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Why Capping Hourly Fees is Usually a Bad Idea

Friday, March 17, 2017 4:17
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As flat fees become more popular, one of the ways lawyers often “try out” flat fees is by offering to cap their hourly fees. For example, a lawyer might offer to bill $200 per hour for a small lawsuit, but no more than $10,000, total. This is a rookie mistake. If the lawyer bills 50 or fewer hours, he will merely be paid for his work the same as if there were no cap on fees. But if he bills more than 50 hours, he gets the short end of the stick.

Contrast this with a true flat fee where the lawyer charges $10,000 whether she spends 10, 50 or 100 hours on the representation. If she spends only 10 hours, she has come out ahead. If she bills 50, she has come out even. And if she bills 100, she has gotten the short end of the stick.

Capped Fees Are a Lose-Lose Proposition

With a flat fee, the risk is more or less evenly distributed. The client’s risk is that the lawyer will be more efficient than an estimate based on hours worked. The lawyer’s risk is that she will be less efficient.

With a capped fee, there is no upside for the lawyer. The best-case scenario is he gets paid for exactly the hours he worked. The worst-case scenario is that he works more than 50 hours and does not get paid for all that time. The client can’t lose, and the lawyer can’t win. He can only tie, at best.

With Capped Fees, the Client Always Loses

Ultimately, if the lawyer “loses” in a capped-fee situation, so does the client. A lawyer who blows past the fee cap may start losing interest in a case he is no longer getting paid for, and start looking for an easy way out.

The same thing could happen in a flat-fee scenario, but it is less likely. First, billing flat fees means separating time and value. While time absolutely factors into value, it is not the measure of value. Lawyers who charge flat fees generally give up on tracking time, or at least worry less about time. The concept of “going over” the fee does not really apply.

Second, the lawyer’s upside is also an incentive to find a more efficient way to handle the representation. Assuming a moderate level of legal competence and creativity, a lawyer charging flat fees should be able to come out well ahead of a lawyer billing by the hour, even while delivering greater value to flat-fee clients.

RelatedConsider Alternative Fee Arrangements, but Don’t Give Up On the Billable Hour

Third, charging flat fees also means carefully defining the scope of representation. If a case blows up in your face, you should be able to go back to your client for more money. That way the fee remains fair to everyone, and nobody gets screwed.

But it also bears repeating that flat fees should just be one tool in your billing toolbox. The point is to deliver greater value to clients and do a better job of aligning incentives. If you cannot do that with a flat fee in a particular matter, don’t use one.

When Capping Your Fees Might Make Sense

One caveat.

Many smart lawyers offer capped fees all the time, and are perfectly happy doing so. But there is an important difference in the way they cap their fees. They are not capping fees as a way of trying out flat fees. They are capping fees as a way of reassuring the client that legal fees will not spiral out of control.

Here is the difference. A lawyer capping fees as a way of trying out flat fees will cap fees at the estimated cost of the representation. If the lawyer and the client believe a Series A financing round should take about 50 hours at $200 per hour, the lawyer will cap his fees at about $10,000 — maybe with a slight cushion, just in case. A lawyer capping fees as a way of reassuring the client will cap the fees at $15,000 or $20,000, instead. In other words, she will pick a safe cap that she is extremely unlikely to run into. It is more like a backstop.

The risk technically remains entirely on the lawyer, but there is a different reward: the client feels reassured, and signs the retainer.

With this one exception, capping fees as a way of trying out flat-fee billing is a pretty bad idea — for lawyers and clients.

Originally published 2014-04-19. Republished 2017-03-17.

Featured image: “Open 5 inch butt of an industrial fire hydrant” from Shutterstock.

Why Capping Hourly Fees is Usually a Bad Idea was originally published on Lawyerist.com.



Source: https://lawyerist.com/73049/capping-hourly-fees-usually-bad-idea/

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