OSB Professional Liability Fund

Establishing Reasonable Fees

January 25, 2019
by Sheila Blackford

You do legal work for clients, hoping those clients will pay you an amount commensurate with that work. Is it possible to avoid the disconnect between what we think our legal services are worth and what our clients perceive as their value to them? Numerous complaints to the OSB for excessive fees emphasize that clients judge the value of what we deliver, which has little relation to our belief about the value of these services.  To make progress in eliminating this disconnect, lawyers need to have a client-centered focus on the purpose of the engagement of legal services. The foundation must be to provide legal services that are of value to your clients and to price your services reasonably under the circumstances.

ORPC 1.5

Oregon Rule of Professional Conduct (ORPC) 1.5 requires attorney fees to be reasonable. The reasonableness of your fee is viewed at three key times: when you enter into the fee agreement with your client, when you charge your client for the fee once the work is completed, and when you collect the fee from your client. The same evaluation applies to your expenses. Rule 1.5(b) sets forth eight factors that impact this evaluation of reasonableness:

Rule 1.5 Fees

(a) A lawyer shall not enter into an agreement for, charge or collect an illegal or clearly excessive fee or a clearly excessive amount for expenses.
(b) A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. Factors to be considered as guides in determining the reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;    
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.

OSB Economic Surveys

New lawyers, especially, will want further guidance. The Oregon State Bar surveys the membership and posts the results in the “Economic Surveys” found on the Bar’s website, www.osbar.org, under “Surveys and Research Reports.” The “Oregon State Bar 2017 Economic Survey Report of Findings” can be found at this link: http://www.osbar.org/_docs/resources/Econsurveys/17EconomicSurvey.pdf  The courts rely heavily on this survey and its results when evaluating legal fees for reasonableness.
 
The rule and OSB surveys provide important guidance from the client’s perspective, but what about the lawyer’s perspective? How do you arrive at the fee you need to charge to keep the lights on and pay yourself a reasonable income?

The Rule of Three

For years, many lawyers have often used the “rule of three” formula in establishing an hourly rate for an associate lawyer. First, take the associate’s salary and multiply it by a factor of three: one-third for salary, one-third for overhead, and one-third for profit to the firm. Next, divide this number by the number of hours expected to be billed and collected over the year. The result gives you the associate’s standard hourly rate. For legal assistants and other staff members who perform services that can and should be billed, consider adjusting the rate based on the percentage of their work that is billable.
 
Next, consider some other factors that will impact your fee calculation. How many hours is your law office open for business? Be sure to factor in time off for vacations, sick leave days, and other personal time off that are part of the benefits package. This generally takes a month away from business hours. Reduce this annual amount by 25 percent to cover time that will not get recorded due to marketing, administration, legal education, etc. The remainder is typically about 1,335 hours a year, about 28 hours a week, or 110 hours a month. Your amount may be more or less.
 
To give you an idea how this may look in actual dollars, imagine an associate with an annual salary of $65,000. The cost to the firm is 1,335 hours divided into $65,000, which is $48.69, rounded to $50.00 per hour. The billing rate for this person using the three times multiplier is $150.00 an hour. Check this figure against the Bar’s Economic Survey figure that considers location, years of experience, and practice area. Hopefully, the standard hourly rate amount that you calculated is reasonable. If it is considerably less, your overhead may be too high, or you are not working enough billable and collectible hours. Billable hours are important, but collectible hours are more realistic. Using our example, if you bill 28 hours a week but only collect 20 hours a week, your collectible rate is 72 percent. Shoot for a healthy collection rate of 95 percent. Get those bills out the door and pick up the phone to follow up on unpaid bills.

Alternative Fee Arrangements

Alternative fee arrangements have become more popular over the past decade. Some attorneys are still uncertain whether these fee arrangements will help or diminish their bottom line. Clients appreciate the certainty and predictability of alternative fee arrangements, especially when they provide greater transparency into how value drives the cost. Billing on an hourly rate can result in legal services becoming bloated and drawn out by inefficient allocation of service providers. At its worst, consider the example of one attorney’s scandalous billing of multiple clients during a plane flight that lasted a third of the time of the cumulative hours billed to each client. How does one bill ten hours for an eight-hour day? Minimum time charges and churning client accounts. at two-tenths of an hour here, four-tenths there, the charges expand on daily time records. No wonder clients have come to mistrust legal bills. Alternative fee arrangements are not about charging more or less than what an hourly rate might be. At their purest level, they are based on what is fair and reasonable to both the client and the lawyer.
 
You can move beyond the billable hour by adopting a project-based approach. Estimate how much you should charge as a fixed or flat rate by considering the time necessary to complete the project.  Fixed or flat fees offer your clients predictability so that they can adopt a financial budget and you can adopt a resource budget. Despite years of entrenched habit, keeping track of time is your measure of cost, not a measure of the value you provide to your clients. A flat rate can inspire innovation and efficiencies not present in an hourly rate pricing method. Utilizing technology wisely facilitates this. Instead of a flat fee for a specific project, consider a task or unit-based approach to identify components of the transaction and set a rate for individual components. Or consider a hybrid version of this model by billing a fixed or flat fee for a portion of the matter and a portion charged on an hourly basis. For example, drafting a personnel manual or revocable trust may be based on a fixed fee while client meetings are based on an hourly rate.  You can find many blog posts, magazine articles and books on alternative fee arrangements.
 
Whatever method you use to arrive at a reasonable fee, you need to keep the lights on and generate a reasonable income. An annual review is important to determine whether you need to make a change. As you prepare your financial records for 2018 taxes, now is the perfect time to do an assessment of the financial health of your law firm. Financial advisors and business coaches can help you implement any changes needed for a successful 2019. If you haven’t created or updated a business plan for your law firm, now is the perfect time to tackle this. The PLF has some helpful materials under the practice aid category Financial Management, such as the Business Plan Outline and the Law Office Business Plan Worksheet. Find them on the PLF website, under the Practice Management tab on the menu, then selecting Forms, then searching for the Financial Management category.