A Guide to Flat Fee Billing for Lawyers
April 26, 2023
Fixed-fee, or flat-fee, pricing is a model of billing where a lawyer charges a client an agreed-upon cost for the full scope of legal services. Flat-fee billing is sometimes referred to as an alternative fee arrangement and gained traction with small law firms and solo practitioners. It is common in transactional work, such as estate planning, company formation, and intellectual property matters. It is increasingly gaining traction in other practice areas like criminal defense and bankruptcy. This law firm billing guide will explore flat fee billing models, and what lawyers need to know about tracking their time.
What Is a Flat Fee?
A flat-fee pricing is an agreed upon cost for a legal service. For example, $1,000 for a simple divorce, or $500 for contract preparation. Clients like flat-fee pricing because it eliminates all future discussions about pricing and the focus shifts to actual legal services.
The History Behind Flat Fee
Many attorneys are surprised to learn that the fixed or flat fee model is actually older than hourly billing models of legal representation. In the late 1800s, state bar associations set maximum “caps” for how much attorneys could charge for services. Hour billing was originally deemed “unethical.” Based on regulations limiting how much lawyers could charge, client billings trended towards fixed rates based on the maximum they were allowed to charge.
In the 1900s, the American Bar Association began allowing lawyers to enter contingency fee agreements, and lawyers began shifting towards value-based fee agreements. By the 1950s and 60s, attorneys were reliably keeping time records. One case, Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), overturned state bar fee caps, allowing lawyers to adopt today’s hourly billing models, which account for more than 80% of attorney billing fees generated today.
Today there are a number of different types of billing arrangements besides flat fees and hourly billing - including piercing menus and hybrid arrangements that combine hourly billing with a lump sum payment upon a successful outcome.
What Areas of Law Will Benefit from a Flat Fee?
Unique fee arrangements are not for every client, every law firm, or every type of case. But because legal work varies greatly, it’s worth considering the best way to Flat fee arrangements are ideal for attorneys that are comfortable with the amount of work required to complete the project, such as a simple divorce, a real estate transaction, or a contract drafting. However, the use of flat-rate billing is expanding in scope.
Some of the most common areas of law that use fixed price models include:
- Corporate / business law, including formations and dissolutions
- Criminal defense, including DUI
- Family law, including uncontested divorce
- Tax law
- Criminal defense
- Probate law
- Estate planning law, including wills and trusts
- Bankruptcy law
Lawyers that do a large volume of work on the same type of legal matters are well-suited for flat-fee pricing. Flat fee pricing may be used for any type of legal work that is done repeatedly and is predictable in scope and in length. Some law firms offer flat fee pricing or menu-style pricing for administrative tasks, such as document review and research memos.
Advantages of Flat Fee Pricing for Lawyers
Below are some of the reasons lawyers consider alternative billing arrangements that involve flat or fixed fees:
1. Fixed Fee Pricing Encourages Efficient Resolutions
By their nature, flat fee billing models encourage and incentivize process efficiency. Lawyers who are paid hourly may spend more time researching and strategizing, while hourly lawyers may focus on reaching solutions as soon as possible. In other words, lawyers who have fixed-rate billing arrangements are compelled to get to work immediately and solve problems efficiently.
2. Flat Fee Attorneys Are Rewarded for Adopting Efficient Technology
Law firm technology, like modern law firm case management software, allows lawyers to be efficient. Whereas lawyers that bill hourly make more money the more time they spend on a case, lawyers that have fixed-fee arrangements get paid more money the less time they spend on a case. Lawyers with flat fees are incentivized to adopt modern efficiencies available that reduce the time they spend on cases and allow them to take on more cases.
3. Flat Fees Reduce Administrative Work and Fee Disputes
Flat fee billing frees lawyers from needing to track their time and liberates them from any suggestions of overbilling or bill padding. Although attorneys should still track the time they spend on legal matters, up-front payments reduce the administrative work associated with billing. There is no need for invoice narratives explaining how the lawyer spent their time. Because all underlying tension related to billing is essentially eliminated, there will be no client issues or disputes regarding how a lawyer spent their time.
4. Flat Fee Attorneys Offer Competitive Pricing
Lawyers that offer a flat-fee billing structure can easily distance themselves from their competition by offering a straightforward, predictable billing arrangement. This can work especially well for less established law firms. Clients may be willing to hire a less experienced lawyer for a fixed-fee arrangement than commit to paying possibly far more for a more experienced attorney who bills hourly because they feel that the flat-fee lawyer can capably handle the matter.
5. Flat Fees Allow For Immediate Attorney-Client Trust
One reason clients are often hesitant to hire lawyers that bill hourly is they feel like there is no telling what they will be charged when their legal matter is finally resolved. It can be daunting to know that simple communications like emails, phone calls, and even text messages can generate expensive bills. When clients are paying a flat fee, they will not be concerned with the cost of simple correspondence, and they will be direct and straightforward in their communications.
Disadvantages of Flat Fee Pricing
One of the obvious disadvantages of flat fee pricing is applying a “one size fits all” price to legal work that turns out to be more complex than anticipated. Some of the cons of flat fee billing are:
- Potential of Limited Profits: Clients and cases vary widely in complexity and actual time required to complete a legal matter. A lawyer may accept a case thinking they will make a certain amount of money, but if the case requires significantly more time and resources than anticipated. Some clients simply require more time and attention.
- Daunting Commitment: Clients may be hesitant to commit to paying a large sum of money upfront, especially in legal matters that will not be wrapped up promptly. Although many clients desire flat fee pricing, for longer or more complex cases, a flat fee can feel like a risk for both sides.
Lawyers wishing to offer fixed free prices to clients should consider that some clients, and some legal matters, simply aren’t suited for flat fee arrangements.
The Ethics Behind Fixed Fee Pricing
Although it makes sense that time tracking and recording are essentially eliminated with flat fee arrangements, many state bars still want lawyers to track their time, to ensure that fees charged to clients are reasonable.
Another reason for time tracking, and one point of consideration is the following what-if scenario: What happens if you retain a client and they pay in full, and the work is not completed and the representation is terminated? If you (the lawyer) terminate the attorney-client relationship for any reason, you will likely be obligated to refund the client an amount of the fee proportional to the work that was not completed, if not the full amount.
Leverage the Power of Automatic Time Tracking
If you don’t have accurate data, it is not possible to create a fixed fee structure that is fair to your clients AND profitable to your law firm. Having a record of how much time you’ve spent on different tasks and types of cases enables you to accurately estimate how much time future tasks and cases might take in the future. You should be able to recognize cases where you haven’t charged enough and avoid making pricing mistakes in the future.
Instead of a flat fee rate based on gut feeling or what one of your competitors charges, you’re able to set those fees based on real evidence and past experience.
Accurate time tracking is also necessary for law firms that bill on contingency. You need to be able to determine how likely a case is to settle in your favor, how much that settlement might be worth, and most importantly how much time you will spend on the case before a conclusion is reached. Fortunately, time tracking software allows your law firm to track time automatically.
With law firm analytics, you can easily understand how much time your lawyers and support staff are spending on cases, so you can plan your firm’s financial future, as well as future caseload.
How to Set the Price for Flat Fee Legal Services
Lawyers may struggle to switch from traditional time-based billing to flat-fee models but may need to offer fixed price packages to stay competitive, because their competition is offering it, and flat-fee pricing is attractive to clients. Flat fee pricing should never be an arbitrary number pulled out of a hat. When setting pricing for a legal service, there are a few things to consider:
1. Determine the Value of Your Services That Your Client Receives
There should be a correlation between the value of the services that you provide, and what your clients pay. Start with the value of the services that your client receives. Your client may benefit directly or indirectly from your legal services:
- Avoidance of jail
- Direct financial gains, such as a settlement
- Increased future income or wealth
- Improved reputation or credibility
- Reduced risks/prevention of future lawsuits
- A favorable outcome in a family law matter
- A settlement or financial award in a civil suit
Many of these benefits are the reasons why your client contacts you for representation in the first place. If you have handled these cases previously, you will have an understanding of the outcomes you can realistically provide, and what they’re worth.
2. Determine Your Own Costs
What will it cost you to represent your client? If you're efficient, you may be able to reach outcomes for your client with minimal effort. However, don’t lose sight of the value you are providing. Pricing your legal services too low can be a mistake - and some flat fee lawyers have lost money on cases, especially when pricing is not adjusted for future clients. Think about the big picture of what your all–in cost will be to complete your work for your client. Will you have to hire anyone to help you complete the case? Will you have to travel?
3. Find a Pricing Strategy That Benefits Everyone
It should go without saying, your own costs are not what you should charge your client. The price you set for your client should be a number that you are comfortable with, and a number that you are comfortable with your client disclosing to people they know, even your competition. While it’s ideal to offer competitive pricing, you don’t want to drive down prices unnecessarily and unrealistically to the point you are not making money.
A win-win pricing arrangement is mutually beneficial - it benefits the lawyer and it benefits the client. If you are asking yourself, “how does a client benefit when they are the one paying a lawyer?” Don’t forget about the value you are providing. Your clients benefit from the value of services, whether it is staying out of jail, being able to keep their professional licenses, receiving a settlement, keeping a home following a divorce, or receiving spousal support.
Flat Fee Billing: The Bottom Line
Flat fee billing may make sense for you, but it should be executed thoughtfully so that it is a win for your practice. Ready to see how legal practice management software from Smokeball can help you streamline your business and optimize your legal practice? Contact us to book a demo.
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