Alternative Fee Arrangements: An Explanation and Examples

Hourly billing has been the primary law firm financial model across prior decades. As is often said, the times, they are-a-changin. Plenty of in-house legal personnel are considering alternative fee arrangements, commonly referred to with the acronym of AFA. AFAs prove especially popular when law firms rely on outside counsel for assistance.

Why AFAs are on the Rise

AFAs are becoming increasingly popular with clients seeking legal service as they incentivize law firms to boost the staff members, seniority, and time dedicated to tasks. The AFA approach is especially appealing to clients as it provides pricing certainty and predictability in terms of costs. AFAs are also revered as they expand opportunities for operational efficiency, reduce risk, and help in the context of cost savings. 

Statisticians who have crunched the numbers from surveys and reports have found nearly 70% of all law firms indicate they are working with clients to create AFAs that prove mutually beneficial. The interesting twist to the rise of AFAs is that the clients tend to broach the subject matter as opposed to law firms. Let’s take a look at some examples of AFA options.

Blended Hourly Rates

Blended rates for legal service are best described as universal hourly rates pertaining to assistance provided by several law firm staffers who would have otherwise billed at different rates that did not relate to their unique level of seniority. For example, a law firm or client can negotiate a blended hourly rate of $300and the firm can determine if it makes sense to assign the work to a senior partner who earns more than this hourly rate.

The advantage of blended rates is that they safeguard clients against the prospect of firms providing low value to senior staff that charge comparably more. Clients don’t have to pay more than the agreed-upon blended hourly rate. Yet, the downside is attorneys don’t have the financial incentive to work with the utmost efficiency, meaning more hours dedicated to the project will hike the service cost.

Fee Caps

Fee caps are hourly billing arrangements that set a maximum payment at the start of the firm-client relationship. For example, if an attorney’s billable rate is $400 per hour, both sides can agree the firm will not charge in excess of$40,000 for services pertaining to the matter. The fee arrangement is centered on the hourly billing model, yet it provides enhanced predictability in that both sides understand the maximum amount of money that will change hands before the point at which legal service commences.

Risk Collars

This hourly billing arrangement is centered on boosting efficiency. The attorney handling a legal matter earns a specified bonus if the work is completed for less than the budgeted amount. The attorney can also provide a discount if the service ends up over budget. 

Fixed Fees

Fixed fee menus are similar to those provided in restaurants, yet legal services take the place of entrees. The law firm provides a specific list of services at predetermined rates. Flat fees can be added to base prices if both parties agree to such an arrangement. However, fixed fee arrangements are typically restricted to corporate law and the banking industry as they most often relate to repetitive tasks.

Contingencies

In legal billing, contingencies are payment structures centered on specific legal results. For example, suppose a law firm emerges victorious in a legal matter and a contingency is in place. In that case, it can bill for a specific percentage of the awarded recoveries, tacking on that money to the baseline hourly rate. Contingency fees are typically used in the context of litigation in which injured or otherwise-wronged parties desire financial compensation for negligence.

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