In the course of working on a matter, law firms end up covering both hard costs and soft costs for their clients at some point or another. Although different, both sets of expenses can be billed for reimbursement, as outlined in the client agreement.
Unfortunately, it’s also easy to let reimbursement slip through the cracks. After all, if you’ve forgotten about the expense by the time you sit down to do your billing, then it couldn’t have been for very much, right? Not exactly.
Hard and soft costs can quickly add up to thousands of dollars a year. That is worth your time, particularly if you can get a system in place that allows you to capture and bill for these costs efficiently so that the process doesn’t disrupt your workflow.
Below, we break down how hard and soft costs differ and what to know about billing for either or both.
Hard costs are a form of direct expense that the law firm pays on behalf of the client concerning a specific client matter.
For example, hard costs include:
- Filing fees
- Mediation fees
- Court reporter fees
- Expert fees
- Hearing transcription fees
Hard costs effectively function as a “loan” to the client—you’re covering the costs now to keep things moving forward, but they will need to pay you back. Hard costs generally aren’t deductible as a business expense, so it’s a good idea to make sure they get onto the client invoice. (More on that below.)
Soft costs, on the other hand, are indirect costs. They are easily attributed to a specific client matter but reflect general support and operational costs.
Soft costs include expenses such as:
- Copy costs
- Legal research materials
- Word processing
- Other clerical services
If soft costs can be clearly attributed to a specific client matter, some law firms will bill clients.
For instance, some firms have a generalized postage charge that they add to client bills when they’ve had to mail materials for the client. Additionally, phone systems and other services allow law firms to assign each client matter a number in order to track the duration of calls made for that client, the number of copies, and so on. In this manner, firms can track specific soft costs by matter.
That said, using an industry-specific accounting and billing platform significantly simplifies the process of tracking soft costs. This matters because you don’t want to be effectively losing the money you recuperate by paying for too much staff time spent on data entry.
A key step for any law firm hoping to recuperate hard costs and/or soft costs is to capture them as they occur. In the same way you would for billable hours, capturing costs as they happen helps ensure you don’t forget to bill for expenses.
To avoid lost charges, leverage your practice management system. For example, a cloud-based system with a mobile app component lets you record fees as they occur, no matter where you’re working from.
Particularly at a smaller firm with less administrative staff, this can be an effective tactic in ensuring you’re getting paid back for the money you spend on your clients’ behalf—because, like most “small” costs, client expenses add up over time.
Having a solid billing and accounting workflow can also go a long way toward making sure costs don’t ultimately fall on the law firm. For example, if your system offers single-platform billing and accounting, you only have to enter information once to know it will be linked to the client matter when it comes time to draft the invoice.
You can also leverage imports with your practice management system—import soft costs via Excel to itemize printing, photocopies, and other expenses. Likewise, if you import your law firm’s credit card statement, it can help you catch billable items you might have otherwise forgotten about.
The second half of billing for hard and soft costs is to make sure the invoices they end up on get paid. Here, similar guidelines apply as to what makes for good billing habits generally.
To start, bill in a timely manner. If a client sees a deposition charge they don’t remember on an invoice, they may immediately get frustrated. It takes far more energy, and time to explain to them that the charge they’re seeing is an expense the firm covered for them three months ago than it does to get the cost onto an invoice within a month of it happening.
If you’re someone who puts off billing because you dread the time it takes out of your workday, use your practice management system to draft invoices for you. This allows you to generate bills in bulk. In a few seconds, you can do what used to take hours. Streamlining the billing process makes it far easier to send bills out on time.
And finally, as with any client invoice, be sure to make the bill easy and convenient for them to pay. Sending invoices electronically—either through a secure client portal or email—and offering online payment options allow clients to see and pay a bill in moments. Just don’t forget to use a legal-specific credit card merchant to avoid possible trust accounting issues.
Leveraging modern technology lets law firms get reimbursed for client costs with minimal hassle and time lost to administrative tasks.
Make sure costs are addressed in your client agreement and recorded as they occur with a cloud-based practice management system that links the charges by client matter. Use a single-platform billing and accounting system to reduce data entry.
When it comes to billing, embrace the speed and convenience of bulk invoicing, electronic delivery, and online payments. Making invoices clearer and easier for clients to pay can save your firm valuable hours and energy.
Ultimately, your practice management system should set you up to get paid back for hard costs and soft costs—without eating up your time or disrupting your work day.
Sign up now to get more tips and news from CosmoLex
- What Law Practice Management Software Is Best for a Solo Practitioner?
- How to Get Employees to Use Legal Practice Management Software
- The 3 Secrets of Electronic Payments for Law Firms (28:23)
- What to Know About Credit Card Surcharges for Growing Law Firms
- How to Modernize Your Law Firm's Billing with CosmoLex (34:14)