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Three thoughts law firm budgets for matters: time period, zero average variance and ranges

Budgets of time – two months to complete the debt offering – may be less susceptible to gaming and slippage than budgets of cost – $85,000 to complete the debt offering. On the other hand, cost is more in the control of the firm than time.

The mean variance from all the initial budgets submitted by a firm over a period of time should be close to zero. Taken as a group, the amounts by which a firm exceeds the initial budget should equal the amounts by which it comes in under budget. Budgets should not be baselines simply for additions.

Budgets and their assessment should vary by the size of the total estimated spend. Thus, larger matters have larger budgets and the accuracy of budgets should be judged by the percentage of matters that end up within the range. For example, a $500,000 budget estimate might have a 5 percent collar of $25,000, so that if the firm completes the matter anywhere between $475,000 and $525,000, it has “hit the budget.” For more on matter budgets (See my post of May 21, 2007: matter budgets with 9 references; and May 31, 2010: padded budgets by outside counsel on matters with 7 references.).