Flat Fee or Hourly? Pros and cons of Legal billing alternatives

When it comes to law firm billing lawyers usually turn towards flat fee or hourly billing depending upon the business they consider. The legal sector is experiencing a shift in how services are delivered as new pricing models are emerging in the market. Traditionally, hourly billing has been the standard for law firms. Clients are billed on an hourly basis for the length time a lawyer spends on a case.

At LawKPIs, we try to ease an attorney’s work by making their billing work and chasing payments from clients as hassle-free as possible.

Law firms regularly face many challenges while enforcing efficient time tracking and invoicing processes into their firm’s billing system. This is because law firms have many repetitive administrative tasks, like, tracking billable hours, sending, or receiving invoices, tracking down late payments, setting reminders apart from meeting client’s needs.  Such everyday tasks require more time and effort because firms use old methods to accomplish daily tasks. Even if the firm can recognize their issues, they fail to address the problem and the toll is subsequently on the legal matters and proceedings.

Hence the need for a better and predominantly consistent fee collection method or process becomes a vital part in running any law firm.

Legal Billing is crucial to law firms of all sizes. And of course, a law firm billing, which includes billing the clients and chasing down payments, is one of the most monotonous and time-consuming tasks of any legal practitioner and the legal staff.

Most legal practitioners record only a few billable hours per day on an average, with the left outs of their workday going towards a wide range of non-billable work. This often includes billing-related tasks like reviewing and sending invoices, processing payments, and updating the billed and billable and collected accounts and reports.

The billing process is rather similar for most law firms. When a legal firm onboards a new client, their legal matters portfolio is created and the billing time is calculated and maintained with the fees, and expenses throughout the case. At the end of each matter, the finance team calculates all bills and expenses and drafts a bill for the client to pay and clear off.

However, in recent years, fixed fee billing has become more common. Flat fee billing is where the attorney charges a single flat fee, plus court costs, for the entire action.

It can be difficult to determine if flat rate billing or hourly billing is more suited to your needs. Each pricing system comes with its own unique advantages and disadvantages and understanding these differences will help you determine which method is right for you.

Read on to learn more about the pros and cons of flat rate billing and hourly billing.

What is Flat Fee Billing?

Flat rate billing is a pricing method where you charge a client a single fixed rate for a particular matter. This means that, unlike hourly billing, you’re being paid for whole case itself, not the time you put into working on f or the case on timely basis.

As a law firm business practitioner whether you’re a solo practitioner, or own a mid to large sized business, or a freelance legal practitioner, it’s important to accurately predict how much time and effort you will need to put into a project before giving a flat rate quote. If your prediction is inaccurate and some aspects of the matters take more time than expected, you won’t be compensated for the extra hours. Regardless of the amount of hours—whether you work for two hours or ten—you’ll be paid the same amount.

To put a proposed fixed fee to your client, you’re going to need to have an excellent handle on estimating and managing your time. If you end up putting in more hours because you estimated poorly, the client will not be on the hook. You may not get enough to cover all the time it took to get the work done. You’ll need a firm understanding of the expectations of the work, delineating very specifically what is and is not included. For lengthy or ongoing projects, you will need to know how to best break work into more manageable deliverables.

Pros and cons of Flat fee billing –

Pros:

• There are several advantages to flat fee billing in family law cases. First and foremost, clients know exactly how much it will cost Since one of the most common complaints clients have is cost, flat fee billing resolves this issue by addressing cost upfront, allowing the client to plan appropriately.

• Flat fee billing also limits the amount of fee disputes and issues with attorney withdrawal. You’re more likely to be paid the full value of the work you provide to a client. Clients understand that if they want more, they pay more.

• Fixed fees also enable clients to make better decisions as they can weigh the costs of legal representation against the benefits and drawbacks of winning or losing the case. With fixed fee billing, the focus is on value rather than billable hours, which aligns with the interest of the client and the law firm.

• Lawyers are encouraged to work efficiently to add as much value to the client’s case as they can. In a word, fixed fee pricing encourages problem solving.

Cons:

• Flat fee billing has its disadvantages as well. One disadvantage is that the fee is based on the average cost of an action. If the client’s action is much simpler than the average case, the client ends up paying more.

• Another disadvantage, specific to family law, is that some cases start off uncontested and become contested as the case progresses. Generally, when this happens, the case becomes an ‘hourly billing’ case and the attorney begins billing based on his or her hours spent working on the case.

• You must collect payment from clients if the work goes beyond what you provide for the flat fee. There is less certainty for the client regarding how much the work will cost. One drawback of fixed fee billing is that lawyers may overestimate or underestimate the amount of work involved in a case.

• With the former, a law firm could find itself out of pocket if a case takes longer than expected. And with the latter, the client could be the one who is left feeling short-changed if a case is wrapped up quicker than expected. For some clients, the idea of fixed fee billing might be seeming difficult.

• The idea of paying a large sum, even though staggered payments, can feel riskier than simply paying an hourly rate on an ongoing basis. Long or complex cases aren’t always well-suited to fixed fee pricing. For example, the introduction of new evidence can significantly extend the length of a case, in which instance, an hourly fee might be better suited to minimize financial risk to both parties.

What is Hourly Billing?

Hourly billing is when you charge a baseline hourly rate for your work on a project. In addition to charging for your time, you may also charge for any materials needed to complete the project.

As compared with flat fee billing, hourly billing seems to be more flexible because you’re generally not limited to a definite amount of time of a particular case or matter. If any sudden changes or new requirements occur to the matter, you can always adapt to these changes and charge for more hours to get the work done. This makes hourly billing ideal for long-term or time-consuming matters, where all the details need to be sorted out.

While hourly billing does offer more flexibility in terms of adapting to changes, making revisions, and so on, it also tends to be more complex than flat rate billing. You’ll have to track all of your hours and justify the amount of time you spent on a given matter in order to satisfy a client that labor costs are fair and accurate.

As a client, hourly billing makes the price of a project more unpredictable since you won’t truly know the total cost of the project until the end.

Pros and Cond of Hourly Billing –

Pros:

• Perhaps the biggest benefit of hourly billing is its familiarity. Lawyers are used to billing by the hour and clients are used to paying an hourly rate. For some clients, this familiarity provides a clear way of comparing one law firm to another. For law firms themselves, hourly billing can be very profitable, particularly in long, or complex cases.

• When the length of a case is unknown, it can be challenging to estimate the workload. An hourly fee enables lawyers and clients to proceed based on recurring need, allowing for increases in workload when required.

• For many clients, hourly billing is clear and understandable. It allows for flexibility if the workload of increases or decreases, and it can reduce administration time on small matters. You can get paid for what you’re worth.

• Set your hourly rate to reflect your experience and expertise. There’s less risk if you get a substantial retainer up-front, and especially if the client replenishes it as needed.

Cons:

• The most obvious drawback of hourly billing is that it could be seen to incentivize inefficiency on the lawyer’s part. After all, the longer a case goes on, the more money the law firm makes with an hourly billing model.

• Hourly billing also creates an element of uncertainty for the client. When work is charged per hour, clients can’t budget for the entirety of a case and may end up spending significantly more than they first anticipated.

• It’s also said that hourly billing encourages performance to be measured against financial targets, rather than the value provided to the client. The success of a lawyer becomes determined by their billable hours rather than their skills, experience, or innovation.

• While hourly billing does offer more flexibility in terms of adapting to changes, making revised fee structures and so on, it also tends to be more complex than flat fee billing. AS a lawyer, you will have to track all your hours and justify the amount of time you spent on a given matter in order to satisfy a client that costs are fair and accurate.

• As a client, hourly billing makes the price of a matter more unpredictable since you won’t truly know the total cost of the matter until the end.

• Most importantly as a drawback of hourly billing, as a lawyer, you may end up chasing clients for payments, or even wondering if they’ve put you in a situation where you may think of filing a motion to withdraw due to nonpayment.

• The client faces uncertainty regarding how much the matter will cost. A legal professional or lawyer will have to manage unearned fees with the firm’s trust account.

Summary

LawKPIs has a pool of custom reports that have helped their customers in gaining an edge over others in terms of profitability, utilization, and ROI.

LawKPIs has allowed many law firms owners and legal Practitioner’s who have integrated and have been using Clio as their reporting tool to improve operational visibility, while:

• Increasing practice profitability by focusing on profitable matters

• Gaining insights to improve Utilization

• Increasing marketing performance visibility

• Providing additional filtering criteria.

LawKPIs automations have radically increased the efficiency of law firms while providing a clear picture of what’s happening in the firm. If you want to take back your time and grow your firm efficiently, we can help.

LawKPIs -Flat fee profitability report helps in analyzing the profitability of flat fee matters. A certain amount for flat fee is maintained for each matter. The invoices are generated for such matters and the amount gets collected from client. The profitability is calculated based on the collected amount and the flat fee amount.