Who Bears the Burden When a Lawyer Underestimates the Fee?

Carolyn Elefant recently posted about fixed fees over on her blog, My Shingle, with a post entitled, "Flat Fees are Fine, But Lawyers Can't Have It Both Ways."

Carolyn is a fan of using fixed fees, but says that when the lawyer fails to properly estimate, or takes longer than anticipated to complete the engagement, it is the lawyer, and not the client, that should bear the cost of the delay.

I think the issue comes down to two things: first, time is just one factor to consider when determining the fee for a particular engagement - it shouldn't be the only factor. In order to use fixed pricing effectively, lawyers will need to stop thinking about their services solely in terms of time. Second, it may take some practice, but lawyers need to become better at anticipating what will happen during the course of an engagement, setting expectations with client up front, and pricing accordingly, regardless of what method they use to determine fees.

Even lawyers that continue to bill hourly (whether we think this pricing strategy is 'right' or not), should be estimating fees, resources, expenses, difficulty, etc. up front and determining the value of their work to the client, so that they can have meaningful conversations with the client at all stages of the engagement.

Part of the process of lawyers becoming better at pricing strategies will involve having specific conversations up front about what the flat fee covers - and what it doesn't. There are always unforseen circumstances or contingencies (that are not the fault of the lawyer). For example, with litigation(and area that most lawyers claim can't effectively use fixed or value pricing), the fee agreement might cover a set number of depositions and court appearances, with a supplemental fee for additional appearances, or for unanticipated motions. Or the fees could be established piecemeal, at each stage of the case, with a fixed fee determined at the beginning of each stage. Or the lawyer could set one fee up to the time the matter is ready for trial, and a separate fee for the actual trial, etc.

Carolyn's post quotes lawyer and fee consultant John Toothman, who likens the process of estimating legal fees to the that of estimating fees for a construction project. As anyone who has ever been involved in a construction project knows, that original estimate is often changed during the course of construction due to unforseen circumstances - or due to a change in the homeowner's plans for the project. A lawyer can issue a 'change order' in the same way a contractor does - as long as the situation is truly one that wasn't anticipated or included in the original agreement.

A contractor that's hired to re-tile a bathroom issues a change order when he realizes that the wall behind the tile is rotten and some of the wood will have to be replaced. He will charge extra for the labor and materials to fix or replace the wood. Since neither the contractor nor the homeowner knew that the original project would require this work, there's no problem with it. So much the better if the contractor tells the homeowner up front that certain things (like rotted studs) will incur an additional fee.

There's no reason why a lawyer can't issue a change order to the client when an additional party is brought into a lawsuit or additional witnesses are revealed that need to be deposed, etc. Often lawyers know from experience what circumstances may arise which would require additional work, and an additional fee. If the lawyer agrees with the client up front that those circumstances will trigger an additional fee, the client is not surprised when the situation arises - and is less likely to argue about the fee.

Of course, if the contractor that was re-tiling the bathroom makes a mistake and causes damage himself, it's the contractor's responsibility to repair the damage at no cost to the homeowner. And if a lawyer fails to keep track of her case, misses a filing deadline and needs to make a motion to vacate a default, the lawyer must bear the burden of the 'extra' work.

Comments

[Carolyn Elefant]

I have to admit that I have never tried to assign flat fees to litigation, only to appellate matters, which for me (after handling at least two dozen appeals) are fairly easy to predict. For litigation budgets or matters where there is more uncertainty, I try to give a low end/high end range (e.g., roughly 25 hours if no one files a 12(b)(6) motion to dismiss, 45 hours midrange (if MTD is standard) and up to 60 hours if MTD is complex. Toothman's point is that lawyers do not want to tell clients up front about the high end possibilities because the client will be scared off by the fees. Also, as I said in my post, if there's something completely unforseen, like a change in the law, that requires extra work, I do not oppose splitting the difference with the client or even having the client pay full freight.

[Carolyn Elefant]

I have to admit that I have never tried to assign flat fees to litigation, only to appellate matters, which for me (after handling at least two dozen appeals) are fairly easy to predict. For litigation budgets or matters where there is more uncertainty, I try to give a low end/high end range (e.g., roughly 25 hours if no one files a 12(b)(6) motion to dismiss, 45 hours midrange (if MTD is standard) and up to 60 hours if MTD is complex. Toothman's point is that lawyers do not want to tell clients up front about the high end possibilities because the client will be scared off by the fees. Also, as I said in my post, if there's something completely unforseen, like a change in the law, that requires extra work, I do not oppose splitting the difference with the client or even having the client pay full freight.