One of the worst things that can happen to a lawyer/client relationship is an unexpectedly high legal bill. Clients hate them. In order to avoid such unhappy surprises, lawyers of all types are ditching the hourly rate and employing various Alternative Fee Arrangements (or AFAs) that are designed (in theory) to make both sides happier.

For lawyers, the key to using AFAs is choosing a fee structure that will result in getting paid fairly for one’s legal services while also convincing the client that the fee being charged is indeed fair. This feat of mathematical magic requires lawyers to understand their business thoroughly—particularly how much time various legal services are likely to take—and to price their services using the AFA that aligns best with the client’s legal needs.

There is no one-size-fits-all AFA, but these are the most common, and when they work best:

Fixed/Flat Fees

Charging a flat fee for various legal services can work well for lawyers who do routine work and know roughly how much time that work will take. Clients like flat fees because there are no surprises, even though they might pay less if they were being charged hourly. The danger is getting caught in a situation where you, the lawyer, end up investing far more time than you expected.

Fixed fee + Success Fee

One way for a lawyer and client to share the risk of a matter together is to establish a fixed fee (say 80% of one’s normal rate) that requires the client to pay the remaining 20% only if the matter is concluded successfully. It’s basically the same as offering a 20% discount if you lose. And everyone loves a discount, even—and perhaps especially—clients who lose.  In this case you will want to thoroughly vet the matters you accept with this fee arrangement to set yourself up for success – both for the matter and your likelihood of payment.

Capped fees

In a capped-fee arrangement, the lawyer charges by the hour but agrees to a maximum “cap,” or limit, to their fee. Such an arrangement reassures the client that their lawyer’s hourly billing will not get out of control. For lawyers, it means billing hourly, as usual, but making sure the time invested doesn’t blow the cap. To provide extra incentives, some lawyers employ so-called “risk collars,” such as a bonus for the lawyer if their work comes in under budget, and a discount for the client for work that inadvertently goes over budget.

Retainers

Retainers are basically a subscription-based model for legal services, and lawyers were using them long before Netflix came along. Retainers can be collected upfront from clients or collected on a reoccurring schedule. This arrangement makes the most sense for companies that are regularly involved in legal transactions of one sort or another, and for law firms with the resources to handle urgent, spur-of-the-moment emergencies. Retainers can be lucrative and they provide a regular revenue stream. They can also be a good indicator of a client’s ability to pay legal fees; if they can’t pay a full or partial retainer now chances are they won’t be able to pay on your regular billing cycle.  The downside is that clients on retainer tend to expect a very high level of service, and are often determined to get their money’s worth out of the bargain.

Contingency

Put simply, contingency means you only get paid if you win. The obvious advice: Win. Also, choose your cases carefully.

Hourly rate + Contingency

“Contingency” is basically another term for “success fee,” so in this arrangement the lawyer bills by the hour, maybe at a discounted rate, and collects the contingency fee in the event of a win. Again, the point here is to provide the client with some measure of consolation should they lose, while also ensuring that you get paid more-or-less fairly for your time, no matter what the outcome.

Task-based billing

Rather than billing by the hour, task-based billing involves creating a menu of fees for various services and billing for the services rendered rather than the lawyer’s time. For the lawyer, however, the cost of the service needs to be tied to the amount of time it takes. Again, knowledge of one’s practice area is the key here. Time is money, no matter how you slice and dice it.

Percentage

Percentage arrangements differ from straight-up contingency in that the percentage is typically based on the value of the matter being addressed, such as a real-estate transaction or an insurance payout. Percentages can work well in transactional situations that aren’t winner-take-all.

Whichever AFA you choose, keep in mind that the ultimate goal is to arrive at a win-win fee arrangement that feels fair to both parties. No lawyer can afford to give away the store, but maintaining a flexible attitude toward fee structures can make clients feel more comfortable and be surprisingly good for generating repeat business.

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Amy Larson is a Director in Small Law Firm Customer Marketing and Firm Central at Thomson Reuters. She has over 17 years of experience in technology marketing with extensive focus on learning how technology can meet the needs of attorneys. Amy has been involved in numerous product launches throughout her tenure, public relations efforts, interviewing customers and telling their stories, and often writes and distributes information on legal practice management.