Best Practice: Law firm billing arrangements - flat fees

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing owner of a four attorney estate planning firm in Phoenix. We also have two paralegals, a receptionist, and an office manager. We have always billed our clients by the hour but have been considering switching to a flat rate billing arrangement. I would appreciate your thoughts and suggestions.

A. I am currently working with quite a few estate planning/elder law firms. The majority of these firms are still using "time bill" billing arrangements. (8 out of 10 firms) A few firms are using flat fee arrangements for estate planning and asset protection matters and "time bill" arrangements for estate administration and other matters.

Few firms that are using flat fee arrangements are realizing effective billing rates even close to their standard "time bill" rates. In some cases I have found effective rates per hour $100 per hour less than their standard "time bill" rates. In some cases the problem is not working effectively or efficiently. In other cases the flat fee price has not been properly set or limits placed on the work that will be done for the flat fee - for example - number or document rewrites, etc. 

I believe that more than ever clients are wanting the budgetary certainty that flat fees provide.  I think that a flat fee pricing strategy is a good strategy but the scope of work and proper price point must be properly established. A couple of suggestions:

1. Do some basic market research - secret shopping - and obtain the best information that you can on competitor pricing.
2. Review time charges on typical estate planning matters and get a handle on the amount of time that it typically takes - by each office professional - for matters of varying levels of complexity.
3. Based on these time estimates determine flat fees using the desired standard hourly rate and then add a risk premium of 10%. If a matters typically takes 10 hours and your desired rate is $200 per hour - set the flat rate fee at $2200.00.
4. Incorporate into your engagement letters, fee agreements, etc.
5. Get at least 1/2 of the fee before commencing work and the other half before delivering and executing the final documents.
6. Keep time sheets on the matters for time expended.
7. Review at least quarterly effective rates realized on completed flat rate matters.
8. If effective rates are below your target rate review the time detail and determine where the problem lies.
9. Make changes and adjustments if needed.

I believe that properly implemented and managed flat fees can be a worthwhile strategy but you must also make money.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.