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Billing for Contract Attorneys – My Mixed Views

by Carolyn Elefant on June 29, 2005 · 14 comments

in Business Models, Ethics & Malpractice Issues, Outsourcing & Hiring

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When I put up this post about the ethics of collecting a profit on fees paid to contract attorneys, I didn’t include my own thoughts because my views are mixed.

From an ethical perspective, I’m fairly certain there’s no problem with the practice, so long as overall rates are reasonable.  In fact, the entire large law firm structure depends upon leveraging young associates who are paid salaries of around $125,000 and might generate billings of three times that ($200/hr billing rate x 2000 hour billable requirement, less any costs associated with training and benefits).  After all, you don’t get to one billion dollars in revenues by billing associates out at cost.  In short, there’s no way any bar association on this planet would criticize a model that enables large firms to profit.

In this context, allowing a law firm to profit off contract lawyers or
outsourced services is not just ethical, but further, conduct we would
want to encourage.  If a firm can hire a contract attorney with a
decade of experience for $100 an hour and bill her out at $200, then
the client gets a far, far better product at a lower cost than
if the law firm had used a junior associate.  Here, the financial
reward to the firm should motivate it to enter into more of these types
of arrangements that benefit all parties involved.

[added 6/29/05 – 8 pm] There’s another reason why lawyers deserve to mark up contract work:  risk.  If there’s a problem with the work that’s been performed, the retaining firm remains liable, not the contract attorney (though some contract attorneys do carry malpractice insurance). ]

But while the ethics of profitting off contract services is clear, I still can’t bring myself to wholeheartedly endorse mark-ups on contract service in all cases as a matter of policy.  In some ways, I’m torn because the contract question impacts solo and small firm lawyers from both ends, because many solos find ourselves on the giving and receiving end of contract work.  As a
solo, I have provided services on a contract basis, at fairly lucrative
rates (which the retaining attorney most likely marked up to the client).  But I’ve also used contract attorneys to ease my workload – and
often, those attorneys have worked on matters where I’ve agreed to a
flat rate or where compensation is contingency or deferred.  In this
type of case, the contract attorney benefits me by freeing me up to
take on revenue generating matters but I can’t immediately pass those
costs through.

So when firms can profit off contract lawyers, it means that contract
lawyers can charge more services.  This benefits the solo who provides
contract services, but harms the solo who needs to use contract lawyers
and can’t pass on the costs because it potentially drives up the rates
of contract attorneys.  Many solo attorneys are already short sighted
enough when it comes to paying for help (which is why so many wind up
neglecting cases or getting dangerously stressed) – and if it costs too much to hire
a contract attorney, they won’t, which hurts those attorneys and
their clients.

As for me, when I’ve used contract attorneys and billed them, I’ve
always passed them on as cost with maybe a 20 percent mark up to
reimburse me for the cost of locating and training the person and the
risk of noncollection since I always pay my contract attorneys whether
or not the client pays.   I might act
differently if I relied on contract attorneys more extensively, but
since it’s usually a project here or there, they don’t provide much of
a revenue source anyway.  Frankly, I don’t know what percentage mark up
is reasonable for associates.  It seems that the biglaw markups
are probably too high though again – what’s the benchmark?  The rates that a solo charges?  The rates that competitors are charges (all pretty much the same anyway?)  The mark-ups sure aren’t excessive when compared to some of the fees recovered in class actions.  How can we even begin to sort out what kind of mark-ups are unreasonable?   It’s a question that I’ll be pondering as the year
progresses and as I begin to grow my firm beyond just me and occasional
per diem workers (more on that later).

As with so many other questions, the ethics part or the legal part is
usually easy.  It’s just that for me it’s never enough.  I want to do
the right thing too – what’s right for me but also what’s right for my
clients.  And it’s a constant struggle to figure out what that is.  Profitting off contract services is ethical in our profession.  But the amount of the mark-up an when it applies and the appropriate benchmark for evaluating it are harder questions to which I don’t know the answers – and maybe most of us lawyers just don’t want to know.

  • http://legalblogwatch.typepad.com/legal_blog_watch/2005/06/do_you_mark_up_.html Inside Opinions: Legal Blogs

    Do you mark up what you sub-contract and outsource?

    Carolyn Elefant, writing today about her struggle with her own policy, welcomes your thoughts. She writes,

  • http://legalblogwatch.typepad.com/legal_blog_watch/2005/06/do_you_mark_up_.html Inside Opinions: Legal Blogs

    Do you mark up what you sub-contract and outsource?

    Carolyn Elefant, writing today about her struggle with her own policy, welcomes your thoughts. She writes,

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 f/k/a

    our outsourcing decision affirmed (by me)

    Lisa Solomon and Carolyn Elefant have disagreed with yesterday’s post “when outsourcing, just pass on the cost” I believe a lawyer/firm should (1) tell a client whenever legal services are going

  • http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 f/k/a

    our outsourcing decision affirmed (by me)

    Lisa Solomon and Carolyn Elefant have disagreed with yesterday’s post “when outsourcing, just pass on the cost” I believe a lawyer/firm should (1) tell a client whenever legal services are going

  • http://www.healthregs.com Jennifer A. Stiller

    The ABA has answered your query as to what makes the mark-up of a contract attorney’s work “reasonable.”
    Many of the online discussions I’ve seen don’t seem to be aware of Formal Opinion 00-420 of the American Bar Association’s Standing Committee on Ethics and Professional Responsibility (2000), which stated that when the costs associated with legal services provided by a contract lawyer are billed to the client as fees for legal services, the amount that may be charged for such services is governed by the requirement of Model Rule 1.5(a) that a lawyer’s fee shall be reasonable. A surcharge to the costs may be added by the billing lawyer if the total charge represents a reasonable fee for services provided to the client. If the contract lawyer’s fee is billed as an expense to the firm that retained it, the rules regarding mark-ups to expenses (i.e., minimal and cost-based, if any) apply.

  • http://www.healthregs.com Jennifer A. Stiller

    The ABA has answered your query as to what makes the mark-up of a contract attorney’s work “reasonable.”
    Many of the online discussions I’ve seen don’t seem to be aware of Formal Opinion 00-420 of the American Bar Association’s Standing Committee on Ethics and Professional Responsibility (2000), which stated that when the costs associated with legal services provided by a contract lawyer are billed to the client as fees for legal services, the amount that may be charged for such services is governed by the requirement of Model Rule 1.5(a) that a lawyer’s fee shall be reasonable. A surcharge to the costs may be added by the billing lawyer if the total charge represents a reasonable fee for services provided to the client. If the contract lawyer’s fee is billed as an expense to the firm that retained it, the rules regarding mark-ups to expenses (i.e., minimal and cost-based, if any) apply.

  • http://blogs.law.harvard.edu/ethicalesq David Giacalone

    Jennifer, The nomenclature loophole offered by the ABA Opinion is the sort of “lawyering” and “lawyerese” that gives the profession a bad name. How can an “ethics” issue depend on the name given to the item on the lawyer’s billing statement? I suggest that the “ethical” law firm must, at the very least — as a fiduciary, agent and counselor for the client — inform the client that the services have been outsourced at a lower fee than the firm’s normal fee, and told the markup involved. Otherwise, the lawyer is merely “lawyering” his or her own client.
    See http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 .

  • http://blogs.law.harvard.edu/ethicalesq David Giacalone

    Jennifer, The nomenclature loophole offered by the ABA Opinion is the sort of “lawyering” and “lawyerese” that gives the profession a bad name. How can an “ethics” issue depend on the name given to the item on the lawyer’s billing statement? I suggest that the “ethical” law firm must, at the very least — as a fiduciary, agent and counselor for the client — inform the client that the services have been outsourced at a lower fee than the firm’s normal fee, and told the markup involved. Otherwise, the lawyer is merely “lawyering” his or her own client.
    See http://blogs.law.harvard.edu/ethicalesq/2005/06/29#a4100 .

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  • http://www.lsicontractattorneys.com David Montgomery

    Hi, Carolyn. I enjoy your blog. Regarding contract attorneys, I just wanted to make a few points. First, I think the issue of what is appropriate to charge has already been answered. Any bar association who has looked at this topic agrees that the mark-up should be “reasonable” (typical attorney response, huh?). I’ve seen this interpreted to be as much as 100% mark-up. Presumably, if the contract attorney who performed the work was very experienced and the marked-up cost for his/her work is still less than what would be paid for a firm attorney with that experience, an argument can be made that this is reasonable.
    As someone who places contract attorneys into law firms and corporations, I certainly don’t encourage 100% mark-ups. The idea is to save the law firm’s client significant money while still providing superior work product. However, I think some law firms don’t want clients to know how much they save by using contract attorneys for fear that they will demand their use on other projects. I also think some firms unfortunately look at this as a potential profit center.
    One advantage to law firms of using contract attorneys is that beyond the price paid to the contract attorney placement firm, they have few costs. We pay employment taxes, unemployment compensation insurance, workers’ compensation insurance, even some liability insurance, etc. We indemnify against employment claims. The law firm adds the contract attorney to their malpractice insurance (insurance companies won’t let us purchase malpractice insurance because we are not supervising their work) and may have to cover them for any premises liability claims. Law firms also have costs of supervision, assuming this is not already passed through to the client. Thus, law firms should not have a lot of extra cost to cover when hiring contract attorneys. Most of the mark-up is pure profit.
    I think you raise an important point when you state that sole practitioners may be doing themselves and their clients a huge disservice when they fail to hire contract attorneys due to fear of pricing. However, at least in large markets, contract attorneys are not too expensive for small firms. In fact, some of my small firm clients are becoming big users of contract attorneys because our contract attorneys’ rates are still lower than the attorneys in their firm. Small firms can be one of the biggest beneficiaries of contract attorneys because the spikes inherent in the practice of law dramatically affect small firms because they have fewer attorneys to whom they can spread the work. Hiring a contract attorney is the perfect answer.
    Regards,
    Dave Montgomery
    Legal Solutions, Inc.
    312 924 2851

  • http://www.lsicontractattorneys.com David Montgomery

    Hi, Carolyn. I enjoy your blog. Regarding contract attorneys, I just wanted to make a few points. First, I think the issue of what is appropriate to charge has already been answered. Any bar association who has looked at this topic agrees that the mark-up should be “reasonable” (typical attorney response, huh?). I’ve seen this interpreted to be as much as 100% mark-up. Presumably, if the contract attorney who performed the work was very experienced and the marked-up cost for his/her work is still less than what would be paid for a firm attorney with that experience, an argument can be made that this is reasonable.
    As someone who places contract attorneys into law firms and corporations, I certainly don’t encourage 100% mark-ups. The idea is to save the law firm’s client significant money while still providing superior work product. However, I think some law firms don’t want clients to know how much they save by using contract attorneys for fear that they will demand their use on other projects. I also think some firms unfortunately look at this as a potential profit center.
    One advantage to law firms of using contract attorneys is that beyond the price paid to the contract attorney placement firm, they have few costs. We pay employment taxes, unemployment compensation insurance, workers’ compensation insurance, even some liability insurance, etc. We indemnify against employment claims. The law firm adds the contract attorney to their malpractice insurance (insurance companies won’t let us purchase malpractice insurance because we are not supervising their work) and may have to cover them for any premises liability claims. Law firms also have costs of supervision, assuming this is not already passed through to the client. Thus, law firms should not have a lot of extra cost to cover when hiring contract attorneys. Most of the mark-up is pure profit.
    I think you raise an important point when you state that sole practitioners may be doing themselves and their clients a huge disservice when they fail to hire contract attorneys due to fear of pricing. However, at least in large markets, contract attorneys are not too expensive for small firms. In fact, some of my small firm clients are becoming big users of contract attorneys because our contract attorneys’ rates are still lower than the attorneys in their firm. Small firms can be one of the biggest beneficiaries of contract attorneys because the spikes inherent in the practice of law dramatically affect small firms because they have fewer attorneys to whom they can spread the work. Hiring a contract attorney is the perfect answer.
    Regards,
    Dave Montgomery
    Legal Solutions, Inc.
    312 924 2851

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