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James Markham

Capped Fees need killing off for good

The billable hour and fixed fees can set off a heated debate, but there is one particular fee type that we should all unite behind and kill off for good...


The capped fee. 


A chimera of a fee arrangement, that is: 


  • 50% hourly rate - with all the inefficiencies and lack of client/law firm alignment that entails 


  • 50% fixed rate - with all the downside risk on overruns and scope management that comes with it


  • 100% a bad deal 


A capped fee essentially works along the lines of the law firm charging their standard hourly rates up to a pre-agreed cap for the matter, say £20k.


If the firm completes the work efficiently, they receive their standard rates x hours worked - say £12k.


If there are overruns, for example if the firm racks up £30k on the clock, they are only paid the £20k cap value.


So the financial risk here is asymmetric - the firm loses out both where the work is completed quickly and where it overruns.


Now you may think "hey, this is great for clients!"


But in practice, this fee structure creates a number of perverse incentives:


  • the firm will work the file to come in as close as possible to the fee cap as possible; financially, this is often the best outcome


  • the client and firm then squabble about out of scope instructions once the cap is breached


  • where the cap is designed to manage "we don't know what we don't know", e.g. in disputes, or transactional work - it encourages the firm to front load work in case the matter doesn't progress, meaning that the back end suffers when it then does progress 


Frankly, none of this is in either the law firm or the client's interests.


Marginally better is to agree a cap and collar arrangement, where you agree that the fees won't exceed £20k (cap), but won't be less than £16k (collar).


However, at this point, you'll have needed to work through a fairly detailed scope to be able to provide the cap and collar figures, which is likely sufficient to offer a fixed fee, with either discrete phases for disputes work, or abort/success fees on transactional work.


i.e. if you get to a £16k - £20k range, why not split the difference and fix at £18k?


Sometimes capped fees are well intended as "best of both worlds" between the flexibility of hourly rates and the price certainty of fixed fees.


But in practice, my view is that, you get the worst of both worlds rather than the best.


Genuinely open to views on what benefits does a fee cap provide (either for firm or client) that can't be better provided by either hourly rate or fixed fee instead?



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