Pricing Legal Services
Setting fees for legal services is obviously a major issue to consider, not only when establishing your practice, but throughout the life of your law firm. There are various ways to price your fees. Some methods require heavy calculations, while others simply require you to survey the market to help determine your fees.
Overhead Plus Method
One method of pricing requires that you first determine your annual costs of operating a practice. Annual operational cost is calculated by adding all expenses connected to your practice, such as office rent, equipment, salaries, supplies, taxes, insurance and utilities.
Then, calculate the number of hours billed in a year. Go back through time billing records to help determine this figure, or estimate the time spent on matters.
Next, divide the annual operating cost by the number of billable hours. This calculation will yield your practice's overhead cost per hour. The overhead cost per hour is the bare minimum you need to break even with your law practice.
Finally, add an amount to the overhead cost per hour to arrive at your hourly billing rate. The amount added should reflect the profit you realistically expect to realize from running your practice.
After arriving at your billing rate, investigate your rate in relation to the competition. Are you on the high end or low end of the market? You may need to adjust up or down depending on your level of variance from the main segment of the market.
For example, if your hourly rate is significantly lower than the general market rate, you may want to raise the amount you added on to the overhead cost. This extra income will enable you to schedule marketing, business development and pro bono activities into your practice budget.
Surveying the Market
A second major method of setting prices is to survey the market for similar legal services in your community.
Setting fees by surveying the market is more of an art than a science, and it requires you talk with other lawyers and/or investigate their advertising materials for some indication of what they charge for any given transaction or matter.
This method requires you to set a fee that balances the prices of others with your own goals and needs. You can use the survey method to establish hourly fees as well as flat fees for handling a matter.
The scope of this article does not address the many different types of client matters that may arise. For any given matter, however, you should ask yourself these questions:
How much time and effort is required to adequately handle this matter?
Do you have any particular skill in handling this matter?
How much are others charging for handling this matter?
How much money is involved in the matter?
How and when do you get paid?
Regardless of the method you use to set fees, the cost of running your practice should not exceed your hourly billable rate. If you intend to run a profitable law practice, your expenditures should not exceed your profits.
When calculating your cost of running a practice, consider what you will charge for disbursements. Disbursements include things like mail and courier services, photocopying, faxing and long-distance telephone calls. Often, lawyers charge clients for the cost of the service, or the cost plus a nominal amount. Some firms may wish to absorb the disbursements if the costs are relatively small.
Also, try to determine the disbursements that will accompany the types of cases and clients you will represent. For example, contract negotiations frequently require excessive fax, telephone and next-day mail services.
Your decision to use one method over another, or a hybrid of both, will depend on your particular circumstances. Lawyers starting their own practices after working in firms usually have a clear idea of the market rates for their areas of practice. New attorneys seeking to go solo or start a small firm would do well to speak with bar associations and other lawyers in their desired field to help determine a reasonable fee for legal services.