Arrangements,” ACC Value Practice (June 2009), available at
“Aligning the Interests of Client and Firm in Complex Litigation and Complex
Transactions- Practices Implemented by Womble Carlyle Sandridge & Rice,” ACC Value
Practice (Dec. 2009), available at
“Class Action Defense Via Flat Fees & Performance Incentives . . . Nationwide Insurance
and Fowler White’s Different Approach,” ACC Value Practice (Nov. 2009), available at
“How to Migrate from Traditional Billing to Alternative Fees,” ACC Value Practice (Dec.
2009), available at
Capped Fees Under an Hourly Rate
Capped fees under an hourly rate approaches are commonly used to set a ceiling on what the
client will pay the law firm on a particular matter, or for a particular piece of work. Examples
include payment of not more than X to prepare and argue a summary judgment motion, and
payment of not more than Y to close an M&A transaction.
■ Advantages: When executed properly, this approach resembles a fixed fee
(discussed above), but in theory gives the client the added up-side of paying less if
the law firm bills fewer hours than anticipated, thus not reaching the cap.
■ Drawbacks: While this advantage sounds good, many observers have noted that
the interests remain unaligned. The law firm does not have the incentive to invest in
approaches that would reduce the cost of producing that piece of work, because it
does not share in any upside for doing so. And since firms know they can bill until
they reach the cap, many don’t attempt to control their costs until they are
approaching the limit. There is also a concern about overpaying if the client selects
the wrong ceiling, not having done enough comparative assessment. While
theoretically, there is a risk of this occurring in any fixed fee structure, the risk of
choosing the wrong ceiling is particularly high under a capped fee structure because
caps are often set without first performing the robust level of data analysis that often
precedes the structuring of a fixed fee. Still, this approach provides a stronger level
of financial discipline as compared to unbridled hourly rate billing.