Billing rates and profitabilty

Basically billing rates consists of three basic elements:

1. compensation (salary + benefits)
2. firm overhead
3. profit

One rule says, that each of 3 components comprise about 1/3 (one third) of the rate. Also there is another rule 50/30/20 which says that 50 percent goes for compensation, 30 percent for overhead and 20 percent is profit.

Profitability rule of three

Mr. Brown offered the rule of three:  If an attorney bills at a rate of $300 per hour, the first $100 goes to salary, the second $100 goes to compensation and the third $100 is profit.  Therefore a 1% discount in price equates to a 3% cut in profit. The point is the mix of cost, discounts and leverage – whatever the bill rate – has a direct impact on profitability.

Realization rate

Realization is the difference between standard rates billed and money collected.

So if 10 hours of work is done, but a firm only collects on 80% of that fee – realization is 80%.

Three things impact realization:

1) Discounts,

2) Write downs (before the client sees the bill), and

3) Write-offs.

Of the three, write-offs become an obvious place to start, because that is time billed that the client saw on the bill but obviously found no value in. Or in other words, the client is saying that work should not have been done.[1]

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[1] http://www.geeklawblog.com/2010/11/end-of-wrtie-offs.html