23. Budget-based billing
One of the things that clients dislike about hourly billing is its seemingly open-ended nature — the fact that the bills know no limits and that the more costly the representation becomes, the more profitable it is for the lawyers.
The benefits of budgeted maximums
Flat fees are one way of addressing this concern. However, an alternative for those lawyers unwilling to head up that path is to bill by the hour but to cap the amounts with budgeted maximums.
The benefit of this type of arrangement is, potentially, that the lawyer operates utilizing what may be a preferred method — time-based billing — but the client knows in advance what the worst-case fee could be.
Indeed, some clients might prefer hourly billing with budgeted caps to a flat-rate system. This is because with flat rates, there is always the possibility of the fee turning out to be rather high if, for whatever reason, the matter ends up coming to a conclusion with much less work than anyone had envisaged.
The drawbacks of budgeted maximums
However, budget-based billing can also end up offering the worst of all worlds. Until the cap is reached, there are all the drawbacks of the billable hour — with its anomalies, arbitrariness, structural inaccuracies, and so forth.
Then, once the cap is passed, the lawyers think they are working for free — and that’s not something that is going to inspire or motivate them to do their best work. That’s because, unlike their flat-rate counterparts, they haven’t really shed the time-based billing model in favor of a value-driven alternative. They are still thinking in terms of selling time as their commodity.
Budget-based billing also runs into the same problems as flat-rate billing, but without yielding all of the latter’s advantages. In particular, there is the challenge of determining in advance what the scope of the work is going to be in order to come up with a cap that makes sense.
So this isn’t a method I would generally encourage. But it has its adherents.
Budget-based hybrids
As with other methods, one can devise hybrids that make budget-capped billing more appealing. For example, one can have a cap, but with a success-related bonus if there’s a good outcome. As always, it makes sense to think creatively about billing options, rather than to assume that a few preset templates are all that’s available.
Entire contents © 2008 John Derrick