Stop Budgeting for Phases. Start Budgeting for Court Events

When a company retains outside counsel for a litigation matter, the firm usually provides a budget at the outset. Within a few months that budget is often out of date: discovery is broader than expected, the other side filed more motions, or the court scheduled proceedings no one planned for. The client typically learns of overruns after the work has been performed and billed.

An overrun is a problem for the firm. When a matter exceeds its budget or fixed fee, the firm usually writes down the excess time rather than bill it, which lowers its realization, the share of recorded time it collects. Firms that absorb repeated write-downs tend to respond by raising rates, staffing more thinly, or pricing work more defensively, so the cost eventually reaches the client.

The three practices below help teams catch changes while there is still time to address them.

1. Ask what the budget is based on

Before accepting a budget or a fixed fee, the client should ask outside counsel to explain the historical data behind it. The firm should be able to show what comparable matters actually cost, broken down by litigation phase, rather than offering a single total.

This matters because a firm’s internal figures are often less reliable than they appear. The amount billed on a matter is frequently below the time recorded, because hours are written down or discounted. A firm pricing a new matter from its billed totals may be relying on figures that never reflected the actual effort. This is a common reason that fixed fees become unprofitable partway through a matter, and that outcome affects the client as well as the firm.

You do not need to audit the firm’s books to evaluate a budget. It is usually enough to ask three questions:

• How many similar matters is the estimate based on?
• How was the cost of those matters distributed across pleadings, discovery, motions, and trial preparation?
• Where has the firm historically written off time, and why?

2. Ask for a common vocabulary

Budgets are difficult to compare in part because each firm describes its work differently. Work that one firm labels “case assessment” may be labeled “pleadings” by another, and neither category may correspond to the way the legal department tracks spending.

Industry standards already exist to address this problem. The UTBMS litigation code set has been in use for decades, and the SALI Alliance (Standards Advancement for the Legal Industry) has developed a broader and more current taxonomy of matter types and phases. When firms budget and bill against a shared standard, the legal department can compare costs across matters and firms, for example by examining what patent cases in Delaware or securities class actions in the Southern District of New York typically cost in each phase.

Benchmarking benefits both the firm and client. Legal departments can test a budget before approving it, and firms have a baseline to support pricing.

3. Ask that assumptions be stated as court events

Most legal departments omit assumption tracking, even though it has the greatest effect on budget accuracy.

A budget entry such as “discovery: $400,000” provides little information on its own, because it does not state what work the figure is expected to cover. A more useful budget identifies the assumptions behind the figure, such as:

• 10 depositions
• One motion to compel
• One claim construction hearing
• No interlocutory appeal

Each event appears on the court docket, which is publicly available and updated as the case proceeds.

When assumptions are stated in this way, it becomes clear as soon as a matter departs from the plan. Patent litigation, where I practiced for several years, offers a useful example. Suppose a case is priced on the assumption that there will be a single round of claim construction briefing, and three months later the court orders supplemental briefing on two additional claim terms. If the budget states the claim construction assumption explicitly, both firm and client can see the matter changed, and they can discuss scope, staffing, or a fee adjustment while there is still time to do so.

Without clear assumptions, the process unfolds differently. Billing lags case activity by 30 to 90 days, so additional work and time accumulate before anyone reviews it. The overrun appears on an invoice, or the firm absorbs it as a write-down, which strains the relationship.

Tying assumptions to docket events makes billing discussions productive. Instead of debating whether the firm worked efficiently, the parties can address a factual question: whether the court took an action that the budget did not anticipate. That is easier for both sides to resolve.

Putting these practices into effect

These practices do not require a lengthy policy process. When negotiating your next engagement letter or alternative fee arrangement, consider asking outside counsel for three things:

1. A phase-by-phase budget based on comparable matters;
2. Budgets and invoices coded to a standard such as UTBMS or SALI, so costs can be compared;
3. A list of scope assumptions, such as motions, hearings, depositions, and trial dates, along with an agreement that the firm will notify you of events that depart from those assumptions.

Firms that price work carefully are likely to welcome these requests, because the practice protects their own margins. A firm’s reluctance to provide this information can also tell you something about how it approaches pricing.

Surprises are unavoidable in litigation, and no budget will eliminate them. Legal spending becomes more predictable when changes are identified as they occur and when the client and the firm have agreed in advance on how they will respond.