Two Methods for Estimating Legal Fees
by John W. Toothman
10(11) Accounting for Law Firms (Leader Publ. Nov. 1997)
Estimation Method 1: Estimating by Compiling Component Tasks
THIS IS THE method most commonly discussed and used by those clients and firms attempting to estimate systematically this is the state of the art. In this method, the plan is crucial because each step of the action plan is broken down into the sub-tasks necessary to accomplish each task or likely to arise under various contingencies. Thus, a discrimination case becomes a collection of tasks, including investigation, research, several motions, discovery taken, discovery answered, trial preparation, settlement negotiations and so on. A legal matter is thus a collection of interlocking building blocks. A price tag is then affixed to each sub-task, with the total of the tasks being the total estimated cost. This method integrates well with a task-based billing system when it comes time to reconcile estimate with bill. The tasks in the bill should be the tasks in the estimate. This makes the feedback from a task estimate relatively immediate, whereas one may not be able to tell how the lump sum estimate is doing until the last bill comes in. Task estimates are also quite flexible when detours or contingencies arise -- a few more depositions here, another motion there and the old estimate fits the new situation. (It is not quite that simple, because tasks are interrelated, but other estimation techniques are far less flexible.)
Estimation Method 2: Estimating By Staff and Time
LACKING THE data to assign estimates to each component task of a legal matter or, perhaps, wishing to create a quicker, simpler estimate, some lawyers rely on a variation of Parkinson's Law to create crude estimates. Parkinson's Law states that work expands to fill the time available. Without inquiring into what tasks will be performed, what the strategy or plan will be or what each step will cost, one can estimate cost by assuming that each timekeeper assigned to the staff will bill however many hours he or she will be assigned to the matter each month, for the duration of the matter. This method is primitive, but a lawyer familiar with a court's calendar or the deadline for a transaction, can create a rough estimate in minutes with little analysis of the underlying matter.
For example, a firm might expect to use one attorney half-time for discovery, then the same attorney full-time and another half-time the month or two before and including trial. If their average hourly rate is $130 per hour, the estimate might be something like $50,000 to $60,000 through trial.
The problem is that this estimate takes into account nothing about the merits of the matter, provides no plan for how the firm will handle the matter, and frustrates intelligent management. Indeed, this type of estimate encourages make-work projects and delays, because each delay causes the estimate to increase proportionally, even though it would seem logical that there would be no more work necessary to prepare the same case for trial in eight months or 18 months. Yet somehow the case expands to fill that extra time, which is the message of Parkinson's Law.
Because it depends so heavily on knowing only four variables -- number of staff, hourly rates, percentage commitment and months to completion -- this estimation method demonstrates the significance of controlling staffing and moving matters along, not just discounting hourly rates, to keep fees down. Unfortunately, the staff/time estimate does little to facilitate integrated management for cost-effectiveness. With monthly breakdowns, the client can tell if the matter is getting off budget, but this may simply be due to the vicissitudes of litigation. Whether the estimate will hold depends primarily on the prognostication abilities of the estimating attorney and on external forces, like congested dockets.
This method relies on the tendencies of hourly billers to find something to do, but does not force counsel to think the matter through and develop a cost-effective strategy. The method does encourage counsel to be cost-conscious, yet the incentive is not to terminate the matter early or staff leanly. Dragging the matter out or convincing the client to add staff automatically makes more work, even if no plan exists into which that work will be integrated. This is a recipe for unfocused representation.
Patience Is Important
Lawyers should not plan to jump into estimating all at once, overnight. Adequate time must be allowed to prepare and test the system. Moreover, the firm must be patient and expect that the first few iterations may be disappointing. All too often a few partners longing for the good old days will pounce on early kinks as an excuse to dump the estimation system before it has had a chance to evolve. Working with a few understanding clients may minimize the cost of these mistakes. Internally, the firm should not jettison an estimation system just because it is not perfect: None is perfect, but even the crudest system will be better than ad hoc estimates conjured from thin air. Pining for the good old days is also futile: The pool of naive clients content to believe that legal services are sacred is dwindling rapidly.
Copyright © 1998 John W. Toothman
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