Alternative Fee Arrangements (AFAs): The Complete Guide

Curious about AFAs? Short for Alternative Fee Arrangements, these pricing models are reshaping how law firms and clients work together - making billing simpler, expectations clearer, and relationships stronger.

It’s common to assume that when a legal matter’s scope is uncertain or subject to change, the only safe option is to rely on the traditional billable hour. While that may seem straightforward, in-house counsel could actually benefit more from exploring an Alternative Fee Arrangement (AFA). In many cases, adopting the right AFA not only simplifies budgeting and communication but also strengthens long-term relationships between in-house legal teams and outside counsel, built on trust and legal spend predictability.

What Is an Alternative Fee Arrangement (AFA)?

An Alternative Fee Arrangement (AFA) is a modern legal pricing model in which law firms are compensated based on an agreed-upon value or outcome - not the number of hours billed. By eliminating the traditional hourly rate, AFAs bring greater transparency and predictability to both law firms and clients.

Instead of tracking every minute, rates for specific services are established clearly and upfront. This approach simplifies billing, reduces administrative strain, and helps in-house counsel to better track and manage their legal spend.

For example, one of the most common AFAs is a fixed or flat fee, where both parties agree to a set price before the work begins. This model removes uncertainty and creates mutual confidence in the value being delivered.

From a client’s perspective, AFAs replace the anxiety of open-ended hourly billing with clarity and trust. Many clients - especially new ones - don’t have a clear sense of how much time their legal matters will actually require. When hours accumulate beyond expectations, surprise invoices can quickly erode trust.

AFAs solve that problem. By removing ambiguity, they provide predictability, reassurance, and stronger long-term relationships. While moving away from hourly billing may feel unfamiliar at first, the long-term benefits - efficiency, transparency, and client loyalty - far outweigh the adjustment period.

Why Are AFAs Gaining Popularity in Legal Services?

Alternative Fee Arrangements (AFAs) are reshaping the legal industry by providing cost control, transparency, and predictability - qualities increasingly demanded by corporate clients and general counsel alike. Costs for outside counsel selection are rising sharply and are predicted to rise further with Global 50 firms driving double digit increases into 2026. AFAs are a strategic solution that can benefit both sides.

When implemented effectively, AFAs create a true win-win scenario: clients gain cost certainty, and law firms can improve efficiency and profitability. Some forward-thinking firms have even eliminated billable hours altogether, focusing instead on value, outcomes, and client satisfaction.

Take fixed-fee AFAs as an example. Clients know upfront exactly what they’ll pay, avoiding billing surprises and budget overruns. Meanwhile, law firms have the freedom to innovate - streamlining workflows, leveraging technology, and allocating talent strategically - without needing to justify every task or time entry. This operational flexibility often leads to stronger margins and improved client relationships.

The rise of AI-driven pricing models is accelerating this shift even further. Data-driven forecasting tools can now predict the cost and complexity of legal services with remarkable accuracy, helping firms set fair, transparent rates before work begins.

By removing uncertainty and shifting the focus from hours to outcomes, AFAs empower law firms to demonstrate value - not defend it. This model also opens new opportunities for growth across legal and procurement teams, creating a more collaborative and results-oriented approach to legal service delivery - while ensuring in-house legal teams are able to reduce costs and manage outside counsel more effectively.

What Are The Benefits Of AFAs?

A successful Alternative Fee Arrangement should create value for both in-house legal teams and their outside counsel. For corporate legal departments, the right AFA delivers cost predictability and transparency with measurable outcomes, aligning legal spend directly with business value. This shift away from hourly billing prioritizes results, not just time.

On the PERSUIT platform, in-house legal teams can leverage AFAs across all types of matters - from litigation and IP to HR, compliance, and M&A - giving them greater control over budgets while driving better performance and accountability from their outside counsel.

Here are some of the key benefits:

For In-House Legal Teams

Cost Predictability & Control
AFAs provide clear, upfront pricing that eliminates surprise invoices and allows teams to budget with confidence.
Transparency & Accountability
With pre-defined fees or outcome-based models, legal departments gain full visibility into what they’re paying for and why.
Value Alignment
AFAs shift focus from hours billed to results achieved - ensuring outside counsel are aligned with business objectives rather than time tracking.
Easier Internal Reporting
Predictable costs and transparent metrics make it easier to communicate value to finance and procurement stakeholders.

Benefits for Law Firms

Improved Profit Margins
By streamlining processes and leveraging technology, firms can maintain or even grow profitability while offering competitive, fixed pricing.
Freedom to Innovate
Without the need to justify every billable hour, firms can focus on improving workflows, adopting automation, and reallocating resources efficiently.
Stronger Client Retention
Firms that adopt AFAs are viewed as forward-thinking, client-centric partners - leading to longer-term engagements and repeat business.
Enhanced Data & Pricing Insights
AFA implementation helps firms benchmark performance and refine future pricing strategies based on measurable data.

Shared Benefits for Both Sides

Stronger Relationships Built on Trust
Transparent pricing fosters mutual confidence and collaboration between clients and counsel.
Incentive for Efficiency & Quality
Both parties benefit from improved processes that prioritize outcomes over billable time.
Reduced Administrative Burden
Simplified billing, fewer disputes, and less time spent tracking hours free both teams to focus on substantive legal work.
Scalability Across Matters
AFAs can be applied to virtually any legal area - from litigation and IP to M&A and compliance - allowing for consistency across engagements.

What Are The Challenges of AFAs?

Alternative Fee Arrangements offer transparency and a stronger foundation for collaboration between in-house legal teams and their outside counsel. However, they also introduce new complexities that both sides must carefully navigate. Each AFA model - fixed, capped, contingency, or success-based - presents its own opportunities and trade-offs.

For example, contingency fees can make costs unpredictable for clients, while capped fees can discourage efficiency if the ceiling is set too high. For in-house teams, the challenge lies in selecting models that balance cost control with flexibility; for law firms, it’s about structuring AFAs that remain profitable while meeting client expectations.

Understanding these dynamics early enables both parties to design smarter, data-backed pricing strategies that align value with performance.

1. Scoping Complexity and the Risk of “Scope Creep”

A clear, well-defined scope is the cornerstone of a successful AFA. For in-house counsel, detailed scoping ensures transparency and prevents cost overruns. For firms, it helps set realistic expectations around deliverables and timelines.

Because legal work often evolves as matters progress, scope creep is inevitable without proactive management. Every AFA should include a material deviation clause outlining what triggers a scope change, how it will be communicated, and how pricing will adjust. This shared framework keeps both sides aligned, minimizes disputes, and maintains fairness even when new complexities arise.

2. Internal Resistance To Changing Legacy Billing Models

Transitioning away from hourly billing can be culturally and operationally challenging on both sides of the relationship. Many law firms are rooted in time-based systems that reward hours logged, while some in-house teams are still accustomed to tracking legal costs the same way.

Overcoming this inertia requires leadership buy-in and education around the long-term benefits of AFAs - including cost predictability and greater efficiency. For in-house teams, pilot programs and hybrid models can demonstrate value. For firms, showcasing early success stories helps shift internal mindsets from time spent to outcomes delivered.

3. Difficulty Pricing Unpredictable or Novel Matters

Pricing complex or unprecedented work is one of the biggest barriers to wider AFA adoption. Matters involving litigation, regulatory uncertainty, or emerging legal areas often lack the data needed for accurate forecasting.

In these cases, data-driven benchmarking becomes essential. In-house teams can use historical spend and matter analytics to guide expectations, while firms can model similar engagements to price fairly. Phased or hybrid AFAs can also help balance predictability for clients with flexibility for firms managing uncertainty.

4. Need For High Quality Data & Transparent Communication

AFAs thrive on collaboration and transparency. Without access to accurate cost and performance data, in-house teams can’t evaluate value, and firms risk mispricing or eroding trust.

Success depends on both parties committing to data-sharing and regular communication. Shared dashboards, periodic reviews, and real-time progress tracking allow teams to identify issues early and adjust as needed. This not only ensures alignment on budget and scope but also deepens partnership accountability.

5. Managing Expectations and Defining ‘Success’

AFAs shift success from hours to outcomes, but without shared definitions of value and quality, misalignment can easily occur.

In-house counsel may fear cost caps will impact quality or staffing seniority, while firms may worry about unrealistic expectations tied to flat fees. The solution lies in upfront alignment - defining clear success metrics, service levels and communication protocols based on outcomes, before work begins. When both sides agree on what success means, AFAs become a tool for partnership, not pressure.

What Are the Main Types of Alternative Fee Arrangements?

There are numerous types of Alternative Fee Arrangements (AFAs), each designed to align costs with value, manage risk, and improve transparency between law firms and clients. The right AFA depends on the nature of the matter, its complexity, and the desired level of flexibility and predictability.

Below are the most common types of AFAs used across legal services today:

Capped Fee or Phased Capped Fee

A capped fee places a ceiling on the total amount a firm can bill for a matter or for specific phases within it. While capped fees offer clients cost protection, they can limit a firm’s incentive to optimize efficiency - especially if the cap is set too high.
Phased capped fees can provide a more balanced approach, breaking down the matter into smaller segments with individual caps for greater accountability.

Overall Fixed Fee

A fixed fee AFA sets a predetermined price for the entire matter, regardless of the hours spent. This model requires both parties to clearly define the scope of work from the outset, including tasks, deliverables, and expected timelines.

Most fixed-fee arrangements also include a material deviation clause, allowing for fee adjustments if unexpected events substantially change the agreed-upon scope.

Structured Fixed Fee

In a structured fixed fee, pricing is divided by phases, key activities, or distinct deliverables. This model is especially useful for matters that may conclude early—such as cases dismissed or settled before trial - since fees align with specific milestones rather than the entire matter.

Contingency Fee

A contingency fee ties the firm’s compensation to a specific outcome or financial result. The firm and client agree on a trigger event and a percentage share of the amount recovered (or saved).

Pure Contingency: The firm receives a percentage of damages recovered.
Reverse Contingency: The firm receives a percentage of money saved or liabilities avoided.

This structure aligns incentives directly with client success, though it can create unpredictability in spend forecasting.

Success or Bonus Fee

A success fee rewards a firm for achieving predefined outcomes - such as winning a motion, obtaining a favorable settlement, or reaching a critical milestone.

Unlike contingency fees, these bonuses aren’t tied to a monetary figure at stake but rather to qualitative achievements that deliver measurable value to the client.

Collared Fee or Annual Collared Fee

Under a collared fee, the firm and client agree on a target price with an allowable variance range - often 10% above or below the set amount.

If billing exceeds the upper collar, the firm may incur a penalty; if it falls below, the firm may receive a bonus.

Annual collared fees apply the same principle across a portfolio of matters over a year, making them useful for ongoing, ad hoc work.

Phased Fixed Fee (Phase-Level Fixed Fees)

Here, the firm and client agree on a set fee for each phase of the matter - for example, investigation, discovery, trial preparation, and trial.

This model allows for predictability while accounting for variations in scope as the matter progresses.

Phased Fixed Fee with Activity Collar

A phased fixed fee with an activity collar combines phase-based pricing with additional flexibility for major cost-driving activities.

If activity levels deviate - often by around 30% - the total fee adjusts proportionally based on a pre-agreed price-per-activity.

Platforms like PERSUIT recommend this phase-based approach because it promotes alignment, fairness, and adaptability as the matter evolves.

An additional clause, known as a “broken deal discount,” can reduce fees if the matter ends prematurely (for example, if a deal falls through).

Hybrid Structures

Hybrid AFAs blend two or more pricing models to balance predictability and performance incentives.

For instance, a client and firm might agree on phase-level fixed fees combined with a contingency reward - ensuring stability while maintaining motivation for successful outcomes.

There is no one-size-fits-all AFA. Each model comes with its own benefits and limitations depending on the matter’s complexity, data availability, and client priorities.

The most effective approach often involves customizing or combining multiple structures - creating an arrangement that aligns both financial predictability and performance-driven value.

How to Choose the Right AFA for Your Matter

Once you’ve decided to implement an Alternative Fee Arrangement (AFA), the next step is to identify your goals. What does success look like for this engagement? How will both parties measure value and performance?

Choosing the right AFA requires careful alignment between scope, data, and desired outcomes. Below are the key steps to guide your process:

Define the Matter’s Scope and Predictability

Start by aligning on a clear scope of work and selecting the AFA model that best fits the matter - whether a fixed fee, capped fee, or hybrid structure. Every AFA type has unique advantages and limitations, so it’s critical to match the pricing approach to the nature of the matter.

Be explicit about administrative details such as engagement letters, invoice timing, and how your eBilling system will process the AFA. Clarity at this stage prevents disputes and ensures a smoother working relationship.

Gather Historical and Benchmark Data

Use data to set realistic expectations. Analyze past matters, market benchmarks, and average hourly costs to determine fair pricing.

Comparing the proposed AFA to traditional hourly billing helps both sides assess potential savings and profit margins.

This data-driven approach provides a strong foundation for negotiations and builds confidence in the final structure.

Identify Performance Metrics: Time, Outcome, and Value

Define what success means for both the firm and the client. Is it completing the matter under budget, achieving a specific outcome, or meeting a key business milestone?

Agree on measurable performance indicators - such as hours saved, outcome achieved, or cost predictability - and set a midpoint review to evaluate progress.

Include a success or bonus fee structure when appropriate to reward strong performance and maintain alignment throughout the engagement.

Match the Right AFA Type to the Matter Profile

Not all AFAs suit every type of matter. For example, a fixed fee works well for well-defined tasks, while a contingency or success fee may fit better for high-stakes litigation.

Consider each model’s pros, cons, and risk distribution before making a decision.

In many cases, combining multiple AFA types provides the optimal balance between predictability and flexibility.

Consider Hybrid Models for Greater Flexibility

Hybrid AFAs blend two or more structures to accommodate varying levels of uncertainty or complexity.

Common examples include:

A fixed fee for early phases of a matter with a capped fee for later, more variable stages.
A phase-level fixed fee supplemented by a success-based bonus upon achieving a desired outcome.

These models allow both sides to share risk and reward while maintaining cost control.

Document Quantified Assumptions and Include a Material Deviation Clause

To prevent disputes and “scope creep,” define clear assumptions upfront - such as the number of documents, witnesses, or interviews expected.

Include a material deviation clause specifying what changes trigger a fee adjustment and how those adjustments will be calculated. A well-drafted clause limits the need for renegotiation while maintaining fairness if unforeseen events occur.

H3: The Bigger Picture

Transitioning to AFAs benefits the entire legal ecosystem. They strengthen firm - client relationships, promote financial predictability, and create a shared focus on outcomes rather than hours. AFAs are not just a pricing shift, they represent a fundamental evolution in how legal value is defined and delivered. With AFAs, data is the new currency of legal value.

Matching Examples

Litigation: Phased fixed fee + success bonus

Consider a hybrid model with fixed fees for early phases and capped fees for later stages. Add success bonuses tied to clear outcomes (e.g., motion to dismiss, favorable settlement).
Transactional: Fixed or collared fee

Works well for defined scopes such as contract drafting, deal execution, or M&A transactions.
Regulatory / Advisory: Capped or subscription-based fee

Ideal for ongoing advisory or compliance matters where predictability and continuity are key.

Negotiation Tips

When negotiating AFAs:

Present multiple pricing scenarios to encourage open discussion.
Include change triggers and quantified assumptions to account for unpredictable work.
Focus on incentives and success bonuses, not penalties.
Document all expectations clearly within the scope of work before finalizing terms.

Effective AFA negotiations emphasize collaboration, transparency, and shared success - ensuring both firm and client achieve the outcomes they value most.

How To Implement An Alternative Fee Arrangement Successfully

For in-house legal teams, implementing an AFA isn’t just about changing how you pay - it’s about transforming how you partner with outside counsel. With AFAs, transparency is power.

Success requires structure, collaboration, and ongoing evaluation. The goal is to move from experimentation to a scalable, data-driven framework that consistently delivers value.

Start small by piloting one or two AFA models on suitable matters. This allows in-house teams to test pricing accuracy, evaluate performance, and refine reporting processes before broader rollout. Once proven effective, expand adoption across additional practice areas and firm relationships to build organizational confidence.

Cross-functional collaboration is essential. Engage finance, procurement and business stakeholders early to align on budget expectations, KPIs and definitions for success. For outside counsel, clarity around scope, communication cadence and performance metrics sets the foundation for accountability and partnership.

Use historical data or industry benchmarks to track outcomes and conclude each engagement with a post-matter review, incorporating feedback from both in-house teams and outside counsel. This continuous improvement loop ensures every new engagement is more strategic, transparent and aligned with business goals than the last.

Key Clauses to Include

When drafting or negotiating an AFA, certain clauses are essential to protect both the client and the firm:

Scope of Work and Exclusions
Clearly define what is, and is not, included in the scope. Detail deliverables, timelines, and assumptions to avoid misalignment and scope creep.
Material Deviation or Re-Scope Mechanism
Include a clause that defines how pricing or scope adjustments will be handled if significant deviations occur.

Pro Tip: Always pair quantified assumptions (e.g., number of depositions, document sets, or hours expected) with a material deviation clause. This ensures fairness and transparency when the matter’s circumstances change.

Metrics to Track

Measuring performance is vital to demonstrating the value of AFAs and identifying areas for improvement. Below are four key metrics every firm should track:

Cost Variance vs. Budget
Measure the difference between the project’s budgeted cost and actual spend at various points throughout the engagement. This highlights pricing accuracy and efficiency gains from the AFA model.
Cycle Time Reduction
Track how long it takes to complete a matter from start to finish. AFAs often encourage streamlined processes and reduced bottlenecks, improving delivery speed without sacrificing quality.
Client Satisfaction / Net Promoter Score (NPS)
Use surveys to gauge client satisfaction and measure whether clients would recommend your firm to others. NPS provides tangible feedback on how well AFAs are meeting client expectations and helps identify opportunities to strengthen relationships.
Return on Investment (ROI) from AFA Adoption
Evaluate the financial and relational impact of AFAs. Successful implementation often leads to:

Reduced total costs through efficiency gains
Increased profitability via better process management
Expanded client base driven by transparent, accessible pricing
Higher client retention and recurring engagements

AFAs are more than a billing alternative - they represent a strategic shift toward value-driven partnerships that empower in-house legal teams to lead with data nad outcomes. By defining value on their own terms and working with firms that embrace transparency and collaboration - in-house counsel can achieve greater cost control ,efficiency and alignment with business goals. When managed effectively, AFAs help legal departments build stronger, more accountable relationships with outside counsel - where success is measured by outcomes, not billable hours.

What’s Next For AFAs?

The future of legal pricing is no longer measured in hours, it’s defined by outcomes, transparency, and shared success. As the legal industry continues to evolve, Alternative Fee Arrangements (AFAs) are becoming the cornerstone of a more efficient, data-driven, and client-focused approach to legal services.

Emerging AI-powered pricing and predictive scoping tools are accelerating this transformation. By analyzing historical matter data, market benchmarks, and outcome patterns, these tools help firms design smarter, fairer fee structures that balance profitability with value. This evolution will make legal services more accessible, predictable, and scalable for clients of all sizes.

The data generated through AFAs will also play a critical role in shaping future models. In-house counsel and legal firms can use outcome-based insights to continuously refine pricing strategies - eventually leading to subscription and retainer-based AFAs that deliver ongoing legal support rather than one-off engagements.

As technology advances, law firms will gain the ability to benchmark their service fees with unprecedented precision, aligning compensation directly with the value delivered. This shift marks a fundamental move from a cost-based mindset to a value-based partnership where in-house counsel pay for outcomes not hours, and where success is measured not by time spent but by the results achieved and the trust built.

In short, external legal management will be driven by transparency and trust. By using Alternative Fee Arrangements, In-house legal teams can make deliberate, data-backed, defensible decisions.

Alternative Fee Arrangements FAQs

What’s the difference between a fixed fee and a capped fee?

A capped fee places an upper limit on how much a firm can bill for a matter or for each phase of work. Billing still follows hourly rates, but total costs cannot exceed the agreed-upon cap.

A fixed fee, on the other hand, is a predetermined total price for the entire matter - one that doesn’t change regardless of time spent or complexity. Unlike capped fees, fixed fees are not tied to hourly rates or broken down by phases. The client knows the exact total cost from the outset, promoting predictability and trust.

Are AFAs suitable for litigation matters?

Yes. AFAs are increasingly used in litigation, including complex, multi-phase cases. In fact, litigation is one of the most common practice areas where in-house teams leverage AFAs - especially on platforms like PERSUIT, where firms and clients collaborate on fixed, phased, or success-based pricing structures.

How are success fees calculated?

Success fees are contingent upon achieving a predefined outcome or milestone. Unlike contingency fees, they aren’t necessarily tied to a financial recovery.
Examples include:

Winning a motion to dismiss
Achieving a favorable settlement
Completing a transaction milestone within a specific timeframe

The fee is only paid when the agreed-upon success criteria are met, ensuring alignment between client outcomes and firm incentives.

Can small firms offer AFAs?

Absolutely. AFAs are not limited to large firms. Small and mid-sized practices often use them to stand out in competitive markets, appeal to cost-conscious clients, and strengthen long-term relationships through transparent, value-based pricing.

What happens if the scope changes mid-matter?

Every AFA should include a material deviation clause - a built-in mechanism for adjusting fees if the scope of work changes significantly.

When scope changes occur, fees can be recalculated using quantified assumptions and pre-agreed formulas. For example, if the number of depositions or document reviews increases beyond the assumed amount, a proportional adjustment is applied automatically.

This approach keeps billing predictable, minimizes renegotiations, and ensures fairness for both the client and the firm.

How PERSUIT Helps Legal Teams Implement and Manage AFAs

PERSUIT empowers in-house legal teams to confidently design, compare, and manage Alternative Fee Arrangements (AFAs) across their panel firms. Through AI-powered insights, benchmarking, and automated workflows, PERSUIT simplifies what was once a complex and manual process - enabling legal teams to make faster, more transparent, and value-driven pricing decisions.

With over 500,000 attorney data points, 4,000+ firms benchmarked, and $18 billion in proposal data, PERSUIT gives corporate legal departments the intelligence and tools needed to align legal spend with business outcomes.

Our platform combines real-time analytics, automated proposal comparison, and procurement system integrations to help legal and finance teams collaborate efficiently - all within a transparent, auditable environment.

Streamlining AFA Negotiation and Setup

PERSUIT eliminates the inefficiencies of manual AFA negotiations. Legal teams can:

Issue structured RFPs or matter requests to multiple firms simultaneously.
Compare proposals side-by-side based on price, scope, and value metrics.
Collaborate directly within the platform to refine terms, clarify scope, and finalize the most suitable fee arrangement.

Automated templates and guided workflows ensure consistency, compliance, and efficiency - making it easier to scale AFA adoption across diverse matter types, from litigation to M&A.

Monitoring and Optimizing Performance

Once an AFA is in place, PERSUIT’s analytics dashboard enables teams to:

Track performance against budget, scope, and timelines in real time.
Identify trends in cost variance and matter efficiency.
Benchmark firm performance to uncover opportunities for improvement or cost savings.

This level of visibility allows both in-house counsel and outside firms to continuously optimize their approach - ensuring every matter remains aligned to expectations and value targets.

Enabling Data-Driven, Value-Based Decisions

PERSUIT transforms AFA management into a data-driven decision process.

AI-powered pricing insights help predict fair market rates and identify the most cost-effective fee structures.
Benchmarking tools allow teams to measure proposal competitiveness against industry peers and past engagements.
Post-matter reporting captures outcomes, lessons learned, and ROI, enabling legal teams to evolve from cost controllers to strategic value creators.

By bringing structure, transparency, and intelligence to AFA implementation, PERSUIT helps modern legal departments move beyond hourly billing - building stronger partnerships, measurable value, and long-term trust with their outside counsel.

Ready to Transform Your Legal Pricing Strategy?

See how PERSUIT can help your team confidently scope, compare, and manage Alternative Fee Arrangements with data-driven precision.

Request a demo today to experience how AI-powered insights and benchmarking can make your legal operations more transparent, efficient, and value-focused.

Alternative Fee Arrangements (AFAs): The Complete Guide for Modern Legal Teams