Hourly or Fixed Fee?

Hourly or Fixed Fee?

How do you charge for estate planning services? I’ve known lawyers who for many years haven’t  budged from charging for their services by the hour. They don’t believe that any other way is practical or appropriate. “How do I pull a number out of the air?” they might ask. Or, “what if the file takes many more hours to complete than we originally anticipated?”

Both are good questions.

Let me address each separately.

Problems with Hourly Billing

As to the first, I counter with another question. “How do you determine your hourly rate? Is that a number that you pick out of the air?” While one might be able to carefully determine the amount of available billable hours in a week, multiply that by the number of working weeks in the year, and subtract from that total anticipated overhead to arrive at some semblance of a take-home salary, we all realize that those are all variables that are difficult to determine with any degree of accuracy.

 A lawyer might base his hourly rate on those he believes other attorneys of similar ability in the local market charge. But how do you know with any degree of accuracy what that is? Worse, on what business facts do those attorneys charge their own hourly rates? Did it start at $100 a few decades ago and simply increase with inflation? When new attorneys flooded the marketplace, did it put downward pressure on fees? This is the commoditization trap problem I’ve alluded to in earlier columns.

I have several fundamental issues with hourly billing when dealing primarily with estate planning transactions. First, it’s not an efficient way to bill clients. Neither you nor the client has a floor or a cap. It’s in your best economic interest to bill many hours and in your client’s economic interest for the transaction to be completed as soon as possible.

Second, it doesn’t price in the many thousands of dollars that you may be spending to complete work more efficiently. How much has your firm invested in computer software, networks, I-T personnel, Internet service, online research and other time-saving measures to increase internal productivity? Is it fair that your client receives all of the benefits of your ability to complete work in only one hour when it used to take four? How can you justify a four-fold increase in your hourly rate to accommodate that without looking as if you’re charging so much more than other attorneys in the local marketplace?

Third, hourly rates don’t factor in the uniqueness of the services that your office provides or in the increased hand-holding available when you hire more than the usual secretary or two. In my office, for example, we have “departments” of personnel that are available to cater to the client’s needs. A client may have a funding question or issue – and for those we have full time dedicated funding assistants at the helm. The client may have a simple maintenance amendment that he would like to make to his revocable trust. Again, we have dedicated staff to serve that function.

All of these personnel increase the cost of doing business and, hence, should increase your fees. But when you are providing a higher level of service, shouldn’t those fees be reflective of that service?

How about marketing? Most businesses also factor in the cost of marketing into their budgets and, hence, the prices that they charge. Today, you can’t expect to hang a shingle and for new clients to bust your doors down. You need to have a website presence, network among other professionals and  advertise in local media. All of this costs a great deal of money and should be factored into the pricing budgets.

I find that when we quote clients a fixed fee for estate planning, they’re relieved. They know going in the price that they’ll pay to achieve their objectives. Further, when we explain to them the steps that we’ll  take together inside of our unique estate planning process, they understand why the fee is what it is. We stratify the fixed fees based on the level of service that’s provided, the complexity of the planning and drafting and the amount of funding and coordination required. We rarely have a new client reject our work on the basis of fees.

The engagement agreement does provide that extraordinary services outside the scope of the agreed on services are charged extra. As to the work engaged, it doesn’t matter to clients how many client meetings or teleconferences are necessary to complete their work. They’re not on the clock, and we tell them so.

Unanticipated Extra Work

As to my original second point in the opening of this column – do some files take longer to complete than anticipated? Certainly. But those files, by and large, even out over the course of a year with the files that take less time to complete. Further, investments in increased productivity and efficiencies not only benefit our firm in an increased profit margin, but also increase client satisfaction in the sense of completing the work in a timely manner.

The key in all of this is to create both front stage and back stage systems that enable your firm to offer services in this manner. Without carefully thought out systems and processes, fixed fee billing won’t work. Otherwise it is simply picking a number out of the air, and your prospective clients will suspect that you’re doing just that.

Our pre-printed service agreement lists the fees for the various levels of services, so the client can see that you haven’t just arrived at a fee from the top of your head based upon their net worth or other non-relevant factors. There are occasions when our service agreement isn’t appropriate for a particular client, in which case we draft a custom engagement letter, but we sit down and review it together before it’s signed.

I hope that this column helps you achieve higher efficiency and profitability.

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