In this instructional video, the speaker walks bookkeepers and legal professionals through the distinct accounting treatments of contingency fee arrangements and retainers in law firms. He explains that a contingency fee means the attorney only gets paid if the case is won, typically taking a percentage (often 30‑40%) of the recovery after reimbursing hard costs (court fees, etc.) and soft costs (photocopies, research). These expenses are recorded in an Advanced Client Cost Account and must be meticulously tagged to each matter. The speaker then contrasts this with retainers, which are prepaid deposits held in a trust account and drawn down as services are rendered, requiring regular reconciliation to meet bar requirements. He discusses the cash‑flow challenges of contingency work, including the need to fund expenses up‑front, the impact on payroll and credit obligations, and the importance of estimating taxes for partnerships that may experience large, irregular windfalls. The video highlights the lack of specialized software in many contingency firms, recommending Clio’s personal‑injury module for tracking matters and documents. Finally, he stresses the necessity of clear engagement documents, ongoing communication with attorneys, and compliance with state and local bar rules regarding trust accounting and reporting.
Chapters
Hello everyone, welcome back. And today we're going to unravel the mysteries of legal bookkeeping, specifically focusing on contingency fees and retainers. I like to think of it as navigating a ship through foggy waters, but don't worry, I'm gonna be your guide. So let's set off on this journey. One of the questions we get often in the Law Lab is what exactly is a contingency fee? It's a bit of a term that you're gonna hear in some law firms And it's a great question. So the best way to explain is imagine that you're walking into a cafe where the barista offers you a unique deal. If you don't love this coffee, it's free. So that's the essence of a contingency fee in the legal world. Attorneys charge only if they win the case. So they'll take on the matter. And if they don't win, there's no fee to the client. It's like taking a high stakes bet and you come out, if you come out with a victory, everybody wins. Right. So you might ask, what's the rates involved in the court cases? So sometimes with contingency fees, there is actually an upfront retainer, but most of the time it's not. And then the recovery fee could be anywhere between 30 to 40%, or whatever's agreed upon. And there's more. So lots of times there's expenses that are upfront regardless of the case outcome, those hard costs like court fees. Soft costs like photocopies or research time. The trick is how you record these in the accounting, especially the hard costs. They have to go into that account called the Advanced Client Cost Account. That represents the amounts to be reimbursed to the attorney if the case ends and there's a winning result. So bookkeeper's challenge is the precision of taking care— track of these things. So you're going to have billing cycles and you're going to meticulously track every cost. You're gonna tag it to the matter so that there's always an accounting of it, because most of the times they do win these matters. So it can sound complex, but it's really all about tracking costs. So you may be wondering, what about a retainer? It's a word, attorneys. You'll hear that a lot in all types of law firms. So retainers are like prepaid lifeline for legal services. Think of it as a reservoir of funds given up front, that upfront deposit And then for the services that are rendered, and they keep drawing from this reservoir as we go, it's stored in a trust account. It's only touched when there's legal services rendered. So the bookkeeping challenge here is you need to reconcile this account consistently. The BAR requires it. If there's a mismatch between your records and the bank's, it needs immediate attention. So it's really critical that you follow the trust accounts and know where every penny is. So is it common to have both retainers and in a contingency matter? We do see it sometimes, not that often, though, but it's like opting for both the starter and the main course. So the retainer might cover some of the initial fees, but when it turns into contingency, it's only when you win. So that's when they calculate the winnings of the case or matter, and always the fees come off the top, and then the remaining part is percentage out to the attorney, the law firm for legal services, and to the client, they get the money that was won. So you might be thinking, is there any way that we can really navigate this properly? But I gotta tell you, when you work with contingency, communication is key. You wanna see that detailed document that they had in the beginning of the engagement with their client to understand the fees that are being presented and what exactly was agreed upon. Sometimes some of these firms have, they have varying costs. You really need to know that upfront. It's also pretty hard to calculate cash flow, as you're going to understand. If you're constantly loaning money out to a client and paying for these fees, it might— you might find that there's a cash crunch, not enough money to pay payroll, enough money to pay the credit card bill. So it's— you really want to understand where the cases are. They can go on for years, and then really try to track the ins and outs of the money, the fees that are expended. If they, if they did lose a case, you have to take those fees out of that advanced client cost account and move them down into the account for the law firm. It becomes a law firm expense. So you don't wanna not lose sight of that as well. So hopefully this is kind of helping you understand the difference between contingency matters and retainers. Typically, this is something that you will see. There's a difference. A lot of the contingency firms don't take a retainer, so it's no money up front. Client comes in, had an accident or whatever, and the, the case or matter starts that way. And then they sign a paper agreeing that whatever money is recouped, it gets divvied out— expenses first, and then 33 and a third percent goes to the law firm, and 33 and a third percent, or a little bit more than that, goes to the client. And that's your typical contingency fee. When you work with law firms and work with personal injury attorneys, there's typically no software involved. That is the other thing about law firms that do contingency, because the Trust accounting happens after the fact. You will see that they typically don't use software because they don't think they need it. They really kind of do. Uh, Clio just put out a product this year that's personal injury, uh, related that you can add as an add-on module. And if you've got a personal injury attorney, you might wanna consider that. Uh, Clio has all the bells and whistles, keeps all the documents and data, and especially because you can tag it for when the matters come to fruition. So a lot of times these cases just sit for several years and then they come up on the law firm docket. A lot of them got pushed out of the way during the pandemic. So there was kind of a mad rush to clean up the easier ones and then take on the more complex ones later. So you might want to talk to the attorney about that. It's something— a lot of this comes down to communication with your client and understanding where they're at and what they're looking at and what they see. They have a good handle on exactly what's happening in their firm, and they'll be able to tell you, I think this one's going to close at this time, and this one's going to close at that time. And those are definitely— it's definitely information you want to know, especially as the year-end comes and you're trying to figure out what's going to happen tax-wise for them, uh, how much profit they're going to have at the end of the year. You want to talk to them and keep an eye on that as well for them because of the ups and downs and the swings of income and revenue generated in the firm, because it's very— common to be not your typical line of income coming in. You're going to find that it's a lot of ups and downs, and you want to help them calculate that. If they're a partnership, you're going to want to help them calculate that estimated taxes, because they might have a big windfall of maybe $1 million in the beginning of the year, and then pretty much nothing. You want to help them kind of push that— some of that money into that rainy day fund to help them with keeping the company afloat during the times when there's no matters really coming to fruition. But then when it's feast, you want to make sure you're covering and really having that rainy day fund there for just this reason, because it is a lot of up and down. And you want to be able to track the waters of the legal accounting when it comes to working with contingency firms, because it's definitely its own beast. And If you are working with a client like that, feel free to join us in the Law Lab. We have actually quite a few people that have this style of client, a lot of interesting ways we, we kind of work around some of the nuances in there. And then, of course, retainers are retainers. You'll see that in all the law firms pretty much, except for the personal injury, and those are just upfront deposits, and we— they are kept in a separate bank account. They are tracked to the penny. That money never is theirs until they've earned it, and then they bill for the earnings, and that's when the money gets moved over. So always know that piece. It's very important. Important. Look up your local jurisdiction, find out what your bar rules are, how often you need to be reporting this stuff, how long, how often you should be tracking it. Every state has different rules. Sometimes it's not just at the state level, but it's also at the local level. So depending on the state that you're in, you might want to check into that. Of course, you can always join us and we'll have a great serious conversation about that. We also have a lot of fun too. So hope to see you next week. And on that note, have a wonderful week. Bye now.
