A second collar for fixed-fee proposals that encompass very significant and hard-to-know cost swings

An article in New England In-House, Nov. 2011 at 11, discusses how to prevent runaway legal fees. Most of the article contains plain-vanilla ideas, but the author does mention a confection new to me. He first trundles out the well-accepted technique of a collar on a fixed fee such that if the firm’s actual fees exceed the fee it agreed to (or drop below), such as by 20 percent, the legal department will absorb part of the excess (or receive a rebate). The rationale for a collar is that something happened that at the start neither the firm nor the department could have reasonably expected.

Then appears the new idea: “And, if the risk is truly great, you can even use a second band at, perhaps, 40 or 50 percent.” The higher band is akin to excess insurance coverage – low cost and very unlikely to be dipped into. This second layer is a commendable improvement for very volatile matters.

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