Practice Management Course...and billing, and help the client identify which best suits them. Consider hourly rates, blended rates, fixed fees, staged fee arrangements, additional

Practice Management Course

Costs, Billing and Profitability

Queensland Law Society | Practice Management Course: Costs, Billing and Profitability Page 2 of 53

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To the extent permitted by law, all other representations, conditions or warranties, whether based in statute, common law or otherwise, are excluded. QLS does not accept any liability for any damage or loss (including loss of profits, loss of revenue, indirect and consequential loss) incurred by any person as a result of relying on the information contained in this document.

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Comments

Comments and suggestions on these materials should be forwarded to Giles Watson, Manager, Practice Support, on [email protected] or 07 3842 5853.

Revision information

Version 1.0 – December 2013

mailto:[email protected]

Queensland Law Society | Practice Management Course: Costs, Billing and Profitability Page 3 of 53

Table of contents

1. Unit introduction ............................................................................................................................ 4

2. Costs communication ................................................................................................................... 2

2.1 Costs: what clients want ........................................................................................................ 3

2.2 Initial costs communications .................................................................................................. 5

2.3 Giving clients control over costs ............................................................................................ 6

2.4 Building client value recognition ............................................................................................ 6

2.5 Managing the file to stay within the estimate ......................................................................... 9

2.6 Cost and estimate updates .................................................................................................. 10

3. Time and money ........................................................................................................................... 12

3.1 Time recording – value and purpose ................................................................................... 12

3.2 Time recording and productivity .......................................................................................... 12

3.3 Efficiency ............................................................................................................................. 16

3.4 Informative and transparent time entries ............................................................................. 17

3.5 Supervision, performance management and analysis ........................................................ 17

3.6 Costing time ......................................................................................................................... 19

3.7 Estimating time .................................................................................................................... 21

3.8 Costs, culture and ethics ..................................................................................................... 24

4. Alternative fee structures and billing options .......................................................................... 26

4.1 Alternative fee structures ..................................................................................................... 26

4.2 How to offer fixed fees ......................................................................................................... 28

5. Costs and profitability ................................................................................................................. 35

5.1 The challenge of profitability ................................................................................................ 35

5.2 Focus on the 5% .................................................................................................................. 37

5.3 Boosting productivity............................................................................................................ 38

6. Review: key points ....................................................................................................................... 40

Appendix 1: Costs in a disciplinary context ..................................................................................... 42

Appendix 2: Costs management checklist ........................................................................................ 49

Queensland Law Society | Practice Management Course: Costs, Billing and Profitability

Page 4 of 53

1. Unit introduction

This unit is required reading as part of the QLS Practice Management Course (PMC).

Effective management of costs and billing is critical to ensuring client satisfaction and practice profitability. This unit urges practitioners to look at costs as more than a compliance issue, and to focus on best practice approaches to communication, management and administration to achieve compliance and ever greater client satisfaction and practice profitability.

Compliance requirements for costs are outlined in Part 6 of the Trust Accounting unit.

Ethical considerations around costing are outlined in Part 3 of the Ethics and Responsibility unit.

At the end of this unit, you will be able to:

describe best practice costs and billing arrangements to comply with regulations and ensure client satisfaction

demonstrate knowledge and understanding of these elements and their implementation in a range of scenarios

discuss the potential advantages and disadvantages of alternative fee structures

identify and discuss alternative approaches to improving practice profitability.

Optional further reading

Balls, A (1998) Law Firms – Managing for Profit, The Federation Press.

Queensland Law Society (2007) QLS Costs Guide, qls.com.au (note this guide will be replaced by a more comprehensive, updated guide in 2014).

LSC Regulatory Guide 8 Billing Practices – Some Key Principles, at http://www.lsc.qld.gov.au

verasage.com (various articles and resources in relation to costs communication and value billing).

Glossary

LPA 2007 is the Legal Profession Act 2007, and all references to sections are to sections of LPA 2007 unless otherwise specified.

LSC is the Legal Services Commission.

WIP is work-in-progress.

Queensland Law Society | Practice Management Course: Client service Page 2 of 53

2. Costs communication

Costs are the most common cause of complaints or dissatisfaction by the consumers of legal services. The LSC Annual Report 2011-2012 reported that over 36% of enquiries and 43% of consumer disputes were primarily concerned with costs issues.

Underlying this is a great deal of informal client dissatisfaction about costs, evident from complaints directly to practices, client satisfaction surveys and general public concern.

Causes of dissatisfaction include:

alleged overcharging

bill significantly exceeds estimate

no estimate given

poor costs communication and updating

unreasonable charging of disbursements

work, and therefore bill, exceeded scope of retainer

unethical charges, for example, charging for entertainment

unnecessarily aggressive billing and debt recovery practices

combinations of the above.

The key underlying causes are:

unethical behaviour – dishonesty or a lack of integrity in relation to costs

inadequate management systems

inadequate solicitor-client communication.

This unit suggests that systems and communications account for the vast majority of these failings, and further, that most are avoidable given an effectively implemented best practice approach to costs.

Information about the general causes of costs dissatisfaction is useful, but the most valuable information is specific to an individual practice and its clients. Information on clients’ needs and subsequent level of satisfaction can be sought in a number of ways: at opening and closing meetings, through client satisfaction feedback forms sent out at the end of the matter, through annual satisfaction surveys, through analysis of internal complaints, or through general staff feedback. Billing statistics such as speed of payment and the recovery rate (the percentage of billed WIP that is actually paid) are also a good indication of the strength of a practice’s costs and billing arrangements.

The point to emphasise is that if practices are committed to improving client satisfaction in relation to costs and thus reaping the benefits in terms of reputation, referrals, profitability and working capital management, they must listen to their clients’ needs and comments, and change their work practices accordingly.


2.1. Costs: what clients want

Clients focus on a mix of many of the following elements.

Costs consciousness

Clients want solicitors to be as careful with clients’ money as they would be with their own. Carefully consider cost implications before undertaking additional work, involve the client in decisions that affect costs, and manage the file to stay within the estimate or agreed budget.

Communication Clients welcome solicitors proactively raising the issue of costs, as it demonstrates that the solicitor recognises the importance of costs for the client.

Good communication involves listening as much as telling, and understanding clients’ needs and preferences applies to the pricing of services. Open discussions about billing arrangements and the structuring of fees and offer an attractive solution.

Communication also includes being transparent about what is and is not billable, including, for example, information about time recording policies.

Control Clients want, as much as is possible, to be in control of costs. This means discussing, or advising about, cost implications before costs are incurred. Examples where a lack of client control could lead to disappointment include:

charging for basic work that could have been done more cheaply by the client

undertaking unnecessary work

providing expensive detailed advice where a cheaper brief update would suffice

having low level work done by expensive senior staff.

Flexibility Be prepared to offer alternative arrangements for fees and billing, and help the client identify which best suits them. Consider hourly rates, blended rates, fixed fees, staged fee arrangements, additional services, no-win no-fee, volume discounts and capped fees.

Be flexible about the timing and format of bills.

Extras Clients hate to see hidden or unexpected extras, overheads or disbursements appearing on a bill. State clearly at the outset what expenses and disbursements will be included in the final bill and their likely extent, and limit them as much as possible. If charging for travel, photocopying and refreshments, these amounts should be reasonable and made clear at the outset.

The LSC has published guidelines for charging outlays and disbursements. These should be read by all partners/principals, and are available at lsc.qld.gov.au.


Certainty and reliability

Fee arrangements that provide certainty are popular. This will usually mean moving away from the traditional hourly fee towards fixed fees or fee caps.

Be reliable – agree what, and when, you will bill your client, and stick to it.

Parts 3 and 4 of this unit deal with alternative cost arrangements, including estimates.

Transparency Clients want to know exactly what they are getting for their money. Be prepared to explain the necessary work in detail and also to offer a full printout of work done and hours spent on the matter by everyone involved. Some practices offer clients the opportunity to inspect time recording and/or billing systems. Narratives or task categorisations should provide sufficient information to assess value.

Value Consider competing on value, not price. Demonstrate superior expertise, experience or efficiency and explain that although an hourly rate might be higher than a competitor’s, the demonstrated superiority will lead to a more desirable, value-added outcome, or less time spent and lower overall fees.

Risk sharing

No-win no-fee arrangements have become common in recent years, primarily in the claimant personal injury area. Many other clients, including commercial clients, would consider similar arrangements. Note s. 325, which deals with contingency fees.

Efficiency Where time costs money, clients expect practices to work efficiently and implement arrangements to get tasks done as quickly as possible.

Regular cost updates

After an estimate, keep the client informed about the progress of costs, and issue interim bills and interim estimates whenever possible, including a detailed explanation of additional costs. It is much better to do this than to wait until the end of the matter and shock the client with a bill in excess of the estimate.

Volume or loyalty rewards

The past 15 years have seen retailers offering loyalty schemes to frequent shoppers (club cards, Flybuys etc) and the same principle can be applied to legal practices. Discounts could be offered to key clients or to win particular instructions. More creative offers could be a way to increase long-term client retention.


Leverage

Clients appreciate the experience and reassurance that the involvement of partners or senior practitioners can bring to a matter, but may be reluctant to pay a premium for it.

Discuss leverage to ensure the matter gets the level of partner involvement required, and that the client is happy with it. This can involve educating the client about the matter and its complexities.

Sophisticated clients are asking for increased leverage to ensure fees are controlled.

These considerations apply to blended rates, which, when quoted, should be accompanied by details of the gearing assumed. See the discussion about blended or composite rates in Part 4.1 and Appendix 1 of this unit.

2.2. Initial costs communications

Client anxiety about costs can start before the first meeting. A major concern is about what is free and what is not. To facilitate effective communication, advise about the cost (if any) of the first meeting, and provide information about standard fee and billing arrangements, hourly rates and other costs.

While solicitors can be cautious about discussing costs, clients value an open and frank discussion and don’t like to have to raise it themselves. An early open discussion about costs can go a long way to avoiding costs dissatisfaction down the track. Key to this is managing expectations. If clients understand the variables that can affect cost, they are less likely to be shocked or dissatisfied when costs rise.

Formal costs disclosure

The subject of formal costs disclosure is dominated by the cost disclosure requirements in LPA 2007. Treating these legislative obligations as a starting point for formal cost communications, not as the only, or even the most important consideration, is a step in the direction of good costs communication.

As discussed in the Client Service unit, following up by phone after a client agreement has been sent can allay concerns and deal with misunderstandings to avoid future problems.


2.3. Giving clients control over costs

Clients want to feel that they are not at risk of costs running beyond the budget or what they are willing to pay, or of costs being incurred on activities of limited value or relevance.

Anxiety over costs can stifle communication and lead to a lack of trust, and a client who feels they have lost control over costs can be resentful and argumentative about fees.

Give clients a feeling of control by:

1. Discussing costs in as much detail as possible at the outset of the matter.

2. Ask the client what their budget is and what they can and cannot afford – explain what can be done for them within their budget.

3. Offer to fix or cap costs where possible, or offer choices about how fees are charged and billing arrangements.

4. Explain cost variables and how different developments might affect costs.

5. Explain what work you propose doing, the risks of not doing it and how it benefits the client – confirm that the client is happy with costs being incurred on each activity.

6. Explain, in detail, the cost implications of different courses of action.

7. Ask if the client would like to do some work themselves instead of paying solicitors to do it.

8. Explain the rates and experience of team members and ask if the client has preferences as to who does the work.

9. Provide an example of what the bill might look like at the end of the matter – ask the client if they would be happy with such a bill.

10. Provide a copy of time recording and billing policies so the client understands that communications and requests might have cost implications.

11. If providing an estimate, treat it as the budget for the matter and manage the file to stay within budget.

12. Advise that approval will be sought before new or additional costs are incurred – and do this.

13. Develop a secure client extranet so clients can check WIP and costs on their matter at any time.

At the end of a matter, survey clients asking whether they are satisfied with the extent to which you kept them in control of costs. Ask what more you could have done.

2.4. Building client value recognition

Client recognition of the value of legal work is critical for practice success and profitability, as clients who do not recognise the true value in legal work do not appreciate the efforts of their solicitors. If legal services are seen as ‘grudge’ purchases, cost disputes, downward pressure on fees, client resentment and an unrewarding experience is a likely outcome.


The legal services ‘grudge’ purchase

It needn’t be like this. Clients may not understand the complexities and value of legal work and should not be expected to – it is up to the solicitor to build their understanding. Building communication skills and being willing to explain your work helps clients recognise its value and is a valuable investment in future client satisfaction.

Building client recognition of the value of legal work helps clients appreciate it and makes it easier for you to record and bill, confident in the knowledge clients will recognise the value – boosting productivity, recovery and profitability.

The satisfied customer

So, how can you build the client’s appreciation of your work?


Understand what the client values

Understanding what the client needs and what they value is the first step to them recognising the value of legal work. Take a few extra minutes in the first meeting to discuss the broader business/personal challenge in the context of the matter at hand, and think about what this means for the way you handle or talk about the work.

Look for value triggers by remembering the ‘TERMS’ model:

time

emotion

risk

money

situation.

Will saving time, stress or money be valued by the client?

Build the pain

As discussed in the Client Service unit, ask questions that build the value of the solution:

What if you did nothing?

What would the impact be if you (we?) couldn’t resolve this issue?

What if this project failed?

What will you be able to do that you can’t do now?

What would the risk be to your reputation?

Communicate value

Explain how legal services can resolve, reduce, control or compensate for the client’s threat, injury, anxiety, risk or other pain. Explain:

what you will be doing

why you will be doing it

why you will do it this way

the risks (to the client) of not doing different tasks

how the activity will benefit the client (in terms of their needs).

Do this throughout the matter – in initial meetings, cost updates, time recording narratives, matter updates, ongoing discussions and in the bill. Before you send the bill, ring the client to explain what you’ve achieved for them, and help them focus on the value of your work, rather than the cost.

Scope for value

Only do work the client values – and educate the client about the value in things they don’t at first understand or appreciate.

If the client doesn’t value it, don’t do it.

Ask if they understand the value of the proposed activities.

Suggest alternatives: could the client do more? Could another adviser get involved?


Highlight competitive advantages

As discussed in the Client Service unit, understand your practice’s competitive advantage and link it back to client needs.

Develop value propositions

Build on the basic value proposition by developing alternatives depending on matter or client needs. Refer to it throughout the matter (costs agreement, updates, and bills), to reinforce value to that client, and give them a ‘top of head’ phrase to use when referring others.

Believe in your value

Never apologise or be defensive about your fees. If you do not believe you are worth your fee, a client never will. State your fees confidently to show you believe that these demonstrate good value, and that you are worth it.

2.5. Managing the file to stay within the estimate

Failing to keep WIP within the estimate leads to internal write-offs and profitability drains, or client dissatisfaction and complaints. Clients interpret estimates as quotes, and are entitled to expect a final bill to fall within the estimate, particularly if it has not been updated.

Failing to stay within estimates might be due to poor estimating skills, poor work management, or might be unavoidable due to circumstances. Whatever the reason, clients view it as poor service and potentially as an ethical breach.

To stay within the estimate:

Spend the time in the first meeting to define the scope of the matter and understand risks that will affect time and cost.

Improve estimate accuracy:

Detail all required work in terms of discrete tasks and activities and refer to historical time/cost data in developing an estimate.

Review recent files where WIP has exceeded the estimate – learn from what has happened.

Discuss estimates with colleagues before finalising.

Measure estimate accuracy (compare to final WIP) and make accurate estimation a performance management issue.

Build a buffer – estimate then add something (say up to 20%). It is good relationship building to come in under rather than over-estimate.

Alternatively, consider capping fees at 20% more than the estimate.

Treat the estimate as a fixed budget/quote for the work, not as a flexible target.

Develop a detailed matter plan with budgeted WIP benchmarks for each stage or activity.

Manage the matter with a view to staying within the budget for each stage or activity.

Don’t undertake activities that are out of scope or which exceed benchmarks without seeking approval for a revised costs estimate.


2.6. Cost and estimate updates

Implement arrangements to provide updates.

Record cost and estimate update requirements prominently on each file.

Train staff and work towards a culture of proactivity in relation to cost and estimate updates.

Diarise key dates for cost and estimate updates for each matter.

Arrange regular, systematic checks of WIP against the initial or latest estimate for each file and consider whether an estimate update is required.

Arrange for an automatic alert when WIP is at 70% of the initial or latest estimate, and consider whether a revised estimate is required.

Include requirements to compare WIP to estimates in matter checklists, to prompt consideration of a revised estimate.

The final costs or estimate update should happen, if required, immediately before a bill is sent. It is good practice to telephone the client before the bill is issued, advise the final costs tally, explain any recent or unexpected costs and seek feedback. If you have been communicating regularly, difficult conversations should be rare.

Cost updates and value

If sending a cost update, revised estimate or final bill outlining the cost, where the work behind it is not made clear, the client is likely to focus on cost rather than value. Telling the client what is being done and how it benefits them justifies fees, and helps clients understand and appreciate your work, limiting the risk of client dissatisfaction.

Imagine yourself as the client of a builder

You want an extension to your house, which you think is a fairly simple task that should not cost more than $15,000. The builder estimates $25,000 without saying that the work is any more complicated than you had assumed. You reluctantly retain the builder but are disappointed when at the end of the job (one month later), the final bill comes in at $32,500, with the notation ‘additional time and materials’. On talking to him, he says the job was ‘harder than I thought’ and riven with ‘complications’.

You are unlikely to be a satisfied client. What if the process had gone another way?

You want an extension to your house, which you think is a fairly simple task that should not cost more than $15,000. The builder inspects your property and explains that, whilst normally this would cost about $15,000, the current drainage arrangements mean that it would be risky to go ahead without additional work on your guttering, drainage and plumbing. Although this will increase the cost to $25,000, he explains the risks of not doing the extra work, and you are impressed by his skill in recognising the problem and how he has explained it to you.

After five days, the builder contacts you and says he has some more news – a serious termite problem in the existing wall, meaning more work and money. He explains the problem in more detail and increases his estimate to $32,500 – and confirms you are happy with this before proceeding. His final bill comes in as estimated and includes a detailed breakdown of where his time and your money were spent.


The two examples include the same initial estimates and costs and both include prompt cost updates. The difference is in how the work – and specifically in the value attached to the extra work – was explained.

Unfortunately, many solicitors’ clients experience more of the first example than the second. Legal work is complicated, and solicitors can be too quick to assume that a client would not understand or be interested in more details. Using good communication skills, complicated legal work can be explained in a way that makes sense to clients, and helps them recognise its value, limiting the risk of costs dissatisfaction.

There is more about communicating value in Part 5.2 of the Client Service unit.


3. Time and money

3.1. Time recording – value and purpose

There are three reasons solicitors should record their time:

1. Billing.

2. Management and supervision information.

3. Information about the value of work done and WIP.

Time recording forms the basis of management accounting because it is a record of professional work. How can a practice know whether work has been profitable if it does not know how much it has cost to produce? For fixed fee matters, time recording facilitates the monitoring of profitability and is a factor in considering whether margins can be improved without detriment to service. Failure to accurately measure the cost of producing work makes it almost impossible to measure and manage profitability.

Time should be recorded fully and accurately, without padding. Irrecoverable time should be written off as soon as a bill for the work has been delivered.

The discipline of recording time means it is used more effectively.

In some practices, standard costing for routine work undertaken by junior solicitors is used in place of time recording. This is made possible by sophisticated financial management and a thorough understanding of the cost base. For the majority of practices and work types, time recording remains the only reliable means of understanding the cost of producing work.

Clients are now asking for copies of time recording schedules with bills, and many practices routinely provide them to display transparency and differentiate themselves from their competitors. Practices on full time recording are able to produce a range of management information:

chargeable hours for each fee-earner on a daily, weekly or monthly basis

information on average hourly fees – by dividing the chargeable hours recorded into the fee-earner’s billed fees

non-chargeable hours for each fee-earner

an analysis of non-chargeable time

total value of work done each week or month

total value of WIP for the practice and for each fee-earner, team, department.

3.2. Time recording and productivity

Productivity means something different in the legal services industry than it does in others. A general definition of productivity could be ‘the amount of output per unit of input’, with ‘input’ measured in hours worked.

While this approach makes sense in practices doing low-value commoditised work and charging fixed fees, with staff who complete stages or matters quickly being more productive, it does not hold true for more sophisticated work, or where time is charged by the hour.

When charging by the hour, hours worked are the output rather than an input, and individual productivity is measured by the recorded number of billable hours.


The challenge is to increase billable hours worked, which can be achieved by:

increasing billable hour targets – say, from 1200 to 1400 per year

recording a higher proportion of time as billable – say, billable time in the office should be 80% up from 70%

In responding to the challenge of increasing productivity, too many practices rely too heavily on the first approach at the expense of the second. Through a mixture of training, guidance, analysis, support and supervision, it is possible to make significant improvements in time recording so that the quantity of billable time can be increased without longer working hours or making ethical compromises.

Policies and guidance

Staff need to understand the what, why, how and when of time recording. Hours are lost because of uncertainty over how to record or whether work should be billable. Clear policies and guidance help avoid ethical indiscretions.

Reliable recording and informative data

Data is only as good as the time recording practice of individuals, and an IT system that genuinely supports the time recording process, rather than becoming a time burden itself, is critical.

Analysis With good data, practices can understand where time goes and consider what needs to be improved. With data on time in office, billable time and non-billable time, practices can start asking questions:

Why is time unaccounted for?

Should any non-chargeable time be chargeable (or vice versa)?

Should some non-chargeable activities be discouraged?

Performance management and support

Assist staff in improving their time recording through guidance and the discussion of work priorities. Practices should make time recording a performance management issue in itself, separate from productivity and quality of work.

Time recording policies, training and guidance

Efficient, ethical and accurate time recording is a skill to be developed and nurtured by guidance and support.

All practices should embrace the policy:

“All fee-earners should accurately and promptly record all their billable and their non-billable time.”

This ensures that all the accurate information needed to cost matters, assess profitability and manage performance is available.

This is now common practice, but those who charge fixed fees or do not understand why non-billable time needs to be recorded may object. The reasons for time recording need to be explained to all staff.

Time must be recorded accurately: limiting or eliminating adjustments upwards or downwards.


Adjusting time upwards, or padding, is unethical and arrangements to limit it include:

making padding or other unethical time recording a disciplinary offence

recognising, then reducing or eliminating real or perceived pressure to exaggerate time

supporting staff in their efforts to time record efficiently

monitoring time recording and questioning any time entries that seem excessive

effective delegation and workload management to limit the temptation to pad timesheets and enable solicitors to meet billable hour targets.

Whatever benefits padding might have for the individual in reaching billable hour targets, it damages the practice in the long run, particularly where clients’ bills are larger than expected or internal discounting, lower recovery rates, slower payment and lower client retention rates are the ultimate result.

Prompt time recording is likely to be accurate. Software solutions allowing time to be recorded ‘in real time’ limit the temptation to make adjustments.

Time recording policies also need to be sensitive to client expectations. Some ethical and commercial time recording practices – like charging for brief phone calls or travel and waiting time – can lead to client dissatisfaction.

Most of the rules about time recording can be narrowed down to four basic principles:

1. Time should only be recorded as billable where it is specific to a single client or matter – general or background activities should not be recorded as billable.

2. Never duplicate time recording or record the same time on two or more different client files.

3. Consider client expectations and disclose or discuss cost implications of various actions.

4. Professional activities are usually billable. Administrative duties are usually not.

Some time recording issues regularly cause confusion and client dissatisfaction.

Units and rounding

When time is recorded in units, time spent is rounded up to the nearest unit. Rounding up is justified to recapture time lost in small activities that are important but not billable.

Rounding up is open to abuse. Recording 20 units for sending out 20 standard letters, which took 15 minutes, or recording 10 units for checking 10 emails in five minutes are both unethical uses of rounding.

The temptation to round is less if the hourly rate is higher. That way, small activities can be listed as $0 entries in the bill, so the client can see you are working but not constantly adding units. Justifying a higher hourly rate may well be easier than justifying many small entries on a bill.

Research

It is legitimate to charge for exceptional research that is necessary, specific to the single client matter and clearly disclosed. Background research or research which is not necessary for any specific matter should be recorded as non-billable.

Junior solicitors should charge their research time without ethical concerns, whether is it spent reading or talking to senior colleagues, as they are not expected to have the knowledge or expertise of a senior solicitor. More senior solicitors should be more circumspect.


A solicitor who knowingly accepts instructions beyond the level of competence expected by the client behaves unethically if they charge the client for ‘learning on the job’.

Practices should review their client engagement and delegation practices and systematically review timesheets to ensure that abuses do not occur.

Waiting

It is legitimate to record time spent waiting for a client, but not working, provided it is a result of the client’s requests or is a necessary consequence of the work for the client. The client should be advised that waiting time can be billable.

If waiting time is used productively on other work, record time for the work actually done. Under no circumstances should the same time be recorded twice.

Clients expect solicitors to use technology to make waiting time productive. Whatever the regulatory/ethical view of recording waiting time, consider client expectations and discuss the cost implications of waiting.

Travelling

Time should either be recorded as travel, where legitimate, or for work done on other files during travel, but never both. As with waiting time, consider client expectations and discuss the cost implications of travel.

Working outside the office

It is common to treat time spent on work outside of the office the same way as work completed in the office. Accountability for work outside the office has been improved through use of laptops, wireless broadband and remote access technologies.

Supervision

Professional supervision time relating to client work on a particular file should be recorded against the matter files by both supervisor and supervisee. Other supervision time should be recorded as non-billable.

Discussions between solicitors

A discussion about the specifics of a client matter, resulting in progress, is billable by both solicitors.

A discussion that is not specific to a matter, or is about background, or that does not contribute to progress on a matter, should be recorded as non-billable.

File administration

Professional file administration, including file audits and other activities that mitigate file risk or otherwise benefit the client is recorded as billable, to the extent it is specific to a particular file.

Pure administration (filing, photocopying etc) and management activities that are not specific to individual files should be recorded as non-billable.

Entertainment

Entertainment should be recorded as non-billable. Even where client matters are discussed in a professional capacity during an entertainment event, consider client expectations before recording any time as billable. Charging for time during an entertainment function risks negating any goodwill generated by the entertainment.

Once you have developed a time recording policy, consider making a version of this available to clients: they would prefer to know in advance what will and won’t be charged for, rather than waiting for the bill to find out.


3.3. Efficiency

Real or imagined inefficiency can destroy ‘value’, and lead to significant client dissatisfaction and suspicions of overcharging. Activities that lead to inefficiencies and which can lead to cost increases or the perception of overcharging include:

Poor delegation

work delegated to wrong person (too slow, too expensive)

poor explanation leading to slow, poor or unfocused work, leading to potential extra time costs.

Poor supervision

leading to mistakes and additional time costs.

Poor knowledge management systems

additional time costs due to lack of appropriate precedents.

IT failures or inefficiencies

document crashes, difficulties in accessing information leading to additional time costs.

Support staff inefficiency

secretarial errors (wipes tape/loses document) leading to duplication of professional work and additional time costs.

Double handling

transitions between fee-earners (illness/holiday).

Poor file management

lost files, misfiled documents.

Poor risk management arrangements

small or large errors that lead to additional time costs.

Inefficiencies raise ethical, client service and profitability issues. Charging time for learning on the job or to correct avoidable errors is probably unethical. Other inefficiencies might not be considered unethical but affect client satisfaction and ultimately practice profitability.

Efficiency gains in IT and knowledge management require significant financial investment. Addressing administrative inefficiencies by policy updates and training carries limited one-off time costs and can result in significant improvements in perceptions of value.

Reluctance to invest in ‘quick win’ efficiency gains can stem from the belief that efficiency gains will reduce the number of hours recorded and thus reduce profitability. This limiting short-term approach can have dramatic negative consequences in the long-term. Without consistent and regular efficiency gains, practices risk rising client dissatisfaction, and ceasing to be competitive in an increasingly competitive and informed market.


3.4. Informative and transparent time entries

Time should be recorded so as to provide as much information as is necessary for a supervisor or a client to understand the activity and assess its value or validity.

Time is usually recorded through a mixture of existing standard codes or entries in an IT application and drafted narratives.

Review standard codes or entries regularly, ensuring all common tasks are included and the descriptions are informative and value-building. This ensures clear and understandable entries and makes recording time easier and quicker.

Drafted narratives should be informative for clients and supervisors, and concise enough so their drafting does not become a time stealer. Guidance or training can assist in this.

All time should be recorded as if the client is the next person who will look at the entries. Block or large time entries that provide minimal information, are vague, and might lead clients to question the amount of time or the value of the activity, should be avoided.

In developing standard codes or entries and guidance and policies on time recording, refer to Court Scale of Costs (available in the Uniform Civil Procedure Rules 1999). Consider tailoring standard entries to those in the scale and recording others separately. If this is the process, be aware of the need to update tailored entries when the scale is updated.

3.5. Supervision, performance management and analysis

Whatever guidance and support is provided for time recording, arrangements to ensure that all bills are ethical and comply with practice policy should be in place. This requires bills to be checked and approved by a supervisor or partner before being sent. This is an opportunity for the partner to discuss any concerns with the solicitor, make amendments, and identify areas where additional training or guidance would be beneficial. The knowledge that all bills will be checked adds discipline to time recording.

Supervision of time recording is too often focused on a single indicator: the number of billable hours recorded each day/week/month/year by individual solicitors.

To ensure efficient and effective time recording, attention should be given to these other key performance indicators:

the percentage of the day accounted for (the goal is 100%)

the percentage of this time that is billable – goals will vary

the recovery rate: the percentage of the billable time billed to clients and which the client pays (80-90% is usual).

Supervision meetings should cover these indicators and offer direction and support. Reviewing non-billable time identifies poor working practices and inefficient use of time that could have been billed. A series of codes for non-billable time allows analysis: should it have been billable? If not, should it have been done at all?

In addition to time, supervisors should check narratives. This is important for internal supervision and client communication and is particularly important in demonstrating value.

Time recordings are the basis for bills, and more detailed narratives or task descriptions can improve the recovery rate. If clients are supplied with short and vague narratives or task descriptions they will tend to focus on cost and perhaps question the value of the service. More detailed narratives give the client an understanding of the work, helping them to focus on its value rather than its cost.


Finally, supervisors should not just be looking for poor performers but also for those consistently working excessive hours, which is not healthy or sustainable in the long-term and can lead to resentments, stress or depression.

Billable hour targets

Set reasonable targets and consider the nature of the work and the other activities of the solicitor.

It is easier to record a full eight hours doing commercial work for a single client than it is to record eight hours for numerous matters for private clients, although both fully occupy a solicitor all day. Targets for time vary, with most practices considering five billable hours a day as reasonable. Targets of six and a half hours are common.

Billable hour targets should be adjusted as solicitors gain experience, become more valuable and perhaps move towards partnership. As responsibilities for supervision, business development and other practice issues take up more time, adjusting billable hour targets downwards in recognition of a broader contribution to the success of a practice is reasonable. In this situation, total hours will probably still increase.

It is not a simple matter to set a practice-wide billable hour target and expect everyone to accept it. Having a range of key performance indicators allows performance to be measured and rewarded on other bases than billable hours. This will make differences in billable hour targets easier to manage and explain, and helps to develop a broad range of skills.

Checking bills

When reviewing individual bills, make these checks:

Sanity check – is the bill fair and reasonable for the work done?

Estimate check – how does the bill compare to the original estimate?

Ethics check – should any listed time entries be non-billable? Is there any evidence of padding?

Double entry check – has time been entered twice against the same single task?

Wrong matter check – has time from other matters been misallocated?

Overworking check – is there any evidence of unnecessary activities, such as overzealous due diligence?

Narrative check – are the narratives sufficiently clear and detailed?


3.6. Costing time

Most hourly rates are fixed not by calculation but by a mixture of incremental increases on past rates and competitive comparisons. Unless costs of production are clearly understood, however, it is difficult to make well-informed decisions about fees and profitability.

A basic calculation of time cost is easy: all costs involved in the production of the service (salary, related employment costs and overheads) should be apportioned and then divided by the number of hours that each fee-earner will be expected to record as billable time.

A simple equation looks like this:

Employment costs + overhead allocation

= Provisional Hourly cost

Number of chargeable hours recorded

This figure provides a provisional cost.

To arrive at an hourly fee, the provisional cost has to be increased to allow for profit margin and recovery rate.

The achievable profit margin is dependent on many factors, but practices should aim for a profit margin of at least 25-30%.

It is rare to recover all billed time, so allow for time written-off and discounted bills. Recovery of 80-90% of time is an achievable goal – see FMRC Legal data.

The calculation for the hourly rate might therefore look like this:

Employment costs + overhead allocation

$120,000 + $50,000 x Profit margin

x 1.3

x Recovery margin

x 1.2

= Hourly rate

= $230 Number of chargeable

hours recorded 1200


Overheads

These calculations show how factors such as overheads and recovery rates affect costs of production, so it is sensible to analyse these costs within different teams and adjust charge-out rates accordingly.

To accurately cost time and subsequently analyse profitability, the more costs that can be allocated to individuals or a team, rather than the practice as a whole, the better. These might include:

individual employment costs: salary, payroll taxes and super contributions – these can be calculated for each individual and allocated to them

department overheads: secretarial, marketing, training and library costs to a department

practice costs as a whole: accommodation and insurance.

The process of allocating overheads leads to much discussion. Teams use secretaries, paralegals or knowledge management resources to greater or lesser extents, with costs allocated accordingly, but complicating the calculations brings little benefit. For example, a discussion about the family law team’s share of PI insurance compared with the property team’s is unlikely to move the costing process forward. Be cautious about allocating expenditure across teams unless the allocation is based on a genuine measurement.

Consider a practice with 10 solicitors: three in the family department and seven in the property department. The practice decides that of their total overhead bill of $500,000, $150,000 should be allocated to the property team and $50,000 to the family team, with the $300,000 balance allocated on a per capita basis.

Each property solicitor will be allocated a share of the general overheads ($300,000/10) plus a share of the property department’s overheads ($150,000/7) to give a total per capita overhead of $51,428.

A solicitor in the family team is allocated the equivalent overhead, slightly less, at $46,666, which recognises that team’s lower usage of secretarial and paralegal staff.

Example overhead calculation

Practice – General

Property Department

Family Department

Overheads $300,000 $150,000 $50,000

Fee-earners 10 7 3

Per capita overhead allocation

$30,000 $21,428 $16,666

Redistributed per capita overhead allocation

$51,428 $46,666

This process should be undertaken twice yearly, and provides a valuable understanding of costs of production, facilitating discussion about costing work and making decisions about profitability and practice direction.


3.7. Estimating time

Some solicitors consider themselves good estimators of the time taken to carry out work and therefore how to price it. Others believe that accurate estimating is impossible for their areas of practice. Very few have a proven system for accurate costing and estimating, and many fail to go beyond a gut feeling, a reference to the last piece of similar work, or a back-of-the-envelope time cost calculation.

Myths about estimating

Consider two myths about giving accurate estimates to clients.

Myth 1: The accuracy of the estimate does not have a strong influence on the profitability of the work – because whatever the estimate, the bill and fees recovered will depend on the actual hours recorded. It is wrong to suggest that the accuracy of the estimate has little bearing on the profitability of the work. With practices on average recovering about 85% of WIP, the link between WIP and fees is not as strong as is sometimes assumed, especially where the final bill exceeds the estimate.

Research shows that accurate estimates increase recovery rates and limit write-offs, improving profitability. In addition, if the final bill comes in close to the estimate, solicitors are quicker to bill and clients quicker to settle, improving cash flow and releasing cash for investment, reduction of bank overdraft or partner drawings.

Given that, in the market, fees above an estimate are seen as negotiable, fees for work done without an estimate are likely to feel very negotiable, leading to a larger proportion of the final bill being treated as negotiable and at risk of being written off.

More accurate estimates lead to higher recovery and a significant increase in profitability. This example shows a 66% rise in profits:

Estimate WIP Notes Recovered fees

Profit @ fees less 75% of WIP

$8,500 $10,000 Partner notices fees are more than the estimate and reduces bill to $9,500 to please client. Client is still upset. If he pays the extra $1,000 he has to justify it to his boss and it affects his budget for other work. He scrutinises the bill and sees $500 has already been written off.

This makes him believe there is scope for a bigger reduction. He asks for another discount.

$9,000 $1,500

$10,000 $10,000 Client is happy with the bill and pays quickly.

$10,000 $2,500

Accurate estimation opens the door to a fixed-fee or capped fee approach for some matters or for specific elements of some matters. Practices that accept some of the cost and profitability risk can look at charging a ‘risk premium’ to further increase profitability.


Myth 2: Accurate estimates are not possible: the work is potentially complicated and there are too many variables that could affect the final size of the bill.

Although some legal work is genuinely unique and ground-breaking, the vast majority of matters a practice accepts instructions for have been done before. The practice should be able to draw on historical time and costs data to identify what past jobs, or their constituent parts, have cost.

Using historical data to provide accurate estimates is an obvious approach. It requires a combination of legal knowledge and accounts analysis skills that neither solicitors nor accounts staff have fully acquired. Solutions include training solicitors in estimation skills or to change the accounts focus from billing to estimating.

Breaking up legal work into constituent parts is vital for accurate estimating. As well as providing accurate figures and more information it increases consistency and so the perceived fairness and accuracy of a bill, even where the overall costs cannot be accurately predicted. For example, it might not be possible to reasonably predict how many documents of a certain type will require review as part of a matter. However, it is possible to predict what each review will cost, for instance, either three hours or about $750. If a practice can quote, stick to and refer to these estimates, then the final bill will be consistent with the estimate, irrespective of the number of documents reviewed.

Expectations about costs can be managed, even if accurate estimates are not possible. A final bill that is consistent with initial indications should give little room for dispute. This is why it is in a practice’s interest to provide as much information as possible about costs, explaining the variables and minimising the risk of failing to manage client cost expectations.

An estimating process

The key to greater sophistication in time cost estimation is the use of the practice’s own historical costs data. Solicitors who claim extensive experience in a particular area but then cannot produce precise and accurate costs estimates frustrate clients.

Why are solicitors so poor at estimating?

The main reason is the lack of a cohesive approach and system, leading to failure to gather the required data at the first meeting.

Consider these steps in developing a system for accurate estimates based on historical data:

Segmentation of stages/tasks

Develop a range of matter templates that break matter types down into stages, then segment each stage into tasks and related sub-tasks.

Time recording guidance and training

Record all time, including non-billable time and time written off, otherwise the historic data and cost projections will be flawed. Train staff and provide guidance on time recording.

Make sure the IT system can measure the time taken to complete the identified stages and tasks.

Develop database of historical task and stage times and costs

Using the data, calculate the average time to complete each task and sub-task, and develop data for varying circumstances and different staff.


Use the first meeting to gather data for costs estimates

Gather all the information required to do an accurate costs estimate during the first meeting. This will include the relevant tasks, to be broken into stages, and any factors that could affect time spent on each task or stage, or on the matter overall.

A prompt, checklist or matter template outlining all possible tasks or stages and all potential variables assists.

Compare meeting to historical data

Refer to the historical database to produce time estimates for the stages or tasks identified for the new matter.

Consider variables and risk factors

Refer to the historical database for information on how any identified variables or ‘risk factors’ might affect the estimate.

Risk factors or variables include:

inexperience/incompetence of the other side

foreign jurisdictions

multiple clients, financiers, agents or other parties

delay: if a matter isn’t completed by a certain time costs might increase significantly

client capacity

client’s communication/service/project management demands

commercial/political/economic events.

Check and review

Before finalising the estimate, briefly discuss it with a supervisor or colleague. A second pair of eyes might identify another variable.

Formalising the process prompts greater consideration and incorporates more data and variables, ensuring greater accuracy.

This process looks complicated. However, a practice that is disciplined in recording data and can streamline the process through the use of support staff and appropriate IT will benefit.

Measurement, discussion, review

Another way to improve the accuracy of costs estimates is to measure accuracy as part of regular supervision. As well as focusing attention on the estimation process, discussing it can lead to ideas for improving accuracy and developing best practice.

By comparing bills to estimates, solicitors learn to identify where they have underestimated time and can use this knowledge to improve the accuracy of estimates in future.


3.8. Costs, culture and ethics

For many years, hourly fees and billable hour measures have been the basic unit of practice profitability, providing a simple, low-risk model to confidently calculate, manage and lock-in profitability. It was assumed that clients accepted them, because they were seen to provide the potential for detailed information and transparency on legal fees.

Most practices are keen to stick to the ‘hourly fee’ system of billing despite the well-documented disadvantages. Criticisms of the hourly fee, time costing or the billable hour system are targeting three different things, which do not necessarily have to be linked together:

Time recording – the internal process of recording time against matters.

Time costing – the basis by which you calculate your fees and bill.

Individual, or team, billable hour targets – the internal targets for solicitors to record or bill a certain number of chargeable hours each day/week/month/year.

It is possible to use time recording without individual billable hour targets. It is also possible (and a good idea) to have time recording and time recording targets without using them as the basis for charging clients.

It is also common for practices to appear to charge clients according to an hourly fee, but for the fee to bear little relationship to the tally of recorded hours. A partner may decide to increase or decrease hours according to an estimate of what the client is willing to pay, or the time a solicitor ‘might have been expected’ to need to complete the work, according to their experience and expertise. This raises ethical and profitability issues which are also discussed in ‘Time recording’, below.

The terms ‘billable hours’, ‘time costing’ and ‘time recording’ are not interchangeable. Many cultural or ethical concerns can be avoided by separating them and considering each on their own merits.

To understand the drivers and motivations for the concerns, it is important to separate the practice from the individual. Time costing prompts concerns at practice level, whilst billable hour targets can lead to questionable individual behaviours.

Time recording

Time recording as an information gathering tool separate from billable hour targets, its use in performance management, or its role in time costing, has few adverse cultural or ethical effects. Despite that, it is unpopular among employed solicitors and can lead to low morale. Very few people leaving private practice miss it.

Most cultural or ethical criticisms of time recording arise when it is linked to time costing or billable hour targets.


Time costing and billable hour targets

The main criticisms of time costing and billable hour targets are as follows:

Together, they can encourage institutionalised inefficiency. Working more quickly, recording fewer hours and so generating fewer fees, could encourage solicitors to allow available work to expand to fill the time.

Together they encourage padding.

Together they can lead to unnecessary additional work (such as overzealous due diligence).

Together they can lead to a reduction in important non-billable activities such as client service, communication, the development of precedents or personal professional development.

Together they can create a long hours culture, adversely affecting employees’ work-life balance and limiting their ability to effectively manage their commitments at home or to social engagements.

Individual billable hour targets discourage team co-operation and support (billable hour targets for a team can, with good management, encourage co-operation and support).

Demanding team billable hour targets, when made the responsibility of a partner, increase the risk of bullying or unreasonable demands on individual team members. Billable hour targets emphasise quantity rather than quality, which can lead to lower quality work and low morale if performance management is exclusively based on billable hour statistics.

Time costing does not provide the client with predictability on cost, leading to anxiety, a lack of accountability, inefficiency, and the potential for disputes.

Together with other negative cultures, the cumulative effect of these ethical and cultural strains can lead to an increased risk of claims and complaints, low morale and motivation, high staff turnover and stress and depression.

Suggestions for avoiding these consequences include:

effective supervision, delegation and workload management to provide the work solicitors require to meet their billable hour targets, reducing the temptation to pad or work inefficiently

make padding and inflation of timesheets a disciplinary offence

agree reasonable and achievable billable hour targets, rather than imposing them

develop career pathways and salary levels for individuals who are not comfortable with high billable hour targets so they can contribute productively

develop balanced performance management arrangements, of which billable hour targets form only one part

develop policies and provide training on time recording, then supervise the practice of time recording to both eliminate unethical practices and offer support to fee-earners

develop work-life balance arrangements to enable people to meet billable hour targets whilst still maintaining their home and social commitments.


4. Alternative fee structures and billing options

4.1. Alternative fee structures

Practices are used to the benefits of hourly rate billing: it is easy and efficient; manages cash flow; evaluates WIP; is objective and, above all, minimises financial risk to the practice. It carries risks for clients, and does not always provide good value. Clients are seeking alternative methods of billing in which the practice bears more of the risk.

A solicitor must understand the cost of production and profitability of work, and how each alternative will affect profitability. This knowledge has been traditionally held by the accountant, practice manager or cashier, so training is likely to be needed.

The goal is to understand what works for the practice and the client and to work to provide the best outcome for both parties.

Billing methods

Hourly rate

Outside conveyancing work, the hourly rate is common.

Advantages

Low risk for practice.

Easy and familiar.

Aids justification in billing disputes.

Some clients prefer it.

Makes interim billing easier for better cash flow management.

Disadvantages

All cost risk to client.

Increases risk of billing disputes.

Many clients dislike it.

Encourages inefficiency.

Places limit on profit margin.

Encourages short-term focus, ignoring long-term issues such as client loyalty, efficiency, staff development.

Hourly rates are best used:

when accurate estimating is not possible

for sophisticated, open-ended high value work

when time recording is efficient and effective

when clients want it.

Hourly rate with cap or limit

Hourly rates with a fee cap or limit offer clients certainty on costs and provide a bridge between hourly rates and fixed fees. An estimate is provided and the hourly rate charged, but the total cost is capped, so fees will not rise above that level. A cap is


usually set at 20%, 30% or 50% above the estimate, depending on how confident the practice is that it can estimate accurately and control costs.

Capped fees share the advantages and disadvantages of both hourly rates and fixed fees.

Capped fees are best used when:

clients need certainty that costs will not exceed certain level

the practice is unable to offer fixed fees.

Fixed fees (also known as value pricing)

Fixed fees provide certainty for clients and alleviate anxiety about costs escalation. As well as the obvious benefits during a matter, they provide market differentiation and help overcome buyer resistance. They also assist in maintaining client relationships.

Advantages

Eliminates client fears about spiralling costs.

Drives efficiency.

Aids differentiation.

No limit on profit margin.

‘Risk premium’ can be charged/justified.

Removes cost tensions from the client-solicitor relationship.

Disadvantages

Higher risk for practice.

Skills in estimating, negotiation needed.

Retainer must be scoped and defined.

Fixed fees are best used when:

there is a good understanding of a client’s situation and needs

there is a good database of historical time/cost information

solicitors can confidently scope, estimate and negotiate

solicitors are able to manage files to stay within a budget.

Menu fees and task based billing

Task based billing sees a client charged a fixed price for a specific task or standard service.

The advantage of this approach is certainty for the client.

Disadvantages:

Higher risk to practice.

Investment costs (IT, knowledge management) of necessary efficiency gains.

Failure to differentiate service offerings can prompt practices to compete on price.

If poorly managed, it weakens the link between internal costs and client fees, leading to low profitability.


Menu fees are best used when:

the cost of specific tasks can be accurately estimated

work is repeated and process-based

the offering is high volume and commoditised – wills, EPAs conveyancing

task costs can be accurately fixed according to historical data.

Blended rate

A practice can quote a blended rate based on the likely work burden on different levels of solicitor.

Advantages

Useful for marketing.

Simplifies cost arrangements for client.

Disadvantages

Significant ethical risks – there is LSC commentary about a case concerning blended rates in Appendix 1.

Needs good management re delegation of tasks to appropriate level.

o Involvement of senior staff must be agreed with client.

Blended rates are best used when:

several solicitors will be involved

the involvement of each level of seniority can be estimated.

4.2. How to offer fixed fees

Profitability and fixed fees

For a practice that charges fixed fees, the profitability equation is:

Profit per equity partner =

Fees x gearing x recovery rate

Costs


The fixed fee levers of profitability are:

Pricing and cost management

Practices will be unprofitable if estimates are inaccurate and the cost of providing the service exceeds the agreed fixed fees.

Negotiation Solicitors can struggle to negotiate their own fees. Partners have to develop new skills to build value in order to raise the level of fixed fees and extract a premium for the fee risk accepted by the practice.

Efficiency and productivity

Working for a shorter time on each job lowers costs because more jobs can be completed with the same capacity, which means profit. Efficiency can be increased through investment in IT, knowledge management, risk management and supervision.

Repeats The more a type of work is done, the more efficiently it can be done, and the more time costs can be reduced. So, fixed fees are associated with commoditised work such as residential conveyancing.

The increased sophistication of financial analysis software makes it easier to consider a move to fixed fee or other alternative arrangements. Given accurate historical data, the likely time required and therefore the cost of regular work can be calculated.

Two avenues of profit are opened in this model. The first is that it is possible to use the historical data to set a floor from which to negotiate upwards in agreeing a fixed fee. The second is that with creativity and efficiency, time spent on each matter can be reduced, cutting internal costs.

Building estimation skills by moving finance expertise out of billing and into pricing and cost management, preferably working closely with partners, assists the transition. In addition, solicitors must improve their fee negotiation skills and learn how to talk in terms of value, including any fee risk premium, and not just time.

While efficiency gains are most achievable for regular commoditised work, good precedent libraries and knowledge management systems can provide guidance and shortcuts to documents and processes, improving productivity and profitability.

Time costs for mistakes and oversights cannot be passed on to the client so risk management and supervision are very important. IT supports this, as it supports efficiency gains generally.

Fixed fees and commoditisation

There are at least two different types of fixed fees, with different implications for client perceptions and profitability:

1. Fees fixed to the legal product (the will, the Binding Financial Agreement, the house sale).

2. Fees fixed to the client’s specific needs.

Fixing fees to the legal product is good for the client – it tells them what they have to pay, reducing anxiety and risk, and allows them to compare the cost of your service to other providers, and choose the cheapest.


But consider these questions:

Does your practice really want to compete on price and be selected on that basis?

How can the practice be sure it is meeting the client’s specific needs?

Without understanding the client’s needs, how can estimates be accurate?

Fixing the price to the legal product means commodification. Is this the future of the practice?

For a practice that tailors work to the client’s needs, charging every client the same sends the wrong message, and is bad for profitability.

Fixing fees to the client’s needs gives more scope to genuinely understand the client, do the work that meets their needs, communicate value – and charge accordingly.

Fixing the fees to the client rather than the work requires more effort in understanding client needs, more sophisticated scoping, estimating and negotiation skills, greater discipline in managing the file to stay within the budget, and more focus on communicating value. It also differentiates your practice from commoditised offerings and should increase profitability.

Fair and reasonable

All cost agreements and bills must be fair and reasonable.

The challenge with fixed fees is that clients need to be provided with sufficient information at the outset to be able to assess whether the proposed fee is fair and reasonable.

This requires a clear explanation of the work and the variables that could affect cost. In setting fixed fees, the solicitor’s advantage is the ability to assess the likely time demands of work involved.

Efforts to address this knowledge imbalance will increase the chances that a proposed fixed fee, and related bill, is fair and reasonable, reducing the risk of costs disputes and requests for itemised bills.

Profit risk, swings, roundabouts and premiums

By charging a fixed fee, practices accept the risk that they might underestimate the amount of time and work involved in a matter and therefore make a reduced profit, or even a loss. This should be balanced by the times that profit meets and exceeds normal expectations because work is overestimated or the matter is managed more efficiently than expected.

Over time and numerous transactions, and assuming fees are pitched at an appropriate level, profit levels should balance out around a normal distribution curve, with volume of transactions acting to mediate the profit risk faced by practices.


A practice’s willingness to accept profitability risk is valued by clients, and fixed fees provide an opportunity to convert that risk and value into higher profits. Given the choice between an estimate of $5,000 with the risk that fees could escalate to $15,000, and a fixed fee of $7,000, many clients would choose the latter.

This provides an opportunity to build a risk/value premium into fixed fee levels, in recognition of the profitability risk the practice is accepting and the value created for the client in fixing the fee.

The adoption of a risk/value premium requires an ethical consideration, and depends on the extent of profitability risk and the informed choices of the client. If the client is fully informed about the variables that could affect likely WIP levels and is offered a choice between time costing and fixed fees, this significantly improves the likelihood of any fixed fees being seen as fair and reasonable.

Fixed fees: an end to time recording?

Opinions are split about whether fixed fees provide an opportunity to stop time recording.

True advocates of the value pricing model argue practice costs, productivity and profitability can be measured through billing records, general profit and loss accounts and other tools such as file velocity – and that timesheets can be thrown away.

For others, the successful offering of fixed fees is dependent on the use of historical data to produce accurate estimates and quotes.

Practices will need to consider all this in light of their own arrangements.


Summary: setting fixed fees

There are many ways to arrive at a fixed fee, based around internal costs, competitive rates or recognised client value. This process is based around the use of historical data.

Stage the instruction

Consider offering a fixed fee for part of the matter, with later stages to be costed as required and as more information becomes available.

Consider ‘hybrid’ cost agreements: part fixed/part time costed depending on which stages/tasks will incur predictable costs.

Staging an instruction is good for interim billing and cash flow, and as a way to consider revising cost arrangements if necessary.

Cost aware client meeting

Identify all probable tasks and risk factors that will affect the cost of the matter during the first meeting.

Consider: Who’s on the other side? What is their strategy? What are the likely complications?

Offer choice, then define scope

The more information, choice and control you can offer, the lower the risk of costs dissatisfaction.

Can the practice offer a choice between time based billing, fixed fees and other alternatives?

Discuss the scope of the work in terms of alternative fixed fee proposals.

Confirm exactly what is and is not included in the fixed fee.

Explain the deal Discuss the work and likely fees.

Explain the process.

Explain that the practice is accepting the risk of work and fees growing beyond current expectations within the agreed scope.

Discuss expectations about how the matter will progress and how this has influenced the preparation of the fixed fee proposal.

Explain arrangements for out-of scope work.

Explain how fees will be adjusted if in-scope work is not necessary or not undertaken.

Provide as much information as possible to enable clients to judge whether the proposal is fair and reasonable.


Accurate cost estimating

Develop the database of historical data.

Compare tasks identified with that data and generate a provisional internal costs estimate.

Consider risk factors and variables and revise estimate.

Review and discuss estimate with colleagues.

Measure, review and performance manage cost estimating.

Profit/risk premium

Consider a risk premium in return for accepting the risk of unexpected costs.

Some clients will be willing to pay a risk premium in return for costs certainty, however it is ethically prudent to explain the nature of this cost to clients.

Value communication and negotiation

Improve fee negotiation skills.

Understand any competitive advantage – which might include fixed fees – and be ready to explain how this benefits the client.

Talk about not just what is being done, but why, and how this benefits the client, including in financial terms.

Be prepared for undercutting from competitors – and talk about better value.

Drive efficiency Invest in IT, workflow, knowledge management, risk management and support staff.

Set efficiency targets.

Continue to time record to measure costs and productivity.


Offer the client choice in terms of scope and extent of work

Explain the deal in terms of your expectations of likely work


5. Costs and profitability

5.1. The challenge of profitability

Profitability is a constant challenge – even, perhaps particularly, for successful legal practices. Increasingly demanding clients, growing competition, downward pressure on fees and upward pressure on internal costs (especially for rent and staff) are ever-present features. This challenge is compounded by the time pressures of fee-earning: solicitors are so busy working ‘in’ the business, it is difficult to spend time ‘on’ the business.

The challenge of improving profitability is a vast subject. Broken down to fundamentals, profitability in legal practices who charge hourly rates is expressed in this equation.

Profit per equity partner = hours x rate x gearing x recovery x margin

Or

Profit per equity partner =

Hours x rate x gearing x recovery rate

Costs

Gearing/ leverage

The ratio of equity partners to other solicitors (the higher the ratio the higher the profitability).

Hours How many chargeable hours solicitors work.

Rate The stated hourly fees.

Recovery Proportion of WIP ultimately paid by the client.

Costs Salaries, overheads and other costs.

Pulling levers

Using this model, profitability has been managed by focusing on key figures and pulling levers:

increasing billable hour targets

increasing rates

monitoring recovery levels so they do not fall too low

cutting costs, or passing on increased overheads to hourly rates.


Pulling a lever to improve the figures on one variable affects the others, and usually not to advantage. So consider the following options:

Option Likely outcome

Rate up? Recovery down, due to client resistance or even loss of some clients.

Increase hours per fee-earner?

Recovery down, due to decreased efficiency, increased staff turnover and increased employment costs.

Increase gearing?

Recovery down due to poor supervision.

Cut costs?

Over-aggressive cost cutting, particularly involving staff salaries, training, marketing, knowledge management and IT can severely weaken the structural base for profitability.

The challenge of profitability can be compared to managing a country’s economy. If growth is boosted, inflation may increase. Tackle inflation with interest rates and growth suffers. The solution for a national economy is structural changes – boost productivity by investing in education or infrastructure, for example, so that inflation and growth indicators move in the right direction at the same time.

The solution is the same for legal practices. A cohesive approach to management and an understanding of the activities that can help build a structural base for profitability provide drivers for growth.

Consider underlying activities that can help build a structural base for profitability.

Increase billable hours recorded by:

improving supervision, practice culture and morale to increase targets without higher staff turnover or costs

developing skills in accurate estimating

implementing arrangements for prompt cost updates to limit write-offs

improving time recording efficiency through analysis, supervision and support

improving branding and business development to attract new clients

improving client service, leading to better client retention and more referrals

investing in IT and knowledge management to improve productivity

training about ethical, commercial time recording.

Increase rates by:

differentiating

demonstrating better client service

communicating value

building and demonstrating a competitive advantage

investing in developmental supervision, training, knowledge management and risk management to justify higher rates

developing better fee negotiation and justification skills.


Increase gearing by:

managing a larger team using efficient and effective supervision

providing supportive supervision and practice culture to keep staff

making effective recruitment and talent marketing arrangements

providing knowledge management and risk management systems to help streamline supervision.

Increase recovery rate with:

good client care, communications and service

accurate estimates and costs disclosure/prompt updates

effective billing arrangements

risk management of internal errors carrying high non-recoverable time costs.

Cut costs by:

implementing strict expenditure discipline and accountability

proactively managing costs and purchasing arrangements

ensuring investment decisions can be justified through payback calculations

controlling overheads through effective management and supervision of support staff and specialists and effective use of non-billable time.

Introduce efficiencies by:

supervising efficiency and productivity

risk management of internal errors with high non-billable time costs

using effective IT and knowledge management systems.

5.2. Focus on the 5%

Improving each of hours, rate and recovery rate by 5% can have the effect of collectively increasing profits by more than 50%.

Consider a small practice with three solicitors (one principal and two associates), who each record 1000 hours a year (200 days x 5 hours). With an average hourly rate of $300, a recovery rate of 85% and 30% profit margin, the practice makes a profit of $229,500.

Hours

Q: If everyone billed an extra 15 minutes a day (assuming costs and recovery are constant), what is the effect on profitability?

A: 50 x 300 x 3 x 0.85 = $38,250 increase in profit (17%)


Rate

Q: If rates were increased by 5% (assuming hours and recovery are constant), what is the effect on profitability?

A: 1000 x 15 x 3 x 0.85 = $38,250 increase in profit (17%)

Recovery

Q: If WIP recovery increased from 85% to 90% (assuming costs and hours are constant), what is the effect on profitability?

A: 1000 x 300 x 3 x 0.05 = $45,000 (20%)

5.3. Boosting productivity

Improving productivity is a quick way to improve profitability. Recording an extra 15 minutes of billable time each day can increase solicitor revenue by 5% and profitability by 15% or more.

For practices that time record, increasing productivity requires more than setting increased billable hour targets – it requires sustained practice and partner support to record a greater proportion of time in the office as billable. Meeting billable hour targets by spending long hours in the office can be demoralising and is likely to be unsustainable. The aim has to be to work smarter, not longer.

Junior solicitors are prone to a series of overlapping insecurities that affect their time recording. These include:

Ethical insecurity

Uncertainty about what can be ethically recorded as billable, and not recording when in doubt.

Efficiency insecurity

Believing a task should be completed in an arbitrary time – perhaps a colleague took this long – and recording that time even though they took longer.

Value insecurity Insecurity about their ability to justify their time entries to their partner, and failing to record the time.

This leads to failure to meet targets, and can carry a significant cost. Partners should address these concerns through monitoring, guidance, support and formal policies.

Principals with insecurities about certain client relationships can underestimate fees, or even fail to send cost updates if they doubt their ability to justify time entries.

On the practice/principal side, consider these tips for increasing productivity:

use accurate scoping and estimation and timely cost updates to avoid write-offs

develop and communicate practice policies on ethical and commercial time recording

communicate minimum acceptable productivity targets and more aspirational targets – and clarify consequences and rewards

provide all training required to undertake the work efficiently

ensure work is available

provide guidance, support and mentoring in time recording and productivity

review and analyse billable and non-billable time

invest in efficient IT systems, knowledge management and support staff.


Beyond the above, much comes down to the discipline and performance of individuals. Common productivity failings include:

not recording the time it actually took to do the work

undertaking personal write-offs – all write-offs should be left to or discussed with a partner

spending too much time on non-billable work

undertaking unnecessary work, work outside the scope of retainer, overzealous due diligence or unfocused matter management

poor time management skills.

In a practice that does not time record, it might be possible to measure or set targets for how long a defined task might take, or how many particular tasks or matters can be completed in a week.

Partners should offer personal assistance and support, model good productivity and time management behaviours, and actively help all staff to improve their productivity.


6. Review: key points

Here are nine suggestions for improving performance in relation to costs, billing and profitability.

1. Think beyond LPA 2007

Costs can be seen as a regulatory issue or as a bureaucratic burden on the ‘proper work’ of solicitors. Since good management of costs and billing is vital to client satisfaction and profitability, a best practice approach brings rewards.

Practices that set higher standards than compliance with LPA 2007, and then implement arrangements to ensure those standards are met, will benefit. Practices that treat costs as an exercise in compliance will not only miss their target occasionally, they will also miss the benefits arising from a best practice approach.

2. Listen to clients

The management of costs is central to clients’ perceptions of the service provided, driving perceptions of value that affect rates, recovery, hours and ultimately profitability.

Over-reliance on a regulatory approach at the expense of client feedback ultimately leads to lower standards of service. Codes of conduct set minimum standards or basic benchmarks, whereas clients demand the highest standards – which is what professionals should be aiming for.

Clients – through first meetings, complaints data, satisfaction surveys or feedback forms – should be consulted about concerns and expectations in relation to costs, and how successfully the practice offers reassurance and meets their expectations.

3. Focus on time recording

All billable and non-billable time should be accurately and promptly recorded. Whether or not time recording is the basis for charging clients or setting productivity targets, understanding how staff time is spent is vital. Without this, informed management decisions, including about performance management and profitability, cannot be made.

Support all staff by providing guidance and training on how to record their time. Where possible, invest in the most appropriate software solutions to make it easier to record time and to subsequently analyse the information.

Instead of focusing only on billable hours recorded, measure the percentage of the day that has been accounted for (with a goal of 100%) and the percentage of that time which is billable.

4. Monitor and understand your internal costs of production

Work cannot be priced effectively unless costs of production are calculated and understood. Although most practices set hourly charge-out rates, the minority actually calculate the cost of producing work each year. Pricing the cost of work might seem laborious, but making the calculation twice a year will provide invaluable information for pricing, management and strategic decisions.


5. Build confidence and flexibility in relation to costs

An understanding of internal costs and the mechanics of profitability can build confidence and competence for costs discussions. Solicitors who understand their internal costs are better placed to negotiate and respond to client preferences in relation to billing and fee structures.

Developing the capacity to offer a range of options gives costs negotiators confidence, as providing alternatives makes it more likely a solution that suits practice and client can be found.

6. Improve the accuracy of estimates

Improving the accuracy of estimates brings benefits in terms of client satisfaction, profitability and cash flow. Training, better information capture, the use of historical data, measurement and internal discussions improve the accuracy of initial costs estimates.

7. Manage cultural and ethical risks

Time costing, time recording and high billable hour targets have been linked to low morale, stress, high staff turnover, poor client communication, padding of timesheets and overcharging. Practices should monitor these risks, and amend their arrangements to minimise them.

8. Build a structural base for profitability

Trying to move one of the levers, without the required underlying skills, systems or investment in place, will not help profitability. Focus on efficient time recording, accurate and informative costs disclosure, client satisfaction, developmental supervision and risk management will allow effective adjustments to the levers of profitability.

9. Apply supervision and performance management

Whatever support is provided for time recording, implement arrangements to ensure that all bills are ethical and comply with practice policy. Bills being checked and approved by a supervisor or partner before being sent provides an opportunity for discussion about any concerns, for amendments as necessary and to identify areas where staff might need additional training or guidance. The knowledge that all bills will be checked adds discipline to time recording.

Benefits flow from measuring and monitoring the following aspects of practice and individual performance:

the percentage of each day accounted for – the goal is 100%

key performance indicators for billable time each day/week/month

the recovery rate for each team and solicitor

the accuracy of initial estimates

unbilled WIP for each solicitor or team

the debtor days for each solicitor or team

team and individual profitability

client satisfaction about costs and costs disclosure.

Such monitoring will identify issues to focus on, and prompt consideration of the need for new systems or additional training, guidance or support.


Appendix 1: Costs in a disciplinary context

Costs in a disciplinary context – charging excessive costs in connection with the practice of law

Contributed by David Edwards, Legal Services Commission Queensland. Paper presented on 15 May 2008 at Ethics and creativity in billing practices, the third in a symposium series presented by Griffith Socio-Legal Research Centre and the Legal Services Commission.

It may come as little surprise to learn that at a minimum, 15% of all complaints investigated by the Legal Services Commission involve costs. The true figure is actually much higher as the 15% mentioned relates only to those complaints dealing primarily with costs. Many more complaints involve costs together with other issues.

Those who have been in practice for any substantial time will know that client concerns over costs can be the bugbear of any practice.

Costs are under scrutiny

For the profession, there is every sign that their charges will be the subject of increased scrutiny from clients and regulators. A recent study prepared by London practice Cost Auditing Ltd examined costs claims submitted by lawyers to insurers. The practice reportedly found that 23.5% the costs claimed were unwarranted. The press release publicising the report noted:

“In a recent case a solicitor and own client bill was reduced by £274,000 from a total of £970,000. The bill contained some very interesting heads of charging, in addition to the normal camel train of lawyers each to do the same job otherwise known as structured and layered charging, was a new concept of “making of time available to work on a case” as an actual chargeable time unit!”

Yet, despite those concerns and general community disquiet about the level of costs charged by legal practitioners, there is little in the way of decided case law as to which billing practices are acceptable and which are not.

The solicitor’s ‘advantage’

Much of that concern arises from what has been described as the ‘position of advantage’ the lawyer enjoys when it comes to charging clients. The point was taken up by Justice Mahoney of the NSW Court of Appeal in the case of Veghelyi v Law Society of New South Wales. In that case, his Honour observed:

“Solicitors are informed or are in a position to inform themselves of what work may be required and what are fair and reasonable charges. They are in that sense in a position of advantage and trust is placed in them. Clients are entitled to be protected against the abuse of that advantage. It is, I am inclined to think, the fact that an advantage has been misused which may in a particular case warrant what the solicitor does being categorised as professional misconduct.”


Legislation

In Queensland, the starting point for considering the ethical and disciplinary implications for practitioners of their charging practices is s. 420 of the LPA 2007. That section sets out in an inclusory fashion certain types of conduct that are capable of amounting to unsatisfactory professional conduct or professional misconduct. The relevant part of the section reads:

“The following conduct is capable of constituting unsatisfactory professional conduct or professional misconduct –

(a) …

(b) charging of excessive legal costs in connection with the practice of law…”

The definition is perhaps more interesting for what it does not say, rather than what it does.

The first point to note is that it talks only of ‘charging’ excessive legal costs, not ‘deliberately charging’ such costs. Secondly, it speaks only of ‘excessive’ legal costs, not ‘grossly’ or ‘manifestly’ excessive costs.

One is tempted to conclude, given that those more expansive terms were well-known and long- established within the profession prior to 1 July 2004, that the decision to frame the definition without reference to them is deliberate.

Certainly, if indeed it is the case that Parliament intended that unsatisfactory professional conduct or professional misconduct could be established by proof that a practitioner charged (without needing to prove deliberately charging) excessive legal costs (without needing to prove that the costs were grossly or manifestly excessive), then many of the concerns arising out of the decisions in Nikolaidis v Legal Services Commissioner and Legal Services Commissioner v Galitsky would be relatively simply overcome.

As yet however, the scope of s. 420(b) has not been tested before Queensland’s Legal Profession Tribunal.

Key Queensland case

For some guidance on the approach of Queensland courts to what constitutes charging excessive costs, the most apposite recent case is QCAO3-469.

The disciplinary charges arose out of a retainer to act (on a ‘no win, no fee’ basis) for a brain-injured person. The client had retained the practice in August 1996 and signed a formal retainer agreement in November 1998. The agreement provided for fees to be calculated on a graduated hourly rate, from $250 per hour for partners and accredited personal injury specialists to $100 per hour for paralegals. The practice could charge an additional amount of up to 30% of the other fees for care and consideration. The agreement allowed the practice to increase the hourly rates by no more than 10% once per year, but only after giving the client 30 days’ advance notice of the proposed new rate.

The firm presented a second retainer agreement was signed in October 2000. That agreement provided for an increase in the fees chargeable, to $300 per hour applicable to all the partners and employees of the practice, together with the 30% ‘care and con’ premium.

The solicitor called the client into his offices to discuss a mediation of the claim scheduled for December 2000. At that time, the client was in financial difficulties and was anxious to continue with his daughter’s claim and he wanted the practice to take on a similar claim in respect of his son. When presented with the suggested increase in fees, the client was of the view (erroneously) that most of the legal costs had already been incurred, so that the proposed increase would have little overall effect on the amount payable in respect of his daughter’s claim.

About half of the work that had been done on the matter to that time was performed by paralegals. This was significant because under the proposed new arrangement, the amount chargeable for their work per hour would triple. The matter was put to the client on the basis that the solicitor would agree


to take on the client’s son’s claim at $300 per hour, rather than the $500 per hour his practice would ordinarily by then be charging, but only if the client agreed to the higher rate of $300 per hour in respect of the daughter’s claim.

The Tribunal found that the solicitor failed to draw the client’s attention to the provisions of the first retainer which limited the capacity of the practice to increase the fees payable, failed to provide an estimate of the likely impact of the proposed increase on the fees payable overall and failed to advise the client that he should obtain independent legal advice before signing the new agreement.

As a result, the Tribunal found that the solicitor had failed to afford the client “the opportunity to make an informed decision with respect to a contract which fundamentally affected his rights,” amounting to “serious breach of his fiduciary duty.”

When the matter was finalised, the practice’s professional costs amounted to $350,000. This was calculated on the basis of time recorded of $280,000, plus a 25% allowance for ‘care and con’.

The bill included what were described as ‘mundane’ items for:

attempts to make telephone calls, but which calls were unanswered

attempts to telephone persons who were unavailable to take the call and for whom messages were left to return the call

photocopying of an account received by the practice

drawing a form requesting the practice’s accounts department to draw a cheque in respect of an account

diarising an appointment

telephoning directory enquiries or using the telephone directory in order to obtain a telephone number

searching for documents and files in the practice’s possession which were unable to be located readily

typing of formal letters by staff performing secretarial duties

arranging accommodation for counsel

internal telephone calls and emails.

It is worth noting that the Tribunal had found a charge based on the inclusion of those items to be established; although it was not convinced that the amounts levied for unanswered phone calls were ‘substantial’.

Perhaps more disquieting were some of the more outrageous examples cited by the Tribunal, including:

“12 minutes of charged-for time spent wrapping a box of chocolates to be given to a reporting doctor’s secretary by way of thanks for facilitating the correcting of a report, and another 12 minutes spent discussing arrangements for the purchase of the gift – for which momentous engagements the respondent was on my calculation billed $156.”

With outlays including counsel’s fees, the total bill was close to $600,000.

The client requested an itemised account, which was prepared by a costs assessor for the practice (and for which the client was charged a further $45,000). The itemised account came to a total (including outlays) of around $226,000 on the indemnity basis; which included a 75% allowance for care and consideration.


Both the Tribunal and the Court of Appeal noted the long-established principle that a difference between a costs assessment and a bill to a client does not necessarily prove ‘gross overcharging’. The Chief Justice (delivering the leading judgment for a unanimous Court of Appeal) however observed :

“While it is true that a solicitor is not bound to charge a client no more than would be assessed on the indemnity basis, one would nevertheless hope that such assessments would provide a reasonable view of the broad bounds within which recovery might reasonably be sought. But the Tribunal said only that these discrepancies did not “necessarily” establish gross overcharging. It was correct in noting that the focus must rest on the bill as delivered.”

The solicitor was found guilty of professional misconduct, a finding upheld on appeal.

Relevance of the costs agreement

In the above case, the Chief Justice helpfully set out several ‘additional views’ on the issues raised by the case, which he collected under the heading ‘The ethical approach’.

One of those concerned the relevance of the retainer agreement. Of course, the position of such agreements is enshrined in legislation and they form an integral part of modern legal practice.

The Chief Justice appears to be addressing the argument (albeit not set out in the judgment) that a practitioner cannot be found guilty of overcharging if they have charged in accordance with an agreement signed by the client. As a response to that (implied) suggestion, the Chief Justice said:

“The circumstance that a solicitor’s right to exact certain charges is enshrined in an executed client agreement will not necessarily protect the solicitor from a finding of gross overcharging. For example, as here, the client may not have given his or her “fully informed consent” to the agreement; or the very extent of the particular charges may itself evidence inexcusable rapacity. It is repugnant to think of a solicitor withholding detail from a client, precedent to an agreement, to the solicitor’s advantage and the client’s disadvantage.”

It is useful to refer here to some statements made in the New South Wales Court of Appeal in Foreman [ ], per Kirby P (p 422):

‘Litigants look to this Court, ultimately, to protect them from over-charging by legal practitioners where this is so high as to constitute professional wrongdoing. The courts of other Australian jurisdictions have begun to deal determinedly with gross over-charging by legal practitioners where this is proved to amount to professional misconduct ... No amount of costs agreements, pamphlets and discussion with vulnerable clients can excuse unnecessary over-servicing, excessive time charges and over-charging where it goes beyond the bounds of professional propriety. Time charges have a distinct potential to result in overcharging ...’

and per Mahoney JA (p 437):

‘... if costs agreements of this kind are to be obtained from clients, it is necessary that the solicitor obtaining them consider carefully her fiduciary and other duties, that she be conscious of the extent to which the agreements contain provisions which put her in a position of advantage and/or conflict of interest, and that she take care that, by explanation, independent advice or otherwise, the client exercises an independent and informed judgment in entering into them.’”

Accordingly, the mere entering into of a costs agreement that allows excessive charging may, in itself, be capable of amounting to unsatisfactory professional conduct or professional misconduct.

The unreasonableness of a costs agreement however does not, in itself, prove that the practitioner has been guilty of ‘gross overcharging’.


The undercharging ‘defence’

One of the matters that arose in the Queensland case concerned an argument that the charges levied were not excessive because there were other matters for which the practitioner could have charged but chose not to.

The argument was given short shrift by the Chief Justice, who stated:

“…it does not lie in the respondent’s mouth to reply, to a finding that the charges he did specifically levy were grossly excessive, that there were others he chose to forego. Levying grossly excessive charges to this extent amounts to professional misconduct whether or not other charges for work have been foregone.”

Time costing

The above case raises some interesting questions for those practitioners who calculate their fees on a time costing basis. In the Tribunal at first instance, the solicitor had argued that there was “genuine confusion in the legal profession about the proper remuneration or basis of charging for difficult matters”.

If that was the case at the time (and the Tribunal made no finding on that particular point), it is probably fair to say it remains the case. While time costing remains a popular, if not universal, method of calculating fees, anecdotal evidence that has come to the Commission’s notice suggests many practitioners do not appreciate what can and what cannot be charged for.

As an example, in a recent matter in which the Commission was involved, a practice appeared to be charging to clients many of the ‘mundane’ items identified in the Queensland case. When this was brought to the practice’s attention, their response included a concession that the partners had directed staff to record literally everything they did on a file, no matter how ‘mundane’ and no matter how tenuous its connection to the prosecution of the matter. They explained that they required this approach as a means of managing their human resources issues.

That management of a practice should want to be fully informed of what their staff members are doing is entirely understandable; but such a situation could easily lead to clients being charged for work they should not be charged for.

While it is beyond the scope of this paper to explore the pros and cons of time costing as opposed to other methods of calculating costs, it is apposite to note some of the criticisms of time costing. A commendably brief summary is provided by the Law Reform Commission of Western Australia in its review of the Criminal and Civil Justice System (1999).

The report noted that time based costs agreements:

are likely to involve a conflict between the duty of solicitors to their clients and their own self- interest

are apt to reward the inefficient

lack anything that shows the appropriateness of the person for the work – for example, a more junior practitioner may well have been able to adequately complete the task

may encourage lawyers to ‘over-lawyer’.

It continued:

“The obvious concern with a system based on billable hours is that it provides an incentive to undertake unnecessary work and to maintain inefficient ways of doing necessary work.”


It might be added that, in addition, it provides an incentive for lawyers (and indeed, their staff members) to:

‘pad’ timesheets to show more time spent on a matter than was actually the case

duplicate work so as to boost the billable hours of those involved in the case (the so-called ‘camel train’ effect)

invent ever more creative ways of ‘working’ on a file (eg a file becomes too big and the cover splits – the client is charged for the time spent in replacing the split cover ).

Blended rates

A particular issue involving time costing is the use of so-called blended rates, where all staff members’ work is charged at a supposedly median rate, rather than varying higher and lower rates.

This became a particular focus in the Queensland case. The Chief Justice addressed the issue squarely:

“A careful explanation should ordinarily be offered for what have, in this case, been termed “blended” rates. A client would usually be astonished to think he or she had to pay for the solicitor’s secretary or clerk at the same rate as for the solicitor. Cases like this one should cause careful clients to be circumspect about entering upon blended fee arrangements. A solicitor proposing such an arrangement should offer a most careful justification for what is proposed, to assure the client he or she is not being disadvantaged, and to inform the client appropriately so the client may make the requisite fully informed decision whether or not to agree to the proposal.

As observed by Gleeson CJ in New South Wales Crime Commission v Fleming and Heal (1991) 24 NSWLR 116, 126, ‘to allow a simple, flat, hourly rate as the basis for charging for anything, of whatever character, done by any solicitor of whatever seniority and experience in relation to the matter, is difficult to justify.” I add, even more so, where the rate extends to work done by employees without legal qualification.’”

Increasing reliance by legal firms on paralegals and other non-qualified staff poses particular challenges for the profession. As the Queensland case illustrates, the combination of heavy reliance on non-qualified staff, time costing and blended rates is a recipe fraught with danger for both clients – and practitioners.

What is the test for overcharging in Queensland?

Having outlined the issues facing the profession and some of the relevant principles, the question remains as to what test should be applied to determine whether overcharging (of the type that might amount to unsatisfactory professional conduct or professional misconduct) has occurred.

As mentioned at the outset of this paper, the starting point is to look to s. 420 of the Legal Profession Act, which speaks of the charging of excessive legal costs in connection with the practice of law. Under the principles enunciated in the common law cases, for a practitioner to be found to have committed a disciplinary breach in relation to charging costs, the disciplinary body had to find that the fees charged were ‘grossly excessive’. The fact that fees allowed on taxation might have been lower than the amount charged did not, of itself, prove gross overcharging. To use the words of Justice Carr in De Pardo v Legal Practitioners Complaints Committee, the issue was “to see whether or not there is a gross overcharge, not just an unreasonable fee that would not be allowed on a taxation”.

This required an overall consideration of the bill (not just particular items in it) and questioning whether the amount charged was “substantially above what any reasonable solicitor would contemplate as being a proper charge”.


The requirement to prove ‘gross overcharging’ set the bar rather high for professional regulators (and, in turn, for the clients whose complaints prompted them into action). A practitioner could be found to have overcharged, but if the overcharge was not ‘grossly excessive’, then disciplinary action was bound to fail.

Does s420 change the position? That question remains open, as the precise scope of s420 has not yet been tested.

Serious questions have to be answered in relation to the section, including:

Does ‘excessive’ in s. 420 mean the same as ‘grossly excessive’ in the common law cases? Is the absence of the word ‘grossly’ from the section significant?

My personal view is that it probably is. If the legislature had intended to translate the common law concept of ‘gross overcharging’ into the statutory regime of the Legal Profession Act, it would have been a simple matter to use the same terminology. The fact that the terminology is different is most likely of significance.

How does a practitioner ‘charge’ fees? Is it enough for the practitioner to ‘sign off’ on a bill prepared by an employee (qualified or not) of the practice?

The term ‘charge’ is rather imprecise. There is a sense in which anyone who has anything to do with preparing a bill is ‘charging’ the fees to the client. To find a disciplinary charge however, one would think that more is required. For example, simply processing a bill through accounting software would not seem to amount to ‘charging’.

However, by the same token, it would seem to be open to conclude that a practitioner who signs off on a bill or sends it to a client is ‘charging’ the client.

Such actions appear to indicate an intention to hold the client responsible for the fees set out in the bill.

Does s. 420 include an element of ‘deliberateness’? Does the practitioner in question have to prepare and send the bill; or is it sufficient that the practitioner supervises the person who did? Again, it is tempting to think that the absence of any reference to ‘deliberate’ charging in the section is intentional. If that is correct, then decisions such as Nikolaidis v Legal Services Commissioner may not present the difficulties for disciplinary action alluded to above. The mere act of sending a bill is, in itself, ‘deliberate’ of course. The practitioner must be taken to be holding the client responsible for fees in the amount stated in the bill. Whether the practitioner ‘deliberately’ intended to overcharge is, in my opinion, irrelevant to the scheme established by the Act.

These are questions for another day, but I hope they will provide some guidance on the issues posed by the Act and the regulatory scheme it establishes so far as they relate to overcharging.


Appendix 2: Costs management checklist

Does your practice … Yes/No Responsible

provide regular training to fee-earners in relation to the costs requirements in LPA 2007?

review its costs disclosure statements for compliance and its ability to respond to client needs?

always proactively discuss costs with clients in a first meeting?

use IT or other systems to prompt a costs update?

regularly measure client satisfaction in relation to costs disclosure and billing?

allow for flexibility in fee and billing arrangements?

encourage and support flexibility in fee and billing arrangements?

have a formal system for estimating the likely overall cost of a matter?

audit and measure the promptness of costs updates to clients?

measure the accuracy of initial estimates?

provide training or guidance about accurate estimating?

use historical costs data as a basis for providing costs estimates?

have agreed policies on time recording that cover issues such as research, travelling, supervision etc?

provide regular training in relation to its time recording policies?

provide training on the drafting and content of time recording narratives?

provide details to clients of its time recording policies?

make padding and other unethical time recording a disciplinary offence?

implement arrangements to limit the cultural and ethical risks that can arise from demanding billable hour targets?

implement delegation and workload management arrangements to ensure fee-earners have sufficient work to meet billable hour targets without the temptation for padding or unethical time recording?

ensure bills are reviewed by a supervisor or partner before being sent to the client?

‘build value’ in cost estimates and bills or when discussing costs?

provide training to fee-earners on costs negotiation?

automatically provide (or offer) clients a full printout of all recorded time at the completion of the matter?


Does your practice … Yes/No Responsible

measure fee-earner performance according to a number of measures, not just billable hours?

measure the percentage of the working day that can be accounted for?

regularly review internal costs for different areas of work?

measure WIP days and debtor days for different practice areas?

measure recovery rates for different practice areas?

Documents

Practice Management Course...and billing, and help the client identify which best suits them. Consider hourly rates, blended rates, fixed fees, staged fee arrangements, additional