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Eight Steps to Follow When
Estimating Legal Fees

by John W. Toothman

10(11) Accounting for Law Firms (Leader Publ. Nov.1997)

    THERE ARE several methods for estimating legal fees, which any firm can implement. To estimate well, a firm needs to invest time in preparation to develop the data and an estimating system, then test the system before betting the firm on it.

Step 1: Gather Basic Data

Obtain and analyze historical data from similar matters. The type of data to collect varies with the type of matter. The following data is important or, at least, helpful for litigation:

    -- Fees and expenses (actual and as marked down or written off);

    -- Results (including amounts paid or collected, not just awarded);

    -- Attorneys assigned;

    -- Jurisdiction and judge;

    -- The nature of the matter, broken down into categories that recur for the firm, the highlights and the basic procedural history of the matter (e.g., five depositions, unsuccessful motion for summary judgment, 12 months from filing to trial, settled one week prior to trial date, etc.);

    -- Any other material aspects (e.g., whether there were multiple plaintiffs or defendants, counterclaims, jury or bench trial, removal from state to federal court, use and value of alternative dispute resolution techniques and so on);

    -- Cost per task, if available or able to be reconstructed;

    -- Any other factors the attorneys considered material to the outcome (e.g., early, focused discovery found details to support a summary judgment motion that provided additional settlement leverage); and

    -- An analysis of how the matter might have been handled more cost-effectively (i.e., a post-mortem).

Even if this data is not available for closed matters, firms (and clients) can begin to build a database from this point forward in existing matters.

Fee data can be analyzed by traditional statistical methods. These are commonly available on any spreadsheet computer program.

Obtain data on what other firms charge for similar matters. These external benchmarks, like fees charged in comparable matters in which the fees were published, may be hard to come by, but are extremely valuable. This data helps to keep the budgeting process from becoming inbred or out of touch with the law firm's competitive environment.

    -- External sources for litigation fee data might include cases in which fees were sought through fee-shifting and litigated disputes between clients and their lawyers over fees.

    -- Certain fields more routinely produce published fees because of fee-shifting statutes or rules, e.g., bankruptcy, civil rights and antitrust.

    -- There may also be press reports of fees charged in cases, including polls or surveys of fees. These have to be taken with a grain of salt since the responses may simply be a "guesstimate" of fees charged, not based on actual data.

    -- External bench marking is one of the estimating methods discussed below. As the sole method for estimating, it has serious drawbacks, but it can provide independent verification for estimates developed more systematically.

    -- Law firms and clients may each consider conducting their own surveys among other clients or firms.

    -- The more comparable the bench-marking data is to the type of matter and plan to be estimated, the more reliable that data should be.

Step 2: Test the Estimating System

Test the estimating system by creating internal estimates for actual matters, even if the estimates are not disclosed to the client.

Study the performance of the system and refine it based on experience.

The system must be updated for inflation, new types of matters, changes in law and procedure.

The system should be sensitive enough to provide estimates tailored to the style of each lawyer or team.

Estimating systems are described below.

Step 3: Evaluate New Matters Thoroughly

Evaluate each new matter carefully -- due diligence is crucial.

With open-ended hourly billing, the primary concern of counsel is signing up the client (after making sure the client can afford plenty of fees), but, for an estimate, the lawyer must know much more about what he or she is getting into.

Due diligence also requires the lawyer to better understand client expectations and goals.

Obtain information about opponents; the judge (or venue); significant substantive, procedural and factual issues; and comparable matters handled outside the firm as well as inside.

Step 4: Develop a Plan for the Matter

Create plans for the matter, including not only the most likely strategy and tactics, but likely contingencies and options as well.

The plan is the skeleton onto which the estimate is attached.

Experienced counsel should be familiar not only with how the matter should proceed "by the book," but with common detours.

Hourly attorneys too often let the matter meander toward completion -- plans establish not only the path, but the goal. This should clarify the lawyer's marching orders.

Step 5: Build the Estimate From the Plan

Attach an estimated cost to each step in the plan, with estimates or ranges for the contingencies as well.

Include as well internal conference time (if billed), time for communicating with the client and other billable aspects of the matter.

    -- Non-billable time should not be included in the estimate given to the client, but the firm should consider this internally, including administrative time.

    -- Some matters are bound to consume more firm resources, whether it's clerical time, library materials or extra office space for a "war room."

In addition to attorneys, fees for other approved staff members, such as paralegals, should be included.

The ABA/ACCA Uniform Task-Based Management System: Litigation Code Set has a primitive budget format designed by law firms. The code numbers for task estimates are taken from the ABA/ACCA uniform task-based billing system.

Include in the estimate the likely out-of-pocket and other expenses the client may incur, including copying, experts, local counsel, transcripts, litigation support, communication and so on.

    -- These costs typically account for less than 10 percent of the bill, but they provide insight into the thoroughness and reasonableness of the plan.

To estimate the full cost of a matter, clients must add to the estimate for outside fees and expenses their own additional costs, such as their internal time and expenses for assisting outside counsel with discovery and so on.

For purposes of evaluating risk, and thus cost-effectiveness and settlement potential, estimate also the probability of each possible outcome or contingency.

Acquire data from similar matters within the firm and from outside sources to determine a range of likely outcomes.

Use the lawyer's experience and judgment to analyze the risks and benefits.

Consider using case evaluation software, which uses various decision-making models to make logical analyses of options.

This analysis is inherently subjective and indeterminate, but, coupled with the legal expense estimate, provides the client with a rational mean for assessing the cost-effectiveness of each option.

Keeping in mind the estimated cost, likelihood of success and expected result should reduce the risk of disproportionately expensive fees.

Step 6: Convey the Estimate to the Client

Unless the estimate has been prepared as a confidential test, discuss the plan and estimate with the client together with the likely contingencies.

This is best done at the threshold as part of the selection process, but counsel may be reluctant or unable to perform full evaluations and expend the time to prepare a detailed estimate for a matter they may never handle.

Through their retention agreements, many clients give a deadline of 60 days for creating the estimate. This seems too long if the attorney is going to give prompt attention to the matter -- 60 days sets an awfully slow pace. Thirty days should normally be sufficient, to coincide with issuance of the first bill.

Step 7: Reconcile Estimates With Bills

Reconcile estimate items with corresponding items in the bills as each bill is issued.

Too often, the initial estimate is treated by lawyers and clients as the end of the process, when it should really be the beginning.

Each bill should include a table or spreadsheet that compares the estimated amount for each stage or task against the amount billed.

This provides a red flag for both lawyer and client whenever the lawyer is over budget, focusing management attention.

    -- Being under budget, e.g., by procrastinating or cutting corners, may also be a bad sign.

    -- Material discrepancies, e.g., over a certain dollar threshold (say $1,000) or over a certain percentage of the task estimate (say 5 percent or 10 percent) should invite an explanation by the lawyer, revision of the estimate and other remedial steps (such as discounting of the fee or even replacement of counsel).

The estimate (coupled with appropriate language in the retention agreement) shifts the risk of estimate overruns from client to lawyer.

    -- Some clients automatically refuse to pay any amounts over budget, which they detect through reconciliation, "exception" or "variance" reports.

    -- Amounts over budget may be held in suspense until the client decides whether to pay (perhaps in light of the ultimate result).

    -- In addition to reconciling the current month's bill with the appropriate portion of the estimate, year-to-date or matter-to-date totals should be presented for both actual fees billed and estimated.

Step 8: Update Estimates

Update the estimate regularly. Regular reconciliation with bills should warn when the estimate is becoming obsolete for task budgets.

Updates should be due at regular intervals and whenever a material event occurs, e.g., one that will change the estimate by 5 percent, 10 percent or more.

Typical intervals are quarterly, though reconciliation of the estimate with bills invites monthly scrutiny.

At the end of each matter, fold the lessons learned from that matter into the historical data used in future estimating processes.

The ability of firms to meet estimates should be considered in making future selections of outside counsel.

Copyright 1998 John W. Toothman




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