Fees in a table-free world
Some advice on calculating hourly fees without the Society's Table of Fees, withdrawn from 1 July 2005
For many firms, the Table of Fees published each year by the Law Society of Scotland used to provide a very helpful guide to setting fees that were, hopefully, fair to both the client and also to the firm. Its withdrawal by the Council earlier this year means that many firms will, perhaps for the first time, have to look carefully at the cost of running their business and calculate for themselves the hourly rates they should be charging.
Some firms used to find the table of less value because their fees were basically determined by the market – there are going rates, for example in conveyancing, over which they have little control, and which they have to quote if they are to keep the business. Even in these circumstances it can still be useful to work out periodically what hourly rate the lawyers in your firm should be aiming to achieve.
Calculating expense rates has the potential to be hugely complicated. This article outlines an approach based broadly on the Cost of Time Survey. This methodology was originally set out in a booklet produced by the Law Society of Scotland several years ago – “The Cost of Time”, which is also set out in the Fees Supplement to the Scottish Law Directory.
Let us assume a firm with four equity partners and another three fee earners – two solicitors and a trainee.
Its financial year runs to 31 March, and the partners have prepared a budget for the year to 31 March 2006. The easy part was salaries, which are reviewed annually on 1 April. They have taken a view on the salaries to be paid over the coming year, and these are summarised in table 1 for fee earners and their secretaries, and table 2 for support staff.
Table 3 shows the overall budget, which comprises these three salary totals, adds employers’ national insurance, and adds the total expected level of overheads. These are forecast at £225,000.
The Cost of Time methodology takes these projected costs and makes an allowance for a number of other items:
- An allowance for a “notional salary” to be earned by each of the partners – something approaching a market rate for a partner in their role of a fee earner. In this case a figure of £55,000 has been used. This is included so as to include a “cost” for each partner in the calculation.
- In this example the firm pays a commercial rent for its offices. However in many cases the partners own their offices and often do not pay themselves rent. Where this is the case a notional rent should be included, once again so as to reflect the true cost of running the practice.
- The four partners have £230,000 capital tied up in the firm, in effect an interest free loan. In the recent Cost of Time report interest was calculated at 4%, and that is what has been included here, although you could simply apply the rate you would be charged by your bank.
- Finally, an allowance is made for partner pension provision, and the Cost of Time uses a figure of 17 1/2%.
Table 4 considers each level of fee earner and takes a view on the total hours likely to be chargeable. Ideally this would be based on time records, although in this case, because these are unreliable, we have used the figures assumed in last year’s Cost of Time Survey published by the Law Society of Scotland. These assume, for example, that a partner will only bill 1,000 hours a year (or around 4 1/2 hours a day), even though they may be in the office from 9.00am to 6.00pm – nine hours. Much of their time will be spent on management of the firm or on supervising other staff, or marketing. One thousand two hundred hours is assumed for other fee earners and 800 for trainees.
It is of course preferable for all fee earners to record their time – both their chargeable and non-chargeable time – even where they are working on a fixed fee basis and do not bill according to time spent. Time recording is a wonderful discipline for more effective time management, and, although often unpopular, is a fundamental management tool. It is the key to understanding how much a matter has cost. The table indicates that (hopefully) we will record and be able to charge clients for approximately 7,200 hours of work.
Finally, table 5 illustrates an expense rate for each level of fee earner. It takes the salary of each fee earner and allocates overheads and other salary costs across the fee earners.
In this example the total of overheads, secretaries, central staff and the other expenses allowed for in the calculation amounted to £465,700. Table 6 shows how this total was calculated. It is for you to decide how to allocate them – there is no right or wrong way. This firm has tried to spread it according to seniority, with half shared equally and the other half allocated pro rata to the fee earners’ salaries.
If you manage to sell the 7,200 hours at the expense rates in table 5, you should produce a total fee income of £757,000 and an income for each of the partners of £55,000. Arguably they could earn that by working for someone else, so an income of £55,000 provides no additional reward for the risks of running a business. You should aim therefore to set rates higher than this to generate a more reasonable profit.
Having calculated an hourly rate, the final stage is to apply that to the particular matter and arrive at a fee. The old Table of Fees cited seven factors that should be taken into consideration, and in our view these still hold good:
- the importance of the matter to the client;
- the amount or value of any money or property involved;
- the complexity of the matter, or the difficulty or novelty of the question raised;
- the skill, labour, specialised knowledge and responsibility involved;
- the time expended;
- the length, number and importance of any documents or other papers prepared and perused;
- the place where and the circumstances in which the services were rendered.
It is for each firm to decide what is most appropriate for it. However our advice would be that it is extremely useful to know the minimum average fees your firm needs to charge for different levels of staff. As competition increases it will become ever more important.
In April the President of the Society wrote to all firms inviting them to participate in the 2005 Cost of Time survey. This will provide historic data on the cost base of the profession. Participation is free and carries a three hour CPD credit as well as an individual report on cost rates in the firm and a copy of the survey report. The individual report calculates all these figures for you. In recent years there has also been a prize draw. Completed questionnaires must be returned by the end of August.
Please refer to the downloadable PDF file of this issue to view the tables