Credit Control for Law Firms: Collecting Fees Without Damaging Relationships

Aug 14

12 min read

Law firm credit control is the discipline of ensuring that fees earned are fees collected. It begins long before an invoice is issued and ends only when the last disbursement has been reimbursed and the ledger shows a nil balance. For many small firms it is the least favoured part of practice. Attorneys-at-law are trained to advise and to advocate, not to chase payment, and there is an understandable anxiety that pressing a client for money will sour a relationship that took years to build. The result is that unpaid fees accumulate quietly, work in progress ages into debt, and the firm discovers that its profitability on paper bears little relation to the cash in its operating account.

The argument of this article is that effective credit control is not in tension with good client relationships; it is frequently a symptom of them. Clients who understand at the outset what the firm will charge, who receive clear and timely bills, and who are approached courteously and consistently when a payment is late, are far more likely to pay and to return. Firms that treat billing as an afterthought and collection as an embarrassment create the very conditions in which disputes arise. What follows is a practical framework covering engagement terms, billing practice, ledger monitoring, communication, escalation and the professional constraints that apply to the recovery of fees.

The rules governing fees, bills, retainers, lien rights and the use of client funds differ among jurisdictions and are enforced by regulators and courts. The practitioner must consult the rules of her own jurisdiction before adopting any practice described here, particularly where the practice touches client money, interest on overdue fees or the withholding of documents.

Why law firm credit control fails in small practices

The causes of poor collection are predictable. The first is imprecision at the start of the engagement. Where the client has not been told how fees will be calculated, when they will be billed and what the likely overall cost is, the first invoice arrives as a surprise, and surprise is the commonest reason for a dispute. The second is irregular billing. A firm that bills only at the conclusion of a matter, or only when it needs money, presents the client with a large sum covering many months of work, and the client's memory of the work is weak while his resentment of the sum is strong. The third is discomfort in conversation. Fee earners who would not hesitate to press an opposing party on a contested point find it difficult to ask a client for payment, and they defer the conversation until the debt has become awkward.

A fourth cause is structural: nobody owns the ledger. In a small firm the partners assume the bookkeeper is chasing, the bookkeeper assumes the fee earner will raise it with the client, and the fee earner assumes the partner has decided to be lenient. Without a named person, a timetable and a standard procedure, debts are managed by neglect. Finally, there is the problem of work performed without adequate funds on account. A firm that continues to act on a matter in which the client has paid nothing for months has, in effect, become an unsecured lender, and the likelihood of recovery diminishes with each additional hour worked.

Building credit control into the engagement

The most effective credit control measures are taken at the point of instruction. The engagement letter is the foundation of everything that follows. It should state the scope of the work, the identity of the fee earners, the basis of charging, the estimated range of costs where an estimate can honestly be given, the frequency of billing, the payment terms, the position on disbursements, and what the firm will do if payment is not made. It should also state plainly that the firm may decline to continue to act, subject to its professional obligations, if invoices are not paid.

Fee structures and their credit implications

Different fee structures present different collection risks. Hourly billing in arrears carries the greatest risk, since the firm funds the work and the client's willingness to pay may diminish as the matter becomes protracted. A fixed fee payable in stages reduces that risk, provided the stages are tied to identifiable milestones. A retainer held on account, from which the firm draws against invoices with the client's knowledge, reduces it further, subject always to the rules on the handling of client money. Conditional or contingency arrangements shift the risk to the firm and are permitted or restricted according to the law of each jurisdiction; where permitted, they require particular care in documentation and in the treatment of disbursements.

The firm should decide in advance which structure suits which type of matter and client, and should apply that decision consistently. A conveyancing client, a corporate client with a regular flow of instructions, and an individual in a contested family matter present different credit profiles, and one policy will not serve all three.

Taking instructions with eyes open

A short assessment of the client's ability and willingness to pay should form part of the intake process. This need not be intrusive. It may consist of obtaining proper identification and contact details, asking who will be responsible for payment where the person instructing is not the person paying, requesting a retainer commensurate with the initial work, and noting any history of fee disputes with other practitioners where this is known. Where a third party, such as a relative or an employer, undertakes to pay, that undertaking should be recorded in writing and the third party should be identified as a party to the retainer, so that liability is not left uncertain.

Billing practice that supports collection

A bill that is clear, prompt and understandable is paid faster than one that is obscure, late or disputed. The following practices are recommended.

Bill at regular intervals, monthly where the matter is active, rather than waiting for a conclusion that may be years away.
Issue the bill soon after the work is performed, while the client remembers what was done and why.
Describe the work in plain terms that the client can understand, with dates, the fee earner responsible and the time or the fixed element charged.
Distinguish clearly between professional fees, disbursements and any taxes the firm is required to charge, so that the client can see what is owed for what.
State the due date, the permitted methods of payment and the account details, and make payment easy.
Review each bill before it is issued for accuracy and for consistency with any estimate given, and explain any material departure from that estimate in the covering letter.

The covering communication matters as much as the bill itself. A brief message that summarises what has been achieved in the period, what is expected next and what the next bill is likely to be reminds the client of the value he is receiving. Where the cost has exceeded the estimate, the firm should explain the reason before the client discovers it, ideally at the moment it becomes apparent that the estimate will be exceeded and not when the invoice is rendered. A client who is warned is a client who can decide; a client who is surprised is a client who can complain.

Disbursements and funds on account

Disbursements require separate handling. Court fees, stamp duties, search fees, counsel's fees and similar outlays are paid by the firm on the client's behalf, and many firms absorb them for far longer than they should. The better practice is to request funds on account for anticipated disbursements before they are incurred, and to bill them promptly once paid. Funds received from the client for disbursements belong to the client until applied, and must be held and accounted for in accordance with the client account rules of the jurisdiction. A firm should never treat money received for one purpose as available for another without the authority the rules require.

Monitoring the ledger and ageing debt

A firm cannot manage what it does not measure. The essential tool is an ageing report, which lists every outstanding invoice by client and matter and groups the sums by the length of time they have been unpaid. Reviewing it at a fixed point each month, with a named partner present, converts credit control from a series of individual embarrassments into a routine management function.

Two further measures are valuable. The first is the monitoring of work in progress, that is, time recorded but not yet billed. Unbilled time is not a debt, but it is an early warning: where it is allowed to accumulate, it signals that billing discipline is slipping, and the firm's real exposure is larger than its ledger of issued invoices suggests. The second is the monitoring of the time between instruction and payment, matter by matter, so that patterns by client type or fee earner become visible.

To illustrate how ageing categories might be used, the table below sets out a possible internal policy. The periods and actions are illustrative only and are offered as a model for a firm to adapt; they are not market data or a regulatory standard.

Status of invoice	Suggested internal action	Responsible person
Due date reached, unpaid	Courteous reminder by email, attaching the invoice and payment details	Billing administrator
Fourteen days past due	Telephone call from the fee earner to establish whether there is a query	Fee earner
Thirty days past due	Letter from the partner proposing a payment plan or requesting payment, and review of continued work	Supervising partner
Sixty days past due	Formal letter before further steps, cessation of non-urgent work where professionally permissible	Managing partner
Ninety days past due	Decision on recovery proceedings, referral or write-off	Managing partner

Communicating about money without damaging the relationship

Tone is the critical variable. The first reminder should assume that there is an innocent explanation, such as an invoice sent to an inbox that is rarely read, a payment already made but not yet reflected, or an internal approval at the client's end that is pending. A message in the nature of an enquiry, in measured language, preserves goodwill and gives the client an easy way to respond. It should state the invoice number, the amount, the due date and the preferred method of payment, and it should invite the client to raise any question.

If the invoice remains unpaid, the next step is a conversation. A telephone call from the fee earner, who has the relationship, is usually more effective than a further email from the accounts department. The purpose is to find out whether the client disputes the bill, has a cash-flow difficulty, or has simply forgotten. Each of those responses calls for a different answer. A dispute should be handled on its merits and quickly. A cash-flow difficulty may be best resolved with an agreed payment schedule. Forgetfulness requires only a firm date.

Payment plans

A written payment plan is often the most constructive response to a client in temporary difficulty. It should record the total sum owed, the amount and date of each instalment, what happens on default, and the effect on continuing work. The plan should be signed or confirmed by the client in writing, and the firm should monitor it as closely as any other debt. A plan that is agreed in conversation and not recorded invites later disagreement about its terms.

Disputed bills

Where the client disputes a bill, the firm should respond in a considered manner and not treat the dispute as an act of hostility. It should listen, review the file, explain the basis of the charge and, where the client has a fair point, consider an adjustment. Most jurisdictions provide a process for the review or taxation of a bill, or a complaints procedure through the regulator or professional body, and the firm should be familiar with those routes. The engagement letter, the contemporaneous time records and the correspondence in which estimates and instructions were recorded will determine the outcome of any such process, which is a further reason to maintain them with care.

Escalation and recovery

When informal measures fail, the firm must decide whether to continue to act, whether to suspend work and whether to pursue recovery. These decisions are bounded by professional duties.

An attorney-at-law who has accepted instructions cannot ordinarily withdraw at a moment of her own choosing without regard to the client's position. Withdrawal for non-payment is generally permitted where reasonable notice is given and the client is not prejudiced, for example by an imminent hearing or limitation deadline, but the detailed rules and the leave of the court that may be needed differ among jurisdictions. The firm should consult its rules, give written notice, explain the consequences, and ensure that the client has an opportunity to instruct another practitioner and that the file is handed over in an orderly way.

The right of a practitioner to retain a client's papers pending payment, commonly referred to as a lien, is a matter on which the law is nuanced and the professional rules may impose limits, particularly where withholding documents would prejudice the client in pending proceedings or where the papers are required by a successor. It should not be asserted without reading the applicable rules, and it should never be used as a threat that the firm is not entitled to carry out.

Recovery through the courts or by instructing another attorney is a last resort that carries cost and the risk of a counterclaim alleging negligence or overcharging. Before commencing, the firm should assess the amount at stake, the quality of its file, the client's means, and the likelihood that the client will respond with a complaint. It should also consider whether the debt is time-barred, as limitation periods run against fee claims in the ordinary way. A claim that the firm would not wish to see tested against its own file should be reconsidered.

Interest and recovery costs

A firm may wish to charge interest on overdue fees or recover the costs of collection. Whether it may do so depends on the terms of the engagement letter and on the law and professional rules of the jurisdiction. If it is to be done, the right must be expressed clearly in the engagement terms at the outset, the rate should be reasonable, and it should be applied consistently. Imposing interest retrospectively on a client who was never told of it is unlikely to be defensible and is likely to aggravate the relationship.

Worked reasoning: the cost of delay

The following is illustrative arithmetic only, not market data, and the figures are invented to demonstrate a method. Suppose a small firm bills an average of ten thousand units of currency per month and collects, on average, after seventy-five days, whereas its own monthly overheads of eight thousand units fall due on the thirtieth day. Over a long run, the firm must fund the gap between the cost of producing the work and the receipt of the cash. If it were to reduce its average collection period by fifteen days, it would release roughly half a month of billing, in this example five thousand units, from working capital, without increasing its fee rates or its volume of work. The point is not the number but the method: the firm should calculate for itself what its collection delay costs in funds tied up, borrowing costs and risk, and treat the result as a measure of the value of credit control.

A similar calculation may be made on write-offs. Where a firm writes off a sum, it loses not only the fee but the time and disbursements invested in earning it. If the firm's net margin on billed work is modest, the volume of additional work needed to recover a single significant write-off may be considerable. This reasoning supports an early investment in prevention, in the form of retainers and prompt billing, over a late investment in recovery.

Policies and responsibilities within the firm

A written credit control policy removes ambiguity. It should set out who issues bills, who reviews the ledger, at what stages reminders are sent and by whom, who may agree a payment plan or a reduction, who decides whether work will be suspended, and who may authorise a write-off. It should be short enough to be read and specific enough to be applied. Authority to waive or reduce fees should be restricted, so that an individual fee earner cannot quietly concede sums that the firm has not authorised.

The firm should also train its staff. Support staff who send reminders should know the approved wording, fee earners should understand why they are expected to make the follow-up call, and partners should recognise that their own willingness to bill promptly sets the standard for the practice. Where a partner's own clients are persistently in arrears and no action is taken, no policy will carry authority.

Practical next steps

The following actions provide a realistic starting point for a firm wishing to improve its credit control.

Review the standard engagement letter and ensure that it deals with fee basis, billing frequency, payment terms, disbursements, funds on account, interest where permitted, and the consequences of non-payment.
Generate an ageing report today, identify every invoice that is overdue by more than the firm's chosen threshold and allocate each to a named person for action.
Calculate the value of unbilled work in progress and set a rule for how often it must be billed.
Adopt a written reminder and escalation timetable, with standard wording for each stage that is courteous and factual.
Establish a monthly credit control review attended by at least one partner and record its decisions.
Check the jurisdiction's rules on withdrawal, lien, interest on fees and the handling of client money before relying on any enforcement measure.
Agree who may approve a payment plan, a reduction or a write-off, and record each such decision on the file.

How practice management software supports credit control

A practice management platform such as Legalytech brings time recording, billing, client communications and matter documents together, so that invoices can be issued promptly, ageing can be reviewed from a single view, and each reminder and payment plan is recorded on the matter file where the responsible attorney can see it. It does not collect fees on the firm's behalf, but it removes much of the administrative friction that causes billing to be postponed.

This article is provided for general information only and does not constitute legal advice. Practitioners should consult the rules of their own jurisdiction and regulator.