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We prefer value–based billing as opposed to billing by the hour. Clients generally do too. Clients tend to dislike the billable hour because it’s often unpredictable. Without an estimate of what the final cost might be, clients many times have unrealistic expectations about the total amount that they expect to spend. This can lead to unpleasant surprises when the final bill arrives. Even if an estimate is provided to the client – a client is told that a particular matter will cost between 10-14 hours – the client is thinking, “Well, 14 hours cost a lot more than 10 hours. I’d prefer to know up front what the final fee will be.”
Other Problems with Hourly Billing
Communication is Stifled
Billing by the hour can hinder communications between the client and attorney. A 15-minute phone call to an attorney that uses an hourly-billing model can result in the client being billed for .25 hours of attorney time. If the attorney’s hourly rate is $250, every 15-minute call will cost the client $62.50. Naturally this structure discourages attorney-client communication. Questions go unanswered and concerns are not addressed because the client is hesitant to contact the attorney.
Inefficiency is Rewarded
Billing by the hour rewards inefficiency. Instead of being motivated to complete the matter quickly and efficiently, the attorney is rewarded for taking more time to complete the work. That is, the attorney is paid more for putting more time into the matter, even if the additional work adds little value to the client.
“Value pricing” is a term used to describe a pricing structure that sets fees based on the value of the work done for the client, and is done before the work begins so that you know how much you can expect to pay ahead of time. Our firm uses a value pricing model for most situations.
Value pricing is not about the time involved; it's about the solution! Value pricing offers many advantages over the traditional hourly billing model:
An up-front fee quote is provided so that the client knows what to expect – there are no unpleasant surprises when the bill comes.
Open Communication is Encouraged
You are not “on the clock” for every phone call or e-mail so you can contact us with any questions, knowing you won’t be billed for every single response.
Efficiency is Rewarded
The attorney is rewarded for being more efficient in handling the matter rather than just for the time involved.
Hourly Billing is Sometimes Necessary . . .
However, there are situations where the value pricing model breaks down:
Undefined Scope of Work
Sometimes the scope of work is impossible to define in advance due to the open-ended nature of the project. This often occurs in transactions that involve many parties, negotiation, due diligence, or document.
New Information or Changes in Circumstances
The value pricing model assumes that the attorney has accurate and sufficient information to estimate the work involved in the representation. If the scope of work changes due to new information or changed circumstances, the scope of work may increase substantially, resulting in much more work for the attorney.
Interrelated Issues to Address
If there are multiple issues to address and the scope of work for one issue is dependent on the resolution of other issues, then the attorney may not be able to provide an accurate estimate of the overall project scope.