Don't let flat-fee arrangements leave you flat broke

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Published on 12/25/06

Legal-fee alternatives to the billable hour continue to be a hot topic, and we've discussed them several times from the standpoint of what is reasonable for the client. However, alternative-billing arrangements should also be reasonable for the lawyer. Consider the trend toward charging a flat fee at a volume discount.

With a fixed or flat fee, the billing rate is determined and stipulated in the engagement letter, before the assignment even begins. It will not vary no matter how much time the lawyer expends, or what the result.

Flat fees are especially useful for routine legal services, and encourage the use of technology to streamline the provision of those services. The challenge with this approach is that lawyers, generally, don't know their costs of operation. Thus, the fee figure chosen often is a "by guess, by golly" fee, not one based on a cost benefit analysis.

Your firm cannot aspire to set an accurate flat fee unless you understand the operation of the firm as a business (budget, collections, profit, loss), the firm's billing structure, and how each attorney determines firm profitability.

A flat fee is only an acceptable billing alternative if the attorney knows the cost structure behind it, and if the client accepts the value that the fee represents.

Flat fees are often considered to be a form of discount, but be careful that you don't negotiate against yourself by accepting them. I recently spoke with an intellectual property lawyer who was approached by a prospective client with the possibility of work in return for a discounted hourly rate. The advice I offered to this lawyer was threefold:

  • First, state that your billing rate is $X (your actual rate); you do not talk about discounts, reduction in fee, or any other modification of your hourly rate. To do so would be to negotiate against yourself and against your self-interest. If in the same breath you quote your fee, then start talking about discounts, you are saying that you are not serious about your own fee.

  • Second, if the client asks whether $X is the least expensive rate you can charge, raise the idea of a volume discount. You are prepared to discount your rate from $X to $(X-Y) if, and only if, the client is prepared to guarantee 20 hours of work per month for a minimum period of time, say six or nine months. This is essentially a flat-fee arrangement.

  • Third, if the client will commit to the amount of hours and the time period, they should pay the discounted fee of $Z (20 hours at $(X-Y)/hour) at the beginning of each month. In other words, they have to pre-pay that amount. If the client needs more than 20 hours of work in any given month, the additional work will be billed at the discounted $(X-Y) rate under billing terms the attorney typically uses (for example, payable within 30 days of the billing).

Approaching the idea of discounting this way says that you are willing to treat clients fairly when they treat you well. In other words, the quid pro quo for a discount is a guarantee with payment up front. It makes no sense to do business with a client who will not agree to do that.

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