It pays to implement an effective billing system—literally. On the front end, having a system in place increases realization rates because it gets money in the door. On the back end, fee disputes and related malpractice claims can be minimized, if not avoided altogether. Knowing the fundamentals of billing and collections can make the world of difference for any law practice from both a financial and risk management perspective. Here are five steps worth considering when implementing or revising your billing and collections processes.
Determine Fee Arrangement Before Attorney-Client Relationship Begins
Subject to market conditions and the simple economics of supply and demand, lawyers typically enjoy the ability to negotiate fees with a prospective client. The best way to minimize problems down the road is to finalize the negotiations before the attorney-client relationship commences. In negotiating a fee arrangement, the most significant requirement under the ethical rules is that the fee must be reasonable. In addition, fee agreements cannot penalize a client who decides to terminate an attorney at any time. (Notably, requiring a client to pay an attorney for the time spent on the representation prior to termination is generally not an unreasonable term.) If the fee arrangement is not finalized until after the representation begins, the attorney and client may already be in a fiduciary relationship at that point. Attorneys have to take care not to use information learned in the course of the attorney-client relationship to the attorney's advantage and to the client's detriment in negotiating the fee. If a client challenges the fee later, courts and bars will look to whether the attorney took advantage of the client's need for continued representation.
That is not to say that mid-representation fee changes are impermissible. In fact, they happen frequently, such as when an attorney's hourly rate changes due to market conditions. This is fairly routine. For a major fee change mid-representation, however, the attorney could recommend that the client consult with independent legal counsel regarding the amended fee arrangement. Attorneys who advise clients on new fee arrangements during the representation that seriously alter the previous terms may be subject to heightened scrutiny.
If the attorney or law practice expects to get paid on a monthly or quarterly basis, that is something that can be discussed with the client at the outset of the representation. Similarly, if the fees are expected to be paid directly from settlement proceeds or at closing, tell the client.
Avoiding surprises is the most important risk prevention technique. When both attorney and client have set their respective expectations (and adjusted them as appropriate), then the attorney-client relationship begins and proceeds on the same page.
Memorialize the Fee Arrangement
There has been considerable commentary regarding the implications of a "fee agreement," particularly whether written agreements extend the statute of limitations for legal malpractice claims. However, the risks of failing to document a fee arrangement far exceed the risks of an extended statute of limitations.
A great majority of fee disputes involve the amount of the fee itself. The simplest and most effective method for avoiding this type of dispute is simply to agree in writing to the terms of the fee arrangement and to have the client sign the document confirming the fee arrangement.
Sending out bills on a regular basis helps show the client—in close to real time—what tasks are being completed and what charges are being incurred. Then, if the client objects to the services or has a problem with the charges, such issues can be addressed quickly. If the attorney is not sending bills on a regular basis, however, the client may later object to the fees (even if the client would have paid the same aggregate amounts if invoiced at regular intervals). Most attorneys will recommend informing the client what the fees are or will be well in advance of the request for payment. For the hourly fee attorney, this means sending out bills regularly so that the client gets a sense of what the fees and costs are. What constitutes "regular" billing will obviously differ based on the circumstances of each representation.
If there is little activity while a motion or appeal is pending, then bills might not be sent for a few months. On the other hand, if there is significant activity, then bills might be sent on a monthly basis.
For transactional representations, providing a pre-closing preview of the closing statement with the fees is helpful. For contingency fees, pre-settlement previews of the amount of the fees is appropriate. If the representation involves significant out-of-pocket expenses for which the client is responsible, consider interim bills. The key is to make sure the client understands (and accepts) what the projected fees are before they are locked in by a closing or settlement to avoid a fee dispute.
Timely Address Unpaid Bills
Unpaid bills are problems waiting to happen. The sooner those problems are identified and resolved, the better. While many attorneys do a good job at documenting the fee and sending the bills, they may do a poor job on the follow-up. Rather than leave the follow-up to chance, the better approach is to set an internal deadline for following-up on outstanding bills. This contact enables the attorney to determine if the client has any issues with the bill or whether the failure to pay is a simple oversight or intended delay.
If there are concerns or issues about the bills, then the attorney should address them. If nonpayment is an oversight, then the contact will serve as a friendly reminder. If it is intended delay, then the attorney and client can discuss what the limitations are and how they might be addressed.
There is no magic time for following up. Instead, it will depend on the contours of the relationship with the client.
For attorneys and law practices that follow the steps discussed above, fee collections can be a little less daunting. For attorneys and law practices who do not, it is never too late to put the systems in place or revise existing ones. Your balance sheet and law license will thank you.