Retainer Agreements v. Flat Fees: Which Is Right for Your Law Firm?

Whenever a lawyer takes on a new client or matter, they have several options for how to bill. Yet each billing method comes with its advantages and drawbacks—meaning that the right approach varies by practice area and matter type.

Below, we break down the different types of retainer fees, flat fees, and important factors to consider when deciding how to bill.

Retainer agreements

A retainer fee functions as an advance payment for services the law firm will perform for the client. Similar to a down payment, the client puts up money that will go toward covering legal work by the attorney.

There are three kinds of retainer agreements:

• General retainers: secure the lawyer’s availability for a certain matter or period of time
• Security retainers: advance payments are deposited into a trust account, and the law firm draws from them each time work is completed
• Special retainers: function as a flat fee for a specific case or project and are paid in anticipation of the complete legal services the law firm will perform for the client

Of all three kinds of retainer agreement, security retainers are the most common. And because managing trust accounts requires constant diligence and attention to detail, many lawyers would say they are also the most complex.

Flat fees

Clients can sometimes be nervous about agreeing to pay an hourly rate for services, especially if they haven’t worked with a law firm before and don’t know how many hours the legal help they need will take.

Therefore, in certain practice areas, lawyers will use a flat fee. This advance payment, also known as “fixed pricing,” covers all the work the law firm will perform for the client.

For consistent and predictable legal work, flat fees can make sense for lawyers to use because a guaranteed price appeals to clients. Uncontested divorces, mortgage foreclosures, and DUIs are all areas where flat fees are commonly used.

However, before you take on a new client, it’s important to conduct a thorough intake process, so that you don’t encounter unexpected surprises after agreeing to a flat fee.

Alternatively, more complicated matters may be billed on a mixed-fee basis where a flat fee is used up to a certain point, but hourly fees are charged if complications arise.^[1]

Written agreements

It is important to have a written agreement for any legal work you do.^[2] We highly recommend going over everything with your client beforehand so that they don’t blame the law firm for any unpleasant surprises, leading to tanked client satisfaction.

A written agreement should address:

• The flat fee or retainer fee, including a detailed basis of the fee.
• Definitions for the scope and nature of the legal work to be performed. This should clarify why the lawyer is expected to do for the client’s case—and what they won’t do.
• Client costs, such as filing fees or travel expenses. If the client is expected to cover these expenses regardless of the outcome, make sure they understand that and that the details are written down.

Additionally, your agreement may address:

• The law firm’s expectations of the client, such as timely communication
• Avenues for resolving a fee dispute
• The rights of either party to terminate the agreement
• Privacy policies
• That the result of a matter isn’t guaranteed
• If a paralegal or associate may perform some of the work and how those expenses will be addressed

Your practice management system’s automated document generation features should make updating written agreements easy, once you’ve created a basic template. Automated document generation often makes more sense than copying and pasting into a template on your own because it reduces the amount of time needed to create a document, as well as the likelihood of errors.

Advantages

Each fee structure has its advantages.

Flat fees can help draw certain clients because they know the cost of the legal work won’t go above a set amount. If you’re drafting a will, a flat fee may hold significant advantages because that pricing structure may help you appeal to more clients.

On the other hand, retainer fees can help ensure a steadier cash flow for the law firm. They may also make more sense in situations with complex legal work or where it’s harder to estimate the number of hours a matter may involve.

Disadvantages

As mentioned above, the chief disadvantage of flat fees is that they don’t make sense for complex or time-consuming legal work—or if a case goes to trial. Likewise, even seemingly straightforward legal work can come with surprises, such as if a client hires a law firm to represent them in a first-time DUI case but turns out to have previous charges the firm didn’t initially know about.

The disadvantages of retainer fees mainly have to do with the complexity of managing them and staying compliant. The American Bar Association and State Bars have strict regulations in place to ensure that law firms adhere to high ethical standards when holding client money in a trust account.

Until the law firm has completed the agreed-upon legal work and billed the client, the funds in a trust account still belong to the client. To prevent lost or commingled client funds, each client’s security retainer must be held in a separate account. Separate account ledgers must be maintained by the law firm, and any funds that aren’t used over the course of a matter must be returned to the client.^[3]

Conversely, law firms may land themselves in a tight financial spot if they don’t carefully monitor retainer balances and replenishment. In an ideal world, security retainers can help reduce the risk of clients not paying their bills.

However, this idealized scenario only works if the law firm carefully monitors the funds left in the trust account against the Work in Progress (WIP). It is up to the law firm to reach out to the client for additional funds if the security retainer is used up before the matter is completed.

Solutions

When it comes to resolving the disadvantages with flat fees, the solutions are fairly straightforward: the law firm can embrace a mixed fee pricing model or move to a security retainer fee.

While there are no iron-clad guarantees, the solutions for staying compliant with security retainers can generally be found in modern legal technology. Contemporary practice management programs offer built-in safeguards that prevent funds from accidentally being withdrawn from the wrong client trust account. They also offer safeguards to prevent overspending and features that prompt retainer replenishment through automated reminders.

Look for a billing and accounting tool with an evergreen retainer system and trust accounting safeguards for a little more peace of mind with your client trust accounts.

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References

1. US Legal: Flat or Fixed Fees
2. American Bar Association, Model Rule 1.5: Fees
3. ABA Model Rules on Client Trust Records – Preface