Hourly billing is the most common fee arrangement you will encounter when working with law firms. The concept of a “billable hour” can seem a bit strange at first, especially for clients more accustomed to dealing with other professions.
This guide will help you understand how billable hours came to be a standard practice, how they work, the main advantages and disadvantages of hourly billing, and some alternative fee arrangements to consider.
The ways attorneys have billed for their services have changed quite a bit over the years. However, the development of the billable hour as a standard practice in the legal profession makes a bit more sense when put in the context of earlier billing practices. The following historical timeline provides an overview of the evolution of legal billing practices in the United States:
The term billable hours refers to time spent by an attorney, paralegal, or other law firm employee on work for a client which is chargeable to that client.
Not all work done within a law firm should be billable. Things such as administrative work, internal meetings, continuing education, and other non-client matters can be deemed not billable.
Travel time is often billable, but in many cases the fee agreement stipulates that travel time will be paid at one half the normal billing rate. If the attorney is travelling by plane or train and actively working on client matters, they can typically bill that time at their normal rate. Double billing, or the practice of charging Client A for travel time on their behalf while simultaneously charging Client B for work conducted during that travel, is considered to be unethical by the American Bar Association.
As we discussed in our article on billing increments, time is usually billed in increments of 0.1 hours (or six minutes) each.
In most cases, the time gets rounded up instead of down, so the time billed for a task is generally slightly more than the time actually spent working on it. Even with completely accurate timekeeping, rounding all the values up means that across a large number of tasks each one will be overbilled by an average of 2.5 minutes.
This may not seem like much, but it can add up to serious money when spread across the thousands of individual line items which make up a large case. Implementing a legal spend management program and establishing legal billing guidelines for outside counsel are two of the best ways to help keep these costs under control.
Billable hours are the principal internal metric law firms use to measure employee productivity. Law firms typically require their attorneys to bill a minimum of 1,500 hours per year on the low end to around 2,200 hours per year on the upper end. Billability on hourly fee agreements is important to the law firms because it covers salaries, overhead, and profit, so there is a lot of pressure on the associates to hit their billing targets.
It’s so important to the bottom line in fact, that there is a thriving industry of lawyer success coaches who advise law firms and attorneys on improving productivity metrics such as their “capture ratio”, or how much time they need to spend in the office to achieve a certain number of billable hours.
The best counter-measure a company or corporation can take is through the implementation of a continuous legal bill review program administered by experts who evaluate on a regular basis whether the time you are being billed for a particular task is fair or reasonable. These experts understand the advantages and disadvantages of hourly billing, discussed below, and can use this understanding to the client’s benefit.
Hourly billing offers the following advantages to clients:
Despite the aforementioned advantages of hourly billing, it also has the following disadvantages which can often outweigh the benefits, depending on a client’s specific needs:
The concept of alternative fee arrangements is a relatively new idea to emerge in the legal industry over the past few decades, especially in the field of corporate law. The primary driver behind this has been the need of corporate legal, risk, and claims departments to have more predictability over their legal costs.
Alternative fee arrangements can get quite complex, but some of the more basic options which may be considered to help clients move beyond standard billable hour arrangements include:
Despite some of the drawbacks and the plethora of alternative fee options out there, hourly billing is not always the terrible deal that some make it out to be.
If you’re working with a law firm with whom you have a trusting relationship, and combine that with an experienced legal management partner to provide a continuous review of invoices to make sure nothing slips through the cracks, hourly billing can often be an effective and efficient way to get things done. It provides a level of transparency which isn’t always present in other fee arrangements, and because it’s something familiar there are rarely any surprises.
Even with all the other fee options growing in popularity, it’s unlikely that hourly billing in the legal profession is going away. Whether you love them or hate them, billable hours are here to stay for the foreseeable future.