Wednesday, August 6, 2014

Flat fees v. billing by the hour

When I started practicing law, I found myself working by the hour for the first time in years.  My salary was fixed, but my most tangible value to the firm was measured by my billable hours.

The billable hour is a haunting presence in a law firm.  Young lawyers are led to believe that happiness is making partner and that making partner means sitting at a desk for more than 2,000 hours per year, but we all know that happiness is not being chained to a desk.  Among my law school classmates, as bright and energetic as they are, most have not become or remained partners in large firms.  They are well-distributed in small firms, government agencies, corporate in-house legal departments, start-ups, and solo practices as well as big firms.  Those who bill by the hour consider it a perpetual burden, and those who no longer bill by the hour were generally glad to unload the burden.

Large institutional clients whose budgets include monthly legal fees generally do not mind this system because they can justify each expense to the board, shareholders, partners, legislators, voters, auditors, etc. by the itemized billing sheet showing each tenth of an hour used for the client's benefit.  Large law firms likewise need the billable hour as a measure of performance in a wide range of practices.  Plaintiffs' firms keep up with their time so they can ask for attorney fees when they win.  (As Keith Lee has noted, the U.S. Supreme Court has etched the billable hour into the stone of American practice by standardizing the "lodestar method" for paying the attorneys' fees of winning plaintiffs.)  In my current solo practice, I bill institutional clients by the hour, and billable hours will likely remain the standard method for determining fees for large clients.

Billing by the hour, however, is not the preferred method for the client who pays you with emergency funds rather than from a budgeted line-item funds.  If you were to improve your home or office on a short deadline, your building contractor would not quote you a billable rate and send you an engagement letter.  Your contractor would define the scope of work, itemize the various materials and labor costs, weigh the risks to you and himself, and quote a price for the job.  Your contractor would likely provide in the agreement for "change orders" in case the scope of work changed in mid-course.  The Great Recession has forced many lawyers to price their services by the project rather than by the hour, and overall, it is probably good for the profession and the public.

Clients want valuable advice and advocacy based upon solid analysis and well-developed skills.  Clients generally do not care how much time you take to accomplish the challenge so long as the value exceeds their expectations.  The paramount place of the billable hour in American law can obscure the ultimate goal of favorable and timely results and thereby feed public cynicism about our profession.

When I began my solo practice on May 1 of this year, I determined that I would charge flat fees, graduated flat fees, or contingency fees to all but my institutional clients.  Now I do not even measure my time; I keep a journal rather than a time sheet (except for my institutional clients and contingency clients).

Perhaps I shall later write that this experiment was a failure.  Nonetheless, I am enjoying the practice of law now more than ever because I can be more task-oriented than time-oriented.

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