Cost Recovery – Should You Just Say No?

By at 20 April, 2007, 2:45 pm

Cost recovery is one of those issues that crops up for discussion several times each year.  It usually begins with a general question of who recovers costs from their clients files and what costs they recover.  It may then go into more detail as to specifics and may include the technology to efficiently capture these costs.  However, the fact that you can’t recapture these costs doesn’t mean that you should.

Most of us know of firms that include, under the expense section of each bill, a portion of their telephone charges for the month, actual postage, the cost of each copy made for the client, overnight express charges and any other costs that they believe should be passed along to the client.  While this may help the firm’s bottom line, it usually ends up aggravating the client.  The client perceives that they are already paying a very high rate for the lawyer’s services; so when you add to that time charges for the preparation of documents or for conducting a phone call, an additional amount for the actual telephone service charge, stamp to mail them a letter, or cost for every copy, the client rapidly becomes disgruntled and feels that they’re being unfairly treated.  Even if you keep your hourly rate lower because you do recover these expenses, the client’s doesn’t see this (or refuses to) and it ends up being detrimental to a healthy attorney-client relationship.

While I’m not advocating foregoing the recovering major expenses such as certified mail fees, the cost to send a package overnight via one of the national delivery services, or charges for large quantities of copies, I don’t believe that trying to recover for every postage stamp, minute of fax or telephone charge and similar expenses results in a better and healthier bottom-line for the attorney nor does it help to maintain a good relationship with the client. So what can you do? There are numerous options to help you recover some percentage of your costs, but allow you to maintain good relations with your client and prevent unhappiness over these expenses appearing on a monthly bill.

In my own practice, I always included an amount for general overhead such as phone calls, first class postage, normal copies, etc. For those charges that I I felt should be recovered, I set forth in my representation agreement language clearly spelling this out for the client. So, for copies, my agreements provided:

Photocopying: $.05 per single sided copy in excess of 50 pages; actual cost for color copies. Large photocopying jobs will be sent to a copy center and charged at actual cost plus staff time to deliver and pick-up.

My clients do upfront that I was only going to charge them for copies if there were a very large amount or if I had to have been copied by an outside service. As a matter of course, I did not charge for general postage, costs to fax to a document or for general office supplies: as I said above, I built an amount into my hourly fee to cover these incidental expenses.

Other attorneys have had success charging a set amount each month to cover normal and customary expenses incurred either by charging a percentage of the amount billed or a set dollar amount of say $10 each month. If you’re going to use this method, I prefer charging a set amount each month to charging a percentage of the amount billed, which can increase rapidly and doesn’t necessarily have any basis in the actual costs. This is because most Rules of Professional Conduct do not allow you to make a profit on your expenses, so you need to carefully review your states rolls before implementing a flat dollar amount or percentage to recover your costs.

After a short time of modifying your cost recovery methodology, you should see improved productivity from your staff and an impact on your bottom line due to the fact that staff is taking less time trying to recover these de minimis costs and spending more time getting your billable work out the door.

If you question the validity of the point I’m trying to make, think back to any medical procedure that you underwent: if you carefully reviewed the bill you should see a charge for everything that was done to you including a cost for each individual aspirin, suture or bandage.  If you’re like me, you scratch your head and become a bit disgruntled when you start going through a bill with so much detail and a growing fear that you’ve paid and paid again.  Now take a look at your own bills to your clients and look at them like you’re looking at one of the medical bills and see if there are any similarities.  If there are, perhaps you should consider the suggestions I’ve made and try to break the cycle that too many lawyers have found themselves in by trying to recover every cost.

Categories : Practice Management | Tips and Tricks

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