (Read: “Is It OK to Pay Referral Fees to Non-Lawyers?“)
