EM Law Retainer Arrangements

Legal Fees: Retainer Arrangements

Or at least they should be. If a lawyer has a client who pays standard rates and never questions the bill or hours spent then that lawyer is in an enviable position. If the standard rate is already very competitive then the client may be ok with this arrangement.

But most lawyers are willing to lower their hourly rate in exchange for a retainer arrangement with their client.

What are retainer arrangements?

They can take various forms.

A classic example is where a client pays a fixed rate every month for, say, 12 months and in return the lawyer offers a certain number of hours per month. In some retainer arrangements the client needs to use up the time credits in a month otherwise they will lose them – the time credits aren’t carried forward. In other retainer arrangements, the time credits may be carried forward in which case the arrangement is more like one where the client is simply buying time in bulk, to be used as and when the client wants throughout the year.

Either way, the client ends up paying an hourly rate that is less than standard. This is because it is valuable for the lawyer to know that there will be a set amount of cash coming in to the firm at a certain date every month – it provides cash flow certainty. This cash flow arrangement can also benefit the client – it gives the client the opportunity to spread the cost of legal services throughout the year.

The other way in which retainer arrangements should benefit both client and lawyer is that they should remove or at least seriously reduce the need for there to be discussions around what the cost of a piece of work is going to be. This means that time is saved and, let’s face it, no-one likes discussions around fees and what they should be.

Just expanding on this point above: if you are a client you may be thinking “yeah, Neil, you would say that - of course you don’t want a check on what you do by having to give estimates on how long things are going to take and at what cost” but wait a minute:

You aren’t going to sign up to a retainer arrangement unless you trust the lawyer. So retainer arrangements are for where you are satisfied that you have found a lawyer who is good at their job and who you trust won’t overcharge you.

A client should see a lawyer who is on a retainer arrangement as performing a role like an in-house lawyer i.e. an employee. Do you ask your employees what it’s going to cost to do a piece of work? No. They are paid a salary and they just get on with things.

Let’s say – extreme example – I go on to a retainer arrangement where my hourly rate is the equivalent of £30 an hour. Aren’t you now going to let me just get on with things rather than we have discussions around how long each item of work is going to take? I think you would probably just let me crack on because you know that you are getting a great rate. So let’s come up with a more realistic example: If my standard hourly rate is £300 per hour but our retainer arrangement brings my rate down to £150 per hour – and don’t forget you have already worked with me for a while so you see how I do things – I would expect you to let me get on with the work you sent me rather than give time estimates for each item that we need to agree on. Don’t forget you will see how my time accrues by time reporting and you can always shout if you aren’t happy.

So, basically, a lawyer should reduce their rate (which the client benefits from) in return for cash flow certainty (which the client also benefits from) and in return for not having the hassle of having to estimate how long it is going to take to do things every time work comes in (which the client also benefits from given the trusted relationship).

A win-win.

EM Law Hourly Rates

Legal Fees: Hourly rate or fixed rate?

Answer: Clients don’t necessarily benefit one way or the other – whatever mechanism is used, it’s all about trust.

The last few years the message loud and clear to lawyers has been that we need to get away from charging legal fees by the hour and offer clients a fixed rate for the work we do. “Clients want certainty.”

Fair enough.

But they probably don’t want to be ripped off either.

I don’t know that many lawyers who are prepared to tell me what they charge for an item of work but I know a few. They are lawyers working in firms of around 30 plus partners and Legal 500 recognised coming in around band 3 or 4. For non-lawyers that means they are in firms who are recognised as being very good but who aren’t top City firms. In the regions they are amongst the leading firms in their area.

When these contacts of mine tell me what they charge in legal fees at a fixed rate for certain pieces of work I think to myself “how do they get away with that?!” In some cases they are charging a fixed quote that is three times more expensive than if an hourly rate had been agreed.

Moving away from the hourly rate model to the fixed rate model seems to have benefitted some lawyers financially but I’m not sure that was what clients had in mind when they said they didn’t like the uncertainty of hourly rates.

Typically, when asked for a fixed rate a lawyer will think about what the job would take to do on an hourly basis and then provide an uplift of an additional 30 percent to provide a cushion in case they underestimated the time they thought it would take to do the work. Not only that but they will caveat the fixed rate by using words such as “as long as nothing unusual arises” or words to that effect.

Earlier this year I engaged a lawyer myself to help with a personal matter. Here is an extract from the email exchange I had with him around legal fees:

Me: “….Can I just check: you are estimating “around £1500”.

Can you provide a fixed quote for this or not? If not what does “around” mean – what’s the exposure on fees that I would be under…..”

Him: “…..My estimate is loosely based on my charging rate of £300 per hour plus VAT but you can treat my quote of £1,500 (plus £500 for a notice) plus VAT and disbursements as effectively a fixed quote so long as the matter is relatively straightforward and does not involve unexpected complications……”

What does “relatively straightforward” or “unexpected complications” mean?

I don’t know either.

Did I go back to this lawyer to query what he meant? No – I just got on with it and trusted that he wouldn’t overcharge me because this lawyer had been recommended to me by a friend. I’ll let you know if this comes back to bite me.

What is the lawyer doing here? He’s giving me a fixed quote that will remain fixed as long as nothing unusual happens (as far as he is concerned). How is this different from an hourly rate? It isn’t much different. I would hope that I would at least get a couple of hours slack if he spends 2 hours more than he thought the work would take but after that suddenly this will turn into an “unusual” case and I’ll have to pay more.

So I have to trust this lawyer that he won’t take advantage and overcharge. The fact that I have a “fixed rate” doesn’t really change anything.

Flipping this over to the lawyer’s perspective: why should the lawyer end up doing a load of work that he can’t charge for if things don’t go smoothly? I don’t think lawyers should be expected to pick up the pieces where things don’t go smoothly and it’s not their fault. So that’s the other reason why I accepted that lawyer’s quote.

But how do I know if things have become bumpy as a result of my lawyer failing to do things properly? I don’t.

Having a lawyer charge legal fees on a fixed quote rather than an hourly rate does not mean that you are saving money. In fact you are probably paying extra for having a bit more certainty as to what the bill will be – unless something unusual happens in which case you will pay more.

So it all boils down to this: it doesn’t really matter whether your lawyer is charging an hourly rate or a fixed rate - the only way you are going to end up paying a fair price for your legal work is by finding a lawyer you can trust. Let that be your focus.