You Say You Want to Pay a Flat Fee?

I remember asking a friend how he computed his fee for a certain amount of work. The work was a project which was going to be billed as flat fee, vs. an hourly rate. Without hesitation, my friend responded: “I charge as much as I can possibly get away with” (!). Now this person is highly ethical and was kidding, but only partially. Pricing work that is billed as a flat fee can be very difficult. What my friend was getting at was that he needed to price the work so that it would still be profitable, even if it took more time than anticipated.
The legal profession is moving into a flat fee environment. “Thanks in part to improved technology for tracking the costs of legal work, companies are increasingly finding ways to avoid the oft-dreaded billable hour”. In fact Cisco Systems “Now farms out 70% to 75% of its annual legal budget, estimated at $125 million, under fixed fee arrangements”.
So how do you compute the fee? Consider this process: First, compute your expenses and profit margin assuming a certain number of hours to finish the work. Second, come up with an estimate of how many additional hours you may need, due to minor unexpected items. Add up those totals, and that should be your starting point for a fee. Third, outline for the client very specifically the circumstances that would require you to increase the fee (The best example is slow responses from client staff when asked for information). Insist that the client signoff that they understand the agreement. If the client refuses, pass on the project.
The Lesson: Don’t take on work for a flat fee if the client is not willing to pay more for delays or events that are out of your control- move onto the next client.
Your Homework: Have you taken on a flat fee project recently that turned out to be a money loser? How did you handle that issue with the client?
(Source: “More Law Firms Charge Fixed Fees For Routine Jobs”, Wall Street Journal 5/2/07)