More on Alternative Fee Arrangements

January 14, 2013 | Author: admin | Category: Uncategorized | Comments (0)

In my last posting on AFAs, I posed the issue of whether clients should care about how the fees paid under an AFA are calculated. Optimally, an AFA computation (assume a fixed fee) should consider the following components in accordance with something like the following process: 1) the issues to be addressed in an engagement; 2) the work which will be necessary in connection with each issue and to manage the engagement; 3) who is best suited to handle the work for each issue (lawyer or non-lawyer) and the amount of time it will likely take that person to do the work (note that in this situation a more experienced lawyer or non-lawyer will get the job done more efficiently and in a shorter time); 4) the costs to provide the work, including for each lawyer or non-lawyer (note that this is not necessarily a matter of multiplying anticipated hours by an hourly rate); and 5) the desired profit.

This is not the way most law firms do it. How law firms typically estimate a fixed fee is probably a mystery, but include, most likely a) asking the question “how much did we charge for this type of work last time? The problem here is that the last time might have been an engagement for which the firm got paid by the hour and managed it without much consideration of efficiency. b) the use of a budgeting software. This might be helpful, but many available software programs work off of hourly rates – not particularly helpful. c) the use an “estimator”. This could be a reasonable approach, but there are qualitative issues here in that the estimator may not be a lawyer, may not understand the necessary tasks in the engagement and, in addition, may be under considerable time constraints to push other AFA estimates out the door.
Almost any AFA is, of course, preferable to getting billed by the hour. An AFA may not have been estimated in accordance with any rational approach, but it at least provides certainty in that the client knows what the legal costs will be. Under an AFA, the client should also be aware of pitfalls that might endanger the success of the engagement. These include: 1) the matter might be staffed with more inexperienced lawyers whose internal costs are perceived to be less, thereby driving down the fee under the AFA and making it more likely that the law firm will get the work. This is, obviously, hardly reassuring to the client who is concerned about the outcome of the engagement. 2) if the AFA fee is later perceived by the law firm to be too low (i.e. a money loser), then the more talented lawyers may shift to other work or pay less attention to the client’s matter.

How does a client determine if the proposed AFA is realistic? The answer to this question is to ask questions: a) how do you propose to staff the engagement? What is the experience level of the lawyers you propose to work on the matter and have they worked on anything like this before? b) can you assure me that the experienced lawyers, including specifically the lawyer in charge, will be available to handle this throughout the course of the engagement (continuity is important for quality reasons)? c) how much of the proposed fee is attributable to your overhead? This is an important issue discussed more fully below. d) can I review a copy of the proposed budget? If the answer is no, then very likely there’s no budget (and your fee estimate is a WAG). If there is a budget, can I get a monthly or periodic printout of actual costs compared to the budget (this should be easy for the law firm to provide).

These might not be questions you’ve asked before, but in my experience many clients seem to ask fewer questions about an hiring a lawyer for an important legal matter than they would in buying a new car, the cost of which could be much lower.

One last point. If you ask for quotes from several law firms, ask that each firm provide a breakdown of the proposed fee into two parts, 1) the percentage of the fee that is attributable to estimated profit and 2) the percentage of the fee that is for overhead. The information you get will enable you to determine several things: a) a high overhead firm may be no better than a low overhead firm – in fact, much law firm overhead is attributable to the cost of paying inexperienced lawyers. b) a low profit (see the definition of profit that follows) may indicate that your matter will not be staffed with people with substantial experience – that may or may not be important, depending on whether your matter is routine or sophisticated and complex. Because law firms may use different definitions of profit (if they use them at all), you should include in your request a definition of profit, which would be the amounts estimated to be paid to “equity partners”, and overhead would be all revenues less profit. That should be simple for the law firm to provide and provides you with some assistance in your choice of counsel. For various reasons, law firms that provide substantially comparable work can have vastly different overhead structures, with some firms having as much as 5-6 times the overhead of others.

There is an important consideration in this discussion, and it is that obtaining quotes from multiple law firms can be very helpful. People who shop at multiple automobile dealers for a new car often never consider shopping for a law firm. Law firms can provide better quality work at more affordable costs if they know they are competing for business – it’s the American way.

[The author of this post is Wynne James]

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