How Legal Fees Work

How Legal Fees Work

Small business owners like to be in control of their expenses. So it can be unsettling to hire a lawyer at an hourly rate for an unknown number of hours.

The good news for business owners is that law firms are increasingly offering alternatives to traditional hourly fees, including flat fees, “unbundled” legal services and blended fee arrangements. And even with an hourly fee, there are ways to manage your legal costs.

Common Types of Legal Fees

  • Hourly fees. Hourly fees are just what they sound like: your lawyer bills you at an hourly rate for the time spent on your case. Some lawyers bill by the quarter hour and some bill by the tenth of an hour. Senior partners bill their time at a higher hourly rate than junior lawyers or paralegals.
  • Flat or fixed fees. In this fee arrangement, your lawyer charges a flat fee for handling a particular matter for you. For example, your lawyer might have a standard fee for setting up a corporation or drafting a nondisclosure agreement. Flat fees are more common in routine transactional matters than they are in litigation, where it’s hard to predict how long the case will last or how complicated it will become.
  • Contingency fees. In a contingency fee arrangement, you don’t pay any legal fees up front, but the lawyer receives a percentage of any money he or she is able to recover for you in a lawsuit. Contingency fees are standard in personal injury cases and are less common in business litigation.
  • Blended fees. Increasingly, business clients are demanding alternatives to traditional hourly fees, and some law firms now offer more creative fee arrangements that may combine the features of hourly, contingent and fixed fee plans.

Billing and Payment

Lawyers who charge an hourly rate typically ask you to pay a retainer up-front. This is an advance against your future legal fees, and the amount will vary depending on the lawyer’s billing rate and the amount of work he or she expects your matter to require. Lawyers must keep retainers in a special trust account until they have actually earned the legal fees.

Each month, your lawyer will send you a statement that itemizes the work the law firm did on your matter, the amount of time spent on each task, and the total legal fees. This total will be deducted from your retainer. If the retainer gets low, your lawyer will ask you to replenish it. If the matter is completed and there are retainer funds left over, they will be refunded to you.
In addition to legal fees, lawyers in all types of matters will charge for “costs,” including such things as court filing fees, process server charges, messenger fees, postage and photocopying.

Ways to Save

There’s no question that lawyers can be expensive, especially if you find yourself in the midst of a lawsuit or a complex transaction. There are some ways to minimize your costs, however.

  • If you are being billed at an hourly rate, understand who will be doing the work and what you will be charged for. Different law firm personnel are billed at different rates, and it will cost far less for a paralegal to prepare your routine business filing than to have it handled by a senior partner.
  • Hourly rates may apply to phone calls, emails and other routine correspondence with your lawyer. To minimize your fees, keep these communications short and to the point. If your lawyer starts to stray into general chitchat, steer him or her back to the topic at hand.
  • Litigation can be costly, and it’s usually billed at an hourly rate. When discussing strategy with your lawyer, ask about the benefits as well as the potential legal fees associated with each possible course of action.
  • Hire a law firm that’s big enough to meet your needs, but not too big. As a general rule, a big firm with fancy downtown offices is going to be more expensive than a smaller firm with more modest accommodations. The big firm may have more lawyers with specialized expertise and it may be better equipped to handle larger and more complex matters. But if you don’t need those features, you will probably save money by hiring a lawyer at a smaller firm.
  • Ask about “unbundled” legal services. Traditionally, law firms offer full service representation. For example, they’ll negotiate a contract for you, draft or review the agreement, negotiate changes and present the completed document to you to sign. But at some law firms, you can save money by hiring your lawyer to perform just some of those services. For example, your lawyer might advise you on a negotiating strategy and review a contract, but leave you to do the negotiation yourself.
  • Don’t be afraid to challenge fees or costs that seem excessive. It can take a long time to research and draft a letter, motion or complex contract, but if the time spent on a task seems excessive to you, don’t be afraid to ask why it took so long. You can also question costs for such things as sending documents overnight or by messenger when ordinary mail or email would have worked just as well. You may get a fee reduction. If not, you’ll likely feel better about the charges if you understand the reason behind them.