Every Client is a Potential Collection Problem

04/12/2011
Lawyers must understand the difference between pricing and billing. The price for legal services is typically an hourly rate, and is used to get the business and define the engagement. It is a prospective measurement.

Billing, by contrast, is retrospective – the way used to tell the client, “This is what I did, this is the time I worked, and this is what you owe me based on my price.” Pricing sets the cost of the legal services, billing conveys the monetary value of those services as defined by the lawyer.

The Wall Street Journal recently spotlighted the few (less than 2.9 percent of the total) lawyers in this country who can command $1,000 or more in hourly rates. Such rates certainly are high, but they still meet the Rule 1.5 standard of being “reasonable” if they are proportional to the value of the services performed and justified by the lawyer’s skill and experience. Such a high rate may sound attractive to many lawyers. But the real issue is whether the client understands the amount and nature of the fee and is willing to pay it.

No matter what price is set for legal services, it is irrelevant if the client does not pay it. Here is the fundamental difference between pricing and billing. Consider, for example, if a lawyer fails to specify a “pay by” date for a client; at what point, if any, can the client legally be considered delinquent for failing to pay? Every engagement to provide professional services should begin with a written agreement on services to be provided in order to be enforceable.

One of the terms of an engagement agreement is price, whether $1,000 an hour or $100 an hour; another is payment due date. If the due date is not stated, some jurisdictions may say it should be “reasonable” in event of a payment controversy. But, that raises the question of what is reasonable. Under most commercial circumstances, this means 30 days after billing or upon receipt, whichever is later.

Such ambiguity is inexcusable. Attorneys and law firms cause their own collection problems by failing to establish collection policies, to explain the policies from the start of an engagement, and to enforce those policies consistently during the engagement. Lack of a written collection policy can lead a firm to financial disaster. The engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment. The written collection policy must detail how to keep track of when clients are behind on their payments, and who/how to contact clients when they are late with payments. Every client is a potential collection problem. That means signed agreements are essential to demonstrate the client’s advance knowledge and acceptance of the payment terms. Once terms are set, it is vitally important to move quickly and collect accounts that are past the payment due date. A bill 60 days past due can still be collected much of the time, but the likelihood of collection drops off sharply thereafter. It should never reach this point, however.

Any vendor or professional service provider, no matter how high-priced, will not be in business very long without stipulating fee, due date, and consequences for failure to pay.

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