An alternative fee arrangement is loosely defined as any type of legal fee arrangement where a client pays an attorney something other than a traditional hourly rate for the legal work performed. Sometimes alternative fee arrangements are referred to in shorthand as “AFAs,” or the newer term, “value-based billing.” The point is that an attorney is paid for the value delivered for the legal service, as opposed to the amount of time it takes to deliver the requested legal service.
Alternative fee arrangements have become increasingly popular in recent years. Alternative fee arrangements may take many shapes and sizes, but more common forms of value-based billing are listed below with agreement descriptions and common uses.
A lump sum amount is paid for legal services covering a large body of legal work. The fee may be paid in incremental payments (e.g. monthly) or at one time.
For example, used when there is a constant flow of certain types of contracts (e.g. IT contracts). A lump sum could be paid to the firm for all legal services relating to the IT transactional work for a given year. The key issues for this AFA are the scope of the portfolio
Fees are billed at an hourly negotiated rate, provided that the client will pay up to but not more than the hard budget number. The law firm absorbs the risk of loss in this scenario.
Used in both litigation and transactional matters. This form of AFA provides certainty to the client regarding the fees; however, the law firm may be incentivized to work up to the hard cap and not achieve efficiencies in delivering the legal services below the cap. Also, the law firm may be unwilling to absorb the risk that the legal fees will exceed the cap.
Phased, Budget-Based Billing
For large transactions or litigation, the legal services are divided into phases and the parties agree upon the budget in each phase.
Used in both acquisitions and litigation, it allows the parties to rescope and redefine the budget for each phase as the matter progresses. Additionally, by adding a budget for each phase, the budgets may be more accurate and assist the client in understanding the costs associated with each phase. For example, if a lawsuit settles before trial, the client should not be billed for the trial phase of the budget.
Law firm receives a percentage of the client’s recovery.
The law firm and client’s interests are more closely aligned because both only benefit from the award to the client. This type of AFA is most commonly seen in personal injury cases and condemnation cases. For example, in condemnation cases, the law firm receives a percentage of the award given to the client above the initial offer from the condemning authority.
Fixed or Flat Fees
Client will pay an agreed upon fixed fee for the work over a specified period.
For repetitive work, a fixed fee provides consistency in the cost. Examples include a flat fee for each EEOC response, a response to a certain type of violation, or a fee for each lease transaction. The key is that there must be sufficient volume that the volume of work for this type of AFA.
Rates are blended between partners and associates and one blended rate is charged to the client for all work performed by the law firm.
These types of hourly rates may be incorporated into any type of arrangement that bills by an hourly rate.
Dead Deal Discount
If the transaction is terminated, the client only pays a percentage of the legal fees.
Used exclusively in a transaction context. The goal is to incentivize the law firm to notify the client early if there are terms in the transaction that may ultimately lead to the deal being terminated before unnecessary legal fees are incurred.
Performance Fee Holdbacks
A discretionary fee paid to the law firm based on the in-house counsel’s review of the legal services provided.
Used to incentivize the law firm to deliver excellent service throughout the transaction. Typically, this type of AFA is coupled with a flat fee in a transaction where the law firm’s fees are guaranteed from the outset.
Success Fees or Performance Incentives
A discretionary fee paid to the law firm if the law firm achieves a favorable predetermined result.
May be combined with almost any other type of AFA. This type of AFA is often used in litigation and paid if the law firm wins the lawsuit or reaches a favorable result.
Law Firms Respond to Demand for Alternative Fee Models
Although alternative fee arrangements are seen as the next frontier in law firm profitability, their adoption has been slower than anticipated.
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