Alternative fees (fixed fees, contingent fees, and hybrids of hourly, fixed, and contingent fees) can be a good alternative to straight hourly rates if you want to change the way your lawyer thinks about your legal work. They change the allocation of risk between lawyer and client. Alternative fees will not necessarily reduce your legal fees but may make you a more satisfied customer. In order to make a choice, it is important to understand the pros and cons of the alternatives.
Hourly Fees: Hourly rate x hours worked = legal bill
- Pay for what you get and only what you get.
- Maximum transparency.
- The risk of legal work being less complicated than anticipated and the lower legal fee falls on the lawyer.
- The risk of legal work being more complicated than anticipated and the higher legal fee falls on the client.
- All parties have an incentive to use the youngest, cheapest and probably least efficient lawyer, rather than the oldest, more expensive, and likely most efficient lawyer.
Fixed Fees: $XXX for a defined service
- Predictability of legal costs.
- The risk of legal work being more complicated and more expensive than anticipated falls on the lawyer.
- No need to review bills.
- The risk of legal work being less complicated and less expensive than anticipated falls on the client.
- Familiarity required with the legal task contemplated or the risk becomes unworkable for one side or the other.
- Nearly no transparency.
Short, repetitive projects are prime candidates for fixed fees. Transactions can be good candidates for fixed fees if lawyer and client have an accurate understanding of the scope of work. Estate planning is often done on a fixed fee basis.
Contingent Fees: 33% of a recovery, if any
- Eliminates legal fees unless funds are recovered.
- Aligns lawyer’s interests with the client’s interests in most instances.
- Typically provides the lawyer with a significantly higher fee.
- Will not work if the client does not have a claim for money, is a defendant, if non-monetary relief is important, or if the dollars sought are not large enough.
Hybrid Fees: mixing hourly, fixed and contingent billing
It is impossible to list the pros and cons of hybrid fees because the benefits and burdens of hybrid fees vary with the type selected. Hybrid fees allow a lawyer and client to mix and match the incentives, benefits and burdens of hourly, contingent, and fixed fees in order to reach the best result for everyone involved. The only limitation is the imagination of lawyer and client.
For example, with a success fee, the parties agree to a reduced hourly rate in exchange for a partial contingent payment. The client reduces some of its risk of loss and provides the attorney with an incentive to reap the maximum result.
Likewise, individual projects within a case might be done on a fixed fee basis. For example, lawyer and client might discuss the relative merits of filing a motion for summary judgment. The parties might balance the risk of such a motion by agreeing that the lawyer would prepare and argue the motion for a fixed fee.
Unfortunately for lawyers and clients, often the solution to legal fee issues is to spend more time thinking about the issues, which is no one’s first choice. However, if lawyer and client look to the goals of each other and use some imagination, fee structures can be reached that benefit both and are superior to the traditional method.