You know your time is valuable, but do you know what it\u2019s truly worth? Whether you\u2019re 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\u2019s success.<\/p>\n
So how can you best assess your rates?<\/p>\n
Determining costs is more complex than just billing the maximum clients will pay or charging the amount you\u2019d like to be making\u2014it\u2019s about understanding the goals of your business.<\/p>\n
In this post, we\u2019ll examine essential factors relevant to planning your firm\u2019s goals, as well as how to calculate an hourly rate that can be justified by those targets.<\/p>\n
Let\u2019s begin with market expectations from an educated, trained, and experienced lawyer.<\/p>\n
There is no doubt that lawyers have a reputation for earning more than people in many other professions\u2014but with good reason. Lawyers take on people\u2019s 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.<\/p>\n
That said, while the scope of service lawyers provide is invaluable, it\u2019s also important to factor the role of clients into the equation when assessing your value\u2014and many lawyers do.<\/p>\n
According to the Clio research<\/a>, clients are the biggest determinant when it comes to how lawyers decide their rates\u201476% of lawyers identify pressure from clients for a better deal as a significant factor for adjusting their hourly fees.<\/p>\n So, in order to set fees that are reasonable and work towards the best interests of you, your firm, and your clients, let\u2019s now look at how to set some baseline expectations when setting rates.<\/p>\n What you bill isn\u2019t just about what you get paid. Your legal fees should encompass everything that keeps your doors open and your lights on.<\/p>\n There are three components to estimating annual cost: salary, business expenses, and profit expectations.<\/p>\n 1. Salary equivalent<\/strong><\/p>\n 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 \u201cpay\u201d 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.<\/p>\n Beyond running your practice, you must ensure that your work salary covers your cost of living.<\/p>\n 2. Business expenses (non-reimbursable)<\/strong><\/p>\n When calculating your non-reimbursable business expenses, you should account for everything that keeps your office running, on an annual basis.<\/p>\n These costs may include:<\/p>\n 3. Firm profits<\/strong><\/p>\n While money earned is generally meant to go into your own pocket, it\u2019s important to continually invest in your business\u2014which means you\u2019ll need to set aside money for the firm.<\/p>\n According to a 2018 PwC survey<\/a>, 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.<\/p>\n 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\u2014or collections\u2014issues throughout the year.<\/p>\n Let\u2019s say you\u2019re looking to take home \u00a3100,000 per year in salary and you\u2019re expecting annual non-reimbursable business expenses of \u00a330,000. If you\u2019re looking to earn a profit margin of 40%, you\u2019ll be looking to bring in another \u00a352,000 (\u00a3100,000 + \u00a330,000) x 40% = \u00a352,000).<\/p>\n To calculate your annual cost of doing business, add these numbers together: \u00a3100,000 + \u00a330,000 + \u00a352,000 = \u00a3182,000. Next, we\u2019ll divide this number by your planned number of billable hours for the year.<\/p>\n Let\u2019s 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.<\/p>\n Chances are, you\u2019ll need to take some holiday time to avoid burnout, and it might be good to plan for a few sick days. Let\u2019s 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).<\/p>\n 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 \u00d7 60% = 1,132).<\/p>\n 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 \u00f7 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<\/a>.<\/p>\n Once you\u2019ve 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: \u00a3182,000 \u00f7 1,132 = \u00a0\u00a3160.78\/hour.<\/p>\n Before making any judgment on whether this number seems high or low, let\u2019s look at a few other factors that can affect your planning.<\/p>\n 1. Compare market rates<\/strong><\/p>\n 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.<\/p>\n To get more information on market rates, start with Clio\u2019s 2018 Legal Trends Report<\/a>. 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.<\/p>\n Beyond that, lawyers can look at employment data to get an idea of average salaries for lawyers across the country. As of 2016<\/a>, the median gross annual salary for private practice lawyers in the UK was \u00a360,000 per annum.<\/p>\n It\u2019s also sensible to talk to colleagues or mentors for information and advice based on their experience in the market.<\/p>\n 2. Make yourself more valuable<\/strong><\/p>\n 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.<\/p>\n You could do this by becoming more specialised\u2014and 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\u2014a study of UK lawyers <\/a>showed that those with 10-15 years experience can earn up to \u00a3100,000, and lawyers with more than 15 years of experience taking home \u00a3181,000 a year.<\/p>\n 3. Increase productivity, bill more hours<\/strong><\/p>\n If you\u2019re 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<\/a> and finding ways to automate repetitive tasks like time recording<\/a> can increase the time you devote to clients.<\/p>\n One more thing: It\u2019s not enough to know how much you should charge potential clients\u2014you must display your costs correctly, too.<\/p>\n Once you\u2019ve evaluated the value of your services and determined your hourly cost, it\u2019s important to know when and how to share those rates to potential clients. Since 2018, the Solicitors Regulation Authority (SRA)\u2019s price transparency rules<\/a> oblige law firms to meet specific requirements\u2014like displaying prices on a website, including details for what exactly is included in quotes, and providing timelines for services\u2014for publishing prices for legal services in certain areas of law.<\/p>\n You can learn more about the SRA\u2019s price transparency rules\u2014and tips for staying compliant\u2014here.<\/a><\/p>\n ***<\/p>\n 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<\/a>” goes into detail on setting rates, budgeting and forecasting, and growing your income.<\/strong><\/p>\nCost of doing business<\/h3>\n
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Calculate your billable hours<\/h3>\n
Put it all together<\/h3>\n
Make your rates clear<\/h3>\n