Alternative Fee Arrangements: Types & Examples
If you’re working at a law firm, there’s no doubt that you’ve had clients who are upset by your hourly rates. Not all clients will be able to pay for legal services billed at an hourly rate. Fortunately for them, and for you, alternative fee arrangements are becoming more popular. If you’re looking to change the way that you bill, keep reading to learn more about alternative fee arrangements!
Here’s What We’ll Cover:
What Are Alternative Fee Arrangements?
An alternative fee arrangement, or AFA, is any type of legal fee arrangement that is not paid for based on an hourly rate. They are also called value-based billing. Rather than paying for the period of time that the attorney works, they’re paid for the type of the work that’s done. Hourly billing can be prohibitive or intimidating for some clients. AFAs are a way to avoid those two things.
Different Types of Alternative Fee Arrangements
Read through the following different types of fee structures that are common AFAs.
Portfolios are large lump sum payments made for legal services that cover a large body of work. They can be paid in a single installment, or incrementally throughout the duration of the work. While that likens them to hourly billing, the difference is that the payment is made for the work done, not the time it took to complete. This billing arrangement is best used for long-term needs of larger clients. These can be corporate clients, or a single client with large volumes of legal needs.
Hard caps are arrangements with clients that result in a negotiated hourly rate. This rate has an overall “cap” that the client will not exceed in terms of payment. Should the amount of work be exceeded, the law firm ends up absorbing the cost. For an average client who cannot pay for an unlimited number of hours billed, this AFA provides a defined cost.
Success or Contingency Fees
This type of AFA is very common. It provides certainty to clients that they will not have to pay any legal fees unless their case is won. You’ll often see these advertised by injury lawyers. Many lawyers will not take these cases unless they are going to win. Then, once the client has received payment for their injuries or damages, the law firm will take a percentage of the recovery.
When client communication and client matters need to be split between different partners, a blended rate is made. Blended rates take the hourly rates of senior partners and junior partners and blend them. This is the best way for clients to receive services from experienced partners and newer partners. This gives them oversight from more than just one lawyer on their case.
Budget-based billing is often broken up into phases. Each phase of the larger legal transaction is then given a budget. This allows clients to pay in separate phases of their larger legal project. This allows for more accurate billing to be done in terms of the AFA. This AFA is best used when the overall outcome of the client’s case is uncertain. It prevents them from paying any unnecessary fees. For example, should a case be settled before it goes to trial, the client then isn’t paying for any associated trial fees. With other AFAs, they may have paid for everything upfront and overpaid.
Flat fees are an AFA used for predetermining the cost of a legal process and standardizing it. They’re normally applied to repetitive processes that have all the same steps. They’re predictable for both the client and the law firm. If any legal process that a client needs to have done is repetitive or takes the same amount of work no matter what, a flat fee is the appropriate AFA.
Overall, alternative fee arrangements are advantageous for both law firms and clients. They allow clients to accurately predict the overall costs of their legal needs. When using methods like the flat fee or the budget-based billing, AFAs also give law firms an idea of how much work will need to be done. Alternative fee arrangements are good for everyone!
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