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The Importance of Managing Advanced Client Costs in Law Firms

advanced client costs client fees hard costs soft costs Mar 13, 2023

For law firms, advanced client costs can account for a significant portion of expenses and greatly impact profitability. Therefore, it's crucial to manage these costs effectively. This post will explore some strategies that law firms can use to handle advanced client costs and keep their finances in check.

It is critical for the bookkeeper of a law firm to keep accurate records of their attorney-client’s costs and expenses. These costs may include fees for filing fees, process servers, investigator services, expert witnesses, research, or other similar costs. Knowing how to track these items accurately can help ensure that the attorney will have accurate records when billing clients or filing tax returns.

Understanding Advanced Client Costs

Advanced client costs refer to expenses incurred by law firms on their client's behalf during the legal representation. These costs can include court filing fees, travel expenses, expert witness fees, and other similar expenses. It's important for law firms to keep track of these costs and bill them back to the clients accurately, as they can have a major impact on the firm's bottom line. Effective management of advanced client costs involves proper communication between the attorney and the law firm’s clients regarding expenses and transparency in billing practices.

Client fees are the overall costs of a case or other legal services that the attorney performs for the client. These fees should be discussed with the client before beginning work and documented in the attorney's bookkeeping records. When you work with attorneys, especially Personal Injury law firms, ask to see the attorney-client engagement.  This paperwork will provide important information to track when the fees are rolled into the bank feed.

Hard Costs

Hard costs, sometimes known as direct expenses, are tangible items that can be reasonably expected to be charged directly to the client. Examples of hard costs include filing fees, process server fees, and expert witness testimony. These hard costs should always be documented in the attorney's bookkeeping records and sent to the client for approval before incurring the expense.

Soft Costs

Soft costs, sometimes known as indirect expenses, are typically billed to the client but cannot be delineated to one specific law firm client. Examples of soft costs include travel and research expenses. When documenting soft costs in attorney bookkeeping records, it is important to enter these fees into the billing software as such. When paid for by the law firm, these expenses are booked directly as law firm expenses. Examples of this are postage and copying costs.

Law Firm Overhead Expenses

Attorneys have many overhead expenses related to running their practice. These include office rent or mortgage payments, office equipment and supplies, employee salaries and benefits, insurance, professional licensing fees, utility bills, marketing materials, client entertainment, and other business-related expenses.

It is essential to keep accurate records of hard costs, soft costs, and client fees so that billing information is accurate and up-to-date. Keeping these records can also help attorneys ensure their books are in good order for client expenses.  Make sure everything is noticed, especially when the matters are finalized.  Any missed fees cost the law firm money as law firm expenses.  It is also important to reconcile the Advanced Client Cost account.  If fees come in for closed matters, as the bookkeeper, you need to bring this to the attention of the attorney of record. They can decide to charge the client and create an invoice to recoup the fees or write them off the books. 

If you find this topic interesting and want to learn more about how to manage advanced client costs effectively, join us at the Accountants Law Lab. In our next session, we'll be discussing how we do this workflow with our clients. Don't miss out on this opportunity to learn valuable insights and strategies for managing advanced client costs in law firms.

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