Understanding Legal Fees
Good attorneys can be expensive; but their guidance is often invaluable. The key to keeping your costs down while still getting great legal advice is to understand how fees are calculated and how you are billed.
When you hire a lawyer, the lawyer should provide you with an engagement letter (also sometimes called a fee agreement or retainer agreement). The engagement letter should explain how you will be billed, the billing rate, and any additional costs you are expected to pay.
Traditionally, lawyers bill by the hour for most legal matters. However, law firms are increasingly amenable to a variety of alternative fee arrangements. Here are some common ways that lawyers charge for their time.
- Hourly. Billing by the hour (or fraction of the hour) is still the most common way lawyers charge for their services. Basically, the "clock" is running whenever the attorney works on your behalf. (That usually includes phone calls with you; every time you call you will be billed.) For example, say you call your attorney to ask a question; he or she makes a note of when the call started and stops, and you are billed accordingly. Some attorneys bill in six-minute increments, others in 15-minute increments, others in 30-minute increments. At the end of the billing period, all the time is itemized and you are billed accordingly.
- Flat fee. Some lawyers charge a flat fee for routine services such as incorporating a business or preparing a will. Lawyers usually won’t handle litigation on a flat fee basis because lawsuits can be unpredictable and it is difficult for a lawyer to estimate how much time a particular case might take. If you agree to a flat-fee arrangement, make sure you know which items are included in that fee and which are not.
- Contingency. In some litigation cases, the lawyer’s fee is a percentage of the amount the plaintiff is awarded in court or receives in a settlement. Contingency fees are most commonly associated with personal injury cases, but they may also be used for business disputes if the plaintiff doesn’t have sufficient capital to finance the litigation. If you lose your case, you will not owe any legal fees, but you will typically have to pay certain costs up front, such as court filing fees and photocopying costs.
- Partial contingency. A partial contingency fee offers a blend of an hourly rate and a contingency fee. Typically, the client pays the lawyer a reduced hourly rate, plus a percentage of the amount of money recovered in a lawsuit. However, the percentage of recovery is smaller than in a pure contingency case. Partial contingency fees are useful if the client can afford some monthly legal expense, but cannot afford to finance the whole case.
- Fixed fee plus hourly. A law firm might agree to do the routine and predictable parts of a matter for a fixed fee, with other services billed hourly. For example, a firm might draft a contract and provide a certain amount of negotiating time and revisions for a fixed fee, but switch to an hourly rate if the negotiations take more time than expected. This arrangement helps business owners predict their legal costs, but compensates the lawyer if a matter proves more complicated that originally envisioned.
Most attorneys require a retainer. A retainer is money advanced by the client and placed in an escrow account; the attorney then draws funds from that account as services are rendered or costs are incurred. When the amount in the retainer account is drawn down to a certain level, the client must add additional funds. (Think of a retainer as the lawyers’ insurance that they will be paid for their time.) Funds placed in retainer are almost always refundable if not used.
You can also expect to be charged for the following:
- Document copying
- Long distance calls
- Delivery charges (postage, overnight delivery, service of court papers, etc.)
- Filing fees
- Travel costs
Now that you understand how you will be charged, let's look at ways you can keep those costs down while still receiving great service:
- Be open, honest, and thorough. Lawyers are required to maintain confidentiality (most often referred to as the "attorney-client privilege"). There is no reason to withhold information; doing so is only likely to cost you money later, especially if that information could have been used to prevent a potential problem.
- Understand the billing process. If your lawyer charges $150 per hour and bills on 30-minute increments, a ten-minute phone call costs $75. If you will need frequent but brief consultations, look for a skilled lawyer who bills in shorter increments (or make fewer visits or calls).
- Use a smaller law firm with experience in your industry. Smaller firms may charge significantly lower rates than big, international firms. A lawyer who has experience representing other business in your industry may be able to handle your matter more efficiently.
- Set up a regular meeting. Instead of making sporadic calls, set up a monthly call or visit appointment. You'll avoid voice mail and wasted time, and by speaking regularly you might head off potential problems before they grow out of control.
- Ask for estimates. Have the attorney provide a written cost estimate; if the final cost is higher, ask why. Some attorneys will also guarantee a maximum cost for certain services; that way you can ensure costs don't spiral out of control. However, for some types of matters, particularly litigation, it’s very difficult to accurately estimate legal fees because it’s impossible to know in advance what sort of tactics the opposing lawyers will use.
- Review invoices. Everyone makes mistakes; check for discrepancies or unusually high fees.
- Ask about a payment terms discount. Some attorneys offer a two or five percent discount for paying within a short period of time.
- Do a little research on your own. You don't have to be an expert, but you should know enough to understand the basics of your matter and to ask decent questions. Time is money… instead of paying your lawyer to explain the basics before he or she gets to the "meat" of the issue, do a little research of your own first. Again, you don't have to be an expert – just an informed consumer.
- Ask what you can do to assist or streamline the process. You may be able to gather files and documents and provide information. And always meet your obligations; never keep your attorney waiting for information.
- Ask about alternative dispute options. Sometimes lawsuits or complaints can be resolved through arbitration or mediation, which can be significantly less expensive than the cost of a trial.