Legal services are notoriously expensive, yet they are necessary to protect companies and their owners, assert legal rights, recover payment for construction services and defend against meritless claims. Attorneys are especially useful in developing and negotiating contracts and significant change orders, setting up corporate structures to minimize and maintain risk, resolving disputes through compromise or litigating them to judgment. From a construction executive’s viewpoint, legal services are like any other service: They must be managed with the goal of obtaining the most value for the lowest cost.
Effectively Communicate With Legal Counsel
One of the best ways to minimize legal costs is to keep an open line of communication with attorneys to convey the company’s goals and objectives. The priorities of construction executives and their attorneys do not always align. Attorneys tend to focus on certain common risks, which in some cases may result in less attention to the client’s particular goals and objectives. For instance, in negotiating contracts, an attorney might focus on—and incur substantial costs for—a complex or novel issue that may be insignificant to the client.
Or, attorneys may assume a certain set of facts and conduct considerable research based on those facts when, in reality, the facts do not require such research. In both of these situations, a clear line of communication from both sides could have prevented the extra cost.
Miscommunications are not only costly, but they also can be detrimental to the client’s interests. In negotiating contracts based on faulty communication or assumptions, attorneys may need to draft additional documents or modify existing documents to correct the errors, resulting in increased costs. Or worse, the client may need to reverse course on a previous position, resulting in a loss of credibility with the counterparty. Similarly, if a construction dispute goes to litigation, attorneys may need to amend prior pleadings or discovery responses, or conduct additional depositions to accommodate for misunderstandings. At a certain stage of litigation, amendments or corrections are no longer permissible, and the client could be stuck with the prior admissions and incorrect statements.
Alternative Compensation Arrangements
Traditionally, law firms charge clients based on hourly rates. While most attorneys bill only what is necessary to accomplish a task, some clients complain that attorneys are inclined to bill more hours because they earn more compensation.
In extreme cases, construction companies will avoid asserting or defending their rights, or they may execute a contract without an attorney’s review, because they either do not have the funds or they fear the high cost and uncertainty that comes with hourly fee arrangements. To avoid these calamities, construction executives should consider alternative compensation arrangements.
These arrangements tend to shift certain risks to law firms or entice them with bonuses. These arrangements can be structured to align the interests of both the law firm and the client. Following are common alternative compensation arrangements.
Monitor Costs and Quality of Legal Services
- Fixed Fee: This model sets a fixed sum or periodic payments for all or a segment of a legal matter. Attorneys may even agree to a guaranteed maximum price, which provides some certainty of legal costs. Attorneys prefer to clearly define the scope and account for certain contingencies. The fixed fee arrangement is especially useful in contract negotiation and drafting, and is occasionally used for phases of litigation (e.g., pleading, discovery and motion).
- Contingency Fee: This includes payment of a percentage of funds recovered in a matter, if any. Expenses related to the engagement may be paid by the attorney or reimbursed by the client. It provides certainty against losses and generally is only available for claims seeking monetary recovery. Attorneys usually perform an extensive review of the matter before agreeing to a contingency fee.
- Hybrid Contingency Fee: This structure has similar attributes as contingency fees, but allows clients to keep more of any recovery at a lower hourly cost. It also permits the client to hedge, but not eliminate, the risk of non-recovery.
- Performance-Based Fee: This arrangement involves some form of compensation that is tied to outcome or satisfaction of criteria. For example, clients may pay some portion of an hourly fee each month, but the remaining portion is withheld contingent on success in the matter. Or, if a claim is resolved with a client paying lower than a target amount, the attorney could share in the savings. Another example is a success fee that is payable if the contract negotiation is completed on time and on budget. This motivates the attorney to meet the client’s goals, which may include budgetary restraints.
Ensure the law firm utilizes lower-cost associates or paralegals for routine or detail-oriented tasks that generally take longer to complete. Also, confirm that associates or partners are not performing secretarial functions, such as copying and mailing documents. Keeping an eye on who performs what tasks can help limit costs during the course of negotiations or litigation.
Technology also can help reduce legal fees. In the context of construction-related legal services, document review and management historically have been huge cost drivers. In the past, attorneys would manually review hard-copy documents in a tedious and costly process. Now, law firms can utilize software to electronically search and categorize documents. In addition, databases are available to manage the large volume of documents in construction litigation.
Shop Around for the Best Cost and Fit
While an element of trust is required in every attorney-client relationship, nothing prevents the client from obtaining quotes or proposals—similar to how prime contractors bid out trade work. These proposals may relate to a specific matter or for multiple services over a period of time. Further, construction executives should interview prospective attorneys to verify if they are a good fit and to ask for ideas on performing legal tasks cost efficiently.
If they are serious about reducing costs, construction companies should be open to evaluating alternative and innovative ideas for obtaining and paying for legal services. If the attorney values the relationship, he or she will welcome the opportunity to satisfy the customer.
David R. Cook is a partner and Chadd L. Reynolds is an associate in the construction law practice group at Atlanta-based Autry, Hanrahan, Hall & Cook, LLP. For more information, visit ahclaw.com.