This is my first substantive post in a series on the structure, tools and processes that the legal industry could borrow from the construction industry. (For my introductory note, see here.) In this post I focus on structure – for example, how a client engaging a law firm to run litigation might do so in the same way a property developer might engage a contractor to build an apartment complex.
Project structure defines who does the work, who pays the bills, who gets rewarded and who takes the blame if something goes wrong.
The right project structure creates a framework within which the project flourishes.
Traditional structure of law firm engagement
The traditional law firm engagement model typically involves a client engaging a law firm to run, manage and strategise its entire case for them, usually on an hourly rates basis. It is often successful. However some of the incentives that it creates contribute to the classic gripes about the industry. For instance, because the client has no other consultants, it might feel distant from the decision making process. Although the law firm engages other parties, such as contractors or barristers, the financial risks often remain with the client, contributing to price uncertainty. To the extent the model is an hourly billing model, there is little incentive to provide efficient or creative solutions, affecting client value, and the corresponding incentives to work junior lawyers adversely affects their well being and retention rates.
The ‘construction’ model of law firm engagement
The construction industry has sophisticated contracting methods for delivering sophisticated projects. There are many different delivery models within that toolbox which might be appropriate for legal work. The diagram below is a typical ‘construct-only’ project structure:
Project structure in Construction -v- Potential structure for Law
In this structure the contractor is engaged by the client to deliver a predefined scope of works. The contractor is given details of time, cost and quality and paid their fee progressively as the building is delivered. If anything changes during the construction, there are rigid notice procedures to determine what has changed, why and how much it will cost. The client has a team of other consultants (on the ‘client-side’) to assist in managing the claims, payments and monitoring the works on the client’s behalf.
The prospective equivalent legal structure for, say, delivering a large litigious matter, is shown on the right of the diagram.
Lesson (1): Fixed prices
There are a number of elements to these structures that are worth noting. Perhaps most obviously is fixed pricing and scope. As opposed to an hourly billing model, the scope and price are fixed as between the client and the contractor / law firm. Fixed pricing (or ‘value pricing’, as it’s often known) is not a novel idea in law, and its growth over the last decade is both notable and welcome. It has been explored at length elsewhere so I will limit my discussion to the headline points: it provides cost certainty to the client; it better informs the client of process and risk, allowing them to make better strategic decisions; it encourages the law firm to further consider overall strategy, process and costs earlier in the engagement (ie. it front-loads the strategy and planning exercise) and to properly communicate those matters to the client.
The dominant objection to fixed pricing in the legal industry is that the scope of the project is too difficult to define up front, and hence too difficult to price up front. It is certainly true that a legal matter, in particular litigious matters, are not as certain as a set of construction drawing that you can measure to the last degree. But not all construction projects provide for a fixed, physical scope of works either. In a design & build contract, the exact scope of what is physically being constructed is not known at the start of the contracting phase. However, the price is fixed.
The nature of a design & build contract is insightful. Although the scope of works is not precisely defined in them, it is nonetheless partly defined and restrained by certain parameters. There is scope to wriggle within those parameters for the fixed price, but there is also (usually) a provision through which the price can change if the scope is wildly varied beyond what was originally contemplated. In construction, for example, the contractor may get to decide what colour doors are used, but if they’re asked to double the floor space of the building they’re entitled to more money. The litigious equivalent is that a lawyer might run a case through to the first court date for a fixed price, but if they’re instructed to appeal then they’re entitled to more fees.
Lesson (2): Legal project management
The second notable matter in the structure is the existence of a ‘client-side’ legal management team. In construction, this role acts as liaison between the client and the contractor and provides technical expertise to the client where they otherwise wouldn’t have any in-house. They are responsible for monitoring the project budget and approving progress payments, monitoring time and progress, assessing requests for variations to the scope, or other claims for additional payment, and then communicating those matters in summary form to the client.
The legal equivalent does not, in my experience, exist, or perhaps occupies a small corner of the market. I envisage the legal project manager would monitor the law firm’s output, assessing budget and approving payment, acting as first contact for claims for scope increase, and communicating those changes to the client.
The legal project manager is notable for what it does not do. It does not provide bespoke legal advice on a particular matter (other than an understanding of procedure), and it does not provide counsel or strategy advice. Its strengths are more akin to a typical project manager, such as budget management, resource forecasting (which might be not only how much money is spent but, for example, forecasting when management personnel and witness time will be required), scope analysis & variation analysis, and no less importantly, using their suite of tools to communicate these matters concisely to the client.
The legal project manager might initially sit within the law firm, but as those skills develop within the industry and as client’s become used to working with them, they could become a bespoke service engaged directly by the client.
Lesson (3): Price risk
Third, is that the law firm adopts the price risk for all external service providers that it engages, such as counsel / barristers, paralegals, document production and e-discovery services. This is akin to a construction project, where a head contractor will typically subcontract out a vast majority of the work to others, and charge a premium for their management and coordination. Similarly, in taking the financial risk a firm would be expected to include a premium in its price. But that would also incentivise creative and cost effective process solutions, it would encourage and give more freedom to law firms to shop around for alternative service providers and would give the client further price certainty.