How to Prevent & Resolve Client Billing Disputes
Lawyers naturally expect to be paid for the work they do. As a result, one of the most prominent strains on a law firm’s bottom line is outstanding accounts receivable, and there’s nothing worse than getting into a billing dispute with a client.
Although the amount might be small, the issue, if it remains unsolved, can be large enough to tarnish even the most respected lawyer’s otherwise stellar reputation. When a legal bill is unpaid, some attorneys are tempted to “fire” the client and sue for fees, but this can be a risky move – it is estimated that up to 40 percent of fee lawsuits lead to counterclaims of legal malpractice against the attorney. So how can attorneys and law firms address billing issues that arise when it comes time to collect from clients and prevent future miscommunications surrounding billing and payments?
Clients value transparency. They want to know precisely what they’re getting for their money, meaning an attorney needs to state, in writing, what their billing procedures are before they begin work on a case. Then, if an issue arises down the road, they will have a signed agreement to support their position. A written fee agreement signed by both the attorney and the client sets forth the scope of their relationship. Here are some things to include in an attorney’s fee agreement:
The extent and limits of the representation
Who will perform the services, including who will be the lead counsel on the case
The billing rates of non-lawyers like paralegals who perform substantive legal work on the case
How often the client will be billed, and how long they will have to make payment
Details specifying whether the fee is hourly, fixed, or contingent based upon the award issued at the end of the case
How litigation costs like filing fees, expert witnesses, travel expenses, and process servers will be handled
The types of costs to be paid by the client, outside of the cost of legal representation – filing fees, expert witness fees, court costs, and copying charges
How each party can end the relationship, if necessary
Avoiding billing issues with legal clients is an ongoing balancing act that involves complete transparency and open communication, and a comprehensive retainer agreement is an excellent way to start.
Why Do Billing Issues Arise?
Attorney-client billing issues can arise for numerous reasons, including a general lack of communication. Some of the most common situations that can lead to billing disputes with clients include:
1. Vague estimates.
When quoting fees as a range, attorneys should be aware that most clients hear the low end of the scale and ignore the high end, so if their bill is calculated at the high end, they are likely to experience sticker shock, cry foul, and a billing issue might ensue.
2. Unspecified fees.
Clients are often stunned by the out-of-pocket expenses that they must pay at the conclusion of their case. Telling them upfront about the types of fees that they can expect to incur – filing fees, expert witness fees, court costs, and copy charges – can help soften the blow when the bill arrives.
3. Less than full disclosure.
If your work hours start to exceed the original estimate provided to a client, inform them as soon as possible. The failure to do so will encourage some clients to argue that you need to stick with the initial budget since you gave them no warning regarding the additional hours.
4. Services left unperformed.
Even a reasonable legal fee might be questioned if the attorney fails to complete the agreed-upon work specified under a signed fee agreement. These circumstances can become the basis for a billing dispute.
5. Wrong amount of information.
When you provide too much detail in a bill, it can confuse the clients, but they might think you’re not working hard enough for them if you give too little information. So, the best approach is to provide sufficient detail to clearly explain tasks and address anticipated client questions, but no more.
Try to write billing descriptions without using complicated legalese. One way to do this is to establish parenthetical definitions of common legal terminology in your software’s billing task descriptions. Understanding a legal invoice is challenging enough without having to decipher legal acronyms and abbreviations.
7. An abundance of no charges.
Although it’s a good idea to include a task in an invoice with a $0.00 charge when you perform a service for a client without charging them, if you do this too often, clients might begin to expect it and balk when a line item that they weren’t billed for last month appears with a charge on this month’s invoice.
8. Outsourcing without explanation.
If you have a matter that requires legal or non-legal outsourcing, include a detailed description of this on the invoice. If you don’t, the client might assume that you cannot provide adequate requisition without help from third parties and start to question your fee. Also, ensure that you have addressed third-party resources and outside counsel in the initial fee agreement.
9.Allowing past-due bills to accumulate.
When a client ignores a bill (or two or even three), don’t sit back and hope for the best. Instead, meet with the client to determine why the bills are outstanding and explore potential options to bring the account up to date.
Another way to avoid billing disputes is to put a standardized law firm billing policy in place. The policy will address issues like how the firm bills clients, when to send invoices, how long descriptions should be, what expenses should be billed and which should be written off, and standard introductory communication to be included on bill
More Billing Pitfalls
There are some billing practices that lawyers generally need to avoid entirely. These include:
Double billing - when an attorney invoices two clients for work done simultaneously. If you performed an hour of research that can apply to two cases, bill each client 30 minutes (not one hour each).
Block billing – combining distinct tasks into a single billing entry. Although block billing might be appropriate during instances like travel, this practice might be considered somewhat suspicious because it does not accurately report the time taken for each task individually.
Inflating time – marking up your time spent working on a matter. You should only invoice for your time to ensure that you are not overcharging your clients and maintaining a strong attorney-client relationship.
Value billing – charging additional fees for specific, higher-value tasks. Many disputes happen when a client notices that an attorney is billing an unreasonable or excessive time for certain tasks. Although there may be legitimate reasons why some work takes longer than anticipated, you need to explain this to the client, and provide them with descriptive time entries to educate them and potentially avoid a dispute down the road.
Unnecessary charges – billing for wasteful, unnecessary, or redundant processes that could have been avoided., e.g., traveling to a meeting when a video conference would suffice.
Charging for overhead – meaning billing a client for creating a bill. Clients should not be expected to pay for your firm’s administrative tasks, and some will take issue if you ask them to do so.
Because these billing practices might involve deception, fraud, and misrepresentation, they can frequently lead to billing disputes and legal liability claims.
How to Address Billing Issues
Billing is a double-edged sword for lawyers. While they want to ensure that they’ve billed a client correctly and ethically so that they will be paid on time, attorneys don’t want to spend too much time on billing (a non-billable service). This situation often gets complicated when a billing dispute arises, forcing the lawyer to walk the tightrope between getting paid and not being sued for legal malpractice. Here are some ways an attorney can proactively address billing issues:
Be direct. When a client is late paying their invoice, you must be clear and straightforward regarding your expectations. Many clients believe that lawyers are wealthy and “don’t really need the money,” at least not right away, and they elect to pay other bills before their legal invoice. Let your clients know that you expect prompt payment from them to avoid this situation.
Address concerns immediately. Whatever the reason for the lack of payment, you need to address your and your client’s concerns right away. Be assertive but also respectful and understanding. Don’t harass those who are behind on their payments, but don’t let your concerns go either. Work on the problem as soon as you realize that there is a problem.
Send a written reminder. Resend the invoice to the client, along with a message stating that you haven’t received payment. While you don’t have an obligation to give the client extra time to pay their bill, if you are dealing with a large company that needs additional time to process payments, consider setting another due date within a week or two.
Follow up with a collection letter. More formal than a written reminder, a debt collection letter includes the payment due date, provides a timeframe for payment (usually two weeks), the methods of payment accepted, and a statement regarding the action that you will take if payment is not made. This statement can be vague in nature (“to avoid further action”) or more forceful (you’ll turn the matter over to a collection agency or initiate legal action). Which phrase you choose to use will depend on the time that has passed, the amount the client owes, and your need to work with this client in the future.
Call the client or meet in person. If your reminders and letters receive no response, consider calling or meeting face-to-face with the client to discuss the issue and a potential resolution. If you haven’t been paid due to financial difficulty, consider setting up a payment plan or accepting partial payment to resolve the matter without resorting to more aggressive and costly actions.
Discontinue work. Suppose you’re working on a long project or an ongoing contract under which you agreed to be paid monthly or at some other interval. In that case, you should stop delivering work after your client misses a payment – sometimes, this is enough to get the client’s attention and get you paid.
If you’ve exhausted all other avenues to obtain payment from a client, you could opt to proceed with a fee suit. Before doing so, research the statute of limitations for a potential legal malpractice claim and wait until it has expired before filing your lawsuit – this will help minimize the possibility of a legal malpractice counterclaim. Before you file a fee suit, ask a colleague to review the file to pinpoint any errors that may have been made that would potentially expose the firm to a malpractice claim. You need to also determine whether the file supports the work outlined in the invoices and analyze the net recovery should you win the fee suit (considering the cost of outside counsel, taxes owed on the recovery, and lost billable time to the firm). Also decide regarding whether you will be able to collect on a judgment against the client.
How to Prevent Future Billing Disputes
A law firm is a business that will not survive if it does not get paid by clients. Although most clients pay their bills on time and most fee disputes are resolved quickly and amicably, others morph into ugly battles – often much larger than the legal matter that led to them. Here are eight ways your firm can improve collections and avoid future billing disputes:
Know what is in your fee agreement. Most fee agreements are comparable to ordinary contracts, and both parties are bound by what is contained in them. Unfortunately, like contracts, people (including attorneys) do not always carefully read them to know what they are signing. To protect yourself and your firm from a billing dispute with a client, you must know exactly what is in your fee agreement to ensure that your billing practices are consistent with your contractual obligations. If you don’t, you risk charging rates that significantly differ from what is outlined in your fee agreement. Uncaught, this situation could cost the client thousands of dollars in unauthorized fees and costs, and if caught, you might be facing an extremely irate client who decides to bring a legal malpractice action against you.
Collect a realistic retainer. Although some lawyers are hesitant to ask for a retainer, thinking that they might scare a client away, if the client cannot come up with a reasonable retainer at the onset of representation, this could be a sign of their inability to pay later. Collecting a retainer and having it replenished as needed is one of the most straightforward ways to avoid payment issues. For certain cases, such as personal injury, a lawyer waits until the case’s conclusion to take a percentage of the award as their fee.
Take cases on a contingency. This type of payment allows attorneys to represent people who have been damaged but cannot afford a lawyer. However, be aware that some contingency clients might be unhappy with the percentage they initially agreed to when presented with an unexpected result. Therefore, when a lawyer is paid on a contingency basis, the fee agreement must state what percentage of any award they will take, whether they will collect a higher rate should the case go to trial, and whether they will be entitled to a portion of the award if representation ceases before the end of the case.
Ensure that your fees are reasonable. Unfortunately, a signed fee agreement won’t help much if your client feels that your fees are unreasonable. According to Model Rule 1.5 of the ABA’s Model Rules of Professional Conduct, the factors used to determine whether a fee is reasonable are as follows: the time and labor required, novelty and difficulty of the issues, whether the fee is customary for similar services in a similar area, the amount involved and the results obtained, the time limitations the attorney is operating under, the nature and length of the relationship, the experience, reputation, and ability of the attorney, and whether the fee is fixed or contingent.
Avoid financial surprises. Legal clients do not like surprises, especially from their attorneys. Although it isn’t possible to completely avoid unanticipated fees and costs, experienced attorneys can prevent most of them by preparing a comprehensive budget at the beginning of the case that lists all the potential fees and other charges a client is likely to be responsible for paying. To stay on track – and avoid unwelcome surprises – this budget should be honest, realistic, and updated regularly throughout the matter. Before starting any particularly costly projects, discuss the reasons for those tasks and the anticipated costs. If the client agrees, put it in writing.
Manage client expectations. While a lawyer can substantially influence the result of a case, much depends on the law and the facts, which are out of their control and cannot be changed. Also, sometimes good lawyers get back results, but less-than-ideal results should not shock the client if the attorney has done the groundwork of managing client expectations. Clients are much more likely to pay fees, even if they have received an unfavorable outcome if their attorney explained the risks upfront and the client was still willing to proceed. Although clients do not typically like to hear about the weak spots of their case, attorneys must explain them in detail, in writing.
Address payment problems immediately. It is much easier to resolve a $10,000 fee dispute than a $100,000 fee dispute. As soon as a client begins to fall behind on paying their invoices, contact them to discuss the situation. Although many lawyers try to avoid this uncomfortable conversation and continue to send invoices, hoping the client will one day miraculously pay the bill in full, this is not realistic. If you fail to address invoice and billing concerns right away, it harms the attorney-client relationship. Unfortunately, when a lawyer feels underappreciated, the resulting animosity can sometimes affect their willingness to provide competent representation to the client, an ethical violation.
Identify problems before they happen. Some clients simply do not intend to pay for legal services no matter the outcome of their case, an unfortunate risk of the legal profession. Some red flags: A potential client who is on their third or fourth attorney, one who refuses to make retainer deposits, or another who fails to pay the first invoice you send them (they will likely not pay subsequent invoices either). Although it is not always easy to identify payment risks before representation, problem clients usually reveal themselves early on. It is wise to end the representation quickly if you can ethically do so.
Successful attorneys know how to practice law as effectively as possible, not just in the way they manage clients but also by the manner that they bill. For example, when they create client invoices, they combine transparency, timeliness, and common sense to improve their chances of getting paid on time and retain more clients by strengthening the attorney-client relationship.