Hourly billing is the most common fee arrangement you will encounter when working with law firms. The concept of a “billable hour” can seem a bit strange at first, especially for clients more accustomed to dealing with other professions.
This guide will help you understand how billable hours came to be a standard practice, how they work, the main advantages and disadvantages of hourly billing, and some alternative fee arrangements to consider.
A Quick History of Legal Billing
The ways attorneys have billed for their services have changed quite a bit over the years. However, the development of the billable hour as a standard practice in the legal profession makes a bit more sense when put in the context of earlier billing practices. The following historical timeline provides an overview of the evolution of legal billing practices in the United States:
- The 1800s – Legal fees were billed using a “per service” maximum dictated by state law and legal costs were paid for by the losing party. By the end of the century, the “per service” pricing caps were phased out, and attorneys began to experiment with other approaches to billing.
- 1908 – The American Bar Association deems retainers and contingency fees to be ethical.
- 1930s and 1940s – State bar associations set new guidelines defining minimum fees and lawyers who charged less were disciplined. One of the driving forces behind this change was the 1938 Federal Rules of Civil Procedure, which complicated the litigation process and made flat fees impractical.
- 1958 – The American Bar Association published a pamphlet called The 1958 Lawyer and His 1938 Dollarwhich claimed lawyers were not good businessmen and should begin to track time and keep more detailed records of their activities. This publication made the process of timekeeping more widespread in the legal profession, but still hourly billing was somewhat of a rarity.
- 1969 – The ABA replaces their Model Code, which had previously listed undervaluing services to be unethical. Until this point, price competition among attorneys had been highly discouraged.
- 1975 – The Supreme Court case Goldfarb v. Virginia State Bar determined that standardized minimum and maximum fee systems were a violation of antitrust laws. After this ruling, billing based on the amount of time spent working on a matter became the standard approach for the legal profession.
- 1990s and 2000s – By this time, attorneys had learned to bill their time more aggressively, and corporate clients had begun requesting alternative fee arrangements from time to time. Even with these alternative fee arrangement options, the billable hour still remains the primary billing method used by law firms.
How Billable Hours Work
The term billable hours refers to time spent by an attorney, paralegal, or other law firm employee on work for a client which is chargeable to that client.
Not all work done within a law firm should be billable. Things such as administrative work, internal meetings, continuing education, and other non-client matters can be deemed not billable.
Travel time is often billable, but in many cases the fee agreement stipulates that travel time will be paid at one half the normal billing rate. If the attorney is travelling by plane or train and actively working on client matters, they can typically bill that time at their normal rate. Double billing, or the practice of charging Client A for travel time on their behalf while simultaneously charging Client B for work conducted during that travel, is considered to be unethical by the American Bar Association.
As we discussed in our article on billing increments, time is usually billed in increments of 0.1 hours (or six minutes) each.
In most cases, the time gets rounded up instead of down, so the time billed for a task is generally slightly more than the time actually spent working on it. Even with completely accurate timekeeping, rounding all the values up means that across a large number of tasks each one will be overbilled by an average of 2.5 minutes.
This may not seem like much, but it can add up to serious money when spread across the thousands of individual line items which make up a large case. Implementing a legal spend management program and establishing legal billing guidelines for outside counsel are two of the best ways to help keep these costs under control.
Why Billable Hours Matter to Law Firms and the Impact on Clients
Billable hours are the principal internal metric law firms use to measure employee productivity. Law firms typically require their attorneys to bill a minimum of 1,500 hours per year on the low end to around 2,200 hours per year on the upper end. Billability on hourly fee agreements is important to the law firms because it covers salaries, overhead, and profit, so there is a lot of pressure on the associates to hit their billing targets.
It’s so important to the bottom line in fact, that there is a thriving industry of lawyer success coaches who advise law firms and attorneys on improving productivity metrics such as their “capture ratio”, or how much time they need to spend in the office to achieve a certain number of billable hours.
The best counter-measure a company or corporation can take is through the implementation of a continuous legal bill review program administered by experts who evaluate on a regular basis whether the time you are being billed for a particular task is fair or reasonable. These experts understand the advantages and disadvantages of hourly billing, discussed below, and can use this understanding to the client’s benefit.
Advantages of Hourly Billing
Hourly billing offers the following advantages to clients:
- It provides increased transparency into the individual tasks completed by the law firm
- It gives insight into who in the firm is actually doing the work on the client’s behalf
- It offers the ability to dispute or contest individual line items
- It gives the ability to match tasks against different stages of the case or matter being handled
- It facilitates changes to the scope of work being handled, often without the need for a new contract or agreement
Disadvantages of Hourly Billing
Despite the aforementioned advantages of hourly billing, it also has the following disadvantages which can often outweigh the benefits, depending on a client’s specific needs:
- The law firm is paid based on the time they spend completing the work rather than on the actual value of the work they deliver
- The exact same work (same quality and same end product) is billed at a different rate depending on the seniority of the person who completes it
- Hidden costs can add up quickly due to how billing increments work and the pressure that attorneys and paralegals feel to hit their billable hours quotas
- There is no cap on the fees which may be charged for a particular case or matter
- A cost-conscious client may be hesitant to ask their law firm for work that they truly need and would be in their best interest out of concerns for the fees which will be incurred
Alternatives to Hourly Billing
The concept of alternative fee arrangements is a relatively new idea to emerge in the legal industry over the past few decades, especially in the field of corporate law. The primary driver behind this has been the need of corporate legal, risk, and claims departments to have more predictability over their legal costs.
Alternative fee arrangements can get quite complex, but some of the more basic options which may be considered to help clients move beyond standard billable hour arrangements include:
- Fixed Fees: The law firm agrees to do all the work related to a particular case or matter for a fixed price. Sometimes, the fixed fees apply to particular subsets of the bigger engagement (for example, individual tasks or services).
- Capped Fees: This is a normal hourly billing arrangement, but the law firm agrees to a predetermined maximum fee that will not be exceeded. Sometimes the client and the law firm will agree to a flexible “soft cap” for more complex matters.
- Blended Rates: This is also similar to a normal hourly billing arrangement, but the main difference is that the client agrees to pay a single hourly rate regardless of who in the law firm completes the task. This avoids the issue with a senior person billing for work that could have been just as easily completed by a more junior person.
- Contingency Fees: Under this scenario, the client will only pay if a desired outcome is achieved. This is more often used in the case of a plaintiff where the fee can be set as a percentage of damages awarded in the case, and are a bit less common for corporate clients on the receiving end of a lawsuit.
The Bottom Line on Billable Hours
Despite some of the drawbacks and the plethora of alternative fee options out there, hourly billing is not always the terrible deal that some make it out to be.
If you’re working with a law firm with whom you have a trusting relationship, and combine that with an experienced legal management partner to provide a continuous review of invoices to make sure nothing slips through the cracks, hourly billing can often be an effective and efficient way to get things done. It provides a level of transparency which isn’t always present in other fee arrangements, and because it’s something familiar there are rarely any surprises.
Even with all the other fee options growing in popularity, it’s unlikely that hourly billing in the legal profession is going away. Whether you love them or hate them, billable hours are here to stay for the foreseeable future.