Alternative Fee Arrangements: Flat-Rate And Fixed-Fee Billing

So far, we’ve covered the billable hour—the dominant fee arrangement—and subscription legal services, an up-and-coming alternative fee arrangement, the popularity of which has been spurred on by advances in technology.

This week, for the Answering Legal blog’s fall Alternative Fee Arrangements theme, we’ll be covering an older fee structure: flat-rate billing.

Flat-rate or fixed-fee billing was how attorneys charged their clients before the advent of the billable hour, as we’ll discuss below. It’s making a comeback among both clients and lawyers as the billable hour is under increased criticism for overworking and underpaying attorneys. In this blog, we’ll describe flat-rate billing, dive a bit into its history, and discuss whether or not it’s the right fee arrangement for your firm.

What Is Flat-Rate Billing?

Flat-rate billing is fairly straightforward: attorneys charge a fixed fee per service, and charge up-front, rather than tracking time and billing at the end of a legal matter. For example, an intellectual property attorney might charge a flat fee per trademark issued. In this blog, we’ll be using the terms “flat-rate billing” and “fixed-fee billing” interchangeably, since both refer to the same concept.

The fixed-fee billing model is an older fee arrangement than the billable hour. Before the advent of the billable hour in the mid-20th century, state law set maximum fees by legal service, since contingency fees and hourly billing were deemed unethical. Litigation fees were paid by the losing party. But as litigation grew more complex, flat fees fell out of fashion for the more lucrative (at the time) billable hour model.

Throughout the later parts of the 20th century and the beginnings of the 21st, however, there have been growing voices in the legal community looking to go back to the flat-rate billing model. We’ll discuss some of the reasons why later on in this blog; if you’d like to see the arguments against the billable hour, click here to read our blog on the topic.

Flat-rate billing is often referred to as a “legal menu”. Firms that offer flat-rate billing will have a “menu” of sorts, a list of services offered and the price of each service. Some firms might even have a physical menu available in the office for potential clients to peruse as they wait for their meeting with an attorney! Again, as odd as it might sound, this was the predominant legal billing method for years before the billable hour became the norm in the 1970s.

The legal menu is quite popular with clients, too.

According to Clio’s 2022 Legal Trends Report, flat fees are preferred by two-thirds of legal consumers, and yet only 37 percent of law firms offer services using flat fees.

There’s a clear demand for transparency in legal billing from the consumer side of the attorney-client relationship. We’ll discuss below how that can be a big draw for the flat-rate billing model.

Pros And Cons Of Flat-Rate Billing

So we know the fixed-fee arrangement was the preferred billing model of the legal world before the Second World War, and that it’s the preferred billing model of legal consumers in the present day. Next we’ll answer the question: what does your firm stand to gain by switching to the flat-rate model?

There’s plenty to be gained, but as with any major change to your firm, it’s not all upside. Below we’ll discuss the potential benefits of switching your firm to flat-rate billing and the potential pitfalls that come with it.

Strengths Of The Flat-Rate Billing Model

Under the billable hour, efficiency is not rewarded. You’re getting paid for how long you work; being inefficient is unethical, of course, but being extremely efficient means you’ll need a lot more clients to bill. With a flat-fee structure, you are actually rewarded for working efficiently; the more clients you provide a service to, the more money you make.

This direct correlation between efficiency and success means efficiency is encouraged by this fee arrangement, which is a big part of why it’s so popular with clients. Along a similar line, adaptability is a valuable skill for flat-fee attorneys. Adopting technology that makes your firm more efficient can lead directly to more profit, so you’ll be able to take advantage of the newest legal tech as it comes out. The same, of course, cannot be said for attorneys billing by the hour.

Next, flat-fee structures remove the mystique of legal billing, and help you stand out from your competition. If other attorneys in your practice area are billing by the hour, a menu of legal services can be a useful tool to attract clients. At the very least, you’ll have clients coming to you to see how much the services they’re looking for are actually worth, which means you can position yourself competitively to outmaneuver competition.

As mentioned above, 67 percent of clients prefer firms to have flat-rate billing as an option. Clients appreciate the transparency of a fixed-fee structure. It’s easy for clients to understand paying a fee for a service, as most other services work the same way. In addition, the transactional nature of the flat-rate structure makes the attorney-client relationship clearer and makes it easier to communicate with clients.

Possible Pitfalls Of The Fixed-Fee Billing Model

There’s a considerable amount of setup required when changing to a flat-fee structure. You’ll have to determine what services you’re going to offer and what you should charge for each of them. As long as your services are predictable, it shouldn’t be too difficult. But the less straightforward your practice area, as we’ll discuss below, the harder the switch will be.

Under the billable hour, complications can feel like blessings in disguise. A straightforward legal matter becoming an entangling morass of back-and-forth communication and legal work at least has the silver lining of allowing you to charge more for your time. Under a flat-rate payment arrangement, these complications would each be a hit to the profitability of a legal matter.

Finally, paying money up front might feel like a considerable risk to both client and attorney. If someone ends the relationship, who is entitled to payment? Will you have to make a refund if your client finds alternative representation? What about if you’re the one who ended the relationship, for whatever reason?

These ethical questions could be sticky, and different states have different answers. Some states, like Ohio, require fees paid in advance to be placed in a trust, only to be accessed by attorneys once a matter is concluded. According to the judgment in the link above, in Ohio, flat fees must be “earned” before they can be disbursed to the attorney in question. Before making a switch to fixed-fee billing, it’s important to do your research for the states you practice in.

Is Flat-Rate Billing Right For My Firm?

Every law firm is different. Some firms thrive under the billable hour model. Others are looking for a way out. At the end of the day, however, it’s less about the strengths and weaknesses of a specific billing model, and more about whether or not it will work for your firm.

As we’ve mentioned, certain kinds of law firms will have more luck than others with a fixed-fee billing model. Transactional firms have an especially good chance of thriving under flat-rate billing. Estate planning, contract drafting, intellectual property law, and other transaction-based practice areas are easy to predict and easy to judge the pricing for.

In addition, these tasks often don’t take too long to complete. Check out this clip from an episode of Everything Except The Law, where 2-Hour Lifestyle Attorney Laura Cowan shares how she works just a few hours a day while charging a flat-fee for estate planning in New York:

The question for litigative firms is a little bit more complex. There are litigation processes that are more predictable than others. Traffic ticket litigation, for example, has a very predictable time investment, based on how serious the violation.

Personal injury and criminal defense, on the other hand, can last a lot longer, and may not be the right fit for a flat-rate billing system. The bottom line is: anywhere processes are predictable, flat-rate billing shines. The less predictable your practice area, the less profitable a switch to fixed-fee billing will be. If you’re considering a switch, make sure you take a step back and analyze where your work falls on the spectrum of predictable to chaotic!

How Can I Capture A Critical Mass Of Clients?

Flat-rate and fixed-fee billing are especially rewarding for transactional attorneys handling a high volume of simple legal matters. For these firms, a single client doesn’t represent a huge chunk of their firm’s annual revenue. But securing the business of a majority of those clients is important to hitting critical mass so you can hit your firm’s annual goals.

If, for example, you handle traffic tickets at a fixed rate, you’re going to want someone answering your phones 24/7 so that your clients don’t call the next attorney on their list. After all, you never know when a client is going to be calling, and cutting yourself off from clients once the sun goes down is a recipe for missing business!

Answering Legal’s virtual receptionists are the perfect candidates to represent your firm, whether you’re working or sleeping. With our team on your side, you’ll never miss another business opportunity. Every call will be answered by a friendly and professional receptionist who answers for law firms every day.

Our receptionists only answer for law firms, and they undergo months of training to do so! Check out our rigorous training program here. Our custom legal intake training empowers our receptionists to secure business for your firm, while our detailed message-taking service means you’ll always be on top of what’s happening at your firm.

Keep your calendar full of clients to bill. Click here or call 631-686-9700 to sign up for our free trial. For a limited time, we’re offering firms that sign up for our service their first 400 minutes free.