Controlling Litigation Costs with Fixed Fees – Fraud Files Blog

With the challenging economy we’re experiencing, people are constantly asking me how business is going. The assumption is that people and companies don’t have money for litigation, and so my business is probably suffering. Add to that the long-term shutdown of various courts, and you’d think that business would be slow.

But I’ve been doing well.  Business was very strong last year, and is even stronger this year. Businesses and people might not have as much money for litigation, but they still have money and certain things still have to be litigated.

However, there is a legitimate concern about the legal fees and expert fees that are going to be incurred, and consumers are choosing wisely.

One common concern is what I call “the black hole of legal fees.” Clients go into litigation with expectations about legal fees, and many times, those expectations and budgets are blown out of the water with hourly fees that keep piling up. It would be easy to blame the attorneys, but litigation takes time, and the lawyers have to bill for their time.

When I started Sequence Inc. 21 years ago, I immediately started using fixed fees. Almost no one was doing that, and amazingly, there still aren’t a lot of experts doing fixed fees. With fixed fees, clients know exactly how much their projects are going to cost, and they are appreciative.

How does it work? I sit down with counsel and the client and determine exactly what needs to be done. I find out:

• What are the issues that must be addressed?
• What documents are available?
• How far back should the analysis go?
• What is the timeline for finishing the forensic accounting work?
• What company personnel is available to provide information and documentation, and how much of the legwork will they do?
• What are the current unknowns related to the project?
• What form should my final report take?

Once these things are fully understood, I quote the client a fixed fee for the engagement, including the analysis and an expert report. We can then negotiate about the scope of work and the fees, if necessary. If the fee is outside the client’s budget, we talk about how to reduce the scope of work to reduce the fee.

Most forensic accounting firms won’t do this for a client. The closest they will come is a budget, in which they will say “we expect our fees to be X, but we’ll bill you for the actual time, times our hourly billing rates.” And in most cases, the actual fees will far exceed that original budget.

This is what I’m referring to when I talk about runaway fees or the black hole of legal fees. The client has no way to gauge what they’ll ultimately pay for the financial investigation, and they often get a raw deal. Simply put, the budget and the expectations are often a long way from the final bill. (I’ve even had other experts tell me they purposely create a budget that is smaller than the fees they expect to bill because “no one would hire us if we quoted the budget accurately.”)

How can I provide fixed fees when so few in my industry are willing to do that? There are a few things that help me accurately come up with a fixed fee:

1. Experience – I know how long these investigations take, and I know who will be doing the work…. me. I know what I’m able to accomplish and I know how long it takes. I’m not relying on a junior associate who might fumble around for days (while billing the client) before coming up with an approach to analyze a set of documents. I know what investigative techniques work, and I know what is appropriate in these cases. I get down to work immediately and complete the forensic accounting engagement efficiently.
2. Systems – I have developed a process for investigating fraud that includes several pieces of software, so I’ve standardized my forensic accounting engagements to a certain extent. That makes it easier for me to calculate appropriate fees and complete the work accordingly. I have gained efficiencies by systematizing my work.
3. Risk-taking – I’m willing to take the risk that I am able to accurately calculate a proper fee. The key is in making sure that I know all of the inputs and all of the expected outcomes. It’s dangerous to quote a fee before I know about all the documentation I’ll have to analyze or places I’ll have to travel. I resist the temptation to quote too soon or too aggressively. And when I’m ready, I quote the fee and I assume the risk that the project might be completed faster or slower than I expected.

Cost control in litigation and fraud investigations provides a significant advantage to clients. The larger the case, the greater the chance that a forensic accountant will blow their budget and spend far more money than the client was prepared to spend. My systems and my fixed fees have helped clients better manage their litigation expenses, and along the way, I have provided them with exceptional results.