Running a law firm, your billing model determines how you connect with clients. Traditional law firm billing is calculated in billable hours. However, fixed-fee services have been a practical part of the industry for decades. As we experience a rising demand for both transparency and predictability in legal fees, many law firms are debating which billing model to use.
On one hand, billable hours allow each case to be billed by its time and complexity. Clients with small cases pay less, while larger cases can be handled with the necessary hours and scope. On the other hand, clients trust fixed-fee billing and appreciate knowing their legal costs ahead of time.
Our goal is to help your law firm determine which billing model aligns best with your services, the needs of your clients, and your firm’s growth goals. Let’s take a closer look at the merits and challenges of each model.
Understanding the Two Models
Billable hours vs fixed-fee billing models represent two different ways of approaching legal services. A clear definition of how each billing model works will give us a foundation to clearly compare the two.
What Are Billable Hours?
Billable hours are the most traditional way to calculate legal fees. This billing type is calculated based on the time spent on a case. Each legal professional and team dedicated to case work will record the hours necessary to complete the case. The client is then billed based on that time spent.
The billable hours model is commonly used in litigation and complex legal matters where it is unclear how much work will be necessary to achieve the client’s goals at the beginning of the case.
Pros
- Each case receives the focus and work level it deserves.
- Firms are compensated for extended and work-intensive cases.
- Works well for litigation, difficult cases, and retainer services.
Cons
- Clients cannot easily predict the cost of their legal fees.
- A difficult case can expand beyond the client’s budget.
- Transparency can be an issue.
What Is a Fixed-Fee Model?
The fixed-fee model allows the client to pay a flat-fee price for specific legal services. This method is most often used for finite services like drafting contracts and wills, legal review of business documents, and routine filings of legal documents. It is a practical way to offer small-scale legal services that often take a predictable and limited amount of time and work from legal professionals.
Fixed-fee billing is increasingly popular with tech-savvy clients and clients who value predictable costs. It is also becoming more common with cases that were once charged by billable hours, such as small divorces and finite business services.
Pros
- Client confidence in predictable costs.
- Predictable revenue per client.
- Works well for contracts, reviews, filings, and other routine legal work.
- Encourages efficient legal work.
Cons
- Limited scope flexibility for unique or difficult cases.
- Financial risk if a case takes longer than predicted.
- Only works for some service types.
Pros and Cons: A Side-by-Side Comparison
Consider the value of billable hours vs. fixed-fee billing by comparing them side-by-side. This chart demonstrates the comparative advantages of billable hours for flexible and potentially large-scope cases versus the advantages of predictability and efficiency when using fixed-fee billing for limited, routine, and small-scope cases.
- Revenue Predictability
- Billable Hours: Varies
- Fixed-Fee: High
- Client Trust and Satisfaction
- Billable Hours: Potential Issues
- Fixed-Fee: Often Improved
- Scope Flexibility
- Billable Hours: High
- Fixed-Fee: Limited
- Risk to the Firm
- Billable Hours: Lower
- Fixed-Fee: Higher – If Scope Expands
- Efficiency Incentives
- Billable Hours: Fewer
- Fixed-Fee: Stronger
Factors to Consider When Choosing Billable Hours or Fixed-Fee Billing
What should you consider when choosing between billable hours or fixed-fee billing for your law firm? Each billing method is ideal for different types of cases and may be preferred by different types of clients. These factors will help you evaluate when to use billable hours and when to prepare fixed-fee legal services.
Practice Area
Your practice area is often the most important factor in choosing a billing model. Consider the volume and complexity of your cases.
Litigation is best suited for billable hours, as each case will have a unique scope and complexity. However, if you practice transactional law in which many of your legal services are fast or finite, fixed-fee billing provides advantages in terms of efficiency, client trust, and revenue predictability.
Client Base
Your clients will likely also have a preference. This relates to both their budget concerns and whether they expect premium service.
If your firm serves corporate clients, they are often more adaptive to billing hours because they will typically keep a legal team on-call for business legal needs. They expect premium service and typically have a larger budget margin.
Individual clients are usually dealing with a smaller and more limited budget but are also more likely to need a few small-scope services like contract review and document filing.
Firm Size and Resources
The size and scope of your firm may also define which billing model works best. Larger firms may offer both fixed-fee services and handle larger cases with billable hours, while a small firm may benefit from specializing in one model or the other.
Consider your administrative overhead and tracking capacity, as well. Fixed-fee services are easier to handle with typical billing methods, while billable hours require more robust time tracking, transparent billing practices, and revenue flexibility.
Technology and Tools
The right software can make a big difference. Legal time and billing software can help you track time for billable hours and block time for a predictable capacity of fixed-fee projects. Tools like LawBillity can combine both time tracking and schedule to help you manage one or both models effectively and translate your work into transparent invoices for clients.
Hybrid Approaches: The Best of Both Worlds
There are many examples of law firms offering both fixed-fee services and taking cases billed by the hour. For example, fixed-fee legal services often take less time and can be handled in between billable hours for larger cases, by legal aid teams, or by junior attorneys in your firm. These services, such as drafting and reviewing contracts, recording wills, and filing official documents, can be handled in between or alongside larger cases that require billable hours for flexible scope by case.
Consider value-based pricing when deciding which services to offer as fixed-fee and which to assign hourly billing. You might also bundle fixed-fee services with a billable-hours case or offer unbundled fixed-fee services a la carte.
Most importantly, you will want to set a clear scope for which type of work is handled as fixed-fee or billable hours and walk clients through change orders if their needs change.
Making the Transition
Are you switching from billable hours to fixed fee (or vice versa?) If so, making the transition can be challenging but ultimately rewarding in terms of revenue and client trust. Be prepared to change your staff and help your current clients to adapt their expectations.
Use data to set competitive and profitable fixed-fee rates by evaluating how long each type of case typically takes to ensure efficiency and reliable revenue.
Building Your Law Firm’s Billing Model
When it comes to fixed-fee vs billable hours for a law firm, there is no one-size-fits-all solution. Instead, you will need to evaluate your clients, firm, and each service your team offers to determine whether fixed-fee or hourly billing is the right way. Consider the advantages of transparency and cost/revenue predictability for fixed-fee services vs the flexible scope of billable hours.
Re-evaluate your billing models regularly based on client feedback, marketing trends, and internal time use efficiency. Most importantly stay flexible and use the right tools to support your chosen model or hybrid solution. Explore new billing and time tracking tools such as LawBillity to see how efficient time tracking, scheduling, and automated billing features enhance your firm’s billing performance.
Try LawBillity for yourself with our 14-day free trial.
