The Gazette 1984

GAZETTE

SEPTEMBER 1984

Calculation of hourly cost rates (HCR), 1984/85 Budgeted expenditure. 1984/85 £ 38,000 142,000 (x) ('/,x Fee earners' salaries Other expenditure £71,000)

The fee I now move to the last part of this article — how to get from time recording and time costing to the fee. First of all, as I have said, the assessment of the correct fee except where it is determined by court tables is a matter of judgment as to what is fair and reasonable in the circumstances — it cannot be an entirely scientific calculation and it cannot be predetermined by some table which is all things to ail men. Having said this, however, we should have all the relevant facts before us when we make our judgment, and one of the most relevant facts in most cases will be the time spent on the job and the cost of it. If may be that when we look at the time cost we may say that it is too high because the job has been badly handled or we may say that the job was done very quickly because the person who dealt with it had become an expert on the matter which he was dealing with or we may say that in assessing the fee the time spent is only a minor factor and that the fee will be related much more to other factors. I believe, however, that in every case we should start with the time cost and then having considered the relevant factors in its make-up and made what adjustments we think appropriate, we should decide what should be what I will call the chargeable or adjusted time cost — the time cost figure that can be validly used in assessing the fee. Various expressions are used to describe the parts of what is the final fee. The adjusted time cost is sometimes called the base factor of the A factor and the other factors are sometimes called the B factor or the supplementary factor so that the fee is A plus B or the base factor plus the supplementary factor. I should perhaps say that I do not think that the unit in the Law Society General Table is really a valid time cost — it is of course meant to be a charging rate and probably includes some element of a B

£ 180,000 69,000 £249,000 Total salaries £107,000 (S)

Notional salaries, etc. Total expenditure

Calculation

Salary

Total

%.v - 9 '/,* - S/s

cost

(s)

Hrs

(2)

(J)

(l)+(2)+(3) HCR

(D

Mr. D Mr. B Mr. L Q A 1 Q A 2 U A 1 U A 2 U A 3

1,000 1,000 1,000 1.250 1.250 1,250 1,250 1,250

23,000 23.000 23,000 9.000 8,500

7.889 7,889 7,889 7,889 7,889 7,889 7,889 7,889 7,889

15,263 15,263 15,263 5.972 5.641 3.982 3,318 3.318 2,986

46,152 46,152 46.152 22.861 22,030 17,871 16.207 16.207 15,375

46 46 46

18 18 14 13 13 17

6.000 5,000 5,000 4.500

Tr

900

9

10.150

107,000

71,000

71,000

249,000

Inevitably there are a number of variations that can be introduced into the calculations — some arising from differences in philosophy and some being fine tuning to produce more accurate costs. Please remember, however, that each firm's hourly cost rates are unique to it and indeed the hourly cost rate for each fee earner is unique to him or her. This does not mean, however, that one would not expect to find similarities in rates among firms similar in size, location and methods of operating. I have said that the hourly cost rate if applied to the chargeable hours should produce a gross- fee income equivalent to the budget costs/expenditure according to how this has been defined. But I am sure you will have realised that this may not be the result. There are certain premises underlying the theory. The result will be attained only: 1. If there is sufficient volume of business. 2. If the firm is able to charge and recover the full value of the chargeable hours. 3. If the costs are contained within the budget figures. 4. If the expected chargeable hours for fee earners are in fact worked. 5. If the partners promptly render fees and are diligent in recovering them. Because, as I explain later, time cost is normally only part of a fee charged the total gross fee income of a firm should be greater than the product of the total chargeable hours at the firm's hourly cost rates — the 'surplus' depending on the extent to which the foregoing hypotheses are met and the way in which the firm has determined its hourly cost rates. It is, however, a management function to monitor all these matters and a good time costing system will help you do this and where appropriate you may have to adjust your figures to reflect changes in chargeable hours, expenditure, cash flow, etc. Indeed you should re- calculate your hourly cost rates if there is any significant change in any of the costs or other variables in the formula.

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