You know your time is valuable, but do you know what it’s truly worth? Whether you’re billing by the hour, with fixed-fee rates, or through contingency fee arrangements, correctly appraising the cost of your services is integral to your law firm’s success.
So how can you best assess your rates?
Determining costs is more complex than just billing the maximum clients will pay or charging the amount you’d like to be making—it’s about understanding the goals of your business.
In this post, we’ll examine essential factors relevant to planning your firm’s goals, as well as how to calculate an hourly rate that can be justified by those targets.
Let’s begin with market expectations from an educated, trained, and experienced lawyer.
Valuing legal service
There is no doubt that lawyers have a reputation for earning more than people in many other professions—but with good reason. Lawyers take on people’s most worrying and pressing problems, and there are consequences if they fail to do their job to the best of their ability. Practicing the law is a significant obligation that demands a high degree of specialised knowledge, tact, and professional responsibility.
That said, while the scope of service lawyers provide is invaluable, it’s also important to factor the role of clients into the equation when assessing your value—and many lawyers do.
According to the Clio research, clients are the biggest determinant when it comes to how lawyers decide their rates—76% of lawyers identify pressure from clients for a better deal as a significant factor for adjusting their hourly fees.
So, in order to set fees that are reasonable and work towards the best interests of you, your firm, and your clients, let’s now look at how to set some baseline expectations when setting rates.
Cost of doing business
What you bill isn’t just about what you get paid. Your legal fees should encompass everything that keeps your doors open and your lights on.
There are three components to estimating annual cost: salary, business expenses, and profit expectations.
1. Salary equivalent
Lawyers often make the mistake of simply subtracting money from their law firm accounts when a client pays their bill. A better method is to “pay” yourself a salary, i.e., a fixed monthly amount that leaves capital in the firm for lean months or can be used to invest back into the firm.
Beyond running your practice, you must ensure that your work salary covers your cost of living.
2. Business expenses (non-reimbursable)
When calculating your non-reimbursable business expenses, you should account for everything that keeps your office running, on an annual basis.
These costs may include:
- Office space
- Software subscriptions
- Accounting services
- Office equipment
- Postage and delivery fees
- Business insurance (see our free guide to solicitors professional indemnity insurance for details on how to get the best deal on your PII)
- Law Society memberships
- Medical insurance
- Travel expenses
3. Firm profits
While money earned is generally meant to go into your own pocket, it’s important to continually invest in your business—which means you’ll need to set aside money for the firm.
According to a 2018 PwC survey, reported net profit margins for UK firms average at 36.6%. This is money that can then be invested in new marketing initiatives, new equipment, or professional development opportunities.
Having funds on reserve in your firm will also help you weather any slow billing periods. It can also help offset any potential cash flow—or collections—issues throughout the year.
Let’s say you’re looking to take home £100,000 per year in salary and you’re expecting annual non-reimbursable business expenses of £30,000. If you’re looking to earn a profit margin of 40%, you’ll be looking to bring in another £52,000 (£100,000 + £30,000) x 40% = £52,000).
To calculate your annual cost of doing business, add these numbers together: £100,000 + £30,000 + £52,000 = £182,000. Next, we’ll divide this number by your planned number of billable hours for the year.
Calculate your billable hours
Let’s say a given year has 260 weekdays (which can range from 259 to 262 days, given the year). With eight bank holidays in the United Kingdom, that brings your total number of regular work days down to 252. If you plan to work eight-hour days, that leaves you with 2,016 potential billable hours.
Chances are, you’ll need to take some holiday time to avoid burnout, and it might be good to plan for a few sick days. Let’s factor in an additional three weeks, or 15 working days (120 hours), of being out of office, bringing our total office hours down to 1,886 (2,016 – 120 = 1,886).
Now, also consider that not all office time is billable. Say you plan to bill for 60% of your office time, that brings your number of billable hours to 1,132 (1,886 × 60% = 1,132).
Relatedly, Clio recently conducted a study that looked at aggregate and anonymised data, free of any self-reporting bias, that shows the average utilization rate (number of billable hours worked ÷ number of hours in the day) could be as low as 30% for law firms. Learn more about these results in the 2018 Legal Trends Report.
Put it all together
Once you’ve figured out and calculated the above, divide your cost to do business by the number of billable hours you expect for the year. In this case, it will be: £182,000 ÷ 1,132 = £160.78/hour.
Before making any judgment on whether this number seems high or low, let’s look at a few other factors that can affect your planning.
1. Compare market rates
Market rates can vary according to geography and specialisation, and there might be room for you to increase your rates up where your services are in high demand.
To get more information on market rates, start with Clio’s 2018 Legal Trends Report. Information on average billable hourly rates can be difficult to find, but the Legal Trends Report draws on aggregate and anonymised data from nearly 70,000 legal professionals to give lawyers reliable information on how their rates compare across states and practice areas.
Beyond that, lawyers can look at employment data to get an idea of average salaries for lawyers across the country. As of 2016, the median gross annual salary for private practice lawyers in the UK was £60,000 per annum.
It’s also sensible to talk to colleagues or mentors for information and advice based on their experience in the market.
2. Make yourself more valuable
If, after analysing the current market, your salary expectations seem low, know that there are ways to make your services more valuable to clients and earn yourself higher fees.
You could do this by becoming more specialised—and therefore improving the quality of your service. Or, if you have ample experience, you may also be able to charge more. One of the greatest fee determiners is experience—a study of UK lawyers showed that those with 10-15 years experience can earn up to £100,000, and lawyers with more than 15 years of experience taking home £181,000 a year.
3. Increase productivity, bill more hours
If you’re unhappy with your current rates, another way to raise expectations for yourself is to increase productivity and the number of hours you bill per day. Setting yourself up with the right case management software and finding ways to automate repetitive tasks like time recording can increase the time you devote to clients.
Make your rates clear
One more thing: It’s not enough to know how much you should charge potential clients—you must display your costs correctly, too.
Once you’ve evaluated the value of your services and determined your hourly cost, it’s important to know when and how to share those rates to potential clients. Since 2018, the Solicitors Regulation Authority (SRA)’s price transparency rules oblige law firms to meet specific requirements—like displaying prices on a website, including details for what exactly is included in quotes, and providing timelines for services—for publishing prices for legal services in certain areas of law.
You can learn more about the SRA’s price transparency rules—and tips for staying compliant—here.
Visiting this page because you are starting a new law firm or have already started one? Our in-depth, free guide “How to Start a Law Firm” goes into detail on setting rates, budgeting and forecasting, and growing your income.
We published this blog post in June 2019. Last updated: .
Categorized in: Business