Budgets are commonplace in our society. They are the rule when large amounts of money are necessary to finance a comprehensive project. Banks want to see budgets or plans before extending loans. Companies insist on budgeting for construction projects, advertising campaigns, and research and development expenditures. Public companies project their costs and expenses in quarterly and annual increments, with lawsuits a distinct possibility where the projections prove to be inaccurate. Individuals often insist on a budget or estimate for substantial undertakings like installing a new roof.
Despite the popularity of budgets for other major financial undertakings, most clients fail to demand meaningful budgets from their lawyers. The trend towards legal budgeting has begun, as some companies are now requiring outside counsel to submit budgets as a prerequisite for getting substantial legal business. What works for these sophisticated clients can work for all clients. This article explains why legal budgets are so critical to effective management of legal services, and provides the framework for creating an appropriate budget for a legal matter.
- Why Budget?
Most large legal matters are completed by lawyers billing by the hour. Hourly billing provides no incentive for lawyers to give any thought to how much a matter will cost a client. Even the merits of a case are of little concern to an hourly lawyer pitching for new business. Such a lawyer is primarily concerned with securing the business and verifying the client’s ability to pay.
Conversely, most other corporate vendors provide fixed rates after surviving a competitive bidding process. Such vendors must give prolonged thought to how much their services will cost so that they can estimate profit margins and provide a bid that is high enough to generate an acceptable level of profit, while low enough to be competitive.
The absence of a budget in an hourly-billing environment is an invitation to get bilked by lawyers who are compensated and promoted based primarily on the quantity of their reported time. Lawyers facing their firm’s often onerous billing expectations learn that legal tasks which are not subject to budgets are infinitely expandable. A comprehensive legal budget, drafted at the onset of a matter and updated as necessary to reflect ongoing developments, curbs excessive billing and has the following additional advantages:
- Since anticipated costs of a given strategy are spelled out in detail, it enables a client to assess the advantages of changing strategies or settling a case;
- By projecting costs, clients can more effectively budget the other needs of their business;
- A lawyer’s inability or refusal to budget a large legal matter provides the client with an inexpensive way to eliminate the lawyer from the selection process;
- The budget facilitates meaningful bill reviews; and
- Budgets force lawyers and clients to focus on what is really important in a matter. In the litigation context, this means focusing on the issues that will determine the outcome or settlement value of the dispute. By directing lawyers and clients to the heart of the matter, budgets enhance the quality of attorney performance.
- Characteristics of Effective Budgets
Not every legal budget facilitates a client’s legal management. Budgets can be a
complete waste of time or worse. Some attorneys use low-ball budgets as a marketing device. Once business is secured the lawyer uses subsequent events to rationalize ignoring or revising a budget. The converse problem is the enormous budget that is created without client consultation after the business is secured. Such budgets will project expenditures for wasteful services. The inflated budget can give otherwise improper fees an aura of legitimacy.
In order to ensure that the budget will actually assist the cause of excellent, cost-effective representation, legal budgets should:
- Create a binding fee ceiling, with some flexibility in the language to account for truly unforeseeable developments;
- Be part of the attorney selection process. Nobody in their right mind would hire a contractor to build a below-ground swimming pool in their back yard and first ask for a budget after the contractor digs the hole. A client’s maximum leverage in obtaining competitive budgets is prior to attorney selection. One possibility is to incorporate the budget into the retainer agreement. If time or expediency requires that an attorney be retained before submitting a budget, set the earliest possible deadline to reach an agreed-upon budget. This will provide some leverage and preserve the ability to change counsel if the parties do not agree on a budget;
- Specify clear goals, the tasks necessary to accomplish these goals, and the costs involved. A budget that focuses on fees and ignores the substantive goals of the representation is doomed to failure;
- Be revisited. Budgets should reflect ongoing developments. The revisions may include a price adjustment (if unforeseen events warrant a price change), changes in strategy, or, in litigation contexts, changes in settlement positions; and
- Be used as a tool to evaluate the attorney’s fees and performance on the entire matter, both while a matter is progressing and after a matter is over. Look at the initial budget – Was the matter handled within budget? Were modifications and surprises minimal? Were the goals of the client met? If the answers to these questions are all yes, chances are the client received high-quality, cost-effective legal services.
A final note of caution – be wary of the attorney who claims that the matter is too unpredictable to budget. Lawyers with high levels of relevant experience and competence will be able to project a likely course for any legal matter. Admittedly there are a lot of variables to the costs of legal services that make the budget process a difficult one for law firms. Law firms are not unique in this regard — hot dog vendors in New England beach towns pay a small fortune in rent to be adjacent to a beach with the hope that the weekends between Memorial Day and Labor Day will be sunny and not too hot. Some summers they make a lot of money, some summers they lose money, and most summers they make a moderate profit. Life is uncertain. Law firms are no more entitled to a sure thing than anybody else. Ask for a budget, and move on if one is not forthcoming.