Law Firm Collections Management: Fix It at the Engagement Letter

Gökçen Beyazoğlu LL.B.

Chief Product Officer · Attornaid

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Collection problems in a law firm start at the engagement letter, not at the overdue invoice. If the letter does not say what the fee covers, that expenses are separate and when each payment falls due, the conversation at the end of the matter is a negotiation rather than a collection. Three habits fix most of it: a written fee agreement for every matter without exception, expenses tracked apart from fees, and a monthly review of receivables. A payment schedule tied to the stages of the matter makes the rest routine.

Collections are the least discussed and most troublesome part of running a law firm. Many lawyers find talking about money uncomfortable, and that discomfort leads to delay. Delay makes the problem bigger: a client's willingness to pay falls as the matter progresses and is at its lowest when the matter ends.

The engagement letter decides collection

Almost every collection dispute traces back to a term that was never written down when the matter was opened. The table lists the terms that most often go missing and what happens later as a result.

Most often left out: What happens to the fee if the client ends the engagement or the lawyer withdraws. It rarely happens, so nobody writes it down. When it does happen there is nothing to rely on, and because the relationship has already broken down, agreeing a figure is harder too.

Every term also has to fit within any fee rules your bar sets, whether they concern minimum fees, what must be disclosed to the client or how fees may be structured. Check those rules when you draft the standard letter, not when a dispute arises. A firm-wide template that covers the six terms above, reviewed once a year, removes most of the drafting effort from each new matter.

The rule that makes the letter work is simple: no signed agreement, no work. A matter that starts on a handshake because the client is in a hurry is the one most likely never to get its letter afterwards.

Keep expenses apart from fees

Money a client advances for expenses such as court fees, expert costs, translations or travel is not firm income. When the two are mixed in one account, two things happen: the firm sees its own position as better than it is, and it cannot give the client a clear statement of what was spent.

• Track the expense advance separately and record each expense against the matter as it is spent.
• Keep a receipt for every expense on the matter file. An expense without a receipt cannot be defended when the client asks about it.
• Tell the client before the advance runs out, rather than carrying a negative balance on the matter.
• Give an expense statement when the matter closes. A statement the client did not have to ask for builds trust.

How client money is held is a regulatory question as well as a bookkeeping one. Follow the client money rules in your jurisdiction on where advances are kept, how they are recorded and when they may be applied. The separation described here is the management habit that sits on top of those rules, not a substitute for them.

Tie payment to the stages of the matter

A payment schedule linked to the stages of the matter, rather than to abstract dates, is easier for the client to understand and easier for the firm to follow up. A typical contentious matter breaks down like this.

Why stages, not dates: A schedule based on calendar dates loses its meaning when proceedings run longer than expected. A stage-based schedule follows the pace of the case itself, and it looks fair to the client, who pays as the work moves forward.

The same logic applies outside litigation. For advisory or transactional work, milestones such as instruction, first draft, signing and completion serve the same purpose. Whatever the stages are, name them in the letter so that each invoice follows from an event both sides can see.

The monthly receivables review

This is the single habit that builds collection discipline. A debt looked at every month gets collected; a debt looked at once a year has often become uncollectable by the time anyone looks.

• List overdue amounts by matter, not only by client.
• Group them into more than 30, 60 and 90 days overdue; the right response differs for each group, from a reminder to a call from the responsible lawyer.
• Make a decision on every amount more than 90 days overdue: pursue, restructure or write off.
• Name one person responsible for each follow-up. A debt that everyone will look at later is a debt nobody looks at.

Keep the review short: the same day each month, with the lawyer responsible for each matter present. The output is a list of decisions and owners, and the next review starts by checking whether those decisions were carried out.

Three indicators to watch

The third indicator is the easiest to fix. Bringing the number of matters without a written agreement to zero improves the other two by itself, and it costs nothing.

Checklist

• Use a written fee agreement for every matter, without exception.
• State the scope of the fee and whether appeals are billed separately.
• Write down what happens to the fee on termination or withdrawal.
• Check the standard letter against any fee rules your bar sets.
• Track expense advances apart from fees, with a receipt for every expense.
• Tie each instalment to a stage of the matter.
• Hold the receivables review on the same day every month.
• Make a decision on every amount more than 90 days overdue.

Frequently asked questions

Where do collection problems in a law firm come from?

From the engagement stage, not the collection stage. If the engagement letter does not set out what the fee covers, that expenses are separate and when each payment falls due, the conversation at the end of the matter is a negotiation rather than a collection. A client's willingness to pay also falls as the matter progresses and is at its lowest when the matter ends.

What must a law firm fee agreement cover?

The scope of the fee, whether appeals are billed separately, that expenses are separate from the fee, a payment schedule, what happens if a payment is late, and what happens to the fee if the client ends the engagement or the lawyer withdraws. The last term is the one most often left out: it rarely happens, so nobody writes it down, and when it does happen there is nothing to rely on. Every term also has to fit within any fee rules your bar sets.

Why should client expense money be tracked separately from fees?

Money a client advances for expenses is not firm income. When the two are mixed in one account, the firm sees its own position as better than it is and cannot give the client a clear statement of expenses. Record every expense against the matter with its receipt, tell the client before the advance runs out, give a statement when the matter closes, and follow the client money rules in your jurisdiction on how such funds are held.

How should a payment schedule for legal fees be set up?

Tie it to the stages of the matter rather than to calendar dates: an upfront portion and an expense advance at opening, a second instalment when proceedings are filed, a third at the evidence or expert stage, and the balance at judgment or settlement. A date-based schedule loses its meaning when proceedings run long, while a stage-based one follows the pace of the case. Appeals are best covered by a separate agreement or an addendum.

How often should a law firm review its receivables?

Once a month. It is the single habit that builds collection discipline: a debt looked at every month gets collected, while a debt looked at once a year has often become uncollectable by the time anyone looks. Group overdue amounts by more than 30, 60 and 90 days, and make a decision on every amount more than 90 days overdue: pursue, restructure or write off.

Which collection indicators should a law firm track?

Three: average time to collect, which shows whether the payment schedule works; the share of receivables more than 90 days overdue, which shows follow-up discipline; and the number of matters without a written fee agreement, where the target is zero. Bringing the last one to zero improves the other two by itself and costs nothing.