Alternative Fee Arrangements: Beyond Hourly Billing

The Shift from Hourly Billing

Clients increasingly demand predictable legal costs. Alternative Fee Arrangements (AFAs) align law firm incentives with client outcomes while providing budget certainty.

Firms that master AFAs report higher client satisfaction and improved profitability.

Types of Alternative Fee Arrangements

Fixed Fees

Set price for defined scope of work:

• Best for: Predictable, routine matters
• Examples: Contract review, trademark filing, entity formation
• Advantages: Budget certainty, incentivizes efficiency
• Risks: Scope creep, underestimation

Capped Fees

Hourly billing up to a maximum:

• Best for: Matters with some uncertainty
• Examples: Simple litigation, contract negotiations
• Advantages: Client protection, firm upside on efficiency
• Risks: Cap set too low

Contingency Fees

Payment tied to outcome:

• Best for: Plaintiff litigation, collection matters
• Examples: Personal injury, business disputes
• Advantages: No upfront cost to client, aligned incentives
• Risks: No recovery = no payment

Success Fees

Base fee plus bonus for results:

• Best for: Transactions, complex litigation
• Examples: M&A, patent litigation
• Advantages: Reward for exceptional results
• Risks: Defining "success"

Hybrid Arrangements

Combination of fee types:

• Fixed + hourly for overages
• Reduced hourly + success bonus
• Phased fixed fees by milestone

Pricing AFAs Effectively

Data-Driven Pricing

1. Analyze historical matters: Actual time and costs
2. Identify cost drivers: What causes variance?
3. Build pricing models: Factor in complexity
4. Include contingency: Buffer for unknowns

Scope Definition

Critical elements to specify:

• Included vs. excluded services
• Assumptions about matter
• Change order process
• Out-of-scope pricing

Learn about legal project management for better scoping.

Managing AFA Profitability

Tracking Metrics

• Realization rate: Actual vs. standard hours value
• Matter profitability: Revenue minus cost
• Budget variance: Planned vs. actual effort
• Write-off rate: Non-billed time

Efficiency Improvements

• Standardize processes
• Leverage technology
• Use appropriate staffing
• Delegate effectively

Client Communication

Successful AFAs require:

• Clear written agreements
• Regular status updates
• Early warning on scope issues
• Post-matter reviews

Track AFA performance. IntelliBill provides profitability analytics for all fee types.

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