Cost estimates, standard deviations and fixed fees
Our legal cost estimates are driven by our historical billing data (adjusted for inflation). By using data and statistics our estimates exclude the common human tendency of underestimating the final all-inclusive cost of future work. We do this by sorting final tax invoices into service types with a rating for risk and complexity. We then analyse the data set to calculate the following.
- The average price for a type of service adjusted for risk and complexity
- Standard deviation (a measure of the typical difference between final bills and the average bill)
- The normal or likely range of final bills (a bell curve)
These mathematical concepts are behind our automated cost estimator which ask clients a series of questions about the new matter so we can identify the service type needed, assign it a risk rating, and calculate an estimate. Our goal for the variability margin or ‘firmness’ of our estimates is plus or minus 10% as the standard deviation. So for example, if our estimated legal cost for a service is $1,100 it is because we think the strong likelihood (68%) is that the final tax invoice will fall within the range $990 to $1,210. This means that your final bill is just as likely to be below as above the initial estimate.
If you are content with the amount of the estimate but want to convert it to a ‘fixed fee’ arrangement, we might agree to that in exchange for a 15% to 25% premium to the estimate and a ‘fair use’ addendum to our costs agreement with you.
Under section 308 of the Legal Profession Act a law practice must give an estimate of total legal costs or if necessary an estimated range of costs (with an explanation of the major variables affecting cost). A law practice must also give notice of any substantial change to the costs estimate or estimated range. This means that notwithstanding the work the goes into our initial cost estimates, revisions may occur because future events or realities emerge that were not factored in when the initial cost estimate was calculated.