Hourly billing is the traditional approach to legal invoicing, but it may not always align with the best interests of your firm or those of your clients.
As the legal industry evolves, so too does the need for more adaptable and transparent billing models. Knowing when and why to shift from the norm is crucial for modern law practices.
So, what are the most common alternative billing arrangements for lawyers, and which makes the most sense for your legal practice? Here are some of the most common:
There are many more alternative fee arrangements law firms can consider, from performance-based incentives to capped fees, hybrid billing, value billing, and more. We’ll unpack the nuances of each approach below to leave you with a clear understanding of which is right for your firm.
You’ll also discover how to streamline your legal billing process no matter which fee structure you choose. InvoiceSherpa’s AR automation software can be tailored to the unique needs of your firm and sends out custom invoices and reminders. It then consolidates payments in your accounting software automatically. Leverage the power of our billing software for lawyers today!
Before getting into the alternative billing arrangements for lawyers, we want to highlight the standard approach to charging your clients: hourly. As you already know, this model charges clients based on the actual time you spend on their case in accordance with your specific rate.
It’s a straightforward approach that aligns your income with the amount of work required for a given case. The rate per hour can vary significantly depending on your experience, the complexity of the case, your geographical location, and your law firm's reputation.
Clients are invoiced regularly, often monthly, with itemized statements detailing how much time was spent on different aspects of their case.
This method has become the norm because it is fair and transparent. Clients pay only for the time a lawyer spends on their case, and lawyers are compensated for every hour worked. It allows for billing flexibility across different types of legal work, from brief consultations to prolonged litigation.
However, hourly billing can also lead to unpredictability in legal costs for clients, as total fees depend on how much time is needed to resolve a matter. This uncertainty can sometimes strain client-lawyer relationships, especially if the case takes longer than anticipated.
This is where the alternative fee arrangements law firms have at their disposal become particularly compelling. So, let’s talk about some of the instances in which you may find that hourly billing is not the ideal approach.
Adopting alternative fee arrangements (AFAs) can be a strategic move for law firms to address evolving market demands and enhance client relationships. There are three reasons you might consider an alternative invoicing arrangement…
Clients are beginning to prefer billing models that provide clearer cost expectations. They don’t necessarily know your rate - and even if you tell them, they may not realize just how many hours will go into their case. This could lead to surprises when it comes time to pay the piper.
AFAs like fixed or flat fee billing offer more predictability so clients can budget for legal services. This pricing transparency fosters trust and satisfaction, as clients feel more in control of their legal expenditures and less anxious about the potential for spiraling costs.
The perceived value of legal services is not always measured by the time spent. Clients want to pay for the worth of the solution provided, not just the effort expended.
Alternative billing models like value billing or performance-based arrangements allow law firms to price their services based on the outcomes achieved or the value delivered to the client, rather than just hours worked.
This alignment can lead to a more satisfying relationship for both parties, as it focuses on the success and impact of the legal services. Your client gets better value, and you stand to earn more for favorable outcomes - everyone wins.
Offering more flexible billing arrangements can help your law firm stand out in an area where hourly billing may be the norm. AFAs appeal to cost-conscious clients or those with specific billing preferences.
In this sense, you can use your unique invoicing arrangements as a selling point - attracting a broader clientele and building a reputation for being innovative and client-focused.
It’s clear that a one-size-fits-all answer to billing is not optimal for any legal professional. So, what are the alternative fee arrangements law firms have at their disposal?
While we’ve highlighted fixed rates, contingency, and retainer-based arrangements, there are many others worth exploring. We’ll unpack all the common alternative billing arrangements for lawyers below.
This model charges a predetermined rate for specific legal services or cases. It’s ideal for standardized work with predictable time requirements.
This AFA simplifies budgeting for clients and streamlines revenue for firms. It's transparent, with no surprises on either side, fostering trust and straightforward client relationships.
However, law firms need to accurately estimate the effort involved to avoid undercharging for their services. This may take some trial and error, but with enough experience under your belt, you’ll be able to accurately forecast the workload and charge a fixed rate accordingly.
Contingency fees are paid only if the lawyer wins the case or settles favorably, with the fee being a percentage of the award or settlement.
They’re increasingly common in personal injury or class action lawsuits. This arrangement aligns the lawyer’s incentives with the client’s success.
While potentially lucrative, a contingency arrangement poses a risk for lawyers who bear the upfront costs and might receive nothing if the case is lost.
You have to be more diligent about which cases you take on, steering clear of uphill battles where the odds are stacked against you. Be realistic with yourself before beginning work to avoid wasting your time and running into cash flow issues.
This is the most common alternative fee arrangement law firms rely on for active, ongoing work with clients over the course of time. Clients pay a fixed price every month (or quarter, whatever schedule you decide on) for a somewhat rigid set of legal service hours or deliverables.
This model ensures a predictable revenue stream for the law firm and provides clients with readily accessible legal services. It’s recommended for businesses and individuals with a constant need for legal counsel.
As with most AFAs, striking a balance here is critical. Firms must manage their hours efficiently to avoid over-servicing without additional compensation or under-servicing, which could lead to client dissatisfaction.
This can be addressed by tracking and communicating the time spent on retainer services. If necessary, you can adjust retainer fees or service scope over time. When used correctly, you can build long-lasting relationships with clients that span years if not decades.
Capped fees set a maximum limit on what a client will be billed for a specific legal project, offering a middle ground between hourly billing and flat fees.
This model provides clients with cost certainty while still requiring the law firm to keep track of hours to ensure profitability. It builds trust with your clientele.
But, it's essential that your firm accurately estimates the scope and potential complexities of a case to set a realistic cap that covers the necessary work without undervaluing your firm's services and leaving the client feeling as if they’re not getting their money’s worth.
Hybrid billing combines elements of different billing methods to tailor the fee arrangement to the specific needs of the case and client preferences. For example, a law firm might blend hourly billing with a contingency fee or mix a retainer with capped fees for certain services.
This flexibility allows firms to adapt to various client demands and case types, offering customized solutions that align with both client value perceptions and firm revenue goals.
Successful hybrid billing requires extra clear communication and detailed agreements to ensure all parties understand the billing structure and conditions. While this is true of all forms of client billing arrangements, it’s especially important in this scenario where there are many moving parts and complexities.
Sliding scale fees adjust the rate based on the client’s ability to pay, often used by firms to offer services to a broader range of clients, including those with limited financial resources. It’s particularly common in family law, immigration, and public interest law firms.
The scale is typically set based on a predetermined formula, where the client’s income level dictates the percentage reduction in standard fees. This system allows firms to serve a broader demographic while still covering operational costs.
While a sliding scale isn’t for everyone, it’s a great choice for legal professionals with a true passion for delivering justice on behalf of their clients - including those who may not be as well off.
However, it requires a clear and fair assessment process to determine the appropriate rate for each client, balancing accessibility with the need to maintain the firm’s financial health. It can often lead to more headaches than its worth.
Performance-based arrangements, or success fee models, link the lawyer's fees to the successful outcome of a case.
Unlike contingency fees, which are purely outcome-dependent, performance-based fees may combine reduced hourly rates with a bonus for achieving specific goals or milestones.
This model incentivizes lawyers to deliver results efficiently and effectively, aligning the interests of the firm and the client towards a common goal.
You must sit down with your client and clearly define the “success criteria” and establish performance benchmarks in the client agreement to ensure expectations are managed and outcomes are quantifiable.
Payment plans allow clients to pay their legal fees over an agreed period, making legal services financially manageable, especially for those facing substantial or unexpected legal costs.
This arrangement can be structured as monthly installments or tied to case milestones. Offering payment plans can enhance client relations and improve cash flow stability, as regular payments are easier to manage and predict than lump-sum settlements.
Law firms must set clear terms for the payment plan, including schedules, interest rates, maximum late fees, and consequences for missed payments, to ensure that the arrangement is adhered to and is mutually beneficial. You can learn more about how to set up payment plans for customers in our blog.
Across all the alternative fee arrangements law firms have at their fingertips, you may realize that you need to use more than one. Just know that the more layers you add to your billing process the more complicated things will be.
At InvoiceSherpa, we prefer to simplify and streamline things instead. So before we wrap up our guide on the alternative billing arrangements for lawyers, let’s offer some general small business accounting tips and tricks.
Regardless of which alternative billing arrangements for lawyers you decide on, it’s worth taking a look at your invoicing process from a broader perspective and looking for ways to streamline things. This will save your firm time and stress while improving client relations and cash flow.
Transparent and detailed invoicing builds trust and clarity between law firms and their clients. This is true not just of legal invoices, but everything from lawn care invoices to plumber invoices. Simply put, clients want to know what they’re paying for.
Each invoice should itemize the services provided, with a clear description of the work performed, the time spent, and the associated cost. This level of detail helps clients understand the value they are receiving and reduces the likelihood of disputes over charges.
What worked for you at one point may not work for you today, which is why you should regularly monitor and evaluate your billing practices.
This involves analyzing billing data to identify trends, inefficiencies, and client payment behaviors. Have you noticed an increase in accounts receivable or an uptick in uncollectable receivables? Do you have a large sum of unbilled revenue piling up?
Understanding these patterns is your first step towards rectifying the issue, which could entail stricter payment policies, more strongly worded reminders, or in some cases, sending out a demand for payment letter.
Rather than outsourcing accounts receivable, consider investing in automated invoicing. It saves your firm money by eliminating time-consuming manual entry and reconciliation.
It also allows your team to focus on what they do best - serving clients. Moreover, you can avoid human error by leveraging the AR automation benefits. So, what is the best accounts receivable automation software for law firms specifically?
InvoiceSherpa has earned the trust of legal professionals across the country. You can integrate with LawPal or Clio to effortlessly track time, send out invoices automatically, and offer your clients a variety of payment methods in their own personalized dashboard.
This helps you get paid faster while also reducing friction for your customers, creating a more positive experience for them. You can customize your invoices to your liking and even send out automatic payment reminders on a set schedule - complete with late fees tacked on.
If you have clients on a retainer-based arrangement, you can even set up automatic recurring payments so that you collect funds without you or your client having to lift a finger.
Plus, an intuitive dashboard makes it easier to stay on track of your finances, from calculating accounts receivable to determining when it’s time to send a bill to collections (if needed). Getting started is easy too - sync with your accounting software, automate key processes, and integrate with payment processors. All payments will automatically reconcile in your accounting software.
So, what are you waiting for? This is the #1 way to handle legal billing for dummies, empowering you to worry less about finances and more about achieving favorable outcomes for your clients. You can try it out for free today with a 14-day trial - no credit card needed. Discover firsthand what makes InvoiceSherpa the #1 choice.
As you can see, alternative billing arrangements for lawyers offer a level of flexibility that hourly billing lacks. There are a number of alternative fee arrangements law firms can use, ranging from the classic retainer-based arrangement to performance or contingency arrangements, hybrid models, and more.
Whichever approach you opt for, just remember to prioritize clear communication, careful planning, and the right technological support to streamline the process and save time and stress.
Our blog has more resources on topics like what can a lawyer do to get clients to pay invoices, charging interest on legal invoices, the importance of cash flow management, the benefits of billing automation software, and more. But at this point, it’s time to take what you’ve learned here in this guide and put it into practice in your law firm.
From fine-tuning your invoice late fee wording to accounts receivable reconciliation, InvoiceSherpa can help you streamline your billing process no matter the fee arrangement you have with your clients.
But unlike other accounts receivable management services, we won’t cut into your bottom line - InvoiceSherpa is like having a full-time AR employee for just $49/month! So, get started today and transform your law firm's billing efficiency and client satisfaction.
April 4, 2024
