How to Marry Fixed Fees with Changes in Scope for Legal Services

There are three key benefits to obtaining a fixed fee for a scope of work on a single matter:

1. Cost predictability
2. Driving outcomes
3. Cost control

The single most common objection we get when we ask Clients if they’d considered a fixed fee arrangement for their matter is that the scope of work is too unpredictable to obtain a fixed fee. Take litigation for example. There may be hundreds of variables that determine the amount of work required from acting counsel. Therefore, how could you possibly negotiate a fixed fee without a firm factoring in the risk of doing more work than was anticipated, or the Client left paying the trial costs of a litigation matter that ended in a successful dispositive motion or early settlement?

The answer is that a good fixed fee isn’t actually “fixed” at all. Sure, there is some risk sharing, but where there is risk, there is reward. A great fixed fee is one that is paired with a mechanism that allows for adjustments to the fee to be paid if there is a material change in the originally anticipated scope of work. Well then, how do we still maintain cost predictability and control?

1. We identify the core cost-driving variables associated with a matter. These could be activities to be performed by counsel, such as taking or defending witness depositions, reviewing documents, or conducting a trial over a period of days. Or, they could be elements of a transaction, such as the parties involved, size of the entities, or value of the deal, for example.
2. We limit the above cost-driving variables to those activities that are material to cost. Sure, outside counsel may spend their time involved in many different tasks, including phone consultations with the client, filing documents, and traveling to and from court. However, in the context of a multi-million dollar litigation, these are not activities we consider material to cost, and ultimately, we want to pay for outcomes, not effort. Firms should naturally factor these minor variables in as activities required to perform the service and/or deliver the outcome. 
   
   
3. The next step is to quantify the core cost-driving activities. These are your assumptions about the scope of work. Hang on - I thought you said I don’t have to predict the trajectory of the matter? No one is expecting you to know exactly how many witnesses there will be or the number of documents that will need to be reviewed, but based on your experience with similar matter types and your read of the case, provide a reasonable assumed quantity. If you’re really not sure - make it up or ask an incumbent firm. The goal here is to ensure your firms are providing fee proposals that are apples-to-apples so that you get a true sense of cost. You’re not asking your firms how much it will cost to represent you in this matter; you’re asking them how much it will cost for them to deliver an outcome, based on the available set of facts.
   
   
4. Ask your firms to provide you with a Fixed Fee that is broken out by:
   1. Each phase or deliverable of the matter; and
   2. Core cost-driving variables within each phase.
      
      
   This allows us to only pay for those phases as and when they occur and to deal with deviations in scope only with respect to those core cost-driving variables.
   
   
5. Set a threshold for what will be considered a Material Change in Scope (also often referred to as a Material Deviation). In an effort to maintain cost predictability and control we want to minimise the number of times a firm can come back to us and ask for a revision to the fixed fee. This means there is still an element of shared risk, but it comes with the benefit of cost containment. We achieve this by limiting the flexibility in the fixed fee to only those changes in scope that we deem to be significant enough to warrant an increase or reduction in cost. It is best practice to define a Material Change in Scope as a 30% increase or decrease in the Core Cost-Driving Variables.
   
   
6. At the completion of each phase, true up your fixed fee for that phase by comparing original assumptions to the actual assumptions to identify if there are any Material Changes in Scope. Where there are, refer back to the pricing the firm provided for the Core Cost Driving Variables to determine how much to increase or decrease the price.

By using the above approach, you have:

1. Achieved cost predictability. Not because you’ll know exactly what you’ll spend on this matter, but because you know exactly how much it will cost for the firm to perform their services. 
2. Incentivized the firms to focus on the outcomes for each phase, rather than their billed time.
3. Maintained control of costs so that if a phase blows up and significantly more work is required than anticipated, you aren’t at the mercy of the firms’ hourly rate and can have an open discussion with them about adjusting the fee, according to their initial fee proposal. 

Not sure where to start? PERSUIT has templatized this approach in its comprehensive library of RFP templates specific to matter type. Find out more here.