The Pros and Cons of Common AFA Models

Unpredictable legal spend, inconsistent pricing, and misaligned incentives make hourly billing one of the biggest challenges facing modern legal departments. Alternative Fee Arrangements (AFAs) offer a powerful way to bring transparency, accountability, and value back into outside counsel engagements - but only when supported by strong scoping, clear assumptions, and competitive benchmarking.

With more than $20B in proposal data, PERSUIT equips in-house teams with the insights and structure they need to build AFA strategies that deliver predictable results and drive measurable business impact.

Why Legal Teams Are Shifting to AFAs

Traditional hourly billing often rewards inefficiency and obscures value. In contrast, Alternative Fee Arrangements (AFAs) create alignment between cost, performance, and outcomes - when structured effectively.

AFAs allow in-house legal teams to introduce predictability, accountability, and transparency into their external spend, supporting more strategic partnerships with law firms.

Common AFA structures include Fixed Fees, Phased-Based Fixed Fees, Capped or Collared Fees, Contingency Fees, Phased Fees, and Hybrid Models - each offering different balances of risk, flexibility, and incentive.

PERSUIT has helped legal teams standardize, compare, and optimize AFAs across every practice area. Our platform provides data-driven benchmarks and guidance to simplify the complexity of legal pricing - helping you select the right model for every matter.

Capped Fee or Phased Capped Fee

Capped fee arrangements maintain hourly billing but set a maximum limit on spend. Phased capped fees take this one step further by assigning individual caps to each stage of a matter.

These models protect budgets while offering firms flexibility, making them a practical step toward value-based pricing. However, caps that are too high - or poorly benchmarked - can undermine savings, and some firms may “work to the cap.”

Best for: Partially predictable matters such as investigations, regulatory responses, or early litigation phases like discovery and research.

How PERSUIT Helps: PERSUIT uses real-time benchmarks to flag inflated rates, validate caps, and enable phase-level comparisons - ensuring your caps are both realistic and defensible.

Matter Level Fixed Fee

A matter level fixed fee offers a single, all-in price for the entire matter. This creates strong budget predictability and incentivizes efficiency but requires precise upfront scoping to avoid pricing disputes or overestimation.

Because firms may build in risk premiums, it’s essential to align scope, deliverables, and assumptions early in the engagement.

Best for: High-volume, repeatable work such as immigration filings, trademark applications, or due diligence reviews.

How PERSUIT Helps: PERSUIT’s standardized scoping templates help legal teams define matter parameters clearly, compare firm proposals side-by-side, and select pricing that reflects the true effort involved.

Phased-Based Fixed Fee

A phased-based fixed fee breaks an engagement into stages or deliverables, with set pricing for each. This provides granular visibility into costs, making it easier to track progress and manage expectations.

The model promotes transparency and accountability but demands disciplined scoping and active management to avoid misalignment between milestones and pricing.

Best for: Multi-phase matters such as M&A transactions or litigation, where work naturally divides into discrete stages.

How PERSUIT Helps: PERSUIT automates phase-level comparisons, helping you evaluate pricing fairness and ensure milestone alignment across proposals.

Contingency Fee

In contingency arrangements, a firm’s compensation is tied directly to the outcome - typically as a percentage of recovery or savings. This model aligns incentives with results and minimizes upfront cost exposure.

However, defining what constitutes “success” and managing firm selection for risk tolerance are key to maintaining balance.

Best for: Plaintiff-side litigation, collections, and high-value recovery or settlement-driven cases.

How PERSUIT Helps: PERSUIT facilitates transparent success metrics and outcome-based comparisons across firms to ensure equitable, performance-driven fee structures.

Collared Fee

A collared fee combines hourly billing with shared risk. If the firm delivers under budget, it retains a portion of the savings; if it exceeds the target, it absorbs part of the overage. 

This model promotes efficiency without rigidity but requires robust data tracking to manage variance and performance fairly.

Best for: Ongoing advisory relationships and unpredictable, multi-matter portfolios such as labor and employment work.

How PERSUIT Helps: PERSUIT centralizes tracking of WIP and total spend across collared agreements, allowing legal teams to measure savings and enforce consistency over time.

Hybrid Structures

Hybrid AFAs combine multiple pricing models to balance flexibility, performance incentives, and cost control. These models are highly customizable but also the most complex to structure and benchmark.

Common Examples:

• Fixed + Success Fee: A fixed rate with a bonus for achieving defined results.
  
  
• Capped + Performance Bonus: A capped hourly model paired with an incentive for superior outcomes.
  
  
• Hourly + Phase-Level Fixed: Hourly billing for unpredictable work, fixed fees for defined phases.
  
  
• Fixed Fee + Collar: A fixed price with a permissible variance range (the “collar”).
  
  
• Volume Discounts + Fixed: Discounts tied to high matter volume with consistent fixed pricing.
  
  

Best for: High-stakes, complex, or global multi-jurisdictional matters - including “bet-the-company” litigation and major regulatory investigations.

How PERSUIT Helps: PERSUIT leverages $20B+ in AFA proposal data to benchmark hybrid models, expose inefficiencies, and ensure incentive structures drive true value - not hidden costs.

Comparison Table: Pros & Cons Across All AFA Models

AFA Model	Predictability	Firm Risk	Client Risk	Best For	Typical Challenges
Capped Fee or Phased Capped Fee	Provides a clear maximum cost for the entire case, which is highly valuable for budgeting the absolute limit of exposure.	Firms may slow-roll until cap is reached	Cap can be set too high if not benchmarked	Investigations Regulatory responses Litigation (discovery, research phases)	Requires tracking hours carefully. Risk of renegotiation if scope shifts
Matter Level  Fixed Fee	Provides a single price for the entire matter with no surprise fees.	Requires strong scoping upfront	Firms may “pad” the price due to perceived risk.  Quality concerns if severely underpriced	Routine or well-understood matters High-volume contract work Immigration, trademark filings, due diligence	Not ideal for unpredictable matters
Phase-Based Fixed Fee	Provides milestone-based clarity and budget control. There’s no risk of high, unexpected fees.	Requires clear milestones to avoid disputes	Firms may still overprice early stages	M&A deals (broken by stage) Large litigation matters Investigations with defined phases	Requires granular scoping and assumptions
Contingency Fee	It offers very low predictability because the final fee is entirely dependent on the case's outcome. There is a guarantee that the lawyer will only be paid if the case is won.	Requires clear reporting to avoid disputes.	Firms may avoid higher-risk matters.	Plaintiff-side litigation Collections High-recovery cases Settlement-driven matters	Hard to define “success” without strong KPIs.
Collared Fee	It establishes predefined upper and lower cost boundaries	Requires detailed spend tracking to avoid disputes.	Hourly billing still drives underlying behavior.	Labor & employment portfolios Long-term advisory relationships Year-long firm partnerships	More complex to administer than traditional AFAs.
Hybrid Structures	This method offers a customizable balance of predictability, with the exact level depending on the specific combination of billing methods used.	Requires very clear rules and assumptions.	Firms may bury inefficiency in hybrid components.	Bet-the-company litigation Highly complex, multiphase matters High-stakes regulatory or antitrust matters Global, multi-jurisdictional work	Hardest model to structure without guidelines.

How To Choose The Right AFA 

Selecting the right AFA requires aligning pricing structure with matter predictability, risk allocation, and business objectives. Before determining which model to use, legal teams should evaluate the following questions:

How predictable is the scope?

Every AFA depends on a well-defined scope. Understanding matter complexity, potential deviation, and expected effort helps determine whether a fixed fee, phased fee, or risk-sharing model is appropriate. The less predictable the matter, the more important flexible structures become.

What is the value of “speed” vs. “certainty”?

Some matters reward speed and efficiency; others require certainty and tight budget control. Consider whether timeline, cost predictability, or outcome flexibility should drive the pricing model. For example, AFAs with performance-based bonuses may reward speed, while fixed fees encourage predictability.

What outcomes matter most?

Define what “success” looks like - cost savings, risk reduction, fast resolution, or a specific business outcome. Aligning incentives with the desired result ensures the pricing structure supports the legal department’s goals while giving firms clarity on expectations.

Which risks should the firm vs. the client own?

AFAs distribute risk differently. Some shift cost uncertainty to the firm; others share risk across parties. Determining who should own which risks - budget overruns, extended timelines, or outcome unpredictability - helps clarify which AFA model best aligns interests.

Do you have historical data to validate pricing?

Data strengthens every pricing decision. Leverage past matter performance, benchmark ranges, and average market costs to validate proposals. Without data, fees may be padded, under-scoped, or misaligned with business needs.

Choosing the right AFA is ultimately about aligning incentives, risk, and expected outcomes - and ensuring both the firm and the client have a shared understanding of value.

Common Pitfalls When Structuring AFAs

Even well-intentioned AFA models can fall short without the right structure. Common challenges include:

Missing or unclear assumptions

Incomplete assumptions around scope, deliverables, or staffing lead to disputes and inconsistent performance. Clear assumptions are foundational to any effective AFA.

Lack of standardization across firms

Without consistent templates and expectations, proposals vary widely in format and structure, making evaluation inefficient and prone to error.

Over-reliance on historical hourly data

Using old hourly billing patterns to predict future effort can inflate budgets, reinforce inefficiency, and undermine the value of AFAs.

Failure to define scope-change triggers

When triggers for scope expansion aren’t defined upfront, even well-structured AFAs can unravel - leading to renegotiations, unexpected spend, or frustration on both sides.

Limited visibility into market benchmarks

Without competitive data, firms may price too high (losing work) or too low (undervaluing effort), and clients miss opportunities for value alignment.

Lack of task-level pricing

When firms don’t break down pricing by task or phase, clients lose insight into cost drivers and have limited ability to compare proposals on merit.

How PERSUIT Solves These Challenges

PERSUIT brings clarity, structure, and transparency to AFA management across the entire engagement lifecycle.

• Real-time matter tracking ensures work remains aligned with scope and budget from initiation through WIP and invoice.
  
  
• Standardized proposal templates eliminate inconsistent inputs and enable apples-to-apples comparisons.
  
  
• Benchmarking and pricing validation surface inflated fees, gaps in scoping, or misaligned assumptions.
  
  
• Visibility into firm performance enables continuous improvement across future engagements.
  
  
• Guided workflows and governance controls institutionalize AFA best practices across global legal teams.
  
  

With PERSUIT, AFAs become measurable, enforceable, and scalable across your legal department.

How a Legal Pricing Platform Improves AFA Performance

Data-validated pricing

PERSUIT provides real-world benchmarks so legal teams and firms can price services confidently and competitively.

Standardized RFP templates

Our templates streamline matter scoping and vendor selection - ensuring clarity, consistency, and efficiency across every engagement.

Built-in AFA structure enforcement

PERSUIT’s workflows enforce pricing logic, scoping standards, and matter assumptions so engagements remain aligned with business outcomes.

Side-by-side proposal comparisons

Evaluate fees, scope assumptions, staffing plans, and value metrics transparently. Identify padding or inconsistencies with ease.

Governance for AFA adoption

Automated process controls help legal teams standardize AFA use at scale and operationalize change management across global regions.

AI-powered automation

PERSUIT’s first-to-market AI agent automates routine tasks, supports pricing analysis, and helps identify the most cost-effective and fair AFA structures for each matter.

$20B+ in proposal benchmarking data

Our analytics dashboard provides insight into cost variance, practice-area norms, and efficiency trends - giving legal teams the intelligence needed to improve performance over time. 

Conclusion

Modern legal departments rely on a diversified portfolio of AFAs to align cost, value, and outcomes across their work. The right pricing model can transform outside counsel engagements - when supported by data, governance, and transparent processes.

Request a demo to build your AFA strategy using real market data and proven best practices from the world’s leading in-house legal teams.