Attorney Fees and Costs: Strategies for Expense Management

Law firms exist to serve clients well and generate profits. Two areas crucial to the profit side of the mission are the firm’s fee structure and expense management processes. A misstep can undermine revenue efforts even as the firm grows its client base.

To ensure your firm is set up for success, let’s explore the fundamentals of attorney fees and costs. We will walk through fee model options, cost types, cost management strategies, and common attorney payment methods—so you can confidently establish or optimize your firm’s revenue and expense strategies.

Types of Attorney Fee Models

Attorneys typically follow one of four fee models: fixed fees, contingency fees, retainer fees, or hourly rates. As discussed below, each model bills for attorney fees and costs in a slightly different manner.

Fixed Fees

Fixed legal fees are flat rates defined by the service provided—clients agree to the fee and pay it upfront. The services are generally routine legal matters, such as contract reviews or will creation. Fixed fees are also sometimes more prevalent in certain practice areas, including immigration law.

This structure streamlines the client’s budgeting and the law firm’s billing administration. The risk to the firm is that the attorney costs plus expenses exceed the revenue. The firm has no recourse in that scenario unless the retainer agreement allows for an adjustment.

To minimize risk, you can regularly analyze the firm’s fixed-fee schedule and the profitability of fixed-fee cases. Also, attorneys can ensure that fee agreements clearly state which services are included and how court fees and litigation expenses are handled. 

Contingency Fees

Contingency fees are paid out of the settlement or monetary award in the client’s case. Typically, the firm collects the funds, retains its portion, and transmits the remainder to the client. The firm should also provide a statement showing the gross amount and deductions taken. If no settlement or award is reached, the firm does not get paid. 

Contingency fee arrangements are used primarily in personal injury cases.  

Contingency fee agreements must specify:

1. The percentage of the award the attorney receives
2. Whether the percentage is taken before or after the deduction of court fees and litigation expenses

Retainer Fees

An attorney retainer fee is an upfront deposit that is paid by the client and earned by the attorney over time. Legal fees are earned by time spent on the case, which is billed to the retainer balance at specified hourly rates. Court costs and other expenses incurred are also deducted from the retainer balance.

Attorney fee agreements should include the following:

1. Hourly rates by level of service, such as paralegal and lead attorney
2. Timing of billing and retainer statements
3. Examples of reimbursable expenses include travel costs, postage, etc.
4. When the retainer must be replenished

Hourly Rates

Hourly rate arrangements bill the client agreed-upon rates periodically as services are performed. Typically, the firm would bill the client monthly for services performed and costs incurred in the prior month.

Hourly rate fee agreements must outline rates the firm charges for different service levels, the timing of invoices, and the general types of reimbursable costs that are expected. To learn about the average hourly rates for lawyers and how lawyer fees can differ by practice area and geographic location, check out the statistics here.

How Does Fee Structure Impact Firm Profits?

Each fee structure comes with some degree of risk for the firm, specifically:

1. Fixed Fees: Under a fixed fee arrangement, the firm can spend more representing the client than it earns. You can minimize that outcome by monitoring the profitability of these cases over time and adjusting your firm’s fixed-fee schedule accordingly.
2. Contingency Fees: Contingency fee cases can incur costs without generating any revenue to cover absorbed attorney fees and costs. The firm can mitigate this risk by making conservative decisions about which clients and cases to accept, and in some cases, requiring clients to pay for costs as they are incurred.
3. Retainer Fees: Retainer fee arrangements protect the firm financially because no work is performed unless the funds have already been collected or refreshed. There is the risk that the case will cost far more than the client expects, which would negatively affect the firm’s reputation.
4. Hourly Fees: With hourly fee cases, attorney fees and costs are invoiced after they are incurred. This exposes the firm to non-payment risks with no recourse, and in some cases, the firm will be unable to withdraw from the case and will have to continue representing the client despite non-payment.

In summary, hourly arrangements create the most risk for the firm financially while retainer-based services are the least risky. Note that unmanaged reimbursable costs can challenge profitability under any fee model. In the next section, we’ll dive into the issues surrounding client costs and best practices for law firm cost control.

Types of Firm Costs

Any costs your firm incurs on behalf of clients should be billed unless the fee agreement states otherwise. Below are six common types of reimbursable costs:

Court Fees

Courts charge filing fees for many types of cases. They may also charge service fees, mediation fees, and appellate fees.

Travel Expenses

Travel expenses include the costs associated with the attorney’s trips to the courthouse, either incurred or imputed. Incurred expenses are parking charges and train tickets. For longer stays, the firm would also bill for lodging and meals. Imputed expenses include gas and mileage costs calculated at a specified per-mile rate.  

Expert Witness Fees

Expert witnesses often charge hourly rates for case reviews, deposition appearances, and testimony. The client is responsible for these fees.

Legal Research Fees

Your firm may want to pass on the client’s share of costs for using online legal research databases or other research services.

Administrative Fees

Administrative fees include charges for copying documents, postage, phone calls, and office supplies.

Paralegal Fees

Work done by in-house or outsourced paralegals and legal assistants is typically billed to the client at a lower rate than the attorney’s time. These hourly rates should be established at the beginning of the client relationship and specified in the retainer agreement.

Why Is It Important to Track Your Firm’s Costs?

If you don’t know your firm’s costs, you have no financial transparency and no way to manage profitability. It can also make your law firm’s accounting process more complex than it needs to be

The most reliable way to determine your firm’s costs is to categorize them immediately. Logging and categorizing attorney costs is critical to effective law firm spend management.

Without a process for same-day expense recording, three profit-killing outcomes can occur:

1. Client costs can go unbilled indefinitely.
2. Delays in documentation or billing can create cash flow issues as the firm’s credit card bills become due before clients have funded the expenses. Immediate documentation, on the other hand, enables real-time visibility into spending and minimizes month-end surprises when the credit card bill arrives.
3. Card misuse can result. If credit cards are shared by team members, charges unrelated to client cases can go unnoticed.

Which Payment Methods Do Most Lawyers Use?

Expediting the payment of client invoices shortens the reimbursement window for the firm, which reduces the potential for cash flow issues related to client costs. One of the most powerful ways to promote quick payments is to give your clients multiple payment options. Certain legal practice management software tools, such as MyCase, enable you to accept various payment types, including credit, debit, ACH payments, payment plans, and even legal fee funding.

Offering your clients payment flexibility can even lead to higher revenues. According to the MyCase 2022 Industry Report, 61% of respondents claimed that their firms collected more money because of online payment processing software.

Credit and Debit Cards

Credit and debit cards are quickly becoming preferred attorney payment methods. The 2019 Federal Reserve Payments Study found that credit card transactions increased from $23.9 billion in 2000 to $117.4 billion in 2018. For clients, card payments are convenient and more secure than paper checks for clients. For law firms, card payment deposits in bank accounts occur faster than checks can clear.

However, implementing credit and debit payment options at your firm can introduce the potential for funds mishandling. Trust accounting rules that apply to unearned retainer fees can be difficult to follow with standard merchant accounts. Card processing charges, for example, must be deducted from the firm’s operating account even if the collected funds are deposited into a client’s trust account.

That’s where payment solutions designed for lawyers, such as LawPay (the sister company of MyCase and the leader in legal payments) step in. These tools can handle trust accounting complexities that standard credit and debit merchant accounts cannot.  

ACH Payments

ACH stands for automated clearing house. These payments work like eChecks; clients provide their account data, and payments are transferred directly from their bank account. ACH payments settle within a few days and typically have lower processing fees than credit card payments.

For a complete guide to understanding ACH payments, refer to this post. 

PayPal

PayPal is an online payment system that allows account holders to make payments without sharing card or account numbers with the merchant. Law firms can accept PayPal payments, but navigating the processing fees and trust accounting rules can be tricky. Be sure to review PayPal’s fee schedule carefully. Also, check with your state for any regulatory guidelines that may apply when accepting PayPal payments from your clients.

Payment Plans

Lawyer payment plans allow clients to pay for legal services through installments rather than a lump sum. This structure is often easier for the client to budget for and provides predictable cash flows for the firm.

Your firm can set up standardized payment plans or design customized programs for each client. Customized programs tend to be more successful, but they are harder to manage. Fortunately, you can use legal payment software that automates installment plans, easing the administrative burden.

For information on building lawyer payment plans that are tailored to meet the needs of your firm and clients, check out this post.

How to Manage Attorney Costs

Ample payment options address the firm’s exposure to outstanding client costs after invoicing, but there are also cost-management steps you can take before invoicing. These steps, discussed below, enable rigorous tracking of expenses as they happen.  

1. Use Spend Management Software

Spend management software records law firm expenses and tracks their status through payment and, where applicable, client reimbursement. A full-featured solution would store receipts, support expense categorization, link expenses to client accounts as needed, share data with your invoicing system, and allow for spend controls such as daily spending limits, employee spending limits, and purchase restrictions.  

2. Track All Reimbursable Receipts

Receipt tracking is essential for recouping reimbursable expenses. A technology solution that prompts team members to scan receipts daily or as expenses arise is ideal. Immediate recording has several financial benefits:

1. Month-end credit card billing surprises are avoided.
2. Reimbursable expenses can go on the client’s next invoice, which limits the firm’s financial exposure.
3. Fewer expenses get lost or forgotten.
4. You will have visibility into the cash flow needed to fund the firm’s bills, payroll, and client costs.
5. You can easily reconcile charges to card statements, which prevents card misuse.

3. Use Spend Dashboards

Spend dashboards aggregate tracked expense information and display it visually for easier analysis. These real-time data visualizations allow you to project the firm’s cash flow needs and the consequences of late payments. Spend dashboards also provide real-time visibility into a firm’s finances and highlight where and how the firm is spending money. 

4. Enforce Client Work Budgets

Work budgets streamline the expense approval process and encourage team members to be conscientious about the expenses they charge to the clients. You may already have these budgets in place, but they are notoriously hard to enforce.

5. Establish a Clear and Thorough Billing Policy             

Clear and thorough billing policies minimize client confusion, which in turn encourages faster payments. If a client doesn’t understand or agree with any detail on the invoice, that bill will remain outstanding until the client gains clarity. Some clients may question the item immediately, while others will wait until the bill is past-due. Either way, the delay slows cash flow and inhibits profitability.

Using legal billing software allows you to automate these tasks to ensure they are done accurately—without taking up too much non-billable time. Creating an attorney billing statement can also help clarify fee expectations and promote transparency.

6. Offer Different Ways to Pay

As mentioned above, offering different ways to pay also promotes quicker payments. Additionally, it can help expand your client base and access to justice. The more payment options your firm offers, the better.

However, supporting multiple payment options individually can be cumbersome. Look for a robust payment solution that enables multiple payment types with only one implementation.

7. Track Time Spent

Just as reimbursable costs can get lost or overlooked, so too can billable time. Use technology and training to empower your team to record their time rigorously across billable and non-billable work.

Legal time-tracking software that shares data with your invoicing system provides the greatest efficiencies. In MyCase, you can leverage notifications that prompt employees periodically to categorize their time.

Learn About MyCase Spend Management

MyCase Smart Spend addresses the most common expense management pain points law firms face today. This law firm spend management solution combines a Visa business credit card that integrates with MyCase to track firm expenses in real-time. Cardholders are prompted immediately after purchases to categorize the expense and upload receipts. Reimbursable expenses are stored to the case file and automatically added to the client’s next invoice, so you don’t miss billing for advanced costs. 

In addition to the expense tracking and documentation features, MyCase Smart Spend also supports work budgets via spending limits by cardholder, card, and expense category. You can also oversee spending with the application’s comprehensive reporting dashboard. The real-time reporting eliminates month-end spending surprises and surfaces potential savings opportunities.

To experience the power of MyCase Smart Spend and explore how it can support your firm’s profitability goals, schedule a demo today.