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GAZETTE
SEPTEMBER 1984
is to record all the time spent on a matter whenever it may
have been done. You may want to have some method of
recording that the work was done in unsocial hours, but
you will want to differentiate between doing work over a
weekend because a client specially required it and doing it
because you spent part of the previous week sick in bed or
on the golf course and had to catch up or simply because
you are a workaholic. It is really only when you come to
the charging that you might want to reflect that certain
work was done at the instigation of the client outside
normal office hours and it is only such work that I would
say is one in 'overtime'.
I am sure that there are other questions, but the
important thing is that for your firm you work out your
own answers and that there is a consistency of approach
so that everyone within your firm records his or her time
on the same basis.
Time costing
As I have indicated, time costing is the process which
converts time which has been recorded against a particular
matter into pounds and pence so that when we know we
have spent, say 6'/
4
hours on a court case or 14'/
2
hours on
a complicated matter we know that the cost of the court
case is £206 and the cost of the complicated matter is £652.
Again there are a number of ways of going about this —
one way is set out in the Law Society booklet entitled
The
Expense of Time,
but even here there are some variations.
What you want to arrive at is an hourly cost rate in
pounds for each fee earner in your office which if applied
to the chargeable hours recorded over a year will produce
an annual gross income equivalent to the cost of running
your practice. The hourly cost rate may be so constructed
that it will also cover the target income of the partners or a
proportion of it.
Whatever formula is used you have to work out on a
realistic basis (1) what you estimate will be your expense
in the coming year, i.e., your costs on books, cleaning,
electricity, insurance, rates, rents, telephones, post,
photocopying, etc., and salaries and (2) how many hours
are worked by each fee earner in the year, or more
importantly the number of hours spent working for
clients (i.e., chargeable time).
The realistic assessment of your expenditure is really
the preparation of a careful budget taking into account
expected increases in certain costs during the year ahead.
If you have a good time recording system you will know
the number of hours spent by each of your fee earners on
work for clients, but if you do not yet have this, as a guide
1,000 hours a partner and 1,100 hours for a qualified
assistant might be adopted — but a partner heavily
involved in office administration will probably not be
able to produce 1,000 chargeable hours.
Let us look at a three-partner firm with two qualified
assistants, three unqualified assistants and one trainee
and say that the budget expenditure for 1984/85 is
£ 180,000 including fee earners' salaries of £38,000 but not
any payment to partners. There is some argument how
you should deal with partners' income in the formula.
Some people say that as we are doing a costing exercise we
shoud give partners a notional salary equivalent to a well-
paid assistant and add on an appropriate amount to cover
pension purchase and interest on working capital. Some
differentiate between different categories of partner
reflecting experience or expertise or speciality. Others say
that the notional salary should be the minimum return the
partner expects to receive at the end of the year. Some
argue that in fixing budget figures we should not take the
target income for partners but take a sum equivalent to an
assistant's salary as a notional salary for a partner in
working out the formula. I think some of these
approaches are not consistent with a costing operation
and can lead to confusion. However, without arguing the
issue further let us use a figure of £23,000 for each partner
for both budget income and notional salary (including
pension provision and interest on working capital) — a
total of £69,000. This makes the minimum gross fee
income required to cover expenditure (including partner
income) £249,000.
We now have the essential information to put in the
formula to calculate the hourly cost rate for each partner,
qualified assistant, unqualified assistant and trainee —
the estimated expenditure, the chargeable hours and the
actual or notional salaries.
The simplest formula would simply be to divide the
total expenditure (£249,000) by the sum of the chargeable
hours for all the fee earners. If the total chargeable hours
amount to 10,150 the hourly cost rate is £24.50 for each
fee earner, but this does not reflect the different salaries
paid to each fee earner and fixes the cost for the trainee at
the same as the partner. It is therefore normal to calculate
the hourly cost rate taking into account the different
actual or notional salaries. The formula can be structured
to relate the total expenditure to each fee earner either
according to his chargeable hours and actual or notional
salary or partly on that basis and partly on a
per capita
basis.
The Law Society booklet uses a formula which
calculates hourly cost rates partly
per capita
and partly
according to salary (actual or notional). On this basis and
using the above figures (see the calculation below) the
partner rate rounded off is £46.00 per hour, the first
qualified assistant is £23.00, etc. With the time recording
system and these figures for 1984/85 our three-partner
firm can calculate what it has cost them to do any
particular piece of work. They should also be able to
ascertain at each stage how much the work has so far cost.
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