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Fixed fees v hourly rate billing – what is best?



The Debate – Fixed fees v hourly rate

There has been a lot of debate recently about the best way to charge, fixed fees, or hourly rate. (or somewhere in between?)

I firmly believe that there isn’t one answer for everyone. You have to choose the structure that suits your firm and your objectives.

Strengths and weaknesses

Both fee structures have strengths and flaw.  It is possible to reduce the problems with training and the correct processes.

Fixed fees provide certainty but can be harder to calculate.

Hourly rates are easier to calculate but provide less certainty of the final amount.

Fixed fees

From my experience, fixed fees work best when you have a clear idea of the client’s objectives and the work you need to do.

They work less well when you do not have all the information available, you cannot easily understand the client’s objectives, and you cannot identify the work you have to do at the start.

The advantage of fixed fees is the certainty provided to a client and the firm about the amount they will have to pay.

Unfortunately, this benefit only works for a firm when the fee, time-based or value-based, is calculated correctly. Otherwise, a firm undervalues its work and undercharges the client.

Hourly rates

Hourly rates do not have this level of certainty, but an accurate estimate assists.

The negatives of hourly rates are well documented but not always fair and steps can be taken to reduce or eliminate a lot of these problems.

The firm’s culture plays a significant role in hourly rates working well. They have a reputation for creating pressure and stress, but that does not have to be the case. A toxic firm can use any means of charging to create a toxic culture.

There can be problems with over-recording and under-recording, but measures can be adopted to help with accurate time recording.

Hourly rates have been blamed for inefficiencies and a firm’s failure to be progressive and make the best use of technologies. Whilst this can be the case, it is more dependent on the choices made by the fee earners and the firms.

Their culture and processes have more influence than the charging structure itself.

I have seen many examples of firms that work in the same way, regardless of whether they work on hourly rates or fixed fees.

What is best?

There are more ways to charge than a straight fixed fee or hourly rate structure, including hybrid options. The best method is the one that fits the client’s objectives, the aims of the firm, the facts and potential difficulties of the work.

Getting the best results from your charging structure is as important as the choice of fee structure.