How to Set Your Billing Rates for Legal Services

Today's market and the increased client sophistication when selecting legal services, are making it necessary to carefully evaluate billing practices. Whether you prefer task based billing, value billing, hourly billing or other alternative billing methods, it is crucial to know what the cost of each billable hour is.

Only after you have determined the cost of each billable hour, will you be able to structure your fee arrangements. The calculations show you where the break-even point is, as well as what your profit margin is.

Following is a sample calculation based on a solo practitioner with a monthly salary of $5000 and a secretary at $2000 per month. The office rent is estimated at $2500, a part-time runner/clerk at $500 and taxes, insurance, supplies, etc. at a total of $2600 per month.

Formula for Solo Practitioners (May be Adjusted for Groups)

Example:

    Total monthly expenses:          $12,600.00

   less attorney's salary:          $ 5,000.00
                                   ___________

   Overhead costs:                   $7,600.00

   divided by billable hours:        160 hours

   Overhead cost per billable hour      $47.50

   plus attorney's rate (5000:160)      $31.25
                __________

Total cost per billable hour:            $78.75
                                    ==========

Conclusion

This calculation results in a cost of $78.75 per billable hour. If you billed your time at $78.75 and your fixed and variable expenses were the same as in the above example, you would be at break-even. Any billing above $78.75 would result in profit.

The danger in this analysis is that it makes no allowance for billing adjustments, such as write downs or write offs. Furthermore, it requires 37 hours to be billed each week.

Therefore, while it is absolutely necessary to know the cost of each billable hour, you must take the collectibility variables into consideration when setting your fee.

In the interest of good client relations, it is well advised to communicate your billing practices with the client before entering into an engagement. This will not only promote good client relations, but it will also increase the collectibility of your accounts receivable.