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Guide to

Costs, billing & profitability


Practice support

Table of Contents

Queensland Law Society

Presidents Introduction1

Costs, client care & communication2

Time Recording10

Costing time17

Estimating time19

Costs, culture & ethics22

Creative fees & billing options 25

Costs & Profitability28

Cashflow and Working Capital32

10

Summary36

Appendix 1

Ethics and Creativity in Billing Practices: Costs in a disciplinary context:


Charging excessive costs in connection with the practice of law39

Appendix 2

Costs management checklist46

Appendix 3

Further Reading47

Costs, billing & profitability a best practice guide page II

Forward
This guide was produced by the Legal and Policy department at QLS to assist legal practitioners
in relation to the client care and practice management aspects of costs and billing. It is
intended to give general guidance only it is not intended to be comprehensive or constitute
legal advice. The Society accepts no responsibility for the accuracy of any of the information or
opinions contained in this guide, or for any loss flowing from its use.
In relation to the costs provisions in the Legal Profession Act 2007 (Qld), please refer to the QLS
Costs Guide available on the QLS website.
Enquiries/comments to:
Giles Watson
QLS Legal Practice Consultant
Tel: 07 3842 5853
g.watson@qls.com.au

Acknowledgements:
Many thanks to the following for their assistance in the production of this guide:
Bob Brittan, Legal Services Commission
Anna Burnett, Blake Dawson
Amanda Donnelly, formerly of
Queensland Law Society
David Edwards, Legal Services Commission
Tim Jones, Vincents Accountants
Scott Mclean, Legal Services Commission
The QLS Litigation & Rules Section
Jonathan Shaw, Blake Dawson
Stafford Shepherd, Queensland Law Society

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Costs, billing & profitability a best practice guide page III

1. Presidents Introduction
This is the most important and most useful document you have read since
your admission and I certainly dont mean that lightly.
Poor costs management is the quickest way for a solicitor to destroy
a client relationship and is one of the most common causes of client
dissatisfaction and complaint to the Legal Services Commission.
Rarely do solicitors deliberately and unethically overcharge but poor
costs management, - it is, more to the point, an understating of our costs
position - inadequate client communication and a generally haphazard office administration
can give that impression to clients or, at the very least, give a client reason to doubt your
integrity, ability and professionalism.
It is fundamentally critical that solicitors aim not just for mere compliance as clients have
higher standards our clients expect that their solicitor will listen to them attentively and
sympathetically and consider the matter with the same seriousness that they do.
It is very strongly recommended that solicitors proactively raise the matter of fees and charges
with prospective clients from the initial contact. It does much to allay concerns and gives
confidence to the client. Tell your client that the first 15 minutes is without charge and take this
valuable opportunity to explain your rate, your billing practice, the terms of your client/cost
agreement and, if you receive the go ahead - and only then - proceed to take instructions.
Confirm your instructions in writing, as your costs agreement may not be sent as quickly as
your first letter. If this is the best advice I can give, then the next best advice is render your bills
regularly and involve small amounts. Why? Firstly, your client will not be stunned by the quantum
of the bill, and secondly, if it is not paid you may need to discuss your clients financial position
and, if necessary, extricate from the instruction if your costs agreement allows you to do so!
If the matter progresses beyond the predicted original outcome, solicitors should again raise
the question of costs and charges and explain, that for reasons already outlined, these will be
higher than originally indicated. Keeping the client informed is a fundamental of best practice.
Most computer systems have reminders when bills reach a certain amount. Use this technology
or have your bookkeeper remind you on a regular basis.
This important and comprehensive guide should be read in conjunction with the Queensland
Law Societys Costs Guide which focuses on compliance with the Legal Profession Act 2007.
A happy client is a client who will come back and a client who will give you referrals and isnt
that alone sufficient reason to have a best practice approach?

Ian Berry
President
March 2009

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Costs, billing & profitability a best practice guide page 1

2. Costs, client care & communication


Costs are the most common cause of complaints or dissatisfaction by the consumers of legal
services. According to the statistics in the Legal Services Commission Annual Report, 2007-8, over
24% of enquiries, and 31% of consumer disputes are primarily concerned with costs issues.
Under the level of formal dissatisfaction (in terms of complaints or enquiries) is a much bigger
layer of informal client dissatisfaction about costs evident in complaints directly to firms, client
satisfaction surveys and general public concern.
There are different causes of dissatisfaction:
Alleged overcharging
Bill significantly exceeds estimate
No estimate given
Poor costs communication / poor costs updating
Unreasonable charging of disbursements
Work, and therefore bill, exceeded scope of retainer
Unethical charges (e.g. charging for entertainment)
Unnecessarily aggressive billing & debt recovery practices
Numerous mixtures of the above
The key underlying causes of such dissatisfaction are unethical behaviour (in the sense of
dishonesty or a lack of integrity in relation to costs), inadequate management systems in relation
to costs, and inadequate solicitor-client communication in relation to costs.
This guide argues the latter two drivers (systems and communications) account for the vast
majority of failings in relation to costs, and further, that most of these failings are avoidable if a
law firm can effectively implement a best practice
approach to costs.
Information about the main causes of costs dissatisfaction across the profession is of only
qualified value to individual practices: the most valuable information is that which is specific
to an individual practice and their clients. Information on clients needs and subsequent level
of satisfaction with how you handle costs can be sought in a number of ways: at opening and
closing interviews, through client satisfaction feedback forms sent out at the end of the matter,
through annual satisfaction surveys, through analysis of internal complaints, or through general
staff feedback. Billing statistics such as speed of payment and the recovery rate (% of billed WIP
that is actually paid) are also a good indication of the strength of a practices costs and billing
arrangements.
The point to emphasise is that if practices are committed to improving client satisfaction in
relation to costs, and thus reaping the benefits in terms of reputation, referrals, profitability
and working capital management, they must listen to their clients needs and comments, and
change their work practices accordingly.

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Costs, billing & profitability a best practice guide page 2

What clients want


As discussed above, the best information on what clients want will come from your own
practice, but past research indicates that clients focus on a mix of many of the following
elements:

Communication

Contrary to the belief of many lawyers, clients actually welcome it when solicitors
proactively raise the issue of costs. Apart from anything else, it demonstrates that the
solicitor recognises the importance of costs for the client.
Good communication involves listening as much as telling, and as with client service
generally, understanding your clients needs and preferences applies equally to
the pricing of services. Wherever possible, try to discuss their preferences on billing
arrangements and the structuring of fees, so you are then able to come up with an offer
or a solution that is attractive to them.
Communication also includes being upfront and transparent with your clients about
what you will and wont charge for. Clients appreciate it when practices provide some
information on their time recording policies, for example.

Control

Clients dont want to just be aware of costs, they want as much as is possible to be in
control of them. Giving clients control over costs primarily means discussing, or advising of,
the cost implications of different actions before the costs are incurred. Examples where a
lack of client control could lead to disappointment include:
where a law practice does (and charges for) some basic work that could have been
done (cheaper) by the client,
undertakes work which is unnecessary,
provides expensive detailed advice documents where cheaper brief updates are all
that is required; or
where work which could have been done by cheaper junior staff is instead done by
more expensive senior staff

Flexibility

Wherever possible, be prepared to offer a number of alternative arrangements in relation


to fees & billing, so that the client is able to identify which best suits them. See chapter 7
on creative fees and billing options.

Extras

Clients hate to see hidden or unexpected extras, overheads or disbursements appearing


on a bill. State clearly at the outset what expenses and disbursements will be included
in the final bill, the likely extent of these, and try to limit these as much as possible. If you
are going to charge the client for travel, photocopying and refreshments, these amounts
should be reasonable and made clear at the outset.

Certainty

One of the main concerns that clients have in working with lawyers is uncertainty over the
cost, so fee arrangements that limit or eliminate this uncertainty are often very popular.
This will usually mean moving away from the traditional hourly fee towards fixed fees or fee
caps.

Transparency

Another major concern of clients is to know exactly what they are getting for their money.
For this reason, it will often help not only to explain in detail the work you will undertake,
but also to offer a full printout of work done and hours spent on the matter by all feeearners involved. Some firms even offer the chance for clients to inspect their time
recording and/or billing systems. For genuine transparency, practices should also ensure
that their narratives or task categorisation provide sufficient information to assess value.

Value

It is rarely a good idea to compete purely on price, it is much better to compete on


value. This can often be done by demonstrating superior expertise/experience/efficiency,
and explaining that although an hourly rate might be higher than a competitors, the
additional experience/expertise/efficiency will lead to either a more desirable, valueadded outcome, alternatively, less time spent on the matter and lower total fees.
Lawyers can also offer added value by offering one or more of the following as part of
their quoted prices:
Complimentary access to online knowledge management resources;
Client extranet
A copy of relevant research or other high-value publication;
Training;
A desk/office for the client with the legal team within the law firms office; and
The secondment of a solicitor to the client for the time of the case.

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Costs, billing & profitability a best practice guide page 3

Risk sharing

Recent years have seen the rapid growth of no-win no-fee offers from legal firms,
primarily in the sphere of claimant personal injury. Many other clients, however, including
commercial clients, would appreciate their legal advisers offering to risk a proportion of
their standard fee/price in the form of a success bonus. Please note s325 of the Legal
Profession Act 2007, re contingency fees.

Efficiency

Where time costs money, clients are especially keen to see practices working efficiently,
and implementing arrangements to ensure that tasks are completed as quickly as possible
and without expensive time wastage.

Regular cost updates

Once fees have been quoted, it is vital to keep the client informed about the progress
of costs against the estimates, and to issue interim bills and interim estimates whenever
possible, including a detailed explanation of the additional costs. It is much better to do
this than to wait until the end of the matter and shock the client with a bill of well more
than the initial estimate.

Volume or loyalty rewards

The past 10 years have seen retailers offering loyalty schemes to frequent shoppers
(clubcards, Flybuys etc) and the same principle can be applied to law firms. Many
firms already offer discounts to key clients or to gain particular instructions. Firms could,
however, be more creative in the way they offer these across the board as a way to
increase long-term client retention.

Gearing & seniority

Clients have traditionally appreciated the experience and reassurance that the
involvement of partners or senior practitioners can bring to a matter. But seniority costs,
and clients will often be reluctant to pay extra (as they see it) for such experience and
reassurance. To avoid dissatisfaction, aim to discuss the likely mix of higher and lower rates
with your clients.

Initial client interview


Client anxiety about costs often starts even before a first interview. One of the major concerns
that clients have when retaining a lawyer is uncertainty over what is free and what they might
be charged for. To facilitate effective communication, it might help to give confirmation that
either
The first interview is free
That the cost of the interview is $x
That the cost of the interview is at a reduced cost of $x per hour; or
That the first y minutes are free, and thereafter they will be charged pro rata at the rate of $z
per hour.
This information should help to reduce some client anxiety in relation to costs. If you are able to
give other information such as usual fee & billing arrangements, standard hourly rates or typical
costs in advance of the meeting, this should also help to facilitate a relaxed interview.
The initial client interview is vital for a number of reasons: getting the relationship off to a good
start, managing expectations, identifying risks, defining the retainer etc.
In terms of costs, the first interview should also, wherever possible, include the following:
An open discussion about the clients expectations in relation to costs
Where possible, a qualified ballpark indication of likely overall costs
An explanation of the issues or variables which could lead to increases in costs
A discussion on the clients preferences in terms of fee structuring, billing and cost updates.
A discussion on the details of the instruction that is detailed enough to give the solicitor
sufficient information to provide a confident estimate of the likely overall cost of the matter.

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Costs, billing & profitability a best practice guide page 4

Many solicitors are cautious about discussing costs. This might be because they:
are embarrassed about the seemingly high level of their fees;
are concerned about the clients reaction; or
because they lack the sufficient skills or knowledge to negotiate confidently re costs.
Research suggests, however, that clients value an open and frank discussion about costs
and are frequently frustrated that they have to raise the issue of costs themselves. An open
discussion about costs in the first interview can go a long way to avoiding costs dissatisfaction
further down the track. Key to this is the management of expectations. If clients understand the
variables that can affect cost, they are less likely to be shocked or dissatisfied when costs rise.
Another key element of managing expectations is ensuring that the initial estimate of the overall
likely cost of the matter is as accurate as it can be. The legal profession does not have a good
reputation on the accuracy of its estimates, and this might reflect a skills gap due to the lack of
training or guidance. Estimating time is discussed further in chapter 6, but the starting point for
accurate estimates is the data-gathering process in an initial interview: how can a fee-earner
expect to produce an accurate estimate of overall cost if they do not fully identify the factors
that can affect cost in an initial interview?

Formal costs disclosure


The subject of formal (written) costs disclosure is inevitably dominated by the cost disclosure
requirements in the LPA 2007. Practitioners should, however, treat these legislative obligations as
a starting point for their formal cost communications, not as the only, or even the most important
considerations.
In addition to meeting regulatory costs requirements, practitioners should be aiming to limit
the possibility of any costs disputes or costs dissatisfaction, and where possible make the firms
service and performance in relation to costs a source of competitive advantage. This can be
achieved by:
Managing the clients costs expectations;
Confirm whether you are providing an estimate or a quote, and what this means;
Ensuring any initial estimate is as accurate as possible;
Discussing and explaining the potential for changes to any initial estimate;
Explaining the value to the client of the services linked to the cost estimates, rather than
focussing purely on the costs themselves;
Acknowledging and addressing any concerns the client might have raised in relation to costs;
Communicating a commitment to manage costs on the clients behalf, keeping them advised
and in control of costs at all times, and
Communicating a willingness to continue discussing costs, and the clients requirements in
relation to costs.
Once the letter is sent, another tactic to limit the risk of costs dissatisfaction is to call the client up
to check:
if they received the letter;
if they have read it;
if they understood it, or if they have any queries; and
if they are happy and satisfied with the stated costs arrangements.
This will help the early identification of any concerns or misunderstandings in relation to costs
and thus provide the chance for any problems to be addressed.

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Costs, billing & profitability a best practice guide page 5

Cost & estimate updates


One of the most common forms of costs dissatisfaction occurs when the client receives a bill
that vastly, and unexpectedly, exceeds either an initial estimate, or the latest estimate received.
Keeping the client informed of any changes to total estimated costs is not only a requirement
under s 315 of the LPA 2007, it is also vital in ensuring both client satisfaction and full, timely
recovery of fees.
Cost and estimate updates, however, do not happen automatically, and rarely seem the
most urgent matter in the fee-earners in-tray. Because of this, practices need to implement
arrangements to ensure that clients are updated as required. Possible arrangements include:
Record cost & estimate update requirements prominently on each file
Train your staff on the importance of updates and create a culture of pro-activity in relation to
cost & estimate updates
Use you diary or reminder system to enter key dates for cost & estimate updates at relevant
stages for each matter.
Train support staff and/or fee-earners to do regular, systematic checks of recorded WIP
against the initial or latest estimate for each file, so you can consider whether an estimate
update is required
Program or design your accounts or time-recording systems to alert you when your recorded
work-in-progress meets 70% of the initial or latest estimate, so you can consider whether a
revised estimate is required
Develop checklists for different matter types that include requirements to compare workin-progress to an initial estimate at appropriate stages of the matter, so you can consider
whether a revised estimate is required
The final costs or estimate update should happen, if required, immediately before a bill is sent.
To ensure that a client never receives a bill that will either shock them or lead to dissatisfaction,
it is good practice to telephone them before the bill is issued, provide the final (provisional) costs
tally, explain any recent or unexpected costs and seek feedback.

Cost updates & value


If you send a cost update, revised estimate or final bill which provides only dollar figures rather
than emphasising the work related to these costs, it is not surprising if the client focuses on the
cost of the work rather than its value. Telling the client what you are doing, and how it benefits
them, not only helps to justify the fees, it also aids client understanding and appreciation, thus
limiting the risk of client dissatisfaction.
The challenge of communicating value can be illustrated by comparing solicitors to builders
and imagining yourself as the client of a builder.
You would like the builder to build an extension to your house, and you see this as a fairly simple
task which should not cost more than $15,000. The builder however quotes $25,000 but doesnt
indicate that the work is any more complicated than you had assumed. You reluctantly accept
the estimate and retain the builder but are disappointed when the builder keeps revising
his estimate and at the end of the job (1 month later) the final bill comes in at $32,500. The
additional cost is justified only by harder than I thought and complications in conversation
and by additional time and materials in the bill.
In the above situation, you are unlikely to be a satisfied client, but this is the situation that many
solicitors clients find themselves in. Compare this to the situation below.

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Costs, billing & profitability a best practice guide page 6

You would like the builder to build an extension to your house, and you see this as a fairly simple
task which should not cost more than $15,000. The builder inspects your property and explains
that, whilst normally this would cost c$15,000, the current drainage arrangements mean that it
would be risky to go ahead without additional work on your guttering, drainage and plumbing.
Although this will increase the cost to $25,000, he explains the risks involved of not doing the
extra work, and you end up being impressed not only by the builders skill in recognising the initial
problem, but in how he has explained the issues to you.
After 5 days, the builder contacts you and says he has some more news. He apologises for
not noticing the issue immediately, but says he has discovered a serious termite problem in
the existing wall, and that this will mean more work and money. He explains the problem in
more detail and increases his estimate to $32,500 making sure you are happy with this before
proceeding with the extra work. His final bill comes in as estimated, and includes a detailed
breakdown of where his time and your money were spent.
The two examples include the same initial estimates and costs, and both include prompt cost
updates. The difference lies in explaining the work, and specifically in explaining the value
attached to the extra work in this case the value of addressing the drainage and termite risks.
Although much legal work is complicated, solicitors are often too quick to assume that the client
would not understand or would not be interested in more details of the work they are doing on
the clients behalf. By working on their communication skills, complicated legal work can be
explained in a way that not only makes sense to clients, but which helps them to recognise the
value of the work, thus limiting the risk of costs dissatisfaction.

Value for money


Value can be defined as
The importance or worth of something for someone.
To speak about the value of legal services to clients, you have to first understand the views of
clients. Clients want to feel that the fee they pay is reasonable for the value they have gained
for your services. Clients will regard your bill as fair and representing good value for money only if
you have provided a service that matches or exceeds - their expectations.
Matching these expectations is difficult for two reasons:
Clients often find it difficult to understand either the complexity of legal work, or the numerous
practice overheads associated with it.
Providing information to explain that the fee charged is not your take home pay will help to
limit sensitivity over costs.
Legal costs are high: the hourly rate for many lawyers will be the same as many private clients
earn in a day.
As the costs are high, expectations will also be high before clients feel they have received
value for money.
Perceptions of value for money are subjective and will vary between clients, but the difficulties
of matching client expectation of value will often lead to a large proportion of clients
perceiving a gap between the cost and the value of legal work.
To ensure your clients consider your service good value for money, you not only have to build
and demonstrate your value by focussing on the areas identified above, you also have to
ensure that this perceived value meets or exceeds the monetary value of your bill.

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Costs, billing & profitability a best practice guide page 7

The issues that most affect perceptions of value for money are as follows:
Managing the matter to your clients satisfaction
Managing financial arrangements and billing
Perceptions of your technical ability
Perceptions of practice efficiency
The commerciality of your advice (if appropriate).
Of these, the first two are the most important, as whilst clients appreciate and value technical
ability, only a minority (sophisticated clients) will be in a position to judge or assess it. Similarly, the
commerciality of your advice will only be relevant for some clients or in some situations.
In most situations, therefore, clients perceptions of value for money will primarily be driven by
how practices manage both the matter and the associated financial arrangements and billing.

Communicating value
To reap the benefits that enhanced client service can bring, practices not only have to invest
in the areas mentioned above, they have to ensure that this value is perceived by clients. This is
not meant to suggest that you need to do a hard-sell and simply tell them how wonderful you
are, but simply that solicitors should attempt to bridge the gap between what you think your
services should be worth, and what the client thinks they are worth.
What you think you
should charge
Perceived
value gap

Service & Communication

Your current fee

What your client considers


to be the value received

As mentioned above, the majority of clients do not understand either the complexities or
economics of legal work, so it is understandably difficult for them to recognise the value in
your service. Solicitors can address this by improving and increasing client communication.
Clients appreciate and value communication from their solicitors, so the act of communication
helps to build value in itself. It also, however, helps to justify your fees by giving the client more
information about your activity and how it benefits them.

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Costs, billing & profitability a best practice guide page 8

Efficiency
As mentioned earlier, any real or imagined inefficiency on the part of the law practice can
destroy value, lead to significant client dissatisfaction, and suspicions of overcharging. Typical
occurrences that lead to inefficiencies and which can then subsequently lead to a cost
increases or the perception of overcharging include:

Poor delegation

Delegated to wrong person


-- too slow / too expensive
-- learning on the job
Poor explanation leading to slow, poor or unfocused work, leading to the risk of extra
time costs

Poor supervision

Leading to mistakes and additional time costs

Poor knowledge
management systems

Additional time costs due to lack of appropriate precedents

IT failures or inefficiencies

Document crashes, difficulties in accessing information leading to additional time costs

Support staff efficiency

Secretarial errors (wipes tape / loses document) leading to additional time costs

Double handling

Transition between fee-earners

Re-inventing the wheel costs.

illness / holiday
Poor file management

Lost files, misfiled documents

Poor risk management


arrangements

Small or large errors that lead to additional time costs

Such inefficiencies raise ethical, client service and profitability issues. The charging of time for
learning on the job, or to correct avoidable errors would probably be considered unethical.
Other inefficiencies might not be considered unethical, but they would effect client satisfaction,
and ultimately
practice profitability.
Whilst some efficiency gains in areas such as IT and knowledge management require significant
financial investment, much inefficiency can be eliminated by simply amending existing
processes and arrangements, and training staff appropriately. Addressing such unnecessary
inefficiencies carries only limited one-off time costs, and can result in significant improvements re
clients perceptions
of value.
For some practices, the reluctance to invest in quick win efficiency gains comes from the belief
that efficiency gains will reduce the number of hours recorded and thus reduce profitability.
This is a limiting short-term approach which can have dramatic negative consequences for any
practice in the long term. Without consistent and regular efficiency gains, practices not only risk
rising client dissatisfaction, they will also cease to be competitive in an increasingly competitive
and informed market.

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Costs, billing & profitability a best practice guide page 9

3. Time Recording
Value and purpose
There are three main reasons why all fee earners should record their time:
Billing
Management & supervision information
Information about the value of work done and WIP.
Time recording forms the basis of management accounting because it forms a record of your
professional work. Your management accounts will be of far less value, if not meaningless,
without accurate time recording. How do you know whether any work has been profitable if
you do not know how much it has cost you to produce it? Some practitioners do not see the
need to record time on matters for which a fixed fee is charged, residential conveyancing for
example, but it is essential to monitor the profitability of work and whether the margins you are
achieving can be improved without detriment to the level of service.
Fee-earners must understand the importance of time recording and be encouraged to record
time fully. They must also recognise the need for accuracy and be discouraged from padding
time. Irrecoverable time should be written off as soon as a bill in respect of the work has been
delivered.
In some firms, standard costing for work of a highly routine nature that is undertaken by junior
fee-earners is used in place of time recording. Such practices should have sophisticated
financial management and a thorough understanding of their cost base. For the majority of
firms and work types, time recording remains the only reliable means of understanding the cost
of producing work.
Traditionally most fee earners have regarded the main, or indeed, only purpose of time
recording as an aid in preparing bills. Many view it both as a complete waste of time (especially
when they charge on a fixed fee basis), and as a demoralising and stressful part of life in a legal
practice.
If fee-earners do not record their time, however, the practice will not be able to accurately
measure the cost of producing work, which makes it almost impossible to measure and manage
profitability.
Increasingly, commercial clients ask for copies of time-recording schedules along with bills, whilst
many firms provide such printouts automatically as a means of being more transparent and to
differentiate themselves from their competitors.
The discipline of recording your time also makes you use it more effectively: It makes you think
about what you are doing.
Firms on full time recording are able to produce a range of management information such as:
Chargeable hours for each fee-earner on a daily, weekly or monthly basis;
Information on average hourly fees by dividing the chargeable hours recorded into that
persons fees;
Non-chargeable hours for each fee earner
An analysis of non-chargeable time
Total value of work done each week or month
Total value of WIP for the practice and for each fee earner, team, department

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Costs, billing & profitability a best practice guide page 10

Time recording & productivity


Productivity can mean different things to a law firm than to many other industries. A classical
definition for productivity might be the amount of output per unit of input, with input
commonly measured in man-hours. For a firm doing low-value commoditised work, and
charging fixed fees, this approach makes sense, with the worker who completes more stages
or matters within the working week being seen as more productive than the colleague who
completes fewer stages/matters.
For practices who charge by the hour, however, man-hours commonly become the measure
of output rather than the measure of input, and individual productivity is measured by the
recorded number of billable hours.
The challenge of increasing chargeable hours can be approached in 2 ways:
Working longer hours, or requiring your staff to work longer hours (e.g. annual billable hour
target increased from 1200 to 1400 hrs)
Recording a higher proportion of your office time as chargeable (e.g. percentage of working/
office time that is billable to increase from 70% to 80%)
In responding to the challenge of increasing productivity, too many practices rely too heavily on
the first approach at the expense of the latter. Through a mixture of training, guidance, analysis,
support and supervision, it is possible to make significant improvements in time recording so that
the quantity of billable time can be increased without either longer working hours or any ethical
compromises.

Queensland Law Society

Policies & guidance

Staff need to understand the what, why, how and when of time recording. Often, hours
get lost not because work isnt being done, but because of uncertainty over how to record
it or whether it should be chargeable. At the same time, clear policies and guidance are
necessary to avoid ethical indiscretions.

Reliable recording &


informative data

Practices need data to help them understand where the time goes. This requires both
consistently good time recording practice, and support from an IT system that genuinely
supports the time recording process, rather than becoming a time burden itself.

Analysis

With good data, practices can successfully analyse where the time goes, and consider
whether work or time recording practices need to be improved. With data on time in office,
chargeable time and non-chargeable time, practices can then start asking questions such as:

Why is time unaccounted for?

Should any non-chargeable time be chargeable (or vice versa)?

Should different non-chargeable activities be discouraged?

Performance
management &
support

Assist staff in improving their time recording through guidance and the discussion of work
priorities. Practices should make time recording a performance management issue in itself,
separate from productivity and quality of work.

Costs, billing & profitability a best practice guide page 11

Policies, training & guidance


Efficient, ethical and accurate time recording is a skill in its own right a skill that has to be
developed and nurtured by guidance and support. The main reason for poor time recording is
uncertainty over how to record time, how much time to record for a given activity, or whether
the time should be chargeable. Practices should aim to remove any uncertainty by developing
clear policies and guidance on key time recording issues.
The first policy that all practices should embrace is as follows:
All fee-earners should accurately and promptly record all of both their chargeable
and their non-chargeable time
This policy is vital to ensure that a practice has all the accurate information it needs to cost
matters, assess profitability and manage performance.
Such a policy is now common practise, but it will often be necessary to deal with individual
objections, particularly from people who charge fixed fees or do not understand why nonchargeable time needs to be recorded. The reasons for time recording therefore need to be
explained to all staff.
The second element of this policy is to ensure that time is recorded accurately: limiting or
eliminating any adjustments either upwards or downwards.
Adjusting time upwards is clearly unethical, and practices should implement a number of
arrangements to limit the risk of padding:
Making padding or unethical time recording a disciplinary offence;
Reducing or eliminating any real or perceived pressure to exaggerate time;
Supporting staff in their efforts to time record efficiently;
Monitoring time recording and questioning any time entries that seem excessive; and
Effective delegation & workload management to limit any temptation to pad timesheets and
enable fee-earners to meet any billable hour targets or expectations.
Whatever questionable benefits padding might have for the individual (in terms of reaching
billable hour targets), time padding rarely benefits the practice in the long run. Increases above
any initial cost estimate are unpopular and are therefore subject to internal discounting, lower
recovery rates, slower payment and lower client retention rates.
Turning this issue on its head, however, practices should also be wary of facilitating a culture
in which fee-earners record time according to how long a task should have taken them
rather than how long it actually took them. It is not uncommon for young fee-earners, perhaps
insecure in their abilities, to compare their speed of completing tasks against the speed of
more experienced colleagues, and consequently edit their recorded time entries downwards.
Similarly, a practice should introduce strict policies on who has the authority to write-off time, by
how much and under what circumstances.
Fee-earners have different levels of skill and experience and this is usually reflected in the hourly
rates they are charged out at. Junior fee-earners should not be expected to complete a task as
quickly as more senior colleagues and should have no cause to record anything other than the
actual amount of time they took to complete any given task.
One way to ensure time is recorded accurately is to require time to be recorded promptly.
Many software solutions allow time to be recorded in real time, thus limiting the temptation for
adjustments, but practices should also aim to supplement this through its own requirements for
prompt completion of time entries.

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As can be seen from the above discussion, time recording policies need to be both ethical
and commercial, addressing both the risk of padding or inflated time sheets, and the risk of
recording inefficiencies or unnecessary adjustments. They also need to be sensitive to client
expectations: some time recording practices might be both ethical and commercial, but would
still lead to client dissatisfaction.
Below is a discussion of some key time recording issues.

Units & rounding

Most practices record time in 6 minute units with the common practice of rounded up to
the nearest unit.
Units of less than 6 minutes are seen as being unmanageable
Units of more than 6 minutes are seen as being unethical
The justification for consistently rounding up is that some time is inevitably lost on activities
that are not, in isolation, recorded as chargeable. The practice of rounding up is seen as a
legitimate way to re-capture some lost time in a swings and roundabouts sense.
The danger of rounding up, however, is that it is open to abuses. It is clearly unethical, for
instance, for a practitioner to record 20 units (2 hrs) for sending out 20 standard letters, a
task that can be completed in 15 mins, or to record 10 units for checking 10 e-mails in 5
minutes.
Practices should regularly review their time recording guidance and policies in respect of
the use of units and the practice of rounding. If a practice finds that it is gaining significantly
more on the swings than it is losing on the roundabouts, arrangements might have to be
revised.

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Research

It is normally seen as legitimate to charge for exceptional research provided that the
research is both necessary and specific to the single client matter at hand, and is clearly
disclosed to the client. Background research or research which is not necessary for any
specific matter should be recorded as non-chargeable.
A grey area in relation to the time recording of research activities occurs where there is
uncertainty whether a practitioner should already be knowledgeable in the areas they
are researching. A junior practitioner should not be expected to have the knowledge or
expertise of a senior practitioner and might therefore legitimately expect to check or clarify
some facts accordingly either through research or discussion with colleagues. As a junior
practitioner will charge less than the senior practitioner, this should not raise any ethical
concerns.
If however a practitioner knowingly accepts instructions which extend beyond a level
of competence expected by the client, either for themselves or for another fee-earner
who ultimately does the work, it is clearly unethical to charge the client for learning on
the job. Practices should review their client engagement and delegation practices, and
systematically review timesheets to ensure that abuses do not occur.

Waiting

It is normally seen as legitimate to record as chargeable time spent waiting for a client, but
not working, provided such waiting is either a result of the clients requests, or is a necessary
consequence of your work for the client. Practices should, however, ensure that the client is
aware that waiting time can be chargeable.
Where waiting time is used productively on other work, time should only be recorded as
chargeable for the work actually done. Under no circumstances should the same time be
recorded twice (for waiting and for other work).
In the modern age of laptops, wireless broadband and mobile phones, the recording
of waiting time as chargeable is becoming increasingly unpopular amongst clients who
expect solicitors to be able to use their waiting time productively. Whatever the regulatory/
ethical view of recording waiting time, solicitors should therefore also consider their clients
expectations in respect of recording waiting time, and discuss these issues wherever
possible

Travelling

The recording of travelling time as chargeable covers much the same ground as waiting
time, with the key principle being that such time should either be recorded as travel,
where legitimate, or under other files, but never both. As with waiting time, solicitors should
consider their clients expectations, and wherever possible discuss the cost implications of
travel with the clients.

Working outside the


office

It has always been common to treat time spent on work outside of the office (at home,
during travel, at meetings etc.) the same way as it would be treated were the work is
completed within the office. Accountability for work outside the office has been increased
significantly through the increased use of lap-tops, wireless broadband and remote access
technologies.

Costs, billing & profitability a best practice guide page 13

Supervision

Professional supervision time relating to client work on a particular file is commonly


recorded against the relevant matter files by both supervisor and supervisee. Supervision
time which is not matter or client specific should be recorded as non-chargeable.

Discussions between feeearners

The treatment of discussions between fee-earners should depend to a large extent on the
nature of the discussion. If the discussion focuses on the specifics of a client matter, and
subsequently results in progress, it would be legitimate for both fee-earners to record the
time as chargeable.
If, however, the discussion is not specific to any particular matter, is background, or
does not contribute to progress on any matter, it would normally be recorded as nonchargeable.

File administration

Professional file administration, including file audits and other activities that mitigate file risk
or otherwise benefit the client is commonly recorded as chargeable, provided the activity
is specific to a particular file.
Pure administration (filing, photocopying etc) and management activities that are not
specific to individual files would normally be recorded as non-chargeable.

Entertainment

Entertainment would normally be recorded as non-chargeable. Even where client matters


are discussed in a professional capacity during an entertainment event, fee-earners should
consider their clients expectations before recording any time as chargeable. Charging
for time during an entertainment function risks negating any goodwill generated by the
entertainment.

Much of the above can be narrowed down into 4 basic principles:


Time should only normally be recorded as chargeable where the time spent is specific
to a single client or matter. General or background activities should not be recorded as
chargeable.
Never duplicate time recording, or record the same time on 2 or more different client files
Consider client expectations and disclose or discuss the costing implications of different
actions
whenever possible.
Professional activities are usually chargeable. Administrative duties are usually not.
Once you have developed your time recording policies, consider making a version of this
available to clients: clients would prefer to know in advance what will and wont be charged
for, rather than waiting for the bill to find out.

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Costs, billing & profitability a best practice guide page 14

Informative & transparent time entries


Practices should aim to ensure that time is recorded so as to provide as much information as
is necessary for either a supervisor or a client to understand the activity and assess its value or
validity.
Time is normally recorded through a mixture of existing standard codes/entries in a time
recording IT application, and personally drafted narratives.
Practices should aim to review its standard codes/entries on a regular basis, ensuring all
common tasks are included and the descriptions informative. This not only ensures entries are
clear and understandable; it also makes the process of recording time easier and quicker for
the fee-earner.
For non-standard time entries, fee-earners need to provide narratives that are sufficiently
informative for clients and supervisors, but concise enough so that the drafting of such
narratives does not become a time stealer. Practices might consider providing guidance or
training to fee-earners to assist in this.
The key is to record all time as if the client was the next person to look at the entries. Wherever
possible, block or large time entries should be avoided as they provide minimal information, are
often vague, and might lead clients to question the amount of time or the value of the activity.
In developing both their standard codes/entries and their own guidance and policies on time
recording, practices should also refer to Court Scale of Costs (available in the Uniform Civil
Procedure Rules 1999). Practices might consider tailoring standard entries to those in the scale,
and recording separately those activities that are not recognised in the scale.

Supervision, performance management & analysis


Whatever guidance and support is provided to fee-earners in relation to time recording,
practices should implement arrangements to ensure that all bills are ethical and comply with
practice policy. This would normally require bills to be checked and approved by a supervisor
or partner before being sent to a client. This is an opportunity for the partner to discuss any
concerns with the fee-earner, make amendments as necessary, and also to identify any areas
where a fee-earning team might need additional training or guidance. The simple knowledge
that all bills will be checked will also add discipline to the practice of time recording.
The supervision of time recording in legal practices is too often focussed on a single indicator:
the number of billable hours recorded each day/week/month/year by any given fee-earner
To ensure efficient & effective time recording, however, law practices should also focus on a
number of other key performance indicators (KPIs):
The % of the day that has been accounted for (the goal should be 100%)
The % of this time which is chargeable goals will vary according to fee-earner
The recovery rate: the % of the chargeable time which is billed to clients and which the client
pays for (80-90% is typical)
Supervision meetings should aim to discuss these indicators, and offer direction and support
accordingly. One of the main discussion points should be non-chargeable time, as this is a great
way of identifying poor working practices and inefficient use of time time that could have
been billed. Develop a series of codes for non-chargeable time and analyse this as closely as
the chargeable time: should it have been chargeable? should it have been done at all?
In addition to the time itself, supervisors should also check the narratives or descriptions of work
done when simple task categorisation is inadequate to describe the nature of the work. This
is important not just for internal supervision purposes but also for client communication, and
particularly in demonstrating the value of the work to the client.
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Time recordings are the basis for bills, and clients are often supplied with a fully itemised bill of all
time recordings, which have a short description of the tasks, along with the respective costs. If
the narratives or task descriptions are short and vague, clients will inevitably focus on the cost,
and perhaps question the value of the service. If, however, the narratives are more detailed
and give the client a better understanding of the work done, the client is more likely to focus on
the value of this work, rather than merely the cost. In this way, more detailed narratives or task
descriptions can help to improve therecovery rate.
Finally, supervisors should not just be looking for poor performers (those with low billable hour
tallys) but also for those consistently working excessive hours, which is not healthy or sustainable
in the long term, and can lead to resentments, stress or depression.

Billable hour targets


When it comes to setting targets for chargeable hours, try to set reasonable targets that take
the nature of the work and the other activities of the fee-earner into account.
It is sometimes easier to record a full eight hours doing commercial work for a single client than
in respect of numerous matters for private clients, even though the fee-earner doing the latter
may have been fully occupied all day. Targets for time vary across firms, but many consider that
to achieve 5.5 or 6 chargeable hours a day is reasonable.
As fee-earners gain experience, become more valuable to a practice and perhaps move
towards partnership, it is good practice to reconsider fee-earner performance management. As
issues such as supervision, business development and other issues take up more time, it might be
necessary to adjust billable hour targets downwards in recognition of a broader contribution to
the success of a practice (with total hours probably still increasing).
These considerations mean it is rarely a simple matter to set a practice-wide billable hour target
and expect everyone to accept this as reasonable. Practices should develop a range of KPIs
and measure and reward performance on a wider range of issues than just the quantity of
billable hours. This will not only make variances in billable hour targets easier to manage, it will
help to develop a broader range of skills.
The effect of billable hour targets is discussed further in chapter 6.

Time recording & efficiency


Perhaps the biggest risk that a practice should be aware of is not necessarily the clear-cut
instance of manipulating time-sheets, but rather the individual instances of wilful inefficiency
that can become institutionalised. Taking a relaxed 2 hours to do a task that could with no risk to
quality be done in 90 minutes not only raise ethical concerns, it can also have a serious impact
on the competitiveness of any practice in the medium and long term.

Time-recording and morale


Many fee-earners dislike time recording, and it can in practice be difficult to do, especially
in high-volume work where a fee-earners has a large number of files. Software can of course
help, and it pays to get the choice of software right perhaps by involving staff in the decisionmaking or arranging demonstrations of different solutions.
Time recording and billable hour targets should be just one way to manage performance
& productivity, not the sole. Practices need to find other ways of measuring performance
beyond billable hour tallys
Discuss & agree billable hour targets with staff dont enforce them
Build in allowances for client care, marketing, personal development, support etc
Management to take a supportive approach to time-recording, rather than merely looking for
poor-performers.
This topic is discussed further in chapter 6.
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4. Costing time
Neither law practices nor individual fee-earners calculate hourly rates on a regular basis: mostly
they are fixed not by calculation but by a mixture of incremental increases on past rates and
competitive comparisons. Unless you understand your costs of production, however, it is difficult
to make well-informed decisions about fees
and profitability.
A basic calculation of time cost is easy: all costs involved in the production of the service (salary,
related employment costs and overheads) should be apportioned and then divided by the
number of hours that each fee-earner will be expected to record as chargeable time.
A simple equation therefore looks something like this:

Employment costs + overhead allocation


Number of hours worked

= Provisional Hourly cost

This figure of course provides only a provisional cost figure. To arrive at an hourly fee this has
to be increased to allow for both the profit margin and the practices recovery rate. The
achievable profit margin is of course dependant on your ambitions and competitive situation,
but as a rule of thumb, practices should be aiming for a profit margin in the region of at least 25
to 30%. Practices should also build in a calculation to allow for time written-off and discounted
bills. Firms rarely recover all their time (80-90% is a typical percentage see FMRC Legal data))
and this should be reflected in the calculation for the hourly fee.
The calculation for the hourly rate might therefore look something like this:
Employment costs + overhead allocation
$120,000 + $50,000

x Profit margin x recovery margin


x 1.3

x1.2

= Hourly rate
= $230

Number of hours work


1200 hrs

Overheads
The calculations above show how factors such as overheads and recovery rates can affect
costs of production, and this is a good argument for analysing these costs within different
practice areas, and adjusting charge-out rates accordingly.
In terms of accurately costing time, and subsequently analysing profitability, the more costs that
can be allocated to individuals or a department, rather than the firm as a whole, the better:
Individual employment costs: salary, Payroll taxes, super contributions
Department overheads: Secretarial, marketing, training and library costs to a department,
and
Firm as a whole: accommodation and insurance to a firm as a whole
The process of where and how overheads can be allocated might lead to much discussion.
Different departments might use secretaries, paralegals, knowledge management resources
to clear greater or lesser extents, and costs can be allocated accordingly. There is a danger,
however, in overcomplicating the calculations for little benefit. A discussion on whether the
family law department should pay a slightly smaller share of PI insurance than the property

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Costs, billing & profitability a best practice guide page 17

department is unlikely to greatly benefit the costing process. You should therefore be cautious
about trying to allocate expenditure across departments unless that allocation can be based
on a genuine measurement.
Take, for example, a practice with ten fee-earners: 3 in the family department and 7 in the
property department. The practice decides that of a total overhead bill of $500,000, $150,000
can be allocated to the property department, $50,000 to the family department and $300,000
should be distributed on a
per capita basis.
To each property fee earner should therefore be allocated a share of the general overheads
($300,000 / 10) plus a share of the property departments overheads ($15,000 / 7) to give a total
per capita overhead of $51,428. For a fee-earner in the family department, the equivalent
overhead is slightly less, $46,666, recognising that departments lower usage of secretarial and
paralegal staff.

Example overhead calculation


Practice General

Property Department

Family Department

Overheads

300,000

150,000

50,000

Fee-earners

10

30,000

21,428

16,666

51,428

46,666

Per capita overhead allocation


Redistributed per capita overhead
allocation

The process outlined above might seem complicated, but only has to be undertaken once
or twice a year, and the benefits of understanding your costs of production cannot be
underestimated in terms of both costing work and making decisions about profitability and
practice direction.

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Costs, billing & profitability a best practice guide page 18

5 . Estimating time
Many practitioners consider themselves good estimators of the time taken to carry out work,
and therefore how to price it, whilst others believe that accurate estimating is impossible for their
areas of practice. Very few solicitors, however, can claim that they have a proven system for
accurate costing and estimating, and many practices fail to go beyond an initial gut feeling, a
reference to the last piece of similar work, or a back-of-the-envelope time-cost calculation.

Estimating myths
Lets look at a couple of myth conceptions about the provision of accurate
estimates to clients:
Myth 1: The accuracy of the estimate does not have a strong influence on the profitability of the
work - because whatever the estimate, the bill and fees recovered will depend on the actual
hours recorded, not the estimate.
Myth 2: Accurate estimates are not possible: the work is potentially complicated and there are
too many variables that could affect the final size of the bill.
Covering the first point first, it is wrong to assume that the accuracy of the estimate has
little bearing on the profitability of the work. With firms on average recovering only c85% of
recorded time, the link between recorded time or work-in-progress and fees is not as strong as
is sometimes assumed, especially where the submitted bill exceeds the estimate. Research from
both law firms and their clients has shown that accurate estimates can affect profitability in a
number of ways:
Firstly, surveys have shown that the closer the final bill is to the estimate, the higher the recovery
rate the percentage of recorded time (or work in progress (WIP)) that is finally paid by the
client to the firm. If a bill comes in exactly as estimated, clients pay it because there are no cost
concerns and nothing to debate or complain about. For the same reason, there is no partner
editing of the bill before it is sent.
If, however, the bill comes in above the estimate, this is when partners either write off some WIP,
or the client is disappointed and becomes more inclined to scrutinize or dispute the final bill,
leading to write-offs or discounts. There seems to be an understanding, observed (to varying
degrees in different markets) by both firms and their clients, that any fees above an estimate are
negotiable. It therefore follows that if work is done without any estimate of overall costs, then an
even bigger proportion of the final bill is negotiable, or at risk of being written off.
More accurate estimates can therefore lead to higher recovery of recorded time and a
significant increase in profitability, and this effect is common amongst the few firms who have
formalized accurate estimating by changing from an hourly fee system to fixed fees in recent
years. Lets look at an example that shows a 66% rise in profits:

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Estimate

WIP

Notes

Recovered
fees

Profit @ fees less 75% of WIP

$8,500

$10,000

Partner notices fees are more than the


estimate and reduces bill to $9,500 to
please client. Client is still upset. If he
pays the extra $1000 he has to justify it
to his boss and it affects his budget for
other work. He scrutinizes the bill and
sees $500 has already been written off.
This makes him believe there is scope for
a bigger reduction. He asks for another
discount

$9,000

$1,500

$10,000

$10,000

Client is happy with the bill and pays


quickly.

$10,000

$2,500

Costs, billing & profitability a best practice guide page 19

In a similar way, if the final bill comes in close to the estimate, fee-earners will be quicker to
bill and clients will be quicker to settle for the same nothing to discuss, nothing to dispute
reasons. If the estimation and billing system can be managed to ensure that bills are consistently
settled quickly in this way, this can dramatically improve the cash-flow of the firm, releasing cash
for investment, reduction of bank overdraft or partner drawings.
If your practice gets really good at estimating accurately, you might then consider moving
towards a fixed-fee approach to some extent. If you are willing to fix or cap fees for either an
entire instruction or specific elements within an instruction, thus accepting some of the risk on
the cost and profitability of the matter, clients are sometimes willing to pay a risk premium
which will further increase your profitability.
In relation to the second myth, some lawyers might be surprised at the number of instructions
it is reasonably practicable to make accurate estimates for, once they realize the extent
to which such accuracy can affect client satisfaction, the payment of bills and profitability.
Although some legal work is genuinely unique and groundbreaking, the vast majority (either
in its entirety or once broken down into its constituent parts) has been done before by any
particular firm. This means that the firm should be able to draw on historical time and costs data
to identify what past jobs, or their constituent parts, have previously cost.
Using historical data to provide accurate estimates is an obvious but often under-used
approach within law firms: it requires a combination of legal knowledge and accounts analysis
skills that neither lawyers nor accounts staffs have fully acquired. Two solutions to this might be to
either train the fee-earners up on estimation skills to a greater extent, or to change the accounts
focus (or move staff) from billing
to estimating.
The breaking up of legal work into constituent parts is also vital for accurate estimating. This
not only helps a law firm come up with accurate figures, and provides a client with more
information; it can also increase consistency and perceived fairness and accuracy of a bill even
where the overall costs can not be accurately predicted. For example, a law firm might not be
able to reasonably predict how many documents of a certain type it will be required to review
as part of a case, but can predict each review will cost, for instance, either 3 hours or c$750. If a
firm can quote, stick to, and refer to these estimates, then the final bill will still be consistent with
the estimate, irrespective of the number of
documents reviewed.
This shows the value of managing expectations re costs, even where accurate estimates are
not possible. As long as the final bill is consistent with initial discussions and indications, a client
should find little room to dispute a bill. This is why it is in a practices interest to provide as much
information as possible re costs, explaining all the variables that can impact on costs and
minimising the risk of failing to manage client cost expectations.

An estimating process
The key to greater sophistication in time-cost estimation is the use of historical costs data.
Solicitors can be very proud of their experience, and it can be very reassuring to hear that a
solicitor has done many of these before. When it comes to cost estimates, however, solicitors
often fail to learn from their experience, fail to predict the unexpected, or fail to plan for
contingencies. Clients have a right to be frustrated by solicitors who claim extensive experience
in any particular area, but who are then unable to produce precise and accurate costs
estimates. So why are solicitors so poor at estimating? Part of the problem is that solicitors simply
fail to gather the required data for estimating purposes because of poor initial interviewing skills.
Another suggested reason is that solicitors do not realise the full importance of the estimating
process, underestimating the impact on client satisfaction or profitability. The main reason,
however, is the lack of a cohesive approach and system for estimating.

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The table below suggests some of the key steps in developing a system for accurate estimates
based on historical data.
Segmentation of
stages/tasks

Develop a range of matter templates that breaks each matter down into costable stages

Time recording
guidance and training

Record all time including non-chargeable time and time written off. If fee-earners arent
recording all of their time on a matter regardless of how much is written off your historic
data and cost projections are flawed.

Segment each stage into tasks and related sub tasks

Develop training and guidance for all staff on time recording


Whatever IT system you use, make sure it can measure the time taken to complete the
identified stages & tasks.
Develop database of
historical task/stage
times & costs.

Develop a database of historical time/cost data, calculate the average time to complete
each task and sub task.
Develop data for how will this vary:
in different circumstances
with different fee-earners

Use client interview to


gather data for costs
estimates

Use the initial client interview to gather all the information you require to do an accurate
costs estimate, including:
The relevant tasks/stages
The factors that could affect time spent on each task/stage, or on the matter overall
Use a prompt, checklist or matter template that mentions all possible tasks/stages and all
potential variables which could increase complexity, time and cost

Compare interview to
historical data

Refer to your historical time/cost database to produce time estimates for the stages or
tasks identified for the new matter

Consider variables &


risk factors

Refer to the database again, for information on how any identified variables or risk factors
should affect the time/cost estimate.
Risk factors or variables might include:
-- Inexperience/Incompetence of the other side
-- Foreign jurisdictions
-- Multiple clients, financiers, agents etc
-- Delay: often if a matter isnt completed by a certain time, the costs can expect to
increase significantly
-- Client capacity.
-- Clients communication / service / project management demands
-- Commercial / political / economic events

Check & review

Before finalising the estimate, briefly discuss it with a supervisor or colleague. A second pair
of eyes might identify another variable that you hadnt considered.

The above process is not dissimilar to the process that each solicitor, informally or unconsciously,
goes through in his/her mind before doing estimates. The formalisation of the process, however,
prompts greater consideration and incorporates more data and variables, which should ensure
greater accuracy. Although the process outlined above seems complicated, it neednt be
provided a practice is disciplined in recording data, and can streamline the process through
the use of support staff and appropriate IT.

Measurement and discussion


Another, perhaps simpler, way to improve the accuracy of costs estimates is simply to measure
the accuracy rates of different fee earners costs estimates. Following the principle of what
gets measured gets managed, comparing the initial estimate to the final recorded WIP, and
then discussing accuracy in team or supervision meetings, can radically focus minds and
prompt teams to pay more attention to the estimating process. Discussing the estimating
process internally might also lead to other ideas for accuracy and best practice.

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6. Costs, culture & ethics


For between 20 and 40 years, hourly fees and billable hour measures have been the basic
economic units of law firm profitability. Assumed to be accepted by clients because they were
(and still are) seen to provide the potential for detailed information and transparency on any
legal fees charged, they also provide law firms with a simple, low-risk model to confidently
calculate, manage and lock-in profitability.
The majority of firms are keen to stick to the hourly fee system of billing, even though many
of the disadvantages are well documented. It should of course be noted that many of the
criticisms of the hourly fee, time-costing or the billable hour system are actually targeting 3
different phenomenon which do not necessarily have to be
linked together
Time recording the internal process of recording time against matters
Time costing the basis by which you calculate your fees & bill.
Individual, or team, billable hour targets the internal targets for fee-earners to record or bill a
certain number of chargeable hours each day/week/month/year.
It is possible to have time recording without the pressure of demanding individual billable hour
targets. It is also possible (and a good idea) to have time recording, and time recording targets
without this being the basis for charging clients. Finally, it is actually quite common for practices
to seemingly charge clients according to an hourly fee, but for this to be only loosely based on
the tally of recorded hours, with the partner deciding to increase or decrease the tally of hours
according to either an estimate of what the client is willing to pay, or the amount of hours any
given fee-earner might have been expected to complete the work in, according to their
experience and expertise. This raises both ethical and profitability issues which are also discussed
in the chapter on time recording.
These examples should illustrate, however, that it can be dangerous to use the terms billable
hours, time costing and time recording as interchangeable or one in the same. Although
they are often found together, many of the cultural or ethical concerns mentioned above can
be avoided by separating the phenomenon from each other and considering each on their
own merits.
In terms of understanding the drivers and motivations for some concerns, it is also important
to separate the practice from the individual. Time costing might prompt more concerns at a
practice level, whilst billable hour targets lead to more questionable individual behaviors.

Time recording
Time recording used simply as an information tool, and separate from billable hour targets, its
use in performance management, or its role in time costing, has relatively few adverse cultural
or ethical effects. It is, however, still unpopular and can lead to low morale. Very few people
leaving private practice miss it.
Most cultural or ethical criticisms of time recording, however, arise when it is linked to time
costing or billable hour targets.

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Costs, billing & profitability a best practice guide page 22

Time costing & Billable hour targets


The main criticisms of time costing and billable hour targets are as follows:
Time costing does not provide the client with predictability on cost, leading to client anxiety, a
lack of accountability, inefficiency, and the potential for disputes
Time costing and billable hour targets can encourage institutionalised inefficiency in working
practices. Practices or fee-earners who do the work quicker record fewer hours, generating
fewer fees, so some fee-earners will allow the work to expand to fill the time. Time costing and billable hour targets can tempt practices and fee-earners to pad or inflate
timesheets and bills
Time-costing and billable hour targets can lead to the undertaking of unnecessary additional
work (such as overzealous due diligence)
Time costing and billable hour targets can lead, at both practice and individual levels, to a
reduction in important non-chargeable activities such as client service, communication, the
development of precedents or personal professional development
Individual billable hour targets discourage team co-operation and support (billable hour
targets for a team can, with good management, encourage co-operation and support).
Demanding team billable hour targets, when made the responsibility of a partner, can
heighten the risk of bullying or unreasonable demands on individual team members
Time costing and billable hour targets can create a long hours culture. Together with practice
cultures which demand or expect you to be available when the work demands it, this can
adversely affect individuals work-life balance and limit their ability to effectively manage their
commitments to home life or social engagements.
Billable hour targets place an emphasis on quantity rather than quality, which can lead to
both lower quality work, and low morale when performance management appears to be
exclusively based on billable hour statistics.
Together with other negative aspects of law practice culture, the cumulative effect of the
ethical and cultural strains described above can lead to an increased risk of claims and
complaints, low morale and motivation, high staff turnover and stress
and depression.
Suggestions for avoiding some of the negative consequences, of billable hour targets include
the following:
Effective supervision, delegation and workload management to ensure fee-earners have the
work they require to meet their billable hour targets, thus reducing the temptation to pad or
work inefficiently.
Ensure all billable hour targets are reasonable, achievable and are agreed with fee-earners
rather than merely imposed.
Develop different career pathways and salary levels, so that individuals who are not
comfortable with high billable hour targets can still contribute productively to the practice.
Develop balanced performance management arrangements, of which billable hour targets
form only one part. Quality of work, business development, supervision, customer care & client
development are all important to the development of fee-earners, and emphasising these
as part of performance management will minimise the risk of the negative aspects of billable
hour targets.
Develop policies and provide training for your fee-earners on time recording.
Make the padding and inflation of timesheets a disciplinary offence
Supervise the practice of time recording to both eliminate unethical practices, and offer
support to fee-earners.
Develop work-life balance arrangements to enable people to meet billable hour targets whilst
still maintaining their home and social commitments.

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Costs, billing & profitability a best practice guide page 23

Time for a change to a fixed fee or alternative system?


Some relatively recent developments, however, suggest that a number of firms might benefit
from re-thinking their reliance on time-costing.
Recruitment, retention & Generation Y morale
General client demand & increased sophistication.
Movement of private practice associates to in-house positions
The first driver is a renewed focus on associate recruitment and retention. Increasingly high
associate drop-out rates are having a dramatic effect on law firm planning and profitability,
with firms calculating turnover costs at up to 2.5 or more times the cost of a salary (allowing for
loss of revenue, loss of some clients, and the time of developing a replacement etc.). In seeking
to improve levels of job satisfaction, firms are reviewing the treadmill culture of high billable
hour targets, and increasingly accepting that Generation Y associates with lifestyle ambitions
are unlikely to stay in high pressure positions with slow professional development, minimal
opportunities for creativity, and limited control over their own contribution to the profits of a firm.
Firms are also acknowledging that the treadmill culture negatively affects profitability by limiting
associate development, thus slowing the rate of increase of associate charge-out rates.
Increasingly disciplined legal procurement processes are also leading to a re-think amongst
many clients of the benefits of the hourly fee compared to a fixed fee, capped fee or other
arrangements. Much will depend on any clients experience of law firms ability to keep to
estimates, but with cost control increasingly important, many clients are increasingly favoring
the security that a fixed fee will bring, even being willing to pay a premium in exchange for the
law firm accepting some risk.
Clients are also getting increasingly sophisticated in their management of their relationships
with law firms due to, among other reasons, the increasing number of former private practice
solicitors moving to in-house positions. Many of these will not only be critical of the inefficiency
and low productivity of the billable hour culture, but also confident of their ability to extract
added value from a firm once a fixed fee has
been agreed.
So, could your firm benefit from re-thinking its approach to the hourly fee? It will depend on your
practice culture and the sophistication of your clients and the work you do for them. You might
have to get used to working in different ways, learn new skills or invest more in IT, knowledge
management, pricing and cost management, risk management and/or negotiation skills. For
some practices, a move to alternative billing systems will mean higher morale amongst your feeearners (leading to more effective recruitment and higher retention), clearer differentiation from
your competitors, and a better understanding of your clients views in relation to value and fees.

Queensland Law Society

Costs, billing & profitability a best practice guide page 24

7. Creative fees & billing options


Hourly rate billing has many advantages for firms: it is relatively easy and efficient; helps with
cash flow; allows a firm to know the value of its work in progress (WIP); is objective and, above
all, minimises financial risk to the firm. But it does nothing to alleviate the risk to clients, nor does
it always represent value to them. Many clients are now seeking alternative methods of billing in
which the firm bears more of the risk.
This poses not just a threat, but also a practical problem because, even if a firms accountant,
practice manager or cashier understands the cost of production and profitability of work, few of
the partners of fee-earners who discuss costs and billing methods with clients do.
Firms should aim to ensure that the fee-earner discussing cost with the client has full knowledge
both of the alternatives that can be offered to the client and the impact of each on the firms
profitability so that the needs of both firm and client can be met. The financial management
of some firms will need to step up a gear so that this knowledge is available. Training may also
need to be provided.
Billing method

Commentary

Hourly rate

Beyond conveyancing work, the hourly fee is the most common billing practice in the
legal profession. Practices like it because it is low risk (they should get paid for all their
time costs) and it is familiar and easy. Clients, however, particularly domestic Mum &
Dad clients dislike it because it means the total costs are uncertain, causing anxiety.
When to use:
When accurate estimating is not possible:
For sophisticated, open-ended high value work
When time recording is efficient and effective
When clients want it
Advantages

Disadvantages

Low risk for firm

All cost risk to client

Easy & Familiar

Increases risk of billing disputes

Aids justification in billing disputes

Many client s dislike it

Some clients prefer it

Encourages inefficiency

Makes interim billing easier for better


cashflow management

Fixed fee

Places limit on profitability margin


Encourages short-term focus & ignores long
term issues such as client loyalty, efficiency,
staff development

Clients are increasingly demanding that their law firms accept more of the risk of legal
costs by providing certainty in the form of fixed fees. Removing client anxiety about
costs escalation can have significant benefits in terms of marketing differentiation,
overcoming buyer resistance, and maintain good client relationships. Beyond cottage
conveyancing, however, few firms seem willing to accept the greater risk that a move
to fixed
fees involves.
When to use
Where accurate estimating is possible
For high volume, commoditised work (such as cottage conveyancing)
When clients want it
Where the firm can rely on a good database of historical time/cost information and
where fee-earners are confident in estimating & negotiating
Advantages

Disadvantages

Certainty for client: (eliminates


fears of spiralling costs)

Higher risk for firm

Necessitates efficiency

Investment costs (IT, knowledge


management) of necessary efficiency gains

Aids differentiation

Skills in estimating, negotiation needed

No limit on profit margin

Needs better definition of retainer

Risk premium can be charged /


justified
Removes cost tensions from the
client-solicitor relationship

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Costs, billing & profitability a best practice guide page 25

Hourly fee with cap or limit

For practices that want to offer some certainty or reassurance to clients on costs, but
are not willing to jump in one leap to fixed fees, the option of hourly fees with caps
might be an option. Here, a firm provides an estimate and charges the hourly fee, but
places a cap on the total cost, be reassuring the client that fees will not rise above a
certain level. A cap would normally be set at 20%, 30% or 50% above an initial estimate,
depending on how confident the practice is in its ability to estimate accurately and
control costs.
When to use:
When clients need certainty that costs will not exceed certain level
When the practice feels it is unable to offer fixed fees.

Task based billing

Advantages

Disadvantages

See above re fixed fees and


hourly rates

See above re fixed fees and hourly rates

Another option for a firm that wants to offer more certainty to clients but is unwilling
to go down the fixed fee route is task based billing. This is where clients are charged
a price for specific tasks, such as a mediation round or the production of specific
documents, rather than quoted a fixed fee for the total matter or charged according
to time.
When to use:
When the cost of specific tasks can be accurately estimated
For common task based work e.g. production of wills, Enduring Power of Attorney
When task costs can be accurately fixed according to a significant data of historical
time/cost information

Composite rate

Advantages

Disadvantages

Low risk/certainty for client

Some risk to firm

Rather than quote a range of hourly fees for different fee-earning levels of seniority,
a firm will often quote a composite rate based on the likely work burden on different
levels of fee-earner. (see appendix 1)
When to use:
When several fee-earners will be involved
When the involvement of fee-earners at different levels of seniority can be
reasonable estimated
Advantages

Disadvantages

Useful for marketing

Needs good management re delegation of


tasks to appropriate level

Simplifies cost arrangements for


client

Value billing

Involvement of senior staff must be agreed


with client

Here, the exact amount of the fee is not known until the matter is concluded, but is
agreed through a discussion of the value of the advice at the end of the matter. This is
very rare in Australia, but has been used successfully by a limited number of practices
in the U.S.
When to use:
Where there is a close, trusting relationship between solicitor and client
Advantages

Disadvantages

Innovative, demonstrates trust /


partnership

Cost risks for both client and practice

Requires solicitor and client to


reach agreement on value

Queensland Law Society

High risk of disagreement with no basis for


resolution
Requires solicitor and client to reach
agreement on value

Costs, billing & profitability a best practice guide page 26

Retainer

When to use:
When work is clearly defined
When burden can be accurately estimated (perhaps through trial period)
For low-level or general advice
Advantages

Disadvantages

Low risk for client, who has


certainty on the expenditure for
defined legal work.

Risk for practice, if volume of work exceeds


expectations

Increases likelihood of gaining


more high value work

Needs regular review

Open to exploitation by client

Assists with cash-flow

No-win, no fee (Conditional


fees)

Common in claimant personal injury, this is an option for litigation firms who are willing to
accept total payment risk as a marketing and differentiation strategy.
When to use:
When an informed assessment of the likelihood of success is possible
When an appropriate uplift (percentage increase in rates) can be agreed
Note: please see s323-325 of Legal Profession Act 2007 (Qld) re conditional fee
arrangements and uplifts.
Advantages:

Disadvantages:

Low risk for client

Firm bears all risk

Can be profitable for practice, if


case successful

Uneven cash flow

Overcomes buyer resistance

Other (partial) conditional


fee arrangements

Cost of work to clients can be high, to offset


risk of failure.

Conditional fee arrangements can also be used for arrangements where payment
might be higher or lower than usual rates dependent on a specific result. For instance, a
practice might offer fees 10% below their normal rates if a transaction is unsuccessful, or
a 10% uplift for a success.
Note: please see s323-325 of Legal Profession Act 2007 (Qld) re conditional fee
arrangements and uplifts.
Advantages

Disadvantages

Client transfers some risk to legal


practice

Practice accepts more risk

Can be profitable for practice

Potential disputes re results and strategy.

Increases solicitor commitment to


client objectives

Uneven cash flow

All of the above options have their advantages and disadvantages for different practices at
different times. Different clients will also have different preferences.
For this reason, practices should encourage flexibility, and equip their fee-earners with the
knowledge, skills and confidence to react to specific client needs and offer a fee structure that
the client is happy with.

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Costs, billing & profitability a best practice guide page 27

8. Costs & Profitability


The challenge of profitability
Profitability is a constant challenge for all legal practices even, maybe especially, the
successful ones. More demanding clients, increased competition, downward pressure on
fees and upward pressure on costs (esp. rent and staff costs) are ever present features. The
challenge of profitability is then compounded by the time pressures of fee-earning: solicitors are
so busy working in the business, it is difficult to spend time on the business.
Although the challenge of improving profitability is a vast subject, touching on almost every
aspect of what a law firm is and does, it might help to break things down to the fundamentals.
Profitability in law firms who charge fees according to an hourly rate is commonly seen in terms
of a simple equation

Profit per equity partner = hours x rate x gearing x recovery x margin

Profit per equity partner =

Hours x rate x gearing x recovery rate


Costs

Gearing /
Leverage

The ratio of equity partners to other fee-earners (the higher the ratio the higher the profitability)

Hours

How many chargeable hours the fee-earners work

Rate

The stated hourly fees the firm, or each individual charges

Recovery

Proportion of work in progress or hours recorded that is ultimately paid by the client.

Costs

Salaries, overheads and other costs.

Pulling levers
Using this model, firms have often tried to manage profitability by focusing on a number of key
figures and pulling different levers such as:
increasing billable hour targets for associates;
increasing associate charge-out rates;
ensuring recovery levels do not fall too low; and
Either cutting costs or passing on increased overheads to hourly rates.
The problem with pulling levers, however, is that if you pull a lever to improve the figures on one
variable, this has a negative impact on other variables.
Rate up?
Recovery down due to client resistance to rates, hours down due to losing some clients
Increase hours per fee-earner?
Recovery down due to poor efficiency, staff turnover up, employment costs up
Increase gearing
Recovery down due to poor supervision

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Costs, billing & profitability a best practice guide page 28

Cut costs?
Over-aggressive cost cutting in terms of staff salaries, training, marketing, knowledge
management and IT can severely weaken a practices structural base for profitability.
The challenge of profitability can in this sense be compared to managing a countrys economy.
If you boost growth, inflation can increase. If you tackle inflation with interest rates, growth
suffers. The solution for a national economy is to make structural changes boost productivity by
investing in education or infrastructure, for example, so that inflation and growth indicators can
both move in the right direction at the same time.
The solution is the same for managing profitability in legal practices. In order to pull the different
levers of profitability without adversely affecting another element in the profitability equation,
you need to take a cohesive approach to law firm management & understand the activities
that can help build a structural base for profitability.
The table below shows some of the underlying activities that can help build such a structural
base for profitability.

Increase hours

Improve supervision, practice culture and fee-earner morale so billable hour targets
can be increased without either higher staff turnover or higher staff costs. (not easy, but
possible)
Improve time recording efficiency through analysis, supervision and support
Branding, business development to attract new clients
Good client service leading to better client retention & more referrals

Increase rates

Demonstrate better client service


Build & demonstrate a competitive advantage
Invest in developmental supervision, training, knowledge management & risk
management so your fee-earners can develop expertise quicker and can justify higher
rates
Develop better rate negotiation & justification skills

Increase gearing

Efficient and effective supervision (to manage a larger team)


Supportive supervision and practice culture to aid the retention of fee-earning staff
Effective recruitment and talent marketing arrangements
Effective knowledge management and risk management systems to help manage the
supervision burden

Increase recovery rate

Good client care, communications and service


Accurate estimates & costs disclosure / prompt updates
Effective billing arrangements
Risk management of internal errors that carry high non-chargeable time costs

Cut costs

Avoid sieve mentality in larger practices by implementing strict expenditure discipline &
accountability for all fee-earners
Proactively manage costs & purchasing arrangements
Ensure all investment decisions can be justified through payback calculations.
Control overheads through effective management and supervision of support staff &
specialists, and effective use of fee-earners non-chargeable time.

Efficiency

Supervision of fee-earners efficiency & productivity


Risk management of internal errors that carry high non-chargeable time costs
Effective IT and knowledge management systems

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Costs, billing & profitability a best practice guide page 29

Profitability & Fixed Fees


For a practice that charges according to fixed fees, the profitability equation is different, and
the levers are also different.

Profit per equity partner =

Fees x gearing x recovery rate


Costs

The fixed fee levers of profitability include:


Pricing and cost
management

Firms run the risk of being unprofitable if estimates are inaccurate and the cost of providing
the service exceeds the agreed fixed fees.

Negotiation

Lawyers are effective negotiators, but not always when it comes to their own fees. Partners
have to develop new skills to build value in order to raise the level of fixed fees, and extract
a premium for the fee risk accepted by the practice.

Efficiency & Productivity

Working for a shorter time on each job lowers costs because you can do more jobs with
the same capacity. With fixed fees, that means profit. Efficiency can be increased through
investment in IT, knowledge management, risk management & supervision.

Repeats

The more a law firm does a piece of work, the more efficiently it does it, and the more
time costs can be reduced. This is why fixed fees are often associated with allegedly
commoditised work such as residential conveyancing.

Firms are now in a much better position to consider a move to fixed or alternative fee
arrangements due to the increased sophistication of financial analysis software. Given accurate
records and a sufficient sample, firms should now be able to accurately predict the time and
cost typically involved in regular work. This will give the firm a base level which it can then
negotiate upwards from in agreeing a fixed fee with the client (profit 1). At the same time, the
firm can reduce the amount of time spent on a matter by encouraging greater creativity and
efficiency, and thus cutting internal costs (profit 2).
The key to this approach is of course increasingly accurate estimates and the confidence to
convert these estimates into profitable fixed fees, necessitating improvements in both costing,
and in client negotiations. Firms should consider moving finance expertise out of billing and into
pricing and cost management, preferably working closely with partners. Partners will also need
to improve their fee negotiation skills and learn how to build fees by talking in terms of value to
the client (including the fee risk premium) and not just time.
Efficiency gains are also key to the fixed fee system, as it rewards rather than penalises firms
who can complete work in shorter periods of time. Efficiency gains are primarily achievable for
regular commoditised work, but good precedent libraries and knowledge management systems
can help to reduce the amount of time firms spend re-inventing the wheel, thus improving
productivity and profitability. Eliminating time costs arising from mistakes and oversights is also
important, because these costs can neither be fully or partially passed on to the client, making
risk management and supervision important. IT can be key to both risk management and
knowledge management, as it can be in generating efficiency gains generally.

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Costs, billing & profitability a best practice guide page 30

Costs and profitability


As can be seen from the above discussion, and also from other sections in this book, costs
disclosure and billing should not be seen as bureaucratic or regulatory burdens, but should
instead be seen as key drivers of profitability.
Good, accurate costs disclosure and billing arrangements drive profitability in the following
ways:
Increasing hours through the client retention and referrals that result from the client
perception of good client service and good costs communication;
Increasing rates by capitalising on the goodwill and perceived value arising from good client
service and good costs communication;
Increasing the recovery rate, and improving practice cashflow by better management of
clients cost expectations which in turn prompts fuller, quicker payment.

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Costs, billing & profitability a best practice guide page 31

9. Cashflow and Working Capital


Managing cashflow in a legal practice can often be as important as managing profitability.
Indeed, many practices with healthy balance sheets and profit and loss accounts may still find
themselves struggling to pay the bills at the end of each month.
Cashflow can be a particular issue for law practices because costs are regularly incurred before
income is received: cash payments associated with running costs such as rent, staff costs and
other overheads go out on a regular basis, usually within two weeks of when any cost is incurred.
Income from professional fees, however, may not appear as cash for many months after the
initial cost is incurred. This time lag effectively means that practice cash and capital that could
potentially be used elsewhere are locked up in the system, leading to borrowing costs, a
lack of available funds for investment, or alternatively, a lack of funds in the partners/principals
personal bank account.

The Cashflow Cycle


The cash flow cycle may look something like this:

150 Days Negative Cashflow


Start
Work

Pay staff &


overheads

Bill client

Get paid

14

104

164

90 days

60 days

WIP (work in
progress)

Debtors

150 days of negative cashflow is not untypical amongst legal practices, but numbers for both
WIP and debtors will vary according to size of practice, and nature of work, with claimant
personal injury work commonly having high WIP and low debtors, and Family work having lower
WIP but higher debtors. Accurate information on typical WIP and debtor figures for your type of
practice can be found in the annual FMRC Legal Performance Benchmarking Reports.

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Costs, billing & profitability a best practice guide page 32

Measuring your working capital lock-up


The sum of WIP and debtors indicates the total amount of credit that has effectively been
given to clients. As this figure can represent c75% of a legal practices total assets, it is important
for practices to attempt to reduce the extent of their negative cashflow, and the first step to
better management of working capital is to monitor and measure it. Firms that wish to calculate
the amount of credit that has been given to clients through WIP and debtors must perform
calculations on a regular basis. The two key formulas are as follows:
WIP days (the time between doing the work and issuing a bill)

WIP days (the time


between doing the work
and issuing a bill)

Debtor days

Work in progress at month end


Inputs into WIP over last year
Debtors excluding GST

Fees issued in last year

x 365

x 365

The sum of these two periods is the total number of days credit that has been given to clients.

Managing WIP and Debtors


Improving your practices cashflow and working capital involves focusing on both WIP and
debtors, and also on a mixture of:
Internal management systems
Consistent discipline; and
Good client communication and service (esp. in relation to costs).
A common failing of practices in attempting to improve their cash flow is to address some but
not all of the necessary areas: WIP, but not debtors, or internal procedures but not client service.
A cohesive approach to tackling cashflow can bring much greater reductions in your negative
cashflow than any piecemeal approach.

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Costs, billing & profitability a best practice guide page 33

WIP
Money on account

Ask for a certain amount of money up front.

Interim Billing

Agree with your client to bill either at regular periods (monthly?) or whenever certain limits
are reached (every $5,000 WIP?)

Billing supervision
and performance
management.

Supervise billing to ensure all your fee-earners bill promptly. Implement targets, and make
prompt billing one of their performance objectives.

Penalties for billing failures

Demonstrate you are serious about billing discipline through the introduction of personal
financial incentives and penalties in relation to billing.

No protected species

Ensure everyone is subject to the same discipline: all partners and all clients. If exceptions
are made, discipline falls down.

Billing support

Invest in the necessary IT, finance staff or support staff training to help your fee-earners
meet their billing objectives.

Debtors

Queensland Law Society

Client engagement

Risk management is a key part of the client engagement process. As with claim related
risks, try to identify any risks in respect of your clients willingness and ability to pay, and
pay promptly. Their attitude, expectations, financial health, the number of parties or
the involvement of an insurer, union or other entity, might all be relevant. If you are not
confident of their ability to pay, or pay promptly, do you want to accept the instruction?

Client engagement
arrangements

Discuss billing and payment arrangements with your client at a first interview. Ensure they
understand, are happy with, and agree to, your practices payment requirements

Accurate, informative
initial costs estimates &
discussions

Clients are more likely to pay quickly, and in full, if the bill comes in at the amount they
had budgeted for. If the bill exceeds the initial estimate, clients may either need to
arrange additional funds, or may react adversely and either delay or dispute the bill.

Prompt, informative cost


updates

As with above, clients are more likely to pay quickly, and in full, if the figures in the bill
match the clients expectations. As soon as costs rise, or are anticipated to rise, inform
your client of the likely increase and the justification for this.

Good client service

Clients are more likely to pay quickly, and in full, if the total of the bill matches their
perception of the value of the service they have received. If they believe they have
received good service, they will pay promptly. If they believe the service represents poor
value for money, they may delay payment or dispute the bill.

Informative, transparent
bills that build value

As with above, if the client feels they have received good value for money, they are
more likely to pay quickly and in full. Use your bills to build the clients understanding of
the value of your service by providing descriptive narratives on the work your have done,
why you have done it, and the benefit to the client.

State payment
requirements clearly on bill

Be clear about payment requirements. If you do not clearly state when you require
payment, this removes any sense of urgency from the billing process, and gives the client
an excuse to delay payment.

Discuss bill with client

Research shows that clients increasingly welcome a call from their solicitors to discuss
a bill before it is sent. This provides the solicitor a chance to explain the bill and the
client a chance to raise any questions or concerns. Another approach is to call the
client promptly after the bill has been sent so the discussion is aided by the client
having something to look at. This, however, risks an initial negative reaction if the
total is higher than expected. If bills are not discussed and explained, this can lead to
misunderstandings or a negative reaction that can lead to delay or a dispute.

Costs, billing & profitability a best practice guide page 34

Use specialist resources to


chase debt

Many solicitors are both unskilled and uncomfortable with chasing payment. It is also
usually an inefficient use of their time. Although a solicitor will be better placed to discuss
a bill with a client, the credit control and chasing of payment will often be better left to
either support staff or a specialist external agency.

Formalised credit
management processes

Implement formal credit management processes with timelines for different actions. A
process might look like this:
Fee-earner call to check the client received bill, is happy with it, or whether they want
to discuss it
Send reminder after 3 weeks
30 days get credit manager to ring
45 days final letter
60 days pass to collection agency

False discounting

Some practices, and numerous companies in other industries, offer an incentive for fast
payment through a small discount of e.g. 5%. This is normally a false discount in that
prices are inflated by 5% to begin with in the expectation that most clients will pay within
the required time. As such the tactic is really a penalty on late payment rather than
a discount for prompt payment. This can be very effective as an incentive for prompt
payment, but has the downside of initially seeming to inflate costs.

Practitioners should be warned, however, that the Legal Services Commission has seen a
recent increase in complaints in relation to threatening letters of demand or other unnecessarily
aggressive debt collection actions. In the interests of both avoiding complaints and retaining
good client relationships, practices should ensure all arrangements are assertive rather than
aggressive, and should use client feedback to assess the client reaction to any arrangements.

Queensland Law Society

Costs, billing & profitability a best practice guide page 35

10. Summary
Here are 10 suggestions for improving your practices performance in relation to costs, billing
and profitability

1. Think beyond the LPA2007


Many in the legal profession instinctively see costs as a regulatory issue or as a bureaucratic
burden on their proper work as solicitors. Good management of costs and billing is, however,
vital to both client satisfaction and profitability, and practitioners should be encouraged to take
a best practice approach to costs rather than see it as an exercise in compliance.
Practices should aim to set themselves higher standards than those in the LPA2007, and
implement arrangements to ensure those standards are met. If practices aim for mere
compliance, they will not only occasionally miss their target, they will also miss the benefits
arising from a best practice approach.

2. Listen to your clients


The management of costs is central to clients perceptions of the service provided. This then
drives clients perception of value for money which subsequently impacts on rates, recovery,
hours and ultimately profitability.
An over-reliance on a regulatory approach to costs, as opposed to the seeking of client
feedback, is likely to lead to poorer rather than higher standards of service, because codes of
conduct can only set minimum standards or benchmarks. Clients, on the other hand, demand
the highest standards and this is what professionals should be aiming for.
Clients through opening interviews, complaints data, satisfaction surveys or feedback forms
should be regularly consulted on their concerns and expectations in relation to costs and how
successful your practice is in offering reassurance and meeting their expectations.

3. Focus on time recording


All fee-earners should accurately and promptly record all of both their chargeable and their
non-chargeable time. Irrespective of whether time recording is used as a basis for charging
clients or setting productivity targets, your practice needs to understand how people are
spending their time. Without this, it is impossible for your practice to make informed decisions on
performance management, profitability or other management decisions.
Support your staff by providing guidance and training on how to record their time, and where
possible invest in the most appropriate software solutions to not only make it easier to record
time, but also to subsequently analyse the information.
Instead of focussing purely on the number of billable hours recorded, practices should also seek
to measure the percentage of the day that has been accounted for (with a goal of 100%), and
the % of time which is chargeable (where goals will vary according to fee-earner).

4. Monitor and understand your internal costs of production


Unless you understand your costs of production, you cannot price work effectively and you
cannot make decisions as to how to improve profitability. Although hourly charge-out rates are
routinely set for fee-earners within most firms, it is only the minority that actually calculate how
much it costs them to produce work each year. Pricing the cost of work might seem a laborious
task, but it only needs to be done a few times each year. The results will be invaluable to your
practice in making a variety of pricing, management and strategic decisions.

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5. Build confidence and flexibility in relation to costs


An understanding of both internal costs and the mechanics of profitability can be invaluable in
building both confidence and competence for costs discussions. Practitioners who understand
their internal costs are better placed to both negotiate and to respond to their clients
preferences in relation to billing and fee structures.
Practices should consider developing the ability to offer a range of different options: time
costing, fixed fees, capped fees, retainer, task-based billing etc. If negotiators are confident
in discussing a range of alternatives, they are more likely to find a solution that suits both the
practice and the client.

6. Improve the accuracy of initial estimates


Improving the accuracy of initial estimates can bring significant benefits in terms of client
satisfaction, profitability and cash-flow. Training, better initial data capture, the use of historical
costs data, measurement and internal discussions can all help to improve the accuracy of initial
costs estimates.

7. Manage cultural and ethical risks


Time costing, time recording and high billable hour targets have together been linked to
issues such as low morale, stress, high staff turnover, poor client communication, padding
of timesheets and overcharging. Practices should monitor these risks, and amend their
arrangements to ensure these risks are minimised.

8. Build a structural base for profitability


Many practices struggle with profitability because they try to increase rates, or hours, or gearing
without any of the required underlying skills, systems or investment in place. Practices that
focus on efficient time recording, accurate and informative costs disclosure, client satisfaction,
developmental supervision, risk management and more will find they can then pull the levers
of profitability without adversely affecting other measures.

9. Focus on cashflow
Managing cashflow in a legal practice can often be as important as managing profitability.
Indeed, many practices with healthy balance sheets and profit and loss accounts may still
find themselves struggling to pay the bills at the end of each month. Improving your practices
cashflow requires a mix of: internal management systems, consistent discipline and good client
communication and service (esp. in relation to costs).

10. Supervision and performance management


Whatever support is provided to fee-earners in relation to time recording, practices should
implement arrangements to ensure that all bills are ethical and comply with practice policy.
This would normally require bills to be checked and approved by a supervisor or partner before
being sent to a client. This is an opportunity for the partner to discuss any concerns with the feeearner, make amendments as necessary, and also to identify an areas where other fee-earners
might need additional training or guidance. The simple knowledge of knowing that all bills will
be checked will also add discipline to the practice of time recording.

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To gain the benefits discussed above, practices need to measure and monitor both practice
and individual performance in a number of key areas:
The % of each fee-earners day which is accountable for (the goal should be 100%);
KPIs for chargeable time each day/week/month;
The recovery rate for each department/fee-earner (the % of work in progress which the client
ultimately pays for);
The accuracy of initial estimates;
The unbilled work-in-progress for each fee-earner or department;
The debtor days for each fee-earner or department;
Team and individual profitability; and
Client satisfaction in relation to costs and costs disclosure.
Constant monitoring of these measures will identify issues that different departments or
individuals need to focus on, and prompt practices to consider where new systems or additional
training, guidance or support are needed.

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Appendix One:
It may come as little surprise to learn that at a minimum, 15% of all complaints investigated by
the Legal Services Commission involve costs. The true figure is actually much higher, as the 15%
mentioned relates only to those complaints dealing primarily with costs. Many more complaints
involve costs together with other issues.
Those who have been in practice for any substantial time will know that client concerns over
costs can be the bugbear of any practice.

Costs are under scrutiny


For the profession, there is every sign that their charges will be the subject of increased scrutiny
from clients and regulators. A recent study prepared by London firm Cost Auditing Ltd examined
costs claims submitted by lawyers to insurers. The firm reportedly found that 23.5% the costs
claimed were unwarranted . The press release publicising the report noted:
In a recent case a solicitor and own client bill was reduced by 274,000 from a total of
970,000. The bill contained some very interesting heads of charging, in addition to the normal
camel train of lawyers each to do the same job otherwise known as structured and layered
charging, was a new concept of making of time available to work on a case as an actual
chargeable time unit!
Yet, despite those concerns and general community disquiet about the level of costs charged
by legal practitioners, there is little in the way of decided case law as to which billing practices
are acceptable and which are not.

The solicitors advantage


Much of that concern arises from what has been described as the position of advantage the
lawyer enjoys when it comes to charging clients. The point was taken up by Justice Mahoney
of the NSW Court of Appeal in the case of Veghelyi v. Law Society of New South Wales . In that
case, his Honour observed:
Solicitors are informed or are in a position to inform themselves of what work may be required
and what are fair and reasonable charges. They are in that sense in a position of advantage
and trust is placed in them. Clients are entitled to be protected against the abuse of that
advantage. It is, I am inclined to think, the fact that an advantage has been misused which
may in a particular case warrant what the solicitor does being categorised as professional
misconduct.

Legislation
In Queensland, the starting point for considering the ethical and disciplinary implications for
practitioners of their charging practices is s.420 of the Legal Profession Act 2007 . That section
sets out in an inclusory fashion, certain types of conduct that are capable of amounting to
unsatisfactory professional conduct or professional misconduct. The relevant part of the section
reads:
The following conduct is capable of constituting unsatisfactory professional conduct or
professional misconduct
(a)
(b) charging of excessive legal costs in connection with the practice of law
The definition is perhaps more interesting for what it does not say, rather than what it does.

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The first point to note is that it talks only of charging excessive legal costs, not deliberately
charging such costs. Secondly, it speaks only of excessive legal costs, not grossly or
manifestly excessive costs.
One is tempted to conclude, given that those more expansive terms were well-known and longestablished within the profession prior to 1 July 2004, that the decision to frame the definition
without reference to them is deliberate.
Certainly, if indeed it is the case that Parliament intended that unsatisfactory professional
conduct or professional misconduct could be established by proof that a practitioner charged
(without needing to prove deliberately charging) excessive legal costs (without needing to
prove that the costs were grossly or manifestly excessive), then many of the concerns arising out
of the decisions in Nikolaidis v Legal Services Commissioner and Legal Services Commissioner v
Galitsky would be relatively simply overcome.
As yet however, the scope of s.420(b) has not been tested before Queenslands Legal
Profession Tribunal.

Key Queensland case


For some guidance on the approach of Queensland courts to what constitutes charging
excessive costs, the most apposite recent case is QCAO3-469.
The disciplinary charges arose out of a retainer to act (on a no win, no fee basis) for a braininjured person. The client had retained the firm in August 1996 and signed a formal retainer
agreement in November 1998. The agreement provided for fees to be calculated on a
graduated hourly rate, from $250 per hour for partners and accredited personal injury specialists
to $100 per hour for paralegals. The firm could charge an additional amount of up to 30% of the
other fees for care and consideration. The agreement allowed the firm to increase the hourly
rates by no more than 10% once per year, but only after giving the client 30 days advance
notice of the proposed new rate.
The firm presented a second retainer agreement was signed in October 2000. That agreement
provided for an increase in the fees chargeable, to $300 per hour applicable to all the partners
and employees of the firm, together with the 30% care & con premium.
The solicitor called the client into his offices to discuss a mediation of the claim scheduled for
December 2000. At that time, the client was in financial difficulties and was anxious to continue
with his daughters claim, and he wanted the firm to take on a similar claim in respect of his son.
When presented with the suggested increase in fees, the client was of the view (erroneously)
that most of the legal costs had already been incurred, so that the proposed increase would
have little overall effect on the amount payable in respect of his daughters claim.
About half of the work that had been done on the matter to that time was performed by
paralegals. This was significant because under the proposed new arrangement, the amount
chargeable for their work per hour would triple. The matter was put to the client on the basis
that the solicitor would agree to take on the clients sons claim at $300 per hour, rather than the
$500 per hour his firm would ordinarily by then be charging, but only if the client agreed to the
higher rate of $300 per hour in respect of the daughters claim.
The Tribunal found that the solicitor failed to draw the clients attention to the provisions of
the first retainer which limited the capacity of the firm to increase the fees payable, failed to
provide an estimate of the likely impact of the proposed increase on the fees payable overall,
and failed to advise the client that he should obtain independent legal advice before signing
the new agreement.

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As a result, the Tribunal found that the solicitor had failed to afford the client the opportunity to
make an informed decision with respect to a contract which fundamentally affected his rights,
amounting to serious breach of his fiduciary duty.
When the matter was finalised, the firms professional costs amounted to $350,000. This was
calculated on the basis of time recorded of $280,000, plus a 25% allowance for care & con.
The bill included what were described as mundane items for:
Attempts to make telephone calls, but which calls were unanswered;
Attempts to telephone persons who were unavailable to take the call and for whom
messages were left to return the call;
Photocopying of an account received by the firm;
Drawing a form requesting the firms accounts department to draw a cheque in respect of an
account;
Diarising an appointment;
Telephoning Directory Enquiries or using the telephone directory in order to obtain a
telephone number;
Searching for documents and files in the firms possession which were unable to be located
readily;
Typing of formal letters by staff performing secretarial duties;
Arranging accommodation for counsel;
Internal telephone calls and emails.
It is worth noting that the Tribunal had found a charge based on the inclusion of those items to
be established; although it was not convinced that the amounts levied for unanswered phone
calls were substantial.
Perhaps more disquieting were some of the more outrageous examples cited by the Tribunal,
including:
12 minutes of charged-for time spent wrapping a box of chocolates to be given to a reporting
doctors secretary by way of thanks for facilitating the correcting of a report, and another 12
minutes spent discussing arrangements for the purchase of the gift for which momentous
engagements the respondent was on my calculation billed $156.
With outlays including counsels fees, the total bill was close to $600,000.
The client requested an itemised account, which was prepared by a costs assessor for the firm
(and for which the client was charged a further $45,000). The itemised account came to a total
(including outlays) of around $226,000 on the indemnity basis; which included a 75% allowance
for care and consideration.
Both the Tribunal and the Court of Appeal noted the long-established principle that a
difference between a costs assessment and a bill to a client does not necessarily prove gross
overcharging. The Chief Justice (delivering the leading judgment for a unanimous Court of
Appeal) however observed :
While it is true that a solicitor is not bound to charge a client no more than would be assessed
on the indemnity basis, one would nevertheless hope that such assessments would provide
a reasonable view of the broad bounds within which recovery might reasonably be sought.
But the Tribunal said only that these discrepancies did not necessarily establish gross
overcharging. It was correct in noting that the focus must rest on the bill as delivered.
The solicitor was found guilty of professional misconduct, a finding upheld on appeal.

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Relevance of the costs agreement


In the above case, the Chief Justice helpfully set out several additional views on the issues
raised by the case, which he collected under the heading The ethical approach .
One of those concerned the relevance of the retainer agreement. Of course, the position
of such agreements is enshrined in legislation and they form an integral part of modern legal
practice.
The Chief Justice appears to be addressing the argument (albeit not set out in the judgment)
that a practitioner cannot be found guilty of overcharging if they have charged in accordance
with an agreement signed by the client. As a response to that (implied) suggestion, the Chief
Justice said:
The circumstance that a solicitors right to exact certain charges is enshrined in an executed
client agreement will not necessarily protect the solicitor from a finding of gross overcharging.
For example, as here, the client may not have given his or her fully informed consent to
the agreement; or the very extent of the particular charges may itself evidence inexcusable
rapacity. It is repugnant to think of a solicitor withholding detail from a client, precedent to an
agreement, to the solicitors advantage and the clients disadvantage.
It is useful to refer here to some statements made in the New South Wales Court of Appeal in
Foreman [ ], per Kirby P (p 422):
Litigants look to this Court, ultimately, to protect them from over-charging by legal practitioners
where this is so high as to constitute professional wrongdoing. The courts of other Australian
jurisdictions have begun to deal determinedly with gross over-charging by legal practitioners
where this is proved to amount to professional misconduct ... No amount of costs agreements,
pamphlets and discussion with vulnerable clients can excuse unnecessary over-servicing,
excessive time charges and over-charging where it goes beyond the bounds of professional
propriety. Time charges have a distinct potential to result in overcharging ...
and per Mahoney JA (p 437):
... if costs agreements of this kind are to be obtained from clients, it is necessary that the solicitor
obtaining them consider carefully her fiduciary and other duties, that she be conscious of the
extent to which the agreements contain provisions which put her in a position of advantage
and/or conflict of interest, and that she take care that, by explanation, independent advice or
otherwise, the client exercises an independent and informed judgment in entering into them.
Accordingly, the mere entering into of a costs agreement that allows excessive charging
may, in itself, be capable of amounting to unsatisfactory professional conduct or professional
misconduct.
The unreasonableness of a costs agreement however does not, in itself, prove that the
practitioner has been guilty of gross overcharging.

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The undercharging defence


One of the matters that arose in the Queensland case concerned an argument that the
charges levied were not excessive because there were other matters for which the practitioner
could have charged but chose not to.
The argument was given short shrift by the Chief Justice , who stated:
it does not lie in the respondents mouth to reply, to a finding that the charges he did
specifically levy were grossly excessive, that there were others he chose to forego. Levying
grossly excessive charges to this extent amounts to professional misconduct whether or not
other charges for work have been foregone.

Time costing
The above case raises some interesting questions for those practitioners who calculate their fees
on a time costing basis. In the Tribunal at first instance, the solicitor had argued that there was
genuine confusion in the legal profession about the proper remuneration or basis of charging
for difficult matters.
If that was the case at the time (and the Tribunal made no finding on that particular point), it is
probably fair to say it remains the case. While time costing remains a popular, if not universal,
method of calculating fees, anecdotal evidence that has come to the Commissions notice
suggests many practitioners do not appreciate what can and what cannot be charged for.
As an example, in a recent matter in which the Commission was involved, a firm appeared to
be charging to clients many of the mundane items identified in the Queensland case. When
this was brought to the firms attention, their response included a concession that the partners
had directed staff to record literally everything they did on a file, no matter how mundane
and no matter how tenuous its connection to the prosecution of the matter. They explained that
they required this approach as a means of managing their human resources issues.
That management of a firm should want to be fully informed of what their staff members are
doing is entirely understandable; but such a situation could easily lead to clients being charged
for work they should not be charged for.
While it is beyond the scope of this paper to explore the pros and cons of time costing as
opposed to other methods of calculating costs, it is apposite to note some of the criticisms of
time costing. A commendably brief summary is provided by the Law Reform Commission of
Western Australia in its review of the Criminal and Civil Justice System (1999) .
The report noted that time based costs agreements:
are likely to involve a conflict between the duty of solicitors to their clients and their own selfinterest;
are apt to reward the inefficient;
lack anything that shows the appropriateness of the person for the work for example, a more
junior practitioner may well have been able to adequately complete the task; and
may encourage lawyers to over-lawyer.

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It continued:
The obvious concern with a system based on billable hours is that it provides an incentive to
undertake unnecessary work and to maintain inefficient ways of doing necessary work.
It might be added that, in addition, it provides an incentive for lawyers (and indeed, their staff
members) to:
pad timesheets to show more time spent on a matter than was actually the case;
duplicate work so as to boost the billable hours of those involved in the case (the so-called
camel train effect); and
invent ever more creative ways of working on a file (e.g. a file becomes too big and the
cover splits the client is charged for the time spent in replacing the split cover ).

Blended rates
A particular issue involving time costing is the use of so-called blended rates, where all staff
members work is charged at a supposedly median rate, rather than varying higher and lower
rates.
This became a particular focus in the Queensland case. The Chief Justice addressed the issue
squarely:
A careful explanation should ordinarily be offered for what have, in this case, been termed
blended rates. A client would usually be astonished to think he or she had to pay for the
solicitors secretary or clerk at the same rate as for the solicitor. Cases like this one should cause
careful clients to be circumspect about entering upon blended fee arrangements. A solicitor
proposing such an arrangement should offer a most careful justification for what is proposed, to
assure the client he or she is not being disadvantaged, and to inform the client appropriately
so the client may make the requisite fully informed decision whether or not to agree to the
proposal.
As observed by Gleeson CJ in New South Wales Crime Commission v Fleming and Heal (1991)
24 NSWLR 116, 126, to allow a simple, flat, hourly rate as the basis for charging for anything, of
whatever character, done by any solicitor of whatever seniority and experience in relation to
the matter, is difficult to justify. I add, even more so, where the rate extends to work done by
employees without legal qualification.
Increasing reliance by legal firms on paralegals and other non-qualified staff poses particular
challenges for the profession. As the Queensland case illustrates, the combination of heavy
reliance on non-qualified staff, time costing and blended rates is a recipe fraught with danger
for both clients and practitioners.

What is the test for overcharging in Queensland?


Having outlined the issues facing the profession and some of the relevant principles, the
question remains as to what test should be applied to determine whether overcharging (of the
type that might amount to unsatisfactory professional conduct or professional misconduct) has
occurred.
As mentioned at the outset of this paper, the starting point is to look to s.420 of the Legal
Profession Act, which speaks of the charging of excessive legal costs in connection with the
practice of law.

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Under the principles enunciated in the common law cases, for a practitioner to be found to
have committed a disciplinary breach in relation to charging costs, the disciplinary body had
to find that the fees charged were grossly excessive. The fact that fees allowed on taxation
might have been lower than the amount charged did not, of itself, prove gross overcharging. To
use the words of Justice Carr in De Pardo v Legal Practitioners Complaints Committee, the issue
was to see whether or not there is a gross overcharge, not just an unreasonable fee that would
not be allowed on a taxation.
This required an overall consideration of the bill (not just particular items in it) and questioning
whether the amount charged was substantially above what any reasonable solicitor would
contemplate as being a proper charge.
The requirement to prove gross overcharging set the bar rather high for professional regulators
(and, in turn, for the clients whose complaints prompted them into action). A practitioner
could be found to have overcharged, but if the overcharge was not grossly excessive, then
disciplinary action was bound to fail.
Does s.420 change the position? That question remains open, as the precise scope of s.420 has
not yet been tested.
Serious questions have to be answered in relation to the section, including:
Does excessive in s.420 mean the same as grossly excessive in the common law cases? Is
the absence of the word grossly from the section significant?
My personal view is that it probably is. If the legislature had intended to translate the common
law concept of gross overcharging into the statutory regime of the Legal Profession Act, it
would have been a simple matter to use the same terminology. The fact that the terminology
is different is most likely of significance.
How does a practitioner charge fees? Is it enough for the practitioner to sign off on a bill
prepared by an employee (qualified or not) of the firm?
The term charge is rather imprecise. There is a sense in which anyone who has anything to
do with preparing a bill is charging the fees to the client. To found a disciplinary charge
however, one would think that more is required. For example, simply processing a bill through
accounting software would not seem to amount to charging.
However, by the same token, it would seem to be open to conclude that a practitioner who
signs off on a bill or sends it to a client is charging the client. Such actions appear to indicate
an intention to hold the client responsible for the fees set out in the bill.
Does s.420 include an element of deliberateness? Does the practitioner in question have to
prepare and send the bill; or is it sufficient that the practitioner supervises the person who did?
Again, it is tempting to think that the absence of any reference to deliberate charging in
the section is intentional. If that is correct, then decisions such as Nikolaidis v Legal Services
Commissioner may not present the difficulties for disciplinary action alluded to above.
The mere act of sending a bill is, in itself, deliberate of course. The practitioner must be
taken to be holding the client responsible for fees in the amount stated in the bill. Whether the
practitioner deliberately intended to overcharge is, in my opinion, irrelevant to the scheme
established by the Act.
These are questions for another day, but I hope they will provide some guidance on the issues
posed by the Act and the regulatory scheme it establishes so far as they relate to overcharging.

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Appendix Two
Costs Management Checklist
Does your practice . . . . ?

Yes/no

Resp.

Provide regular training to fee-earners in relation to the costs requirements in the LPA2007?
Regularly review its costs disclosure statements for both compliance and its ability to
respond to client needs?
Always proactively discuss costs with clients in a first interview?
Use IT or other systems to prompt you when you meet milestones in terms of accrued WIP
(e.g. to prompt a costs update?
Regularly measure client satisfaction in relation to costs disclosure and billing?
Allow for flexibility in relation to fee and billing arrangements?
Encourage and support flexibility in relation to fee and billing arrangements?
Have a formal system for estimating the likely overall cost of a matter?
Audit and measure the promptness of costs updates to clients?
Measure the accuracy of initial estimates?
Provide regular training or guidance in relation to accurate estimating?
Use historical costs data as a basis for providing costs estimates?
Have agreed policies on time recording that cover issues such as research, travelling,
supervision etc.?
Provide regular training in relation to its time recording policies?
Provide training on the drafting and content of time recording narratives
Provide details to clients of its time recording policies?
Make padding and unethical time recording a disciplinary offence?
Implement arrangements as appropriate to limit the cultural and ethical risks that can
arise from demanding billable hour targets?
Implement delegation and workload management arrangements to ensure fee-earners
have sufficient work to meet billable hour targets without the temptation for padding or
unethical time recording?
Ensure bills are reviewed by a supervisor or partner before being sent to the client?
Build value in cost estimates and bills or when discussing costs?
Provide training to fee-earners on costs negotiation?
Automatically provide (or offer) clients with a full printout of all recorded time at the
completion of the matter?
Measure fee-earner performance according to a number of measures (i.e. not just billable
hours?)
Measure the % of time within the working day that can be accounted for?
Regularly review internal costs for different areas of work?
Measure WIP days and debtor days for different practice areas?
Measure recovery rates for different practice areas?

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Appendix Three
Further reading
Balls, A (1998) Law Firms Managing for Profit, The Federation press
Mark, Steve & Jamison, Amora, (2007) Analysing Alternatives to Time-Based Billing and the
Australian Legal Market, www.lawlink.nsw.gov.au/olsc
Legal Services Commission (Qld) (2008) Survey on billing practices (Medium to Large firms)
www.lsc.qld.gov.au
McFadyen, Graeme, & Vincent, Mark (2004) Profitability every minute counts: the imperative
of time recording, Proctor/QLS: www.qls.com.au
McFadyen, Graeme, (2004), The value of WIP?, Proctor/QLS: www.qls.com.au
McFadyen, Graeme, (2006), Low productivity means low profitability, Proctor/QLS:
www.qls.com.au
McFadyen, Graeme, (2008), Whats it worth?, Proctor/QLS: www.qls.com.au
Otterburn, A (2002) Profitability and Law Firm Management, Law Society Publishing
QLS, (2008) Client Care, Service & Communication, www.qls.com.au
QLS, (2007) Costs Guide, www.qls.com.au
Stewart, H (2003) Excellent Client Service, Law Society Publishing

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qls.com.au
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