There are two types of reimbursable costs, soft costs and hard costs. Soft costs are those costs that the client’s fee agreement allows your firm to bill for even though your law firm doesn’t write a physical check to a vendor for the item. These include items such as copies, general postage, facsimiles, etc. Hard costs are those costs attributable to a specific client for which your firm disburses its own funds to the vendor for the item.
General accounting programs such as Quickbooks may not be configured out-of-the-box to track hard costs or soft costs. And even if the program is configured to track hard costs or soft costs, it might track them in a way your firm would prefer not to track them. For example, soft costs can be tracked either as an expense, e.g. it would appear as a negative postage expense, or as a negative copier lease expense, or it can be tracked as “soft cost income.” Hard costs, on the other hand, can be tracked either as a Reimbursable Client Cost Expense or as an Advanced Client Cost Asset. It is important to talk to your accountant to see how you need to track these costs for tax purposes, and you will need to hire an experienced bookkeeper to set this up properly in the general accounting program, as doing so is a very technical exercise.
Also, it will be important for you to train staff on how to enter these kinds of costs into your general accounting program and how to add them to client invoices properly. For example, in Quickbooks, you have to use the Job Costing feature to add reimbursable expenses or client cost advances to a client invoice. If your staff or bookkeeper doesn’t understand how to use this feature properly, then your hard costs will not be properly billed to the client.
So, while you can use general accounting programs to track your hard and soft costs, the limitations described above require your firm to have a knowledgeable bookkeeper set up the general accounting program, and may increase the time your legal staff must spend entering your soft and hard costs into the program and ensuring that they appear on client invoices.
1. QuickBooks for Law Firms: Setup
2. New Resources for Accounting for Law Firms
3. What Distinguishes a Reimbursable Expense From Other Expenses?
4. QuickBooks for Law Firms – Tracking Client Expenses
5. An Introduction to Matter Cost Accounting Software for Law Firms
6. Tracking job costs in QuickBooks Desktop