Alternative fee agreements (AFAs), which include all fee agreements that are not based purely on hourly rates, are being used more frequently by companies as an effective tool to manage their legal spend. When law firms bill on an hourly basis, costs can often get out of control and AFAs help keep legal bills more predictable and offer the clients additional benefits.
These benefits are evident in the most common types of AFAs:
1. Fixed or Flat Fee
Under a flat fee agreement, the law firm and client agree on a specific service for a set price – regardless of the amount of time it takes to complete the negotiated work. Sometimes, the set price is for the entire casework; other times the price is set on a stage-by-stage basis or specific tasks within the entire life of a case. By setting the price in advance, the client can predict the total spend for the course of that case and can better allocate the company’s legal budget.
2. Contingency Fees
Under a contingency arrangement, the client only pays the law firm if a desired result is achieved. The various benchmarks are up to the parties to decide. Contingency agreements are most common for plaintiffs, where the firm is only paid if the plaintiff wins the suit, however, a defendant party might agree with the firm that the firm only gets paid if damages are less than a certain amount. A contingency agreement places more of the risk on the law firm to obtain the desired results but also protects the client from paying for work for which the client does not receive equivalent value.
3. Capped Fees
Under a capped fee agreement, the law firm and client establish a maximum threshold for the total cost of the matter. The law firm will then bill the client on an hourly basis for the duration of the matter but will not charge more than the capped amount. The company and firm can also agree on a “soft cap” agreement for more unpredictable matters, which provides some flexibility on the final cap amount should the necessary legal services greatly exceed the work that was initially anticipated.
4. Holdback Fees
Under a holdback agreement, the company and firm agree upon an amount to be paid up front – either on an hourly basis or a fixed fee arrangement – but a portion of that amount is withheld until certain benchmarks are met. The law firm and client decide upon these benchmarks, and a certain amount of the withheld money will be paid to the firm (if the firm meets the benchmark) or to the client (if the firm falls short of the benchmark). The parties must decide on the terms that measure whether the law firm has provided successful representation. This agreement bases the total cost on the value of legal services received by the client. It also establishes a range for the final cost of the matter, which offers more certainty for the client.
5. Blended Hourly Rates
Under a blended fee arrangement, the client pays a general hourly rate for any attorney billing time regardless of that attorney’s usual hourly rate. For example, the company agrees to pay the firm $300 per hour for all work performed by any attorney regardless of the attorney’s position. This agreement can benefit both the law firm and client because it gives companies a better price but also incentivizes the firm to delegate appropriate casework.
A basic understanding of the above types of AFAs available allows companies to maximize the benefits of AFAs and enables them to choose when to use AFAs confidently.