A firm that retains a contract attorney may seek to mark up or add a surcharge when billing a client for the cost of services provided by the contract lawyer. A markup is attractive to a retaining firm because it can offset the cost of write-offs, delays in payment from clients, and overhead, and it can provide profit. But are markups over the cost of contract attorneys allowed and must they be disclosed to the client? It depends on how it is charged to the client.
Billed as Legal Services
When costs associated with legal services of a contract lawyer are billed to the client as fees for legal services, a surcharge may be added by the retaining firm if the total charge represents a reasonable fee for services provided to the client. See ABA Formal Op. 00-420. ABA Formal Op. 08-451 explains that:
This is not substantively different from the manner in which a conventional law firm bills for the services of its lawyers. The firm pays a lawyer a salary, provides him with employment benefits, incurs office space and other overhead costs to support him, and also earns a profit from his services; the client generally is not informed of the details of the financial relationship between the law firm and the lawyer. Likewise, the lawyer is not obligated to inform the client how much the firm is paying a contract lawyer; the restraint is the overarching requirement that the fee charged for the services not be unreasonable.
When a firm bills a contract lawyer’s services as fees, the client’s reasonable expectation is that the retaining lawyer has supervised the work of the contract lawyer or adopted that work as her own. In such a situation, there is no duty to disclose the surcharge. Where there is no direct supervision, a fee division with a contract lawyer is allowed but (1) the fee must be in proportion to the services performed by each lawyer; (2) the client must be advised of and approve the fee division; and (3) the total fee must reasonable. See Ga. Formal Advisory Op. 05-9.
Billed as an Expense or Cost
Where the charges incurred by the retaining firm for contract lawyers are billed to a client as an expense or cost, the client must be advised of the compensation arrangement between the retaining firm and the contract lawyer or the contract lawyer’s agency. See ABA Formal Op. 00-420 And “in the absence of any understanding to the contrary with the client, the client may be charged only the cost directly associated with the services, including expenses incurred by the billing lawyer to obtain and provide the benefit of the contract lawyer’s services.” Id. In other words, the retaining firm cannot mark up the charge for profit.