What follows will for many of you, be the tortured reality of day-to-day legal practice. In the course of strategising a solution to this real-world problem with a partner recently, it occurred to me that it might be a useful way to kick off our first thought piece of 2021. At issue was a carefully and thoughtfully scoped estimate of ~£75,000 but the final cost is likely to be ~£100,000 - possibly a little more.
Summarising, and appropriately redacted, it went something like this…
Lawyer: As you know we are a few weeks away from completing the job and I wanted to give you a detailed update of where we are on costs. As you can see, we have incurred considerably more on the [two work streams that frequently blow out]. Here is a detailed breakdown and explanation. Can you confirm that you are happy for us to continue on the understanding that we will invoice you for that extra work?
Client (CFO): When we discuss a fixed price, I do not expect there to be necessary things that are excluded. Your fixed fee should include everything needed to complete the transaction and you should have included [certain work streams] within your scope. If our understanding missed a minor point in your fee estimate, then I am sorry; but I think this should be the position.
Lawyer: We didn’t agree to cover all eventualities. I gave you a detailed scope and as I have explained we needed to do more work than was anticipated and you required us to do so in order to get the job done. As I am sure you appreciate, the point of providing a scope of work (whether that is a lawyer, an accountant or a builder) is so that the client is clear what is included within the fee. No service provider could ever provide a competitive fixed fee which would cover all eventualities.
Client (CFO): It seems we have a difference of opinion, as the transaction is very busy for all of us at the moment, I suggest we discuss this once we have completed.
Oh, the humanity! How many times have you had that conversation in your career?
The nuances of situations like this require a high degree of emotional intelligence, commercial pragmatism and negotiation skills and therefore do not lend themselves to a one-size-fits-all formulaic approach.
Nonetheless, there are some key principles that apply and perhaps the most important thing to note is that they are preventative rather than reactive. How do we avoid getting into this sort of conversation in the first place?
1) It goes without saying that the foundation of any pricing arrangement should be a carefully and thoughtfully prepared scope with clear assumptions and exclusions.
2) The proposal needs to be unequivocally clear as to whether it is a single figure estimate, an estimated range, a fixed fee or a capped fee. Reviewing the correspondence in this particular instance, I noted references by both the client and the lawyer to the proposal that was actually sent being construed as an estimate, a fixed fee and a cap. Lack of clarity and shared understanding on this point alone inevitably gives rise to problems.
3) Time and time again, lawyers paint themselves into a corner by assuming that they have discharged their compliance, regulatory and commercial responsibilities by emailing a pricing proposal to the client. The client may confirm that they are happy with it or the client's approval may be inferred by the absence of any objection on the lawyer getting on with the work (good luck arguing promissory estoppel with a disgruntled client!)
4) However, we must combine the written proposal with a pricing conversation. It is simply not enough to send a written proposal and presuppose that the client has actually read it and overtly agreed to it (as with the situation above, "… If our understanding missed a minor point in your fee estimate…"). It doesn't matter which comes first, but the pricing arrangement should be book-ended by both the conversation and a written proposal. If you leave out the conversation bit, you greatly increase the chances of misunderstanding. We have written about this in more detail previously in ‘Hit Send and Hope for The Best’.
5) Timely re-engagement with clients as soon as you become aware that you or your team are undertaking out of scope work and/or the final cost is likely to end up more than what was originally quoted. Although many ostensibly cogent reasons are offered up for doing so, kicking the can down the road until after the job is completed is frankly absurd for many reasons but two immediately spring to mind.
First, as an exercise in client relations, it is appalling. None of us like bad news but the only thing worse is bad news that is not delivered in a timely manner.
Second, from a pure price negotiation point of view, clients will often suggest that the matter is deferred to the end (as precisely happened in the case above) for the simple reason that once the job was completed, the lawyer has lost all negotiation power. We have written about this in more detail previously in ‘We’ll Have a Chat at the End – a $20 Billion Black Hole’.
It would be facile to suggest that by following a few simple pointers, all such pricing problems could be avoided, but experience has shown that implementing a few simple disciplines can significantly mitigate the problems and minimise scope creep write-offs.