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A Complete Guide to Alternative Fee Arrangements [Part 2]

A Complete Guide to Alternative Fee Arrangements [Part 2]

5th August 2022

There is definitely no shortage of reasons why a law firm would want to move to an alternative billing service model, but doing so does require careful consideration of how to match the price and value for each legal service.

HAVE YOU READ PART ONE?

This gave rise to different types of commonly used alternative fee structures. It’s important to note that you can price your legal services in any way you wish, as long as it makes sense and works for your law firm and your client.

Let’s take a comprehensive look at the different types of AFAs that you could potentially implement for your law firm.

Subscription Or Periodic Fee

Subscription or periodic fee models have been adopted by some law firms, where they charge a monthly or annual fee to a client in exchange for a set of services. The number of services and what exactly is included in the client’s subscription is set out in advance to match the law firm’s capacity and the client’s needs.

Here’s an example: Let’s say a real estate client needs regular contract reviews to ensure that the information included is accurate and worded correctly. This client would benefit from being charged a subscription or periodic fee so they can have regular access to a lawyer to handle these matters as they come about.

Fixed or Flat Fee

With a fixed or flat fee arrangement, the legal service is simply billed at a set price. In other words, it’s a set price that’s charged for a single matter that has a clear scope of work.

Here’s an example: Let’s say a client wants a lawyer to draft a basic Last Will and Testament. Because the lawyer knows how long this task will take and how much effort is involved, they can charge the client a flat fee for drafting the document.

Portfolio Fixed Fee

This type of fee arrangement is typically reserved for larger businesses that need a number of legal matters to be handled at one time. The overall thought process behind the pricing works the same as a typical flat fee structure, where the client is billed a set amount based on the scope of legal work.

Here’s an example: A large corporation needs a lawyer to handle a number of legal disputes, so they hire a lawyer that charges a fixed fee so the total cost of the service is known in advance.

Staged or Phased Fee

A legal matter is divided into stages or phases, where the client pays a predetermined fee when a stage or phase in the legal matter is complete. Each phase may have the same or a different fee, depending on what the legal matter is as well as the scope of work for each stage.

Here’s an example: Let’s say a client has an ongoing lawsuit. For each completed phase of the lawsuit, the client pays the lawyer a fee. However, the lawsuit ends up not going to trial, which was one of the phases outlined in the original scope of work. Because this phase didn’t occur, the client doesn’t need to pay the fee for this phase.

Contingency Fee

A contingency fee is a set percentage that the lawyer receives if the outcome of the legal matter is successful. The definition of success is predetermined and agreed upon by both the client and lawyer.

Here’s an example: A client has a litigation case where the lawyer is confident that they can win the case successfully. If they do, they receive a percentage of the client’s compensation.

Fee Collar

With a fee collar, also known as a collared fee, the client and the lawyer agree to a specific fee in advance, along with a percentage that the lawyer has to go over or under with their total time spent in order for that fee to change. If the lawyer’s total hours fall within that percentage, then the initial agreed-upon fee is paid. But if the percentage of hours spent is significantly less than predicted, then the savings are shared between the client and the lawyer. But if the hours exceed the percentage, then the lawyer is only paid a percentage of the excess amount.

Here’s an example (Law Technology Today): A client and lawyer agree to a $10,000 fee with a 20% up and down collar. If the lawyer’s billable time stays between $8,000 to $12,000, the final fee for the client will remain at $10,000. If the lawyer only works $6,000 in billable time, then the $2,000 difference is split between the lawyer and client, and the client receives a $1,000 credit, leaving the final fee paid by the client at $9,000. If the lawyer works $14,000 in billable time, the lawyer is paid 50% of the amount over the $12,000 collar, meaning the final fee is $11,000.

Unbundled Legal Services

Sometimes clients require legal services but can’t afford to pay for every service they may require. In this case, unbundled or limited legal services can be offered as a potential solution for these clients. With unbundled services, a client can pick and choose the most important services taken care of by a lawyer, and handle the rest of the legal matter themselves. However, it’s important that the client is completely informed about their specific legal matter and that they understand what their role is and what the lawyer’s role is in the matter.

Here’s an example: Let’s say that a client wants a legal review of a specific document. No adjustments, just a review to ensure the content is correct. If a law firm offers unbundled legal services, a lawyer can complete that review and bill a flat rate for it rather than charging the client the cost of an entire review (which would include edits, advice on adjustments to language, etc.). This means that the client is only paying for the service that they require, and the lawyer is only providing the service that the client asks for, saving the lawyer time and the client money on legal fees.

Sliding Scale Fees

This type of alternative fee structure is based on a client’s ability to pay. A sliding scale fee considers external factors that might affect a client’s budget, like income and family responsibilities, and leads to the client paying lower rates. Sliding scale fees exist in an attempt to increase access to justice so that more people can receive legal help.

Here’s an example: A client needs legal help with regard to a dispute with their landlord. Taking their income level into consideration, you charge them a base rate of $50 instead of your standard rate of $200.

Success Fees

With a success fee, the law firms receive a bonus payment if the previously agreed upon definition of a successful result is met or exceeded. This bonus is usually a percentage of the result that is set out in advance.

Here’s an example: Let’s say a lawyer agrees to take on a lawsuit case at a discounted rate because there’s a good chance of a favourable outcome. The client and lawyer agree that if the case is won, the lawyer will receive 30% of the total monetary result. But if the case is lost, then the lawyer receives nothing.

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ARTICLE BY ALTFEE

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