Managing Disbursements and Client Expenses Accurately

Law firm disbursements are the sums a firm pays to third parties on behalf of a client in the course of a matter: court filing fees, registry and search fees, stamp duty paid on a client's behalf, expert and counsel fees, process server charges, travel costs incurred for a specific matter, and similar items. They are distinct from the firm's own fees, which pay for the practitioner's time and skill, and distinct from the firm's general overheads, which the firm absorbs in the ordinary course of business. Handling that distinction correctly is a matter of both profitability and professional propriety.

Disbursements are a frequent source of leakage and of friction. Money is paid out of the firm's account for a client and never billed. A receipt is lost, so the item cannot be proved. A cost that the client never authorised is added to an invoice and later disputed. A payment for one client is coded to another. Each error is small, but together they erode margin, damage trust and, where client money is involved, may amount to a breach of the accounts rules which govern the firm. Careful management of law firm disbursements is therefore a core discipline, not an administrative afterthought.

This article describes how a firm can classify disbursements, obtain client authority for them, capture them at the time they arise, recover them promptly, account for them in its books and control them through a regular review. It does not state the accounts rules or tax treatment of any particular jurisdiction, which differ, and practitioners must consult the rules of their regulator and the guidance of their own tax authority.

What counts as a disbursement, and what does not

The starting point is a clear internal definition. A disbursement is generally an expense that the firm incurs on behalf of a particular client and for which the firm is entitled, under the engagement and the rules governing its profession, to be reimbursed. The key features are that the expense is paid to a third party, that it is attributable to a specific matter, and that it would not have been incurred but for the instructions of that client.

The boundary with overheads should be set out in the firm's policy. Typical items that a firm treats as its own overheads include rent, general stationery, ordinary telephone and internet costs, subscriptions to general legal research services and routine photocopying. Typical items treated as disbursements include fees paid to a court or registry, the cost of searches commissioned for a particular transaction, fees of an expert instructed for a client, the cost of couriers or process servers for a specific matter, and the cost of obtaining certified or apostilled copies of documents for the client. Items at the margin, such as bulk printing for a large trial bundle, should be addressed explicitly in the engagement letter so that the client knows what will be charged and on what basis.

Categories worth distinguishing

Many firms find it useful to divide disbursements into categories that attract different treatment.

• Paid and recoverable: sums paid by the firm from its own funds and then billed to the client, such as a registry fee advanced to complete a filing.

• Paid from client funds: sums paid out of money held for the client, such as stamp duty paid from funds the client has placed on account.

• Agency or counsel items: fees of other attorneys or counsel, which may be billed to the firm and passed through, and which often arrive after the work is done.

• Third-party invoiced items: invoices from experts or suppliers that are addressed to the firm but relate to a client matter.

• Internal charges: charges that the firm makes itself, for example for photocopying at an agreed rate, which must be disclosed and which some regulators restrict.

The first two categories raise different questions about client money. The last raises a question of whether the firm is entitled to a profit on the item. The rules of the regulator and the terms of the engagement letter govern both.

Obtaining client authority and setting expectations

A client should never learn of a significant disbursement for the first time from an invoice. The engagement letter should explain which categories of expense are likely to arise, who will incur them, how the firm will notify the client and the point above which the firm will ask for prior approval.

Estimates

At the start of a matter, the practitioner should give an estimate of the principal disbursements, with clear assumptions. In a property transaction this may include registration fees, searches and duty. In litigation it may include filing fees, the costs of serving documents, expert reports and the fees of counsel. The estimate should be updated as the matter changes. If an estimate is exceeded, the client should be told when the excess becomes apparent, not at the end.

Thresholds for prior approval

The firm should set an internal threshold, expressed as a fixed amount, above which no individual disbursement may be incurred without the client's written approval. Below the threshold, the engagement letter may authorise the firm to incur routine costs. The threshold should be reviewed from time to time and should be lower for clients who are vulnerable, who are paying out of their own limited resources or who have expressed concern about cost. Expert and counsel fees should almost always require prior approval, since the amounts are significant and the client's choice of expert may matter.

Documenting the approval

Keep the client's approval on the matter file. An email in which the client agrees to the instruction of an expert at a stated cost is sufficient for many purposes, provided that it is saved to the matter and not left in an individual inbox. If the approval is given orally, the attorney should confirm it in writing afterwards. In the event of a dispute about a bill, the document showing authority will be the first thing a regulator or court asks to see.

Capturing disbursements at the time they arise

Many disbursements are lost through late capture. A fee earner pays a filing fee in cash on a Tuesday, intends to record it later, and by the end of the month the receipt has gone missing. Systems and habits should be designed so that each disbursement is recorded on the correct matter on the day it is incurred.

A simple capture procedure

1. Identify the client and matter before payment is made. If the matter number is not known, the payment should not be made until it is.

2. Pay by a method that creates a record: bank transfer, cheque, card or an account with a supplier, rather than cash from a petty cash box where possible. Where cash is unavoidable, such as at a registry that accepts only cash, require a receipt and a signed petty cash voucher.

3. Record the disbursement in the practice management or accounting system on the same day, with the date, payee, amount, tax element, description, category and matter number.

4. Attach the receipt or invoice, preferably as a scanned image linked to the entry, so that proof can be produced quickly.

5. Mark whether the item is to be billed immediately, held until the next invoice or paid from funds held for the client.

Receipts and evidence

Receipts should be retained for the period required by the regulator and the tax authority. Where a registry or court issues an official receipt, the original or a clear copy should be filed. For items for which no receipt is given, the firm should create its own record, signed by the person who made the payment, stating the date, payee, purpose and amount. A firm that bills disbursements without evidence is vulnerable to challenge.

Counsel and third-party invoices

Invoices from counsel and experts often arrive weeks after the work has been done. Establish a procedure by which every incoming invoice is logged on receipt, matched to the matter and referred to the responsible attorney for approval. Prompt logging allows the firm to include the item in the next invoice to the client. Where the firm is aware that an invoice is outstanding but has not yet arrived, it should record an accrual or a note on the matter, so that the final bill is not issued before the cost is known.

Client money, disbursements and the accounts rules

The treatment of money held for clients is one of the most heavily regulated areas of legal practice. Regulators in most jurisdictions require a firm to keep client money separate from its own, to record each receipt and payment against the individual client, and to reconcile the accounts at fixed intervals. Disbursements sit at the intersection of the firm's money and the client's money, and this is where errors most often arise.

Paying from the client account

Where the firm pays a disbursement from money held on account for a client, the payment must be authorised, must be made for the purpose for which the money was provided, and must be recorded against the correct client ledger. The firm must not pay a disbursement for one client out of money held for another, even temporarily, and must not allow a client ledger to become overdrawn. Where the money on account is insufficient, the firm should ask the client for further funds before paying, unless the rules and the engagement letter permit the firm to advance the cost from its own resources.

Advancing from the firm's funds

When the firm pays a disbursement from its own account and expects to be reimbursed, it has extended credit to the client. The firm should record the amount as a recoverable item on the matter and bill it promptly. Large or long-outstanding advances should be reviewed by a partner, since they represent a risk to the firm's cash flow, and the engagement letter should make clear that the client is liable to reimburse the firm whether or not the matter succeeds.

Money received for disbursements

Money that a client pays specifically to cover disbursements, whether on account or in advance of a transaction, is ordinarily client money until it is applied for the purpose for which it was paid. It should be paid into the client account, recorded on the client ledger and used only for the intended costs. Any balance remaining at the end of the matter should be returned to the client promptly. Practitioners must consult the accounts rules of their own jurisdiction, as the definition of client money and the permitted uses of it vary.

Tax and accounting treatment

The tax treatment of disbursements differs between jurisdictions and between types of expense. In some tax systems, a pure disbursement paid as agent for the client and passed on at cost falls outside the firm's taxable supplies, while an expense incurred by the firm as principal and recharged is treated as part of the firm's own supply. The distinction can affect the amount that appears on the invoice and the tax that the firm must account for. The firm should obtain advice from its accountant and confirm the position with the relevant tax authority, and should apply it consistently.

In the firm's books, disbursements recovered from clients should be shown separately from fee income, so that the firm can see its true fee revenue and the level of recoverable expense outstanding. Disbursements that cannot be recovered, because they were not authorised, are not provable or have been written off, should be shown as a cost, and the reasons recorded. A rising level of write-offs is a warning that the capture and approval procedures are not working.

Billing disbursements clearly

An invoice should show disbursements as a separate section from professional fees, listing each item with its date, description and amount. Vague descriptions such as sundry expenses invite challenge and may fall short of the requirements of the regulator. Where a client is billed for an item at a price greater than the cost to the firm, the mark-up must be permitted by the rules and disclosed. Many regulators require that a disbursement be charged at cost, and a firm should assume that this is the position unless it has checked.

The following is illustrative arithmetic and not market data. Suppose a client matter has professional fees of 2,000 currency units and the following disbursements: a filing fee of 150, a search fee of 60, a process server charge of 90 and an expert report of 800. The disbursements total 1,100, and the gross invoice is 3,100 before any tax. If the client had previously paid 1,000 on account, the invoice should show that sum as a credit, leaving a balance of 2,100. If the firm had failed to bill the expert report of 800, the invoice would have totalled only 2,300 before credit, and the omission would represent roughly a quarter of the correct gross figure. The example shows why each item must be captured and billed, and why the invoice should reconcile to the ledger.

Billing cycle

Disbursements should normally be billed in the cycle immediately after they are incurred. Delays make the item harder to recall and the client more likely to dispute it. For long matters, interim billing at agreed stages, with disbursements included, protects the firm's cash flow and allows the client to see costs as they accumulate. Large disbursements, such as an expert's fee, may be better handled by asking the client to put the firm in funds before the work is commissioned.

Month-end controls and review

A firm that wishes to manage disbursements accurately should build a short review into its month-end routine. The routine need not be elaborate.

Unbilled disbursements report

Run a report of all disbursements recorded but not yet billed, ordered by age. Each item older than the firm's chosen period, for example one billing cycle, should be explained by the responsible attorney. Items that are properly held back, such as those awaiting the matter's conclusion, should be marked accordingly. Items that have simply been forgotten should be billed.

Reconciliations

Reconcile the disbursement ledger to the bank and, where relevant, to the client account. Check that payments made on a client's behalf appear on the correct client ledger and that no ledger is overdrawn. Check that petty cash is accounted for by vouchers and receipts. Investigate every difference promptly.

Exceptions

Review a small sample of matters each month, tracing a selection of disbursements from the receipt through to the invoice. Look for items without receipts, items without evidence of client approval, items charged at more than cost, and items coded to the wrong matter. Note patterns by individual or by department and address them through training and clearer procedures.

Write-offs

Set an approval rule for write-offs of disbursements and require a written reason. A fee earner should not be able to write off a disbursement without the approval of a partner, since a write-off reduces the firm's income and may disclose a failure in the process that needs to be corrected. Review write-offs by amount, by reason and by matter type at least quarterly.

Common errors and how to prevent them

Error	Consequence	Preventive measure
Disbursement paid but never recorded on a matter	Unrecovered cost; unreconciled account	Require a matter number before any payment is released
Receipt lost or never obtained	Item cannot be proved; challenge to bill	Scan on the day; use a signed voucher where no receipt is issued
Expense incurred without client approval	Dispute; possible regulatory complaint	Set a threshold for written approval; record it on the file
Payment made from the wrong client ledger	Breach of accounts rules	Check the ledger balance before payment; reconcile regularly
Counsel or expert invoice arrives after the final bill	Cost absorbed by the firm	Confirm outstanding third-party invoices before closing the matter
Mark-up added without disclosure	Regulatory exposure; loss of client trust	Charge at cost unless the engagement letter and rules permit otherwise
Balance of funds on account not returned at closure	Client money held longer than permitted	Include a refund step in the closure checklist

Practical next steps

1. Write a short disbursements policy that defines what the firm treats as a disbursement and what it treats as an overhead, and approve it at partner level.

2. Amend the engagement letter to explain the likely disbursements, the threshold for prior approval, the basis of charging and the client's obligation to reimburse.

3. Adopt a same-day capture rule, with a matter number required for every payment and receipts scanned and linked to the entry.

4. Establish a procedure for logging and approving incoming counsel and expert invoices, with a check for outstanding items before any final bill.

5. Review the way disbursements are paid from the client account and from the firm's account, and confirm that each complies with the accounts rules of the jurisdiction.

6. Take advice from the firm's accountant on the tax treatment of disbursements and apply it consistently in the invoice format.

7. Introduce a month-end routine comprising an unbilled disbursements report, reconciliation and a sample check.

8. Require partner approval for write-offs and review them quarterly.

How practice management software supports accurate disbursements

Disbursement control depends on recording each cost against the right matter at the moment it arises, retaining the evidence, and carrying it through to the invoice. Practice management software that links expense entries, attached receipts, matter records and billing in a single system removes much of the re-keying from which errors arise. Legalytech offers such a platform to firms at a price set per firm with unlimited users, so that every fee earner and assistant who incurs a cost on a client matter can record it directly, without the firm limiting access to control a per-seat bill.

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.