Guides · Billing

Flat fee, hourly or retainer: how law firms bill and account for each

Law firms charge for work in three ways. Hourly billing invoices time actually spent at an agreed rate. A flat fee charges a fixed price for a defined scope regardless of the hours it takes. A retainer is money the client pays in advance, held in trust and drawn down as work is billed. They differ less in how the invoice looks than in where the money sits before it is earned and when it becomes the firm's — and a single matter can use all three.

Hourly

Each timekeeper records time against the matter with a rate, a date and a narrative the client will read. At billing time the entries are reviewed — a billing partner may write hours down before they are invoiced, leaving the original entry on the record — then pulled onto an invoice. The firm earns the fee when it issues the invoice; the client owes it from the due date. Nothing sits in trust unless the client also paid a retainer.

Where it goes wrong: time recorded weeks late from memory, rates that differ between the engagement letter and the system, and write-downs done by editing the timekeeper's entry so nobody can see what was cut.

Flat fee

The client and firm agree a price for a piece of work — an incorporation, a simple will, an uncontested filing. The fee is billed as one line, and time may still be tracked internally to know whether the price was right. When the fee is earned depends on the jurisdiction and the engagement letter: some treat a flat fee as earned on receipt and payable to operating; others require it held in trust until the work is done or milestones are reached. The engagement letter must say which, and the bookkeeping must follow it.

Where it goes wrong: a flat fee deposited to operating in a jurisdiction that requires it in trust until earned, and scope creep billed as extra hours the client never agreed to.

Retainer

A retainer paid in advance for future work is the client's money until earned. It is deposited into the firm's IOLTA trust account on a ledger in the client's name, and as invoices are issued the earned amounts are transferred from that ledger to operating and recorded as payments on the invoice. An evergreen retainer is replenished when it falls below a floor; whatever remains at the end is refunded. A "true" or general retainer that pays only for availability is different again and is earned on receipt, but it is rarer than the name suggests.

Where it goes wrong: transferring before invoicing, transferring round numbers, or letting the ledger go negative by paying one client's costs with another's deposit. See the retainer guide for the full lifecycle.

One matter, three methods

A litigation matter might carry a flat fee for the initial pleadings, hourly work thereafter, court filing fees and an expert's invoice as pass-through expenses, all funded from a retainer the client topped up at the start. The invoice should show each on its own line — the flat fee, each time entry with hours and rate, each expense with what it was for — total them, and then show the retainer applied as a payment, leaving the balance the client actually owes. Two systems, one for fees and one for trust, is how firms end up with an invoice and a ledger that disagree.

How ModusBill does it

A matter in ModusBill has a billing type, but any matter can carry time entries, flat fees and expenses together, and one invoice pulls whichever are unbilled. Time is recorded with the rate that applies and can be revised by the billing desk with the original kept. Flat fees and expenses are lines with their own UTBMS codes. Retainers sit on the client's trust ledger and are applied to the invoice as a payment that debits the ledger in the same action. The invoice the client receives lists the lines, the total, the retainer applied and the balance due, and it can be paid online from a secure link.