It’s not a new question. Since the 1980s, when law firm billing practices changed dramatically from “for services rendered” to detailed accounting of charges, law firms and corporate law departments have been struggling to find the optimum approach to contracting for legal services. The latest attempts, advertised variously as “value challenge,” “value based billing,” or other designations, again raise the ageold question of whether there is a place for charging by the “billable hour.” The short answer, in my opinion, is yes. Change just for the sake of change is not the answer.
At the outset, I should note that my support is not for “your grandfather’s” billable hour. The “for services rendered” approach is indeed dead, as it should be. However, the idea of eliminating billing by the hour is not a new argument. Instead, the billable hour shouldn’t be under attack and should be included in any lawyer’s arsenal of forms for contracting for legal services.
A little history is in order. In the 1980s, when the billable hour was first being attacked, the advocates for change suggested that fixed-fee contracting was the preferred alternative. Strangely, the same argument had been made by the then secretary of defense in the 1960s when he advocated contracting for all military procurement on a firm fixed price basis from design, development and production to support. Unfortunately, the government continued to maintain the view that they would retain the right to direct performance of these contracts. The result: wholesale claims for constructive change orders and lawsuits.
Eventually, the government settled on what should be instructive for law firms and law departments alike to recognize. Contracts for legal services should be tailored to fit the project at hand – the more the task can be specifically defined and contained, the greater the use of fixed-fee type of contracting is appropriate. The more the task is unknown, unknowable, or difficult to firmly determine, the more the contract should be “cost-plus” (in government parlance), “time and material” (in construction industry parlance) or “billable-hour” (in legal parlance). Federal Acquisition Regulation FAR Part 16, “types of contracts” should be required reading for both sides in this question. One part of this section provides, in essence, that cost-plus contracts (or “billable-hour” contracts in our case) are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract. It should also be noted that there are various sub-forms of contracting: firm fixed price, fixed price incentive fee, cost-plus incentive fee, cost plus fixed fee and even some other creative combinations. They are all viable alternatives to be chosen based on the predictability of the work.
How does the in-house bar view this approach?
• Fixed-price contracting should save money and is predictable – the task can be ignored until it’s done. • Billable-hour contracting is wasteful. • Other products are sold at fixed price, why can’t legal services be the same? • How do I effectively manage a bill able hour contract given the need for in house budget predictability? • If a fixed-price contract necessarily has built-in contingencies, wouldn’t a billable- hour contract be cheaper? • Who takes the risk of over- or underruns for either form of contract? • Who should take these risks? • How does the private bar view this dilemma? • Fixed price is scary. • Fixed price yields less profit. • Fixed price yields more profit. • Billable-hour contracting is too traditional to change. • Legal services are too indeterminate to ever be contracted fixed-price. • How would we manage a billable-hour contract to keep our client happy? • How would we manage a fixed-price contract to keep us both happy?
In sum, these are all legitimate concerns, but frankly, focus on the wrong issue. Instead, the focus should be on the FAR definition of choosing the correct contract vehicle to suit the task at hand. For example, there are firms that quote preparation of patent applications, workers’ compensation defense, depositions, motions and certain parts of transactions on a fixed price basis. Some would argue this has led to commoditization of legal services. Many others argue that overall litigation and transactional work can never be contracted fixed prices. Yet lawyers would be well served to focus on crafting a form of contract appropriate not only for a task in its entirety, but perhaps on parts of a task that may lend themselves to alternatives.
In the end, both parties need to be happy. Firms are looking for long-term client relationships and law departments are searching for law firms to perform legal tasks that will make law department budgets predictable. Irrespective of the form of contract chosen, neither side can afford to ignore the project during performance. Once a contract form is selected, the focus has to be on estimating and managing. Marvin Genzer