Valuations and Appraisals

Fixed Fees Benefit Everyone If Well Planned

January 2011
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Clients like fixed fees. My firm also likes fixed fees. Here is why my firm would prefer to work under a fixed fee arrangement:

  1. We get paid for our expertise and results. In contrast, hourly-rate work sometimes does not fairly compensate the consultant for the value delivered.
  2. No one likes to keep track of time to the nearest tenth of an hour. For those who have not thought about it, six minutes is a pretty small increment.
  3. Billing and collection is much easier with a fixed fee. With hourly-rate work, the consultant must prepare detailed bills, and then wait for the subsequent review and approval of such bills by the client. Under a fixed fee arrangement, the consultant delivers a product, and gets paid for the deliverable.
So, since everyone likes fixed fees, why are fixed fees not the predominant way of paying economic and financial consultants? The simple reason is that the client has not taken the necessary steps to make a fixed fee arrangement a success. A successful fixed fee needs ALL of the following:
  1. A specific description of the records the client will provide that will underlie the desired work. In most fixed-fee cases, as part of the proposal process, my firm receives either the complete actual records, or representative record specimens.
  2. A deliverable that can be described with a fair amount of specificity. For example, the following are examples of assignments that are sufficiently precise to work well with a fixed fee:

    1. Provide an opinion on the fair market value of a particular asset
    2. Calculate the lost income for an individual who has the following demographic characteristics (We have a list for this purpose, as well as for other recurring assignments.) and who is now permanently disabled
    3. Explain why a report from an opposing expert is incorrect as it is being applied to the following fact situation (list specifics)
  3. A specific reporting format that has a clear ending. For example, the following are examples of deliverables that will work well with a fixed fee:

    1. A written report of approximately 4 pages in length - In addition to the four pages of prose, exhibits will be attached to the report that show the calculations which underlie the numerical conclusion.
    2. A meeting of no more than two hours in length in which the professional verbally describes the conclusions that have been reached
    3. An expert witness deposition
  4. A listing (preferably written) of the assumptions and background information upon which the work will be based
  5. The assistance (if any) that the client has agreed to provide

Once these cost parameters are addressed, then a fixed fee request will be well received by us, and can be responsibly relied upon as a fee commitment. However, if ANY of the above items are missing, there is a chance that the project is not yet well defined and there has not been a meeting of the minds of what underlies the fixed fee. Assignments without this detailed agreement bear an unacceptable risk that at least one half of the contracting relationship will be disappointed.

In over thirty years of working as a consultant, I cannot remember any prospective client telling me that the above list is incorrect, or that any of these above components are not necessary for there to be a complete agreement. Yet, most clients attempt to avoid this planning process. Unfortunately, in many assignments, this information is not available. While the consultant can be sympathetic when the necessary information is not available, sympathy does not mean that the consultant should be asked to predict that which is unrealistic.

Nevertheless, I am regularly asked for a budget before the above list has been addressed. The perhaps well-meaning prospect or client will often try to tell me that the budget or fee is not binding. However, if the client were not relying on the non-binding estimate, why bother asking for it? I do not want my clients to act on useless or non-binding information, so my response is instead an offer to seek answers and agreement on the list provided above. If answers to the above list are simply not available, the estimate can only be responsibly be provided as a range (sometimes a wide range), and not a specific number.

With the above in mind, here are some examples of non-starters in terms of fixed fees. We get a request for each of the following (or something similar) at least one a week. In each of the following cases, a fixed fee is unrealistic because there is significant information regarding the scope of work that is not yet addressed.

“I received plaintiff’s interrogatory response on damages that states (i) they are seeking lost profits and (i) the damages are approximately $(add amount). Since the plaintiff never made much money, I know this claim cannot be correct. I have plenty of discovery on liability issues, but we have not yet received much discovery on damages. How much will it cost to analyze the plaintiff’s claim?”
“I own a patent that does (add description). The patent has not been commercialized, although I have a prototype. What will it cost for you to appraise the patent’s value?”
“I have a license agreement, and my royalties have been decreasing. I am concerned that I am not receiving all the royalties that I should be receiving, but because the royalties are decreasing, I really do not want to spend that much. I have never done an audit of my licensee before. How much will it cost to audit whether I am owed more money?”
“I represent a plaintiff in the (add industry). They have $(add amount) in revenues annually. They are suing for (list causes of action). How much will it cost to tell me the damages that we should win if liability is proven?”

Anyone who gives you a quick response to any of the above requests is either (i) not sufficiently experienced, or (ii) thinks they will be able to bill more once the project gets started, so is not really worried about the fixed fee amount. Under either alternative, you are better off not working with such a consultant even though a tempting low fee is being dangled before you.

Cost control is important to the vast majority of Fulcrum’s clients. To help get started, Fulcrum provides no-cost consultations to help decide whether a project is right for both of us. If the client wants the initial consultation to include a fee estimate, then part of getting that cost control involves having answers to the questions raised at the beginning of this article. Alternatively, Fulcrum will happily address these items for you as part of a first phase of work. But, this first phase should be compensated because this planning takes time, and adds significant savings to the entire project.

Regardless of whether you want a budget of not, the best way of controlling costs on data analysis is to (i) use a consultant that makes insightful use of technology, and (ii) get the assignment’s data to your selected consultant in an executable electronic form. For advice in this area, see A primer on the Litigation Production of Data Bases, and How to Get the Discovery You Need from Your Opponent.

Fulcrum Inquiry’s services include forensic accountings, business valuations, and economic assessments of damages.