Incurring costs are a natural part of running a law firm and providing legal services to clients. Many of these costs are incurred for work done on your client’s behalf, and you need to understand how to include them in your accounting.
Client costs are grouped into hard costs and soft costs, both of which are handled differently for accounting purchases. Here is everything you need to know.
What Are Hard Costs and Soft Costs?
All of your law firm’s expenses are broken down into two categories: hard costs and soft costs.
Hard costs are expenses that are incurred on behalf of a client and require direct payment to the vendor. These are also known as direct costs. Law firms usually pay these upfront and bill clients for reimbursement, and they’re classified as law practice expenses that are deducted from income.
Soft costs are expenses that your law firm charges to the client without direct payment to the vendor. These are also known as indirect costs. Some law firms charge these costs to the client while others record these as the necessary costs of doing business.
Examples of Hard and Soft Costs
If your firm pays a court filing fee directly for a client case, that’s a hard cost. Other hard costs may include:
- Court reporter fees
- Mediation fees
- Hearing transcript fees
If your firm charges for the photocopies you make using your own office equipment, you incurred costs but didn’t have to pay a vendor. This scenario would be considered a soft cost. Other soft costs may include:
- Telephone services
- Internet services
- Printing costs
- Legal research material
Resources to Track Hard Costs and Soft Costs at Law Firms
The key to tracking your law firm’s hard and soft costs is using the appropriate legal time and expense software to ensure you have detailed records.
Time and Expense
Time and expense tracking with Bill4Time is essential for accurate accounting. With time tracking tools, you can capture your time in real-time, on any device, instead of using spreadsheets or notepads.
Detailed time and expense tracking is essential for managing hard and soft costs, including those small costs that can slip through the cracks. Bill4Time simplifies how your firm captures transactions incurred on behalf of a client for reimbursement.
Bill4Time’s custom reporting feature helps you get a big-picture view of your firm’s financial health. You can view your comprehensive accounting activity or granular information like payment history, expenses, or collections by the client or matter to identify gaps and issues.
Clearly communicating hard and soft costs on a client invoice can decrease the chance of confusion about charges. By standardizing your legal invoicing process, your firm can quickly and effectively generate transparent invoices.
Along with having an invoice creation process in your firm’s legal billing policy, you can use Bill4Time to create custom invoice templates to reduce the time it takes to generate invoices and ensure they’re consistent across your firm.
Importance of Tracking Hard Costs and Soft Costs
Keeping track of your hard and soft costs is essential to understand your firm’s financial health.
Hard and soft costs are recorded differently for accounting purposes. Tracking them appropriately ensures that you have an accurate financial picture with categorized expenses, as well as reimbursements when clients are billed.
Transparency in billing is an important aspect of maintaining client retention and avoiding invoice disputes. If you’re billing your clients for reimbursements for the costs your firm incurred, it’s essential that the clients understand what the costs are and why they were charged.
Legal billing must be compliant with the American Bar Association, state bar guidelines, and Interest on Lawyers’ Trust Accounts (IOLTA), which requires accurate billing and expense tracking.
Final Thoughts on Hard Costs vs. Soft Costs
Tracking expenses is key to running a profitable law firm, which includes effectively managing hard costs and soft costs.