The risk premium for fixed fees should be counterbalanced by a potential performance premium

About 10 years ago, Susan Samuelson, a professor at Boston University, published a very good book about law firm management. In Chapter 6 of Law Firm Management: A Business Approach (Little, Brown 1992) she discusses pricing legal services. In Section 6.2.2 she turns her attention to fixed-see billing. She expresses what may be a common sentiment of law firms: “When law firms give a fixed price, they are accepting more risk than when they bill on an hourly basis. Their fixed fee should be higher than their hourly fee in compensation for this risk.”

The error in this proposition regarding an assumption of premiums built into fixed fee’s lies in the fact that law firms operating under a fixed fee arrangement have the opportunity to make more money than on an hourly basis. If they can complete the task at less cost than the fee, the firm gets to keep a performance premium. Why should the premium only run one way?

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