Five Basic Alternative Fee Arrangements for Law Firms

There are five basic categories of Alternative Fee Arrangements (AFA) for law firms. These include the contingency, flat fee, capped fees, holdback, and blended fees. Here is a quick description of each.

1. Contingency

This is the most well-known form of AFA and the oldest. Pure contingencies mean that a client will only pay the firm if a particular result is achieved. This is typically used with plaintiffs cases, but can be used for defendant cases, as well as determining fees in transactional matters. For the use with a defendant, you and your client will agree upon an expected damages award. If it comes in at or below this value, then your firm will get a fee. The firm’s fee grows the more the damages are below the budgeted amount. For transactional matters, your fee is typically a percentage of the transaction and requires that you complete the transaction. In this case, you will have a “broken deal” fee to provide protection to your firm.

2. Flat fees

The contingency is the most well known AFA, but flat fees are the most common. With flat fees, your firm agrees to represent a client for a specific fee without looking at billable hours. This works well for firms that can finish the matter up faster than the billable hour rate and works to the advantage of the client when the work takes longer than billable hours would generate. Flat fees can be based on tasks, stages, or all of a client’s legal needs in a particular area. These fees are best for repeat and/or repetitive work where the client and firm know what they are getting into and how much it should cost.

3. Capped fees

Clients with capped fees pay an hourly rate but know that the total amount will be capped. Sometimes, capped fees also come with a minimum fee, and this is known as a collared fee agreement. This kind of fee structure is not good for the firm if the case scope is not predictable. You may also agree to a soft cap. In this case, you agree upon a cap given that certain things will happen. If the assumptions you made are incorrect, you and your client will adjust fees accordingly.

4. Holdback

The client pays the firm a percentage of the typical hourly rate. Then, based on the agreement, when the matter is settled, the firm may receive additional money that makes up the difference in the holdback and could exceed the holdback. How this is structured depends upon the contract and links the fee to client satisfaction.

5. Blended fees

The client pays a specific hourly rate that is not tied to a specific lawyer’s hourly rate. This encourages the firm to delegate work to less expensive attorneys.

Of course, AFAs do not have to fall into one of these categories. Firms can work with their clients to develop a fee arrangement that works for everyone involved.

Are AFAs a Good Idea?

The answer is yes and no. It depends on the AFA and the circumstance in which it is being used. It takes excellent communication between the client and firm so that a win-win situation can occur. Without good communication, someone is bound to be dissatisfied.

Your firm needs to create a symbiotic relationship with clients to determine the most appropriate fee arrangement. This method will be consistent with your goals as well as the goals of your client.

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