Fall-09 Peckar paper - P1 (00315260).DOC

American Bar Association

Forum on the Construction Industry

Creative and Alternative Billing Arrangements in Construction Law: Reality or Illusion?

Robert S. Peckar, Esq.

Peckar & Abramson, P.C.

New York, New York

Presented at the 2009 Fall Meeting

“The Two-Way Street of Construction Counseling:

Learning From the Ins and Outs”

October 15-16, 2009

Philadelphia, Pennsylvania

Introduction

The topic of creative alternatives to the standard billable hour fee arrangement has taken on new importance in this period of challenging economic times. While the discussion typically talks in terms of better ways to compensate lawyers on the basis of the value of their services, the emphasis invariably is on reducing cost.[1] If hourly billing resulted in law firms being underpaid, it is doubtful that there would be so much discussion about changing the way in which law firms charge for legal services.

In the construction industry, most discussion about alternatives to hourly billing is primarily motivated by the substantial cost of dispute resolution (the most common reason that construction industry members retain lawyers) and the desire to reduce those costs. The dispute resolution process, whether it is litigation or arbitration, is extremely expensive. The cost of consultants and experts, the enormous volume of project documentation on a large project, the advent of the paperless project and its replacement with electronic documents, and of course, the cost of competent legal counsel to manage this complex process and advance the case of the client, can be staggering.

If a significant dispute arises on $300 million dollar two year project, a construction manager (earning a 2% fee) can spend half its entire fee on the dispute resolution process. The same considerations apply to design professionals. Thus, the discussion about “alternatives” to reduce these high costs is a recurring theme.

However, alternatives to the billable hour in the construction industry are often more elusive than real, as there are as many concerns about the cost of the alternative fee arrangements as there are with the hourly fee approach. Indeed one law firm consultant reported to the ABA Journal that seventy-five percent of corporate chief legal officers are skeptical about law firms changing the way in which they deliver legal services to provide “better value” to clients. The article also reports that the consequence of this negative perception is resulting in some law departments re-thinking the balance between the use of in-house and outside law firm resources for their legal needs.[2] It is clear that the concept of “better value” is directly related to the cost of legal services.

Against this backdrop, it is not surprising to read the following bullet points provided to attendees at an “alternative fee arrangement” conference:

· Strengthen the firm/client relationship by softening the shortcomings of the billable hour in an economically challenged environment.

· Better respond to the need for a higher level of cost-certainty.

· Explore and better understand "value-based alternatives" that reward positive outcomes.

· Fashion and develop alternative fee arrangements such that they are mutually beneficial.

· Determine if alternative fee arrangements are successful and worthwhile.

· Address the risk management aspects of experimenting with other fee arrangements and in mitigating the risk of customary fluctuations in scope.

· Address the pros and cons of straight hourly fees.

For those who are old enough to remember the “good old days,” the volume of articles, books, and seminars regarding alternative fee arrangements is in some respects humorous. Decades ago it was common, if not prevalent, for construction lawyers to be engaged by their contractor clients to resolve disputes on a purely contingent fee basis—usually in the 33% range. During that same time many of the then older construction lawyers, particularly those who had close personal relationships with the owners of the client companies, received an annual fee or a monthly retainer based upon the value of their legal guidance and counsel when required. Today these concepts are characterized as “alternate fee arrangements” as if an innovation. Consistent with this memory is the Chapter entitled “A Perspective—From Value Billing to Time Billing and Back to Value Billing” in which the author states in 1989 that she was personally involved in the “introduction of time records to the legal profession approximately thirty years ago.…At that time, lawyers had, for many decades, produced bills to clients that were based on the value of the services rather than on the time involved.…”[3]

What happened and, particularly, what happened in construction law? The answer to that question is well known; the industry moved towards an overwhelming reliance upon the hourly fee as the sole manner in which lawyers get paid. Despite the steady flow of criticism that the hourly fee system “does nothing to reward efficiency in the delivery of law services [and may be] counterproductive to any efficiency efforts—for the more hours generated result in higher profits for the firm,”[4] there is little doubt that hourly fees are the predominant billing mechanism in the profession and certainly in the practice of construction law.

Initially the concept of lawyers recording time was advocated as an element of law firm management by providing a way to measure the “cost” of representing a client—not value, not fairness to the lawyer, or not fairness to the client—just cost.[5] Yet, in practice, the recorded hour or tenth of an hour increments that lawyers are typically required to post to their time sheets has become the standard way to charge fees. If writing a brief takes one lawyer five hours at $300 per hour and another lawyer in the same law firm ten hours at the same $300 per hour, the client will be asked to pay $1,500 or $3,000 for the very same work depending upon the efficiency or lack thereof of the lawyer working on their case. This is true even if the product produced in five hours was of a better quality than the one produced in ten hours. The inherent weakness in the billable hour approach is as simple as this example.

Are there alternatives? The answer is “yes”, but the realization of those alternatives is difficult to achieve at best. A few examples from this writer’s experience may be helpful in understanding that difficulty.

Many years ago this writer was approached by a client long sought after. The client, a contractor, was in the midst of erecting a major urban hospital. The project was well along, perhaps 85+ percent complete with temporary certificates of occupancy issued for three quarters of the building, when the hospital notified the contractor that their contract was being terminated for default. On the day of termination, the project had a full work force, and subcontractors were incurring very high costs as they worked shifts and overtime to complete the project. The President and General Counsel of the defaulted company came to the writer and basically said the following: “We are in big trouble here. Aside from the fact the owner owes us more than $5 million plus our retainage, our subs are owed a lot of money and the owner has made demand upon our surety to complete the project. We are not looking for litigation—we are looking for a solution. We also are not looking for a law firm that will load this case with lawyers and bill us to death. We want a ‘lean mean legal machine’ with senior partner leadership and participation that will get us out of this mess. If you can do that, we will reward you appropriately for the value you have brought to us.”

This potential engagement presented an exciting opportunity. However, neither the client nor the writer had prior experience defining what “value” meant and how it would be rewarded. Somehow clients and their business lawyers find a way to express value when a new financing deal is closed or a business acquired, however, construction lawyers find that task more challenging. In any event, an agreement was made that interim billing would be provided and paid for on an hourly basis and that a “plus or minus” adjustment would be made at the end of the matter based upon the level of success achieved.

To make a long story short, the matter was resolved without a complaint every being filed. As a result of intense efforts with the hospital and its counsel, the surety, the subcontractors and their respective lawyers, and indeed, even with government agencies involved in the financing of the project, the matter was resolved with:

· The default termination being withdrawn.

· The contractor being reinstated to complete the project.

· The contractor being paid all sums it was due together with interest.

· The subcontractors being paid all sums due together with interest.

· The hospital getting additional funding from government agencies.

· The contractor being placed on the hospital’s “preferred contractor” list.

· The contractor’s surety being quite pleased!

· Total hourly fee interim advances under $250,000.

What was the value of this result? Placing aside the achievement of full payment for the contractor and its subcontractors (thereby eliminating the contractor’s risk for payments to the subcontractors), how can the value of the removal of a default termination combined with restoration of the client relationship be determined? What is the value of achieving such results without any litigation and therefore without any of the expense of litigation?

Pleased with the results, the writer flew to the corporate offices of the client to discuss the final fee. The General Counsel attended that lunch meeting and delivered the news that neither he nor the President of the company felt they could go to their board and recommend the payment of any fee above the hourly fees paid; “after all, Bob, you have received payment for all your hourly fees.” So much for “value billing” on that matter.

On another matter in litigation, the hourly billing was quite high for many reasons. The extent of legal and other litigation costs in combination with the losses the contractor had suffered placed the project team in a very difficult position with their superiors. Thus, they asked for an alternative arrangement to the hourly fee arrangement that was being used. An agreement was reached that changed the arrangement to a “straight contingency fee.” The matter was resolved very successfully and to the great pleasure of all a very substantial sum was recovered—so substantial that the contingent fee would have exceeded the total hourly fees by a significant amount. However, despite the successful result, the net amount to the client after the payment of the contingent fee would have resulted in a net loss for the project team. Thus, they asked that the legal fees be reconstituted on an hourly basis and paid upon that basis.

From these two experiences, and the experiences of others related to this writer, a serious question arises as to whether or not the construction industry is truly ready to move to alternate fees. Alternate fee arrangements are touted as the key to enhanced favorable client relationships. It is often said that the switch from hourly fees as the sole manner of charging for legal services to other alternatives results in greater satisfaction in the client relationship from the perspectives of the attorney and the client and creates a greater sense of “partnership” between them. If such results could be achieved, they would certainly be attractive to the construction bar and, according to many published reports, attractive to their clients as well.

The Billable Hour

What is wrong with the standard bearer in the construction industry – the billable hour? Why is it so roundly criticized? The answers are relatively obvious to those who have used the approach and have been touched on above.

The immediate profit incentive for the law firm is to have those lawyers on whom the firm makes the most money – the associates – bill as many hours as possible to the case. Many industry members believe that law firms do so without regard to whether it is in the client’s best interest or not. This belief is nurtured by the commonly held belief that associates and, even partners, are typically rewarded in the firm compensation structure for billing as many hours as possible, which if solely motivated by that method of reward, can lead to lawyers and their firms billing non-productive time and, even worse, billing for time not worked. In addition, the law firm wants to make sure that it performs all the services that may be necessary in the representation of the client in part so that it is not criticized at a later time for having failed to do something. Many law firms are loathe to take the risk of failing to do something in order to reduce costs to the client, particularly when by not doing tasks that may justifiably be performed and billed they reduce the firm’s profits and expose the firm to future criticism. Thus, it is both safer and more profitable to review every document in discovery, not just those that are likely to be relevant. Complicating this situation is the reality that it takes “two to tango.” If one law firm is motivated to maximize services and therefore billing on a litigated matter, is likely that the other law firm, even if motivated appropriately to keep the cost of services at a proper level, is obliged to go beyond those services and fees that it would prefer. Obviously, the best law firms, from the client’s perspective, understand that over-billing is not only unethical, but likely will result in the loss of its clients in the long term. The problem is that the immediate incentive is pushing in the wrong direction.

The client is in a more difficult position in assessing value. Its first inclination is to decrease the number of hours billed, i.e., cost, but it does not want to do so and lose the case or have its lawyer draft a bad contract. As one lawyer said, “I have never been complemented for losing cheaply.” The client must weigh the cost against the return it receives.

The key to the successful billable hour arrangement is communication and management of the case. The lawyer must make sure that in-house counsel and upper management of the company understand the value they are receiving for the money they are paying. Outside counsel must overcome the inherent reaction of the client that he or she is simply running up hours and trying to maximize it billings. This requires the lawyer to include the key client personnel in the process and decision making so that they understand what the lawyer is doing, how dedicated the lawyer is to protecting the client’s best interests, and what value the client has received.

Even more importantly for the hourly fee arrangement to work, in-house counsel must make sure the outside counsel understands the client’s goals and is acting in the client’s best interest. In-house counsel should require early estimates of fees and projections of likelihood of success in litigation, monitor them on a regular basis, and require an explanation of variances. However, the goal of this process must not be to simply take money back from the lawyer. In-house counsel also must participate in decisions involving risk vs. cost savings, e.g., should every document be reviewed in discovery or should the cost be minimized by not looking at documents that are not likely to lead to relevant information.

Finally, in a billable hour arrangement, the in-house lawyer should be looking for ways to incentivize their retained lawyers to do what is in the company’s best interest. The obvious incentive is to give the firm additional work. A more novel approach is to pay a discretionary bonus for excellent performance. However, there are other no-cost incentives that are often ignored. The testimonial or referral to potential new clients has a real value to outside counsel and cost the client nothing. Even simple praise for looking out for the client’s best interests will be well received by outside counsel.

Conceptualizing the Alternative Fee Arrangement

Of course lawyers and clients have the ability and right to devise alternatives to the hourly fee arrangement. Though the hourly fee may predominate the legal-billing landscape, nowhere in the ancient religious texts is it written that “Thou shall bill by the hour.” While the premise of hourly fees is that the client pays for the services rendered as measured by the duration of the effort, the growing challenge to the hourly fee is often based on a lack of trust that time spent providing the service reflects value and fairness of cost. Thus, one would hope that the movement towards alternative fees arrangements would be founded upon a core concept of building trust.

Trust is essential to every form of alternative fee. When a client agrees to a percentage of recovery or to a percentage of avoided exposure or to any other metric or evaluation of services performed, that client must trust that the attorney will perform to the highest level of service, provide allegiance to the client, and will comply with ethical requirements and not act in the lawyer’s own self interests. Thus, for example, if a client and attorney agree that legal services will be compensated upon the basis of a contingent fee (percentage of recovered amount), the client must trust the attorney to use best efforts to maximize the result for the client even though at some point in time it is possible that the amount of effort expended by the attorney may exceed the expected contingent fee when measured in terms of the value of hours expended at customary hourly rates and thus encourage the attorney to either provide less service or encourage the client to a settlement otherwise not advisable.

Similarly, the attorney must be able to trust the client. For the lawyer, it is so important to trust that the client will accept the lawyer’s guidance on strategies that directly impact upon the amount of effort that will have to be expended and will accept a reasonable settlement if offered and not simply push the lawyer through all the expense of trial preparation and perhaps trial simply because the cost of the lawyer is a contingent and not a current expense. Trust, therefore, must exist on both sides of the equation.

Intricately intertwined with trust is perception. To have a successful fee arrangement both the lawyer and the client must “perceive” that they are receiving fair value. It is not enough that the agreement is fair to both, but it must be perceived by both to be fair. However, as discussed above, each party measures value differently. The law firm’s definition of value is an amount of money that covers its costs and provides a reasonable profit or more. The client cares less about whether the law firm makes a profit. The client’s definition of value is a fee that produces it the largest net return for the client and is in line with what other firms charge for the same services.

The parties should follow the example of partnering in construction when negotiating an alternative fee agreement – each party to the fee agreement must put themselves in the others shoes and attempt to reach an agreement that will work not only for themselves but for the other party. If each party is committed to look after the others interests, then both parties are more likely to perceive that they are receiving value for the services.

Underlying any fee agreement is the issue of ethical conduct. The hourly fee has aspects to it that challenge concepts of ethical legal practice. The Model Rules of Professional Conduct clearly state the obvious concern about legal fees in whatever form: “A lawyer’s fee shall be reasonable.”[6] Is it reasonable to bill two matters or two clients for the same hour if both are being serviced during that hour? (Of course not.) Is it reasonable to bill for time expended pursuing a theory or course of action that turns out not to have value for the client? (Some would argue either side of that issue). Is it reasonable to bill the time of senior lawyers while they review and perhaps correct the work of their subordinates? (Here again, some would argue either side of that issue as well). So, it is not that hourly billing is free of ethical issues.

Alternative fee arrangements raise interesting ethical issues as well. For example, is it ethical for a lawyer to receive one third of the total recovery pursuant to a contingent fee arrangement if settlement is achieved before, say, ten percent of the anticipated effort has been expended? (Some would argue both sides of this issue as well.)

It is clear that the alternative fee arrangement must be well conceived, thoroughly discussed, and tested against hypothetical scenarios that could result in unhappiness by either party to the agreement. Only then does it have the potential to accomplish the goal of fairly compensating the attorney to the mutual satisfaction of both parties.

What Is a Reasonable Fee?

Underlying all discussions about fee arrangements is the issue of the reasonableness of the fee. Reasonableness involves many issues, including: cost vs. reward, measurement of what constitutes success, actual fees vs. anticipated fees, changed circumstances, adherence to budgets, and efficiency of the effort, among others. The key for the outside counsel to remember is that perception is reality. If the client believes the fee is unreasonable, then it is unreasonable

The Model Rules of Professional Conduct (Rule 1.5) require that a fee charged by an attorney must be reasonable and list eight factors to consider in determining the reasonableness of a fee:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent. [7]

Of course, these factors have been prepared from the perspective of measuring the adherence of a fee to ethical standards. A fee that meets all those ethical requirements may still not satisfy a client that the fees are in proper relationship to the value the client received as a result of the lawyer’s services.

Hourly fees have a reputation for client dissatisfaction because they have a tendency to take on a life of their own. Time expended equals fees billed whether or not they satisfy the concerns in the preceding paragraphs. One attorney has expressed his view of the hourly fee in a website article that addresses Alternative Fee Arrangements. In regard to hourly fees, he says:

The hourly fee is good when an attorney doesn't know how long a case will take and fears over or underestimating the time it will take to handle a certain case….The hourly fee structure ensures the attorney is paid for the work she or he does, no more and no less. It's an accurate portrayal of input to output.[8]

It takes a significant interest on the part of a law firm to scrutinize and modify its hourly bills prior to issuance to assure that all time is fairly and properly billed. Even the smaller firm would be required to review many thousands of time entries each month to be certain that time billing is accurate and fair, i.e., it reflects the value of the work performed. Despite such efforts, clients are often less than content with the fees expressed as a function of time. Some clients use the services of outside auditing firms that specialize in reviewing hourly bills for conformity with company policies or against computerized models that purport to measure actual billed hours against “reasonable hours.” Unfortunately, such audits often identify some deviation, which whether fair or not, only exacerbates the client’s perception that a certain amount of abuse is inherent in the hourly billing system.

For many lawyers, the hourly billing practice is akin to an addiction to a bad habit. They know that hourly billing allows them to do financial planning based upon the creation of “budgeted” time-billing from their attorneys. If each attorney reaches 2,000 hours, they can estimate very accurately what the firm’s income will be and predict partner earnings accordingly. That is the addiction. However, many of these same lawyers will be heard to bemoan the inherent unfairness of saving a client millions of dollars with a piece of sound advice based upon decades of experience and only being able to charge tenths of an hour equal to the time of the telephone conversation. Is it reasonable to provide advice of such value and be paid perhaps $175 for the time? By contrast, is it reasonable to charge fifty hours at $200 per hour for an inexperienced lawyer to learn how to write a simple brief on a motion to compel discovery? These examples highlight the conundrum created by hourly billing.

The mutual agreement of a client and attorney that the legal services will be provided on a contingent fee, partial or full, or other form of billing that does not rely upon the hours expended billed at pre-arranged hourly rates would seem to hold great promise for avoiding the issue of “reasonableness” as, by their very nature, they are reasonable because the parties have agreed that they are just that. Furthermore, the mere fact that the attorney is accepting a risk that the fee will be less (or perhaps no fee at all), if the resolution of the matter is unsuccessful, supports the reasonableness of a pre-stated percentage or recovery or other similar approach. Yet, as indicated in the anecdotal examples presented above, the situation is often not that simple.

Set fees, such as task-based fees, retainers, and other such fees that are fixed either by reference to a particular task or period of time should all but eliminate discontent with legal fees as they have been discussed, negotiated, budgeted for, and “fixed.”

Defined “Success Fees” that are based upon clearly stated metrics that measure the achievement of the client’s goals should provide both the client and the lawyer with a clear understanding of the client’s goals and, therefore, a method of compensation that pays the lawyer upon the achievement of those goals, rather than the extent of the service necessary to reach those results.

Finally, discretionary fees that are intended to reward results without sole regard to the time expended by the lawyer would appear to give the client the greatest amount of comfort and satisfaction; however lawyers will be wary of such arrangements except with the most trusted clients.

Designing the Alternative Fee

What types of arrangements will result in mutual trust, a perception of fairness, and reasonableness, and therefore, help build a strong durable relationship between the attorney and the client? Some typical and not so typical arrangements are discussed below.

Variations to the Billable Hour – Volume Discounts and Blended Rates

Most law firms are willing to provide a discount for a large volume of work. This approach can provide a win-win situation for the law firm and the client.

The second approach is to use a blended rate so the partner and associate are billed at the same hourly rate. While this approach may appear to give the client a lower rate, it produces a natural tension between the client and the law firm. It is in the best interest of the law firm to have all work done by the lowest level associate who generally will spend more hours to perform the work. In contrast, it is in the best interest of the client to have the most knowledgeable senior partner perform all of the work. If a blended rate is used, it must be managed by both the client and law firm in a manner that produces value to both.

Contingent Fees - Litigation

Contingent fees are the most used substitute for the billable hour for several reasons. When a client cannot afford the cost of litigation, the contingent fee provides an easy answer. If a client does not have sufficient confidence that the investment in litigation will be worthwhile, resort to the contingent fee may be responsive to that concern, however, such a circumstance should raise the concerns of the attorney about the quality of the case and the commitment of the client to see it through to resolution.

Although the contingent fee arrangement seems alluringly simple, it can be anything but that. In setting the rate or agreeing to take the case on a contingent fee basis, the law firm must assure itself that the likely recovery, through settlement or litigation/arbitration, will be sufficiently in excess of what the billable hours would have produced under a hourly rate arrangement to compensate for the risk that is being taken by the law firm. The client must understand and accept that the fee agreement can produce a large recovery for the law firm for very little work. There are many other issues that both parties must consider, including those set out below:

To be considered by the client:

· What is a fair percentage? If the recovery produces a high contingent fee in comparison to the number of hours worked, will the client feel that it has been overcharged and not received adequate value for the amount paid?

· Will the law firm provide the same level of quality and service as the most qualified and experienced lawyers may be pulled to assignments on which current hourly fees are being paid?

· Will the attorneys have the same resolve to “see the matter through to trial” if the potential “profit” from a contingent fee erodes with increasing time being expended on the matter?

· Will the attorneys be pushing for an early settlement at an amount lower than the real value of the claim?

· What happens if the client becomes dissatisfied with the law firm’s performance and elects to terminate the agreement? What does it owe the terminated law firm?

To be considered by the attorney:

· Is the quality of the case sufficient to support the risk of tying the fee to the outcome?

· Will the client support the case (both attitudinally and substantively), if the attorney is carrying most, if not all, of the risk of the case outcome?

· Who pays for the cost of litigation/arbitration such as copying, transcripts, filing fees, etc.?

· Will the client be reasonable in response to settlement opportunities or will it insist upon going forward because it is not concerned about the costs of going forward?

· What happens if the case changes negatively in a material respect during the course of the representation, e.g., a surprise document or witness appears that destroys the case? Is there an understanding of how the legal fees will be handled under such circumstances?

· Can the law firm withdraw if comes to the conclusion that the case has no merit and what happens to the time invested in the case, if it does?

· If the contingent fee substantially exceeds the billable hours, will the client pay the fee and will the client perceive that the lawyer has been over-compensated which could affect the lawyer’s ability to obtain work in the future?

· Will the amount of the contingent fee recovered be greater than what would have been earned under the billable hour arrangement to justify the risk involved?

To be considered by both:

· Do both the client and the attorney have a shared view of the value of the case?

· Have the client and the attorney agreed upon a settlement strategy and value based upon the information at hand?

· Does the adverse party have the ability to pay?

For a construction industry client and its attorney to achieve a workable and fair contingent fee, the above issues, at a minimum, must be discussed and resolved.

A popular variation of the pure contingent fee arrangement is the partial contingent fee with a reduced hourly rate or upfront retainer. As in all but hourly billing arrangements, the parties can be creative in designing the combination of parts to try to provide value to both parties and properly incentivize each. However, once the contingency aspect is on the table, all of the issues recited above must be considered.

The concept of the “negative contingency” is an interesting variation as well. For example, if a client is being sued for $20 million but appreciates that it will be held liable for a minimum of $2 million, a fee arrangement might be arranged pursuant to which the attorney receives a contingent fee (pure or partial) based upon that portion of the $18 million that is successfully saved. In reality, this arrangement is no different than an “affirmative contingency” calculated upon the amount recovered. However, the attorney entering into such an arrangement must recognize that the client will be even more predisposed to want to renegotiate this type of agreement or be unhappy in the end. It is one thing to write a check from a recovery and another to write a check based upon the avoidance of payment that the client probably didn’t believe it owed in the first place.

Fixed Fee

Unlike litigation, which is in many respects a “black box” of uncertainties, commercial practice is far more easily defined. There are any number of transactional and business-related services provided by construction lawyers that can be charged on a fixed fee basis, among them contract drafting, contract review, preparation of liens, and training.

This subject, however, all but begs a discussion of the difference between the way lawyers consider fees and clients consider value. If a lawyer is asked, “how much would you charge to draft a subcontract for me?” that lawyer likely would start thinking about how long it would take to do so and multiply the hours by the customary hourly rate to arrive at a “value.” The attorney also might be thinking about whether it can sell the same printed document to another client at the same fixed fee. The client, on the other hand, would probably be thinking about what it considers to be affordable (measured against criteria that may be rather abstract from the perspective of the attorney), what the value is of having a customized contract rather than a standard printed form, and whether there is another attorney who would do the same project for a lower fee.

In the appropriate circumstances, where the parties’ two different methods of assessing value come together at a common number, the fixed fee represents an excellent alternative method of billing.

Retainer for Advice and Counsel

As stated in the Introduction, many years ago lawyers received annual retainers that allowed clients the opportunity to seek advice and counsel from their lawyers without incurring individual charges for each such service. Aside from the fact that the client and attorney fix a value for access to such service, perhaps the most positive feature of this relationship is the fact that clients are not encumbered by the following concerns: “Should I call? How much is this call going to cost me? Will I be criticized for making the call when the bill arrives?” From the attorney’s perspective, it means that the attorney is adding real value to the client by providing guidance and counsel upon a basis of compensation that is not tied to “time.” For many attorneys, such a relationship represents the most enjoyable aspect of being a lawyer. At the same time, that lawyer is receiving more calls regarding more issues, which means that if litigation (the real money maker) arrives, the firm likely will be retained for that work.

The establishment of a retainer for advice and counsel helps produce the type of positive relationship that both the lawyer and client should seek in their relationship. Creating a framework in which the amount of that retainer can be revisited periodically to be sure that both parties perceive that the agreement adds value to each of them.

The Discretionary Bonus

A less common approach is to incentivize the law firm through a discretionary bonus at the end of a matter or based on a yearly review of performance. For example, if the lawyer achieves an unexpected excellent settlement through good lawyering with fewer billable hours than might otherwise have been charged, the payment of a bonus makes perfect sense. In this way, the client can reward value and incentivize the lawyer in the future. Under the “what’s good for the goose is good for the gander” principle, that same client might well seek a reduction in the bills where the result is not good due to less than stellar lawyering or poor controls of cost.

Carried to the next step, the parties could reach an agreement to have the final fee determined retrospectively to reflect the value of the services provided during a period of time. This approach requires trust between the lawyer and the client. In any event, the agreement should specify metrics that will be used, at least in part, to determine the final fee. A major potential obstacle to such an approach will arise for many law firms at the prospect of potentially being called upon to reimburse some of the fees already paid.

The DuPont Legal Model

Probably the most discussed approach to procuring legal services is the DuPont Legal Model.[9] DuPont made a major overhaul in its method of procuring outside counsel in 1992. In its first four years, DuPont reduced the number of law firms representing it from 350 to forty-two. It estimates that it saved $33.8 million in legal fees in 2003 alone. By 1999, its docket had been reduced by 70%.[10]

The DuPont model emphasizes developing relationships with a small number of firms who are committed to strategic partnering – “emphasizing long term relationships, sharing risks and rewards, working collaboratively, and contributing to each others financial success.”[11] The model includes the following concepts:

· Alternative fee arrangements.

· Client commitment to the law firm’s success.

· Faster pay.

· Promotions and referrals.

· Technology edge.

· Early case assessments to allow for cost effective business solutions and better planning.

· Focus on the client’s objective and the best business solution.

· Strategic budgeting based on early case assessment.

· Metrics to help define value.

· Promote communication between the lawyer and the client.

· Emphasize on efficiency and cost control.

· Assure that all parities have adopted a culture of efficiency.

· Promote diversity.[12]

All of these concepts should be part of any fee arrangement.

Is the Desire for Alternative Billing Arrangements Real?

One merely has to read or hear what corporate counsel have to say about hourly billing to know that for many it is the bane of their existence—a constant source of tension within their company and with their outside counsel. This discussion typically relates to litigation and dispute resolution services rather than corporate and commercial services where set fees and retainers are used with success.

Management often does not understand or appreciate the effort required by and the cost of litigation. In-house counsel is the recipient of management’s displeasure with the hourly billing arrangement caused by this lack of understanding. Accordingly it comes as little surprise that corporate counsel are heard to yearn for a willingness on the part of their outside counsel to reach alternative fee arrangements.

This is an example where in most circumstances, reality and aspirations collide. Despite the genuine desire expressed by in-house counsel in the construction industry for alternative fee arrangements that will produce value to both parties, the hourly fee arrangement still persists as the standard. Therefore, most efforts by corporate counsel to control legal fees are aimed at controlling those fees through budgeting, establishing milestones, reporting, establishing billing protocols and standards, auditing bills, and otherwise managing the billing process. Some corporate counsel will support the use of contingency (partial or full) fees in lieu of hourly billing.

Outside law firms also will be heard to genuinely support the concept of alternative fee arrangements, however, they, too, suffer from the tendency to defer to the hourly fee arrangement. Despite all the issues and, at times, distress that hourly fee billing presents to the law firm, hourly fees provide cash flow, predictability, and comfort for the law firm.

The Role of Insurance Carriers

Insurance carriers are taking on an ever expanding role in construction dispute resolution as they continue to offer products that accept risks ranging from personal injury to a defaulting subcontractor. Accompanying that expanded role is the imposition of insurance company legal fee policies on many circumstances that were within the control and purview of the construction industry company and their regular legal counsel until very recently. For the law firm that regularly works with these carriers this change presents an opportunity to expand their practice with the comfort of being fully aligned with the carriers and their unique billing practices. For the other construction law firms that have not traditionally worked with carriers, the effort to do so can strain the ability of those firms to do so economically.

Alternative fee arrangements are not part of the insurance industry lexicon. Insurance carriers pay on an hourly basis at reduced rates and under stringent billing practice controls and limitations. With due respect to these fine companies, it is difficult to conduct a discussion with them about “value” or other attributes of alternative fee arrangements. Thus, it would appear likely that more and more construction dispute resolution will not benefit from alternative fee arrangements and insurance carriers continue to control a very large number of cases.

Conclusion

It is this writer’s belief that the construction industry will be having the same discussion about alternative fee arrangements ten years from now. While some enlightened lawyers and their clients will seek out and identify opportunities for real change, where value is genuinely recognized and compensated accordingly, for the most part, the industry and the construction bar will continue with the fee arrangements that have been their standards for many years. Nonetheless, efforts to find opportunities to innovate and experiment in alternatives should continue so that they may inspire others to do likewise.