Many years ago, our firm switched to fixed fees. We had previously employed an hourly billing model. The switch was motivated by the confusion our clients experienced under the hourly billing system. They were in a constant state of agitation, and we needed to find something that worked better for them so they would stop aggravating us.
When we used the hourly system, we assessed the case and asked the client to deposit a certain sum into our trust account to secure the payment of our bill. Each month, we would tally up our bill and transfer the payment from our trust account to our operating account. We’d then ask the client to replenish the trust account if we anticipated further work.
Unfortunately, no matter how hard we tried, our clients frequently failed to understand the need to replenish the trust account. We explained our system repeatedly, both orally and in written client agreements, yet our clients seemed to hear only the need for the original deposit to our trust account. Additional payments frequently triggered a client upset. It drove me crazy.
The big question we had about switching from the hourly system to the fixed fee was, how much should we charge? We had to come up with some guidelines or we would be making wild guesses about fees.
Here’s what we did. We pulled out five years’ worth of files. We also pulled the billing records for those files. We then categorized the files in a variety of ways to look for patterns.
We ultimately discovered that many of our files were resolved without the need for any court appearances. We called those our “non-litigation” cases. These files had a fairly consistent total fee without great variation. We broke them down and looked for commonalities that affected the fees of these files.
What we found was that the fee tended to be lower when the parties didn’t have children or retirement plans. Having either of those variables present moved the fee from low to average. When the parties owned a business or professional practice, the fee tended to be at the higher end of the range. When one spouse was financially dependent on the other, the fee tended to be a bit higher. Additionally, when one of the parties had engaged in marital misconduct, the fee was higher than average.
A smaller number of our files ended up going to court (or an action was filed and the matter was settled before any hearings). We studied the data and found that the more issues that were present (custody, child support, spousal support, property division), the higher the fee. Again, we found that ownership of a retirement plan, business, or professional practice also increased the fee. Obviously, the longer the case dragged on, the higher the fee.
Once we discovered these patterns, we pulled all the fee data together for the files and grouped them around these variables. We ended up with average fees for clients without the need for litigation and those with the need for litigation. We were able to break out those fees more specifically for people with children, marital misconduct, financial dependence, and ownership of more complicated assets.
Analyzing the files was a labor-intensive task, but it gave us the data we needed. In a sense, we were fortunate to have the data to analyze. This process is more challenging when you’re new to the practice and don’t have the old files and fee data. When you’re in that situation, you’re forced to do more estimating based on your sense of the time required to do the work. That can be tricky, and nearly universally, attorneys tend to underestimate the time required to do the work.
Once we had set our fees, we started quoting them to clients. It wasn’t always smooth sailing. We’ve had a variety of issues, including concerns raised by our State Bar. We’ve tweaked our system repeatedly over the years. If you’re going to try fixed fees, you should expect to treat it as a work in progress. You’re going to learn many lessons—some the hard way—as you lock in on your numbers.
While determining fixed fees can be challenging, it’s worth the effort. Once we fully rolled out our system, we had a dramatic reduction in clients experiencing distress over fees. They like knowing the total cost of the representation in advance. They appreciate gaining the ability to make cost/benefit decisions as they move through the process, and they fully understand what they’re getting into before they commit.