Law firms abjure fixed fees because of the magnitude of uncertainties, not because they don’t know their costs

Corp. Counsel, Vol. 14, Dec. 2007 at 22, extracts some findings from the fourth annual litigation trends survey conducted by Fulbright & Jaworski (See my posts of Oct. 26, 2007; Oct. 29, 2007 (2); and Oct. 31, 2007 for more on that study.). The extracts concern billing arrangements for a fixed fee. A consultant opines that the stumbling block, what gets in the way of fixed fees being more common, is that law firms “don’t have a handle on their costs.” Since partners know their hourly rates, the speaker must mean that the partners don’t know how much it costs to accomplish something.

Wrong. Partners are all too aware of the vagaries of legal representation. Law firms worry about committing to a fixed fee for a matter because they know that that unforeseen events happen and that client expectations and support are different. To protect themselves from unknowns, they add in a premium to the set fee. The premium they want to charge to cover the bad-case scenarios make them uncompetitive on price in the eyes of law departments. The way around this situation is for the law department to explicitly address and limit assumptions made by the law firm (See my post of Oct. 31, 2005 about how to narrow assumptions.).