Alternative Billing for Construction Claims: “An offer you can’t refuse”

For this week’s Guest Post Friday here at Construction Law Musings, we welcome Kevin B. Watson for the first time.  Kevin is a partner with the Philadelphia Area law firm of Halberstadt Curley, LLC.  Kevin is an engineer that ran out of ideas and went to law school, practicing as a Construction Lawyer since Reganomics was in vogue. His practice focuses on construction claims, professional liability, and risk management. 

This is my first foray into Construction Law Musings. Many thanks to Chris for the opportunity share on a topic of current interest.  Since the economy is at the forefront of everyone’s mind, it seems like an appropriate time to discuss the economics of the attorney-client relationship, and specifically in the context of construction claims.

One of our firm’s strengths is the ability to offer clients Alternative Fee Arrangements (“AFA’s”). If you go to our firm link on Alternative Fees you’ll see our philosophy and various alternatives to the billable hour. While AFA’s have been utilized in the legal community for many years, for some reason construction industry clients have been slow to adopt them.  There are several reasons for this, not the least of which is the failure of construction clients to appreciate their unique ability as buyers of legal services to demand risk sharing and incentivized results in their attorney-client relationship.

Thinking through how to best drive home the benefit of AFA’s, I “mused” (sorry Chris) to an example of how relationships have traditionally developed in a billable hour context, borrowing a line and a character or two from a “Family” that is no stranger to tough solutions in hard times.

For construction clients unfortunate enough to become involved in high stakes construction claims, you know the script all too well. First there’s the impact – a denied change order request worth much more than you can afford to ignore, or a claim from a subcontractor that couldn’t perform.

Next is the search for counsel. After you work your way through a long list of likeable but less than qualified commercial litigators, you’re recommended to a highly credentialed construction lawyer – a Don Corleone if you will – a dean of the construction bar, fully capable and seemingly eager to prepare, prosecute and win your claim. You can’t help being impressed with the Don – he has poise, swagger, and seems to know the difference between an RFI and a CPM.  You eagerly sign a retainer agreement, paying little mind to the $600 per hour, time and material, open ended terms. It doesn’t matter, because with a handshake and confident smile the Don promises to quickly and effectively make your opponent “an offer they can’t refuse.”

But after the first meeting or two with the Don, you begin to recognize new faces and names cropping up at meetings, in e-mail, and on telephone conversations. You ask: “Who is Sonny, and why is he asking for documents I produced to the Don already?” “Fredo who? Why is he defending me at a deposition?” Slowly you realize that the Don has “handed off” your case to other members of the Family.  But you don’t make waves, because your pact with the Don says that in return for your loyalty, your legal and attendant financial interests will be kept under control. And why shouldn’t you trust the Don?

Here’s why: the first bill.

One day, like a horse head at the foot of your bed, you’re greeted in the mail by a billing statement thicker than your claim. Pages and pages of billing entries from the Don’s associates give little detail on the service (“office conference,” “review documents,” “travel to/from court”), but excruciating detail on the amount due.  You come to realize that the “Family” has spent hours upon hours on matters both routine and complex. And the billable hour equation doesn’t differentiate the task. All that matters is the billing rate multiplied by time spent.  The punch line is that this is the first in a long series of legal bills that, if unchecked, promise to exceed the value of your claim in a very short period of time.

You want out of the “family.”  OK, but it will cost you . . .

Of course this is not the way that all hourly billing arrangements work, and many smaller firms do not have a large pool of associates or levels of partner/principal that need to be fed.  However, more than one large firm has been known to run this way.

So what’s the solution? Either move away from high billable hour arrangements into AFA’s, or work from reasonable hourly budgets.  Maybe it’s time to demand that your lawyers put their skin in the game.  Why not send out a request for proposal where your attorneys estimate the fees and provide a lump sum bid? You do this in your area of expertise every day, why can’t we? How about an Alternative Fee arrangement that pays the attorney more if he wins, and less if he loses?  How about cost plus a fee that is tied to results?  Alternatives to high hourly rates are limited only by your need and creativity.

AFA’s are not new to the legal profession.  In the past few years many highly innovative and entrepreneurial businesses have demanded that their attorneys be equally innovative and entrepreneurial when it comes to bidding for their legal needs.  Firms like Valorem and Exemplar have responded by offering AFA’s for corporate, transactional, commercial, and employment law work.  But for some reason the billable hour continues to reign in the world of Construction Litigation. Why the change has been so slow is debatable, but that change must and will come is undeniable.

So the next time you’re locked in a room with the Don, try making him an offer he can’t refuse. You might be surprised at his reaction.

Kevin and I welcome your comments below.  Also, please subscribe to keep up with this and other Guest Post Friday Musings.