How to price legal work at a small firm
A small firm can be busy every week and still be short of cash, because the price of a matter was set before anyone knew what the hours behind it cost. This guide is for partners, practice managers and solo practitioners who set rates, quote flat fees and chase unpaid bills. The sections on cost rates, flat fees and matter variance apply just as well to accountants and consultants. Every number comes from your own records: time recording and practice management software, payroll, the firm's accounts and your engagement letters. The rules on fee arrangements, referral fees and client money are set by your jurisdiction and professional body; the calculators simply apply the terms you enter.
1. Know what an hour costs before you set what it bills
A billing rate means little until you know the cost behind it. Work it out for each timekeeper, meaning anyone whose time is billed to clients: partners, associates, paralegals and trainees. Take salary and benefits from payroll, and allocate a share of overhead from the firm's accounts: rent, practice management software, insurance, professional body fees, support staff and IT. Then take billable hours from your time recording software, using hours actually recorded rather than a target. The timekeeper cost rate calculator returns the loaded cost, the cost rate per hour, the margin per hour and as a percentage at the bill rate you enter, and the break-even hours each person must record. If you are not sure how many of the hours in the office are billable, the utilization rate calculator and the billable hours calculator help you get an honest figure.
2. Price flat fees from hours at cost, not from the firm down the road
Clients ask for fixed fees on conveyancing, wills, employment claims and corporate work because they want certainty. Another firm's fee tells you nothing about how long your team takes. Pull the recorded hours from a handful of closed matters of the same type in your practice management software, split by partner, associate and paralegal. Enter those hours at each person's cost rate from section 1, add expected disbursements, a scope contingency for the matters that run long, and the margin you want on the fee. The flat fee matter price calculator returns labour cost, total cost, the flat fee and the effective hourly rate it earns. Write the scope and the exclusions into the engagement letter so extra work becomes a new quote, not free time. If you are converting a familiar hourly matter, the hourly to fixed fee calculator gives a quick check.
3. Track every matter against its budget and act on the variance
A budget only helps if someone looks at it while the matter is still open. At set points, such as each month or each stage of the matter, compare budgeted hours and fees with actual hours and fees recorded. The matter budget variance calculator takes those figures and the agreed fee and returns the hours and fee variances, the realized rate, the write-off and the recovery percentage. When a matter is running over, decide early: tell the client and agree a revised estimate, move work to a lower cost timekeeper, or accept the overrun and record why. Feed the actual hours from closed matters back into your flat fee quotes in section 2.
4. Measure realization: recorded, billed and collected
The hours you record, the amount you bill and the cash you collect are three different numbers. Time gets written down before the bill goes out, bills get reduced after a complaint, and some are never paid. Each month, take recorded time at standard rates from your time recording software, billed amounts from your invoices and collections from the firm's bank account. The realization rate calculator splits this into billing realization, collection realization and overall realization, with the effective rate you actually earned. Run it per fee earner and per matter type as well as for the firm. A matter type that keeps showing write-offs is priced wrong or scoped badly, and the matter budget variance calculator will show you where.
5. Shorten lock-up, the gap between doing the work and being paid
Lock-up is the time your money sits in unbilled work in progress (WIP) and unpaid bills. Take unbilled WIP from your practice management software, receivables from your aged debtors report and annual fees from the firm's accounts. The lock-up days calculator returns WIP days, debtor days, total lock-up days, the cash locked up and the cash each day of lock-up holds back. The two halves need different fixes. High WIP days mean you bill too late: bill at agreed stages, take money on account where your rules allow, and stop waiting for a matter to finish. High debtor days mean you collect too slowly: set clear terms with the invoice due date calculator, follow up on a fixed schedule, and apply any late payment charge your terms allow with the late fee calculator. The cash runway calculator shows how long the firm can cover its costs while that cash is tied up.
6. Check contingency and referral arrangements from both sides
A contingency or conditional fee looks generous on a large settlement and thin on a long, hard case. Look at it from both sides before you agree it. Take the settlement figure, the contingency percentage and any referral percentage from the engagement and referral agreements, case costs from the matter ledger, and hours from your time recording software. The contingency fee split calculator lets you deduct case costs before or after the fee, as your agreement states, and returns the gross fee, the referral fee, the net to the firm, the net to the client and the effective hourly rate the firm earned. Compare that rate with your cost rate from the timekeeper cost rate calculator to see whether the case paid for the time it took.
7. Review rates and fee types once a year with the matter data in front of you
Pick one month each year. Rerun each timekeeper in the timekeeper cost rate calculator with this year's payroll and overhead, then reprice your main flat fees in the flat fee matter price calculator using hours from matters closed that year. Look at realization and lock-up by matter type, and ask which work should move from hourly to fixed, which fixed fees need a new scope, and which clients take more hours than they pay for. The client capacity calculator shows how many more matters your team can take before you need to hire, and the retainer calculator helps price ongoing advisory work. If you want the whole routine in one file, the Law Firm Pricing Workbook keeps cost rates, flat fee quotes, matter budgets and lock-up figures together for the annual review.
The mistakes that cost the most
- Setting rates without cost rates. A bill rate that looks healthy can sit below what a timekeeper costs once overhead is allocated. Check margin per hour in the timekeeper cost rate calculator.
- Flat fees with no scope or contingency. Without written exclusions and an allowance for matters that run long, every extra hour comes out of your margin.
- Looking at matter budgets only at the end. By the time the bill goes out, the write-off has already happened. Check variance while you can still talk to the client.
- Treating lock-up as one problem. Slow billing and slow collection need different fixes. Split WIP days from debtor days in the lock-up days calculator and work on the larger one.