Contingency fees make legal representation more accessible by allowing you to take on cases without requiring upfront payment. This means your firm gets paid only if the case is successful. While this payment model can benefit both you and your clients, it also comes with challenges, such as keeping cash flow steady and ensuring that clients fully understand how legal fees and expenses are deducted. Let’s break down contingency fees and the best ways to manage them to keep your firm profitable.
What are contingency fees?
Contingency fees mean you only get paid if you win a court case. Instead of charging an hourly rate or requiring upfront payment, you take a percentage, usually between 25% and 40% of the client’s final settlement or court award. This payment structure is common in personal injury, employment, and class action cases, where clients might not have the funds to pay for legal representation upfront.
Common challenges with contingency fees
While contingency fees can be highly profitable, they also come with challenges, such as:
- Determining the right percentage: Most contingency fees fall between 25% and 40%, but failing to consider factors like case complexity and jurisdiction can impact your profitability.
- Managing client expectations: Many clients don’t fully understand how contingency billing works and that case expenses can impact their final payout. This misunderstanding can lead them to question deductions and delay payments.
- Handling delayed settlements: Since most contingency cases take months or even years to resolve, you may cover case-related costs, such as investigation expenses, with your money.
When you don’t have a structured approach to law firm contingency billing, clients may question your deductions and delay payments, leaving your firm to shoulder expenses tied to the case.
How to calculate contingency fees
Some firms deduct case-related expenses before calculating contingency fees (net recovery method), while others apply the percentage first and deduct expenses later (gross recovery method). Here’s how to calculate your contingency fees to maximize profit:
- Determine the agreed-upon percentage: It is usually between 25% and 40%, depending on the case type, location, and difficulty.
- Decide when to deduct expenses: Choose whether to deduct expenses before or after calculating your fee, depending on what works best for your firm’s profitability.
- Apply the contingency percentage – Multiply the final settlement amount by the agreed-upon percentage.
- Account for any adjustments – If there are partial settlements or court-ordered reductions, make the necessary adjustments.
Example calculation for partial settlements:
- Initial settlement: $300,000
- Contingency fee (33%): $99,000
- Final settlement (6 months later): $200,000
- Contingency fee (33% on final amount): $66,000
- Total contingency fees collected: $165,000
- Explain the final fee calculation to your client – A quick discussion upfront can prevent misunderstandings when they receive their final payout.
On a last note, clearly outlining your calculations in your contingency fee invoicing helps clients understand deductions, which eliminates disputes.
How to track contingency fees and expenses
Tracking every dollar spent on a case ensures your firm doesn’t end up covering costs out of pocket or struggling to justify deductions. Here’s how to stay organized:
- Maintain separate case records: Keep a dedicated ledger that logs all expenses and payments for each case.
- Update financials regularly: Record expenses as they occur to avoid confusion when a case settles.
- Provide itemized statements to clients: Send invoices that clearly break down deductions so clients understand how their final payout was calculated.
Best tools for contingency fee tracking
Manually tracking contingency fees and asking for payments is difficult, especially if you’re handling multiple cases. Tools for automating tracking include:
- For solo practitioners & small firms
Tools like Bookipi and PracticePanther are cost-effective solutions for automating contingency fee invoicing and expense tracking.
- For mid-sized & large law firms
Tools like Clio and QuickBooks for Law Firms generate detailed financial reports and offer customizable legal accounting tools to track settlements and expenses.
To wrap up, choosing the right tool for tracking your law firm contingency billing helps reduce time spent on paperwork by automating expense tracking.
How to communicate with your client about contingency fees
Many clients don’t fully understand how contingency fee invoicing works, so it’s essential you set the right expectations with clear communication about expenses and deductions.
Setting expectations from the start
To properly set expectations, be as transparent as possible in your legal agreements about:
- The contingency fee percentage: Clients should know exactly what percentage will be deducted from their settlement and whether it’s a flat rate or varies depending on the case stage (e.g., pre-trial vs. post-trial).
- How expenses are handled: Explain whether case expenses (court fees, medical records, etc.) are deducted before or after calculating your fee.
- What happens if the client loses: Many clients assume that “no win, no fee” means they won’t owe anything. Be upfront if they will be responsible for any case-related expenses, even if the case is unsuccessful.
A well-structured retainer agreement helps lay out these terms clearly, ensuring that your clients understand their financial obligations upfront.
Providing clear and detailed invoices
Presenting a clear legal invoice that breaks down how settlements are allocated prevents misunderstandings between you and your clients. Essential details to include in your invoice:
- The final amount was recovered for the client.
- Itemized case-related expenses listing all deductions, such as expert witnesses and deposition costs.
- How the contingency percentage was calculated (before or after expenses).
- The final amount the client receives.
Instead of manually creating invoices, consider using quote maker software to generate detailed invoices that outline deductions, fees, and final payouts.
Addressing client questions about fees
Even with a well-explained retainer agreement, clients may still have questions or concerns when they receive their final settlement. Here are some common concerns and how to handle them:
- Why am I getting less than I expected?
Walk the client through their invoice, using their settlement statement to show how deductions were applied.
- Can you lower your fee?
Remind the client that the percentage was agreed upfront in the contract. If adjustments are possible, explain under what conditions fees might be renegotiated, such as higher settlements.
- I didn’t realize I had to pay for expenses.
Point to the retainer agreement and explain that these costs were necessary for building a strong case. Reassure the client that they are not additional fees to your firm but rather payments made to third parties.
Clearly communicating your law firm’s contingency billing process to clients reduces disputes and ensures smooth settlements.
Common challenges law firms experience with contingency fees
Invoicing contingency cases can be highly profitable, but it also comes with financial challenges such as unpredictable cash flow, since your firm only gets paid when a case is successfully resolved. Let’s look at other common contingency fee invoicing challenges and how to overcome them.
Handling delayed settlements
One of the biggest headaches with law firm contingency billing is that cases can take months or even years to settle, leaving your firm to cover case-related expenses. This can cause cash flow issues, especially if you’re handling multiple long-term cases. To minimize payment delays, consider:
- Maintaining regular communication: Regularly check in with clients and settlement administrators with case progress updates to prevent payment delays.
- Negotiating structured settlements carefully: If a client’s payout is being made in installments, ensure your partnership agreement outlines that your firm’s fees are included in the first payment.
- Using escrow accounts: Keeping funds in a dedicated escrow account can help speed up the payout process once a settlement is finalized.
Managing cash flow while waiting for settlements
Since contingency fees are only paid after a case is resolved, it can be difficult for your firm to cover payroll and office expenses while waiting for settlements to clear. Steps to keep your cash flow steady include:
- Building a financial cushion: Set aside a portion of contingency payouts for future firm expenses.
- Diversifying case types: Have a mix of hourly or flat-fee cases rather than relying only on long-term contingency cases.
- Using legal fee financing options: Leverage short-term credit lines or legal funding services to cover expenses while waiting for payouts.
Streamlining payment processing with digital tools
Once a settlement is received, you need an efficient way to process payments quickly while staying compliant with the State Bar Rules of Professional Conduct (RPC). Best practices for faster payment processing include:
- Using digital payment platforms: Services like LawPay make it easy to process payments and transfer funds quickly.
- Leveraging IOLTA or escrow accounts – Keep client funds in a dedicated trust account to ensure proper allocation before withdrawal.
- Automating invoicing and fee calculations: Reduce the risk of errors by using legal accounting software that can generate accurate invoices with all deductions clearly outlined.
Financial planning and automation go a long way in making sure your firm stays profitable while working on a contingency basis.
Stay on top of payments and your cash flow with Bookipi
Bookipi simplifies contingency fee invoicing, helping you track payments in real time with:
Effortless invoicing for contingency fees
Bookipi lets you create clear, detailed invoices that outline contingency fee percentages, case expenses, and the client’s final payout which reduces disputes over invoicing contingency cases.
Automated payment tracking
Whether you’re waiting on a settlement or handling multiple case payments, Bookipi provides real-time payment monitoring which allows you to know which invoices have been paid and which payments are still pending.
Seamless digital payments
Bookipi integrates with various payment gateways, making it easy for clients and settlement administrators to pay you faster, reducing delays in invoicing contingency cases.
Try Bookipi for free today to keep your law firm contingency billing system organized and receive early payments.
