Control Project Costs Using Alternative Fee Arrangements

All successful construction projects require the upfront identification and quantification of risks and cost impacts. Alternative Fee Arrangements (AFA) with legal counsel are an effective device to control legal spend as they set legal costs upfront as opposed to the attorney billing by the hour.

Why consider an AFA? AFAs provide clients with cost predictability and budget certainty. There are no surprises. AFAs limit the need for extensive invoice review and increase the productivity of the construction staff. Finally, AFAs align the interests of the lawyer with the contractor by focusing on accomplishments rather than the billable hour. There are several types of AFAs available depending upon the needs of the client and the project.

FLAT FEES FOR NON-LITIGATION SERVICES

For a negotiated monthly rate, agreed-on legal tasks are handled by experienced construction counsel. Project staff have access to legal counsel to answer questions without fear of incurring unknown and unbudgeted legal fees. Typically included in this arrangement are drafting requests for bids or pricing; drafting, reviewing, and negotiating contract and vendor agreements; drafting, reviewing and negotiating subcontract agreements; analyzing change order requests; ensuring compliance with local, state or federal legal regulations; attending project meetings; addressing legal questions from project staff; and other repetitive legal tasks that consume staff time. By seeking legal advice upfront, the company decreases the risk of future litigation and inadvertently waiving contractual rights. Claim preparation, claim analysis, trial and appellate services are not included.

FLAT FEES FOR NON-LITIGATION AND LITIGATION SERVICES

For a negotiated fee, all legal tasks, including the preparation and analysis of claims, litigation of claims and appellate services are included. Expert costs can be included. Under this arrangement, the law firm keeps any money not spent. The benefit is obvious: All costs are known and accounted for in the project budget.

AFAs FOR LITIGATION SERVICES

AFAs can be an equally effective tool to control and manage costs once a dispute has arisen, such as unreimbursed costs caused by project delays or changed conditions. In this scenario, costs are rising and a claim is imminent or already has been submitted. There are several models available to provide budget certainty, including the following.

• Fixed Fee With a Bonus: The law firm charges a flat fee and a bonus percentage on any money received (or saved) by the contractor.
• Fixed Fee: The law firm is paid a fixed fee for the entire litigation. Half is paid up front with the remainder paid monthly.
• Fixed Fee With a Collar: A monthly fee, hourly rates and collar percentage are agreed on. If the actual legal fees are within the collar, the client owes only the monthly fee. If the actual fees are below the collar, the firm refunds the amount overpaid. If the actual fees are above the collar, the client pays a percentage of the excess. For example: Monthly fee of $10,000 per month with a 10% discount on fees. The matter continues for 12 months. If the actual legal fees are between $108,000 and $132,000, the client pays only $120,000. If the actual fees are below $108,000, the firm refunds the difference up to $108,000. If the actual fees are above $132,000, the client pays 90% of the excess.
• Staged Fixed Fee: Agreed-on amounts are assigned to stages of the claim or litigation. For instance, an agreed-on amount is paid for claim preparation and negotiation. Once a claim is in litigation, amounts can be agreed upon to cover stages such as fact discovery, expert discovery, motion to dismiss, mediation, summary judgment, trial preparation and trial.
• Partial Fixed Fee: A fixed fee is charged for drafting and filing the complaint with the law firm retaining an agreed-upon percentage of any monies recovered.
• Holdback/Success Fee: Upfront, the law firm and client agree on results of the litigation that will qualify as a success. The client agrees to pay a percentage of the legal invoices until the matter is concluded. The lawyer earns none, all or some of the holdback at the end of the matter.

No contractor ever wants to spend money on litigation, but litigation can and does happen on construction projects. Legal expenses should be included in every project budget. AFAs are an effective tool to control legal costs and keep the construction project within the budget. In the unfortunate event that litigation arises, AFAs are the most efficient means to control legal costs.

In light of the COVID-19 epidemic and the economic uncertainty generated by it, cost certainty in legal spend is more vital than ever. Alternative fee arrangements are the best method to achieve this cost certainty and align a contractor's and its legal counsel’s interests. Reach out to legal counsel to discuss the possible alternative fees.