3 Things You Need to Know about Litigation Budgets

Litigation budgets. Almost every client requires them, but what do you actually do with them? Do they get filed away with a checkmark to ensure that the law firm provided one? Do you enter the amount into your matter management system – without comparing actual spend to budget? Or do you have a robust system that allows litigation spend tracking and provides actionable intelligence on the management of your cases and law firm relationships? Litigation budgets serve multiple purposes, and identifying why you require them will help guide their level of functionality.

Encourage planning and milestone setting

In its most basic form, a budget encourages counsel to think about a matter from the outset, estimating the cost, scope, and duration of a matter. The creation of a budget should serve as a roadmap for the matter, identifying particular milestones and the estimate of the time and cost to hit each milestone. Ideally, this exercise should occur within the first few weeks of a case assignment, and a copy of the budget will then be furnished to all interested parties. Depending on the level of requirement, “interested parties” could include the in-house counsel, a claims manager at a TPA, and the attorneys working on the matter.

An easy way to measure law firm performance is to review the initial budget provided. Does the law firm provide a “stock” budget with the same total for all matters? Or does it appear that the firm has done their diligence in reviewing the facts and identifying costs accordingly?

Set more accurate reserves

One of the most important functions of a budget for the client is setting reserves. Clients, especially internal Risk departments, rely heavily on a law firm budget estimate to set reserves for litigation spend when a new matter is assigned to counsel. Setting reserves is required for the insurer or the self-insured employer – most specifically, under Sarbanes-Oxley for workers’ compensation matters. A client often relies on the estimate provided by outside counsel to provide the legal fees portion of setting a reserve. When these estimates are inaccurate, it causes problems down the line for the insurer. One effective way a client can measure outside counsel performance is to compare a provided budget amount to the total cost of case. How accurate (or inaccurate) was the budget? Did the law firm provide a revised budget when the matter changed from the initial outlook?

Create better billing habits

More proactive law and risk departments are not waiting until the end of a matter to identify issues with the budget, but instead are monitoring case spend-to-date in relation to the initial budget. When a case hits a threshold amount (usually 75-90% of the budget total), the claims manager or in-house counsel can confer with the law firm and require a revised budget. This type of case management encourages outside counsel to continuously review the work on the matter in relation to the budget and to make changes accordingly. It also allows outside counsel to learn better budgeting practices for future matters, with the goal of providing increasingly accurate budgets as their representation continues. Tracking spend to budget also allows the client to update their reserve information, providing a more accurate estimate for their insurers.

Before requiring budgets from outside counsel, law and risk services departments should consider their use. Knowing the purpose and communicating that use to counsel will provide a better understanding of why the request is being made. Also make sure to enforce all guidelines regarding budgets; if your outside counsel guidelines state that invoices exceeding a current budget amount will not be paid until a revised budget is provided, make sure the spend-to-budget is being tracked in order to enforce that requirement. Litigation budgets can be powerful case management tools when leveraged properly. So, how are you using yours?

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