In this series we have been looking at the roles and responsibilities of the ‘Trusted Advisor’ to Law Firms, in part because a lot of accountants and ProAdvisors are developing interest in specializing their practice in this area of service. Law firms, of variable sizes, may be searching for such trusted advisors to provide not just accounting and/or bookkeeping services, but services related to their special needs including Trust Fund accounting, client billing practices, case cost tracking, law firm compensation methodologies, and practice (case) management including case-load tracking. You may need to assist them with not only operational procedures and best practices, but the selection and implementation of software associated with meeting each of these law firms specific requirements.
In this article we will look at the concepts associated with how law firms perform their billing, including alternative fee arrangements, as well as how a trusted advisor can make sure their law firms are using a solution that helps them perform billing efficiently and effectively. Typically, a trusted advisor will be required to develop an expertise in multiple billing solutions that provide different billing alternatives, not just a single product.
When we talk about ‘billing’ in relationship to a law firm, what we really mean is how the firm is compensated for their legal services. There are at least 2 entirely different aspects of this ‘billing’ topic. The first is the ‘forms or methods of compensation’ and the 2nd is the ‘mechanics of compensation’.
Different law firms, with different legal practices, will be compensated in entirely different methods. As a trusted advisor you must understand not only the various methods, but the specific legal practice (or case load) of a given law firm and how those cases impact the firm’s compensation. In some firms, both large and small, the types of cases may vary and thus the methods of compensation will vary as well.
Civil litigation firms
There are two types of civil litigation firms, plaintiff firms and defendant firms. A plaintiff firm represents a client who is bringing a 'civil action' or lawsuit against another individual, business, corporation or in some cases even ‘the government.’ On the other hand, a defendant firm has the responsibility to ‘defend’ a client against a plaintiff action; this could include a lawsuit, an IRS (civil) action, a contractual dispute, or other civil action.
The method of compensation will vary significantly between plaintiff and defendant firms. Again let me point out that some firms will actually practice both forms of civil litigation; in such cases they must always insure against even the appearance of any ‘conflicts-of-interest’ arising out of their respective roles as they relate to different clients.
Plaintiff firms that handle personal injury cases often operate on a contingency basis. This means that they ‘get paid’ when they win (or settle) the case; in many such cases they receive an agreed percentage of the amount awarded or settled. In addition, they will also be compensated for the expenses they have ‘advanced’ on behalf of their client out of the settlement or award. Even the formula used in determination of their fee compensation and expenses can vary.
For example, a firm may have an agreement with a client that provides that they will collect 40.00% of any settlement or award after all case-related expenses are deducted from the settlement or award; this is referred to as 'post-expense contingency fees.' On the other hand, a different agreement with another client may provide that they law firm will be paid 33.33% of the settlement or award, before any case-related expenses are deducted; after their fee is computed then all expenses are deducted from the remaining portion, and only after all expenses are reimbursed, is the client paid the remaining portion of the settlement or award; this is know as 'pre-expense contingency fees.'
Let’s look at how these two potential compensation methods would be computed in a $1,000,000 settlement.
Civil case example
As you can see, there is a substantial difference in both what the law firm receives in total, and what the Client receives in total. This is just an example of possible compensation methods, which should be clearly defined on a client-by-client basis in a representation letter.
When the plaintiff law firm is representing a large corporation or other business, rather than an individual, the terms of compensation may actually require the client to reimburse the law firm any litigation related expenses (filing fees, deposition/stenographer, and similar costs) on a pay-as-you go basis. This means that the law firm will be ‘billing’ the client for all such costs on a regular basis, the frequency of which may vary from monthly to ‘per occurrence’ basis. In such cases the client will then be ‘refunded’ any reimbursed amounts from the settlement or award based upon the of the law firm’s engagement, either before or after law firm fees.
Defendant civil litigation firms are providing the defense of their client against a lawsuit brought by another party. In these cases, most firms will charge the client an hourly rate (or rates) based upon the type of work actually being performed. For example, drafting a written response to plaintiff interrogatories may be charged at an hourly rate of $125.00 per hour for an Associate in the firm, or $300.00 per hour by a Partner. On the other hand, an Associate’s in-court time maybe $250.00 per hour, and a Partner’s in-court time maybe $750.00 per hour. In many cases these hourly rates not only will vary by the type of work and firm member but also the ‘type of law’ involved. (A law firm that represents individuals who caused a traffic accident may charge less per hour than if the same firm represents individuals accused of ‘contaminating the ground water of an entire community.') Additional factors associated with the compensation rate maybe the specific client or billable party. (For example a law firm may charge an insurance carrier at a higher rate than a client without insurance.)
In many of these defendant firms, the law firm may require a retainer to be paid up-front. Such retainers will be tracked in an IOLTA Trust fund and may specifically be enumerated within the law firm’s engagement to be used for expenses (only), fees and expenses, or fee (only). It is critical that all costs and expenses are properly tracked so that they can be applied appropriately against any retainer, and that retainers are then billed to the client for replenishment.
Criminal Practice Firms
There really is only a ‘defendant’ side of most criminal law firms, but such firms may defend both ‘paying’ and ‘indigent’ clients. Typically, when such a firm defends ‘indigent firms’, they have been assigned that responsibility by a governmental or quasi-governmental agency, and in such cases that agency or governmental office will compensate the law firm based upon a standardized ‘fee structure’ established by the agency or office. The law firm agrees to accept this fee structure in exchange for the opportunity to participate in such a defense ‘ legal aid’ program. Many small criminal law firms or solo practices representing defendants will participate in this type of ‘legal aid’ program in order to build their practice and reputation as well as skills in defending criminal cases.
As a general rule, most criminal law firms represent their paying clients on a ‘lump sum’ (paid upfront) basis, typically based upon the nature of the ‘criminal charges’ brought against the client. For example, a ‘speeding ticket’ may cost a client only a few hundred dollars for representation, on the other hand a ‘driving under the influence’ case may be a few thousand dollars. A serious crime like ‘rape’, ‘embezzlement’ or ‘murder’ may cost in the tens or hundreds of thousands of dollars depending on the circumstances.
In many cases the law firm will charge a ‘pre-trial fee’ that covers their services from initial representation up until the time of any trial. They may then charge another ‘trial fee’ that covers their services for representation during the actual trial, and this may vary significantly based upon the case complexity as well as the expected duration of the trial proceedings. If the case ‘doesn’t go well’ for the defendant and an appeal is necessary, the law firm will typically charge a fee for an appellant brief, and perhaps another fee for any appellant hearing.
Fees, of the type discussed above, are just that, ‘fees’, they are not contingent upon any outcome; as such they are generally considered non-refundable. In these cases, those fees are ‘earned’ at the time the lawyer is retained to provide services, and so all such moneys are generally not subject to IOLTA trust fund requirements. (Some state ‘Bar Association’ requirements may be different from this ‘generality’, so the trusted advisor will be expected to be familiar with not only the conceptual practices for this type of firm, but confirm with the law firm’s members the applicable practices under state Bar rules and/or statutes.)
Some criminal law firms will ‘cover’ the cost of all expenses associated with the defense; on the other hand, they may in fact require the defendant to pay all (or some of) such costs. Such costs must be tracked carefully and might include investigators, jury selection experts, evidence-expert witness fees, depositions and transcripts, and even the cost of holding a ‘mock trial’ (when warranted). In some cases, criminal law firms will require a retainer to be deposited with the firm to cover such costs, in those cases that retainer will be subject to IOLTA trust fund requirements applicable within the law firm’s state of practice.
General Practice Law Firms and Other ‘Matters’
Many small law firms, especially those in smaller cities, may not have sufficient volumes of business to specialize in either civil litigation plaintiff work, defense of civil cases, or even in criminal law. In such cases these firm have a ‘general law’ practice which means that they may actually practice all of these types of law, as well as perform other routine legal matters. Their forms of compensation may vary by the type of case, and may correspond to the various ‘billing’ methods set forth previously.
In many cases these law firms may use both ‘hourly rates’ and ‘flat fees’ for ‘other matters’. For example, a lawyer with his own practice may charge a client $125 per hour to review documents associated with, or attend a real estate closing. The same lawyer might charge a flat fee of $500 to draft a simple ‘will’ for a client. Some firms may charge hourly rates for ‘assistants’ or ‘clerks’, or even a ‘trip charge’ to file papers at the local courthouse. In a lot of cases firms using a ‘billable charges’ approach will not only bill a client for time, but also all expenses such as copies, postage, travel (mileage), or outsourced work (they might hire a law student to draft a brief) which is finalized by a law firm member.
How Other Law Firms Bill their Clients
There are countless numbers of ‘law firms’ practicing other types of, or specializing in, different legal matters. Family law (divorce, adoption, custody, etc.), business law (contracts and interpretation), copyrights and patents, governmental law (federal, state, local), international law, immigration law, social and welfare law, finance and banking law, insurance law (how insurance is conducted), real estate and property (including trusts), estates and probate, tax, and numerous others.
In these firms billing can take many different forms; from flat fees to tasks performed billing, from detail to summary, these firms may use one or a variety of methods. For example, a law firm that specializes in representing oil companies in securing mineral rights may charge either hourly rates for services performed, or may have negotiated a flat-fee for each such ‘lease’ they secure on behalf of the client.
Law firms that do ‘estate’ or ‘financial planning’ may charge a flat fee for specific types of documents such as a ‘will’ or ‘to set up an employer’s SEP retirement plan’. On the other hand, they may charge an hourly rate to set-up a ‘trust’ because it may involve the complexity of multiple properties, funds, and even multiple generations as well as provisions for a trust administrator or trusteeship.
In some situations, a law firm may actually incorporate ‘costs’ into their rate structure. For example, knowing that the firm typically spends 4 hours preparing a simple will may justify the cost of a document assembly program that, once set up, might allow the preparation time to be reduced to one hour of attorney time. In this case they may set a ‘flat rate’ that is valued at the appropriate compensation and costs for the typical matter.
Just like the accounting industry, there is a wave of law firms looking to migrate from hourly or task-based billing, and transition to alternative fee arrangements like the ‘value billing’ model many ‘trusted advisors’ are using. But law firms are for the most part ‘very traditional’, they tend to move even more slowly than accounting firms and it maybe a considerable time before we see a substantial number of firms move away from ‘the old ways’ of billing their clients.
Compensation Mechanics – the ‘tools of law firm billing’
While small law firms may choose to use QuickBooks or a similar ‘small business’ accounting system to bill their clients, many will select a more sophisticated option that may in fact be associated with their ‘time-keeping’, or ‘docketing’, or ‘IOLTA accounting’ systems. Still other firms will select an all-inclusive law-firm specific software package to meet their various requirements.
There are a lot of factors that go into the selection of the specific software, and Insightful Accountant has published numerous articles by the authors of this article, regarding what to look for and how to go about assisting your client in making a selection, so we will not go into those considerations today. In addition, we have also written about a lot of law firm billing solutions, so we won’t discuss specific billing software in this article. On the other hand, we will look at some specific examples of how a couple of ‘billing’ related considerations may impact the specific choices you recommend and/or your client selects.
It is very important to understand how the law firm wants their bills to look, and whether they need to look different for different clients. (I once had a law firm select billing software solely on the basis that they could have every bill format customized for each customer, even if that created 10 times the amount of work for their employees.)
Some billing systems establish the bill layout at the time you run the bills, meaning that clients with different layout requirements must be run in separate batches. Other programs allow the layout to be assigned to the client which provides more flexibility in billing groups of clients.
For some types of law, electronic billing capability is essential. Electronic billing is the production of bills according to specific rules and in a format that can be uploaded for review by a billing house. The billing house will review the bill electronically and make sure the bill conforms to the agreed on rules for rates, expenses and types of charges. Specific codes and formats are usually required. If the bill "passes" review, the firm will get paid.
Law firms that routinely perform services “typically civil litigation defense’ on behalf of large insurance companies may be required to use this type of electronic billing.
You can think of this type of electronic legal billing as being very similar to how medical providers (physicians, clinics, hospitals, etc.) must submit bills to Medicare or health insurance companies using diagnostic and procedural codes as well as the specific approved rate for such ‘determinants’.
While there are a large number of electronic billing houses and formats in use, the most common legal formats are Ledes1998B and Litigation Advisor.
Trusted advisors specializing in law firms will be expected to know which billing software programs offer customized billing formats, allow for multiple formats, permit formats to be selected for specific clients, and be thoroughly familiar with the billing routines associated with each solution they support. Similarly, if a law firm is in need for an ‘electronic billing’ solution, you must understand which electronic format is being used by the ‘billing house(s)’ they submit claims to, and then be knowledgeable about which billing solutions can transmit data in the required format.
Next time, in part 4 of this series, we will examine ways the law firms track and account for advanced client costs, as well as the difference between hard costs and soft costs.