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GAZETTE
SEPTEMBER 1984
Calculation of hourly cost rates (HCR), 1984/85
Budgeted expenditure.
1984/85
£ 38,000
142,000 (x) ('/,x
Fee earners' salaries
Other expenditure
£71,000)
Notional salaries, etc.
Total expenditure
Calculation
£ 180,000
69,000
£249,000 Total salaries £107,000 (S)
Salary
Total
(s)
%.v
- 9 '/,* - S/s
cost
Hrs
(D
(2)
(J)
(l)+(2)+(3) HCR
Mr. D
1,000
23,000
7.889
15,263
46,152
46
Mr. B
1,000
23.000
7,889
15,263
46,152
46
Mr. L
1,000
23,000
7,889
15,263
46.152
46
Q A 1
1.250
9.000
7,889
5.972
22.861
18
Q A 2
1.250
8,500
7,889
5.641
22,030
18
U A 1
1,250
6.000
7,889
3.982
17,871
14
U A 2
1,250
5,000
7,889
3,318
16.207
13
U A 3
1,250
5,000
7,889
3.318
16.207
13
Tr
900
4.500
7,889
2,986
15,375
17
9
10.150
107,000
71,000
71,000
249,000
Inevitably there are a number of variations that can be
introduced into the calculations — some arising from
differences in philosophy and some being fine tuning to
produce more accurate costs.
Please remember, however, that each firm's hourly cost
rates are unique to it and indeed the hourly cost rate for
each fee earner is unique to him or her. This does not
mean, however, that one would not expect to find
similarities in rates among firms similar in size, location
and methods of operating.
I have said that the hourly cost rate if applied to the
chargeable hours should produce a gross- fee income
equivalent to the budget costs/expenditure according to
how this has been defined. But I am sure you will have
realised that this may not be the result. There are certain
premises underlying the theory. The result will be attained
only:
1. If there is sufficient volume of business.
2. If the firm is able to charge and recover the full value of
the chargeable hours.
3. If the costs are contained within the budget figures.
4. If the expected chargeable hours for fee earners are in
fact worked.
5. If the partners promptly render fees and are diligent in
recovering them.
Because, as I explain later, time cost is normally only
part of a fee charged the total gross fee income of a firm
should be greater than the product of the total chargeable
hours at the firm's hourly cost rates — the 'surplus'
depending on the extent to which the foregoing
hypotheses are met and the way in which the firm has
determined its hourly cost rates.
It is, however, a management function to monitor all
these matters and a good time costing system will help you
do this and where appropriate you may have to adjust
your figures to reflect changes in chargeable hours,
expenditure, cash flow, etc. Indeed you should re-
calculate your hourly cost rates if there is any significant
change in any of the costs or other variables in the
formula.
The fee
I now move to the last part of this article — how to get
from time recording and time costing to the fee.
First of all, as I have said, the assessment of the correct
fee except where it is determined by court tables is a
matter of judgment as to what is fair and reasonable in the
circumstances — it cannot be an entirely scientific
calculation and it cannot be predetermined by some table
which is all things to ail men. Having said this, however,
we should have all the relevant facts before us when we
make our judgment, and one of the most relevant facts in
most cases will be the time spent on the job and the cost of
it. If may be that when we look at the time cost we may say
that it is too high because the job has been badly handled
or we may say that the job was done very quickly because
the person who dealt with it had become an expert on the
matter which he was dealing with or we may say that in
assessing the fee the time spent is only a minor factor and
that the fee will be related much more to other factors.
I believe, however, that in every case we should start
with the time cost and then having considered the relevant
factors in its make-up and made what adjustments we
think appropriate, we should decide what should be what
I will call the chargeable or adjusted time cost — the time
cost figure that can be validly used in assessing the fee.
Various expressions are used to describe the parts of
what is the final fee. The adjusted time cost is sometimes
called the base factor of the
A
factor and the other factors
are sometimes called the
B
factor or the supplementary
factor so that the fee is
A
plus
B
or the base factor plus the
supplementary factor. I should perhaps say that I do not
think that the unit in the Law Society General Table is
really a valid time cost — it is of course meant to be a
charging rate and probably includes some element of a
B
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