Costs budgeting: burden, discipline and reform

The Civil Procedure Rules (CPR), introduced in 1999 following Lord Woolf’s “Access to Justice” report, aimed to make litigation quicker, more cost effective, and less adversarial. Yet by the mid-2000s, rising litigation costs continued, prompting further review and Lord Justice Jackson’s 2010 report which advocated for proportionate costs and fair outcomes. 

A key recommendation was cost budgeting - requiring parties to set and agree budgets early to control expenses. The Jackson Reforms were implemented in 2013, making budgeting under CPR 3.12–3.18 standard. Yet over a decade later, it remains a source of frustration - often feeling like a second litigation process requiring as much strategy and preparation as the claim itself.

The Basics

CPR 3.13 states that unless ordered otherwise by the Court, all parties (except litigants in person) must file and exchange cost budgets (in form of Precedent H): 

• with their directions questionnaire the value of the claim is less than £50,000; or 

• in any other case, not later than 21 days before the Costs and Case Management Conference (CCMC). 

Costs budgets set out the estimated costs for each stage of the litigation including pre-action, issue and statements of case, the CCMC, disclosure, witness evidence, expert evidence, trial preparation, trial and any other contingent costs. They must detail fee earners’ grades (dictated by experience level), hourly rates, and projected time per stage.

The parties must then file an agreed budget discussion report (in the form of Precedent R) no later than 7 days before the CCMC.

At the CCMC, the court reviews and approves the budgets, making revisions if necessary to ensure they are reasonable and proportionate.

Once approved, the budget acts as a framework: recovery of costs is generally limited to what has been budgeted, unless there is a good reason to depart and/or vary the budget.

CPR 3.14 provides that if a party fails to file a budget, it will be treated as having filed a budget comprising only the applicable court fees. 

The Judicial Approach

Courts are vigilant in ensuring costs remain proportionate to the value of claims. Judges often reduce budget estimates and the result is a persistent gap between what practitioners believe is necessary to prepare a case properly, and what the court is willing to approve. Recently in Zavorotinii v Malinowski [2025] EWHC 260 (KB), the court sanctioned unrealistic budgeting, cutting the claimant’s proposed budget of £511,125.30 to £308,909.30.

Though the red pen may conjure up memories of harsh correction from our school days, as practitioners we must remember that proportionality is the overriding objective. 

Common Pitfalls

1. Overly Optimistic Drafting

Budgets that assume unrealistic efficiencies are quickly undermined. Courts are more likely to prefer conservative, evidence-based estimates.  In Worcester v Hopley [2024] EWHC 2181 (KB), Master Thornett cut the claimant’s budget by 53% (from £342,263 to £159,675), citing excessive senior fee earner time and poor delegation. The claimant was also denied their costs for the budgeting hearing. 

Master Thornett made a similar decision in Jenkins v Thurrock Council [2024] EWHC 2248 (KB), where they found the claimant’s budget of £1,195,754.26 for a claim valued at £200,000 was “inappropriately ambitious” and that a costs management hearing could have been avoided if had the claimant taken a “more reasonable modified approach”. A clear reminder that a with a high costs budget should be prepared to have justifications for the same.

2. Departure from the Approved Budget

Practitioners who exceed or underspend the approved budget without seeking a variation risk having those costs disallowed by the court. In Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB), the High Court confirmed that an approved costs budget is binding at detailed assessment unless there is a good reason to depart (both downward and upward departures). This reinforced that a budget is not merely guidance but a genuine control mechanism.

Under the indemnity principle, a receiving party can only recover costs incurred, not the higher budgeted amount. In Utting v City College Norwich [2020] EWHC B20 (Costs), the claimant underspent, and the defendant argued this justified further reductions without showing further good reason for departure. The court disagreed, holding that underspend alone is not a good reason to depart from the approved budget under CPR 3.18(b), unless due to incomplete stages. The approved budget was upheld, with no further reduction.

3. Late Preparation and/or Filing Late

Budgets cobbled together shortly before filing are more likely to contain inconsistencies and lack assumptions. This is more likely to result in judicial uncertainty and/or reductions. 

Timely filing of costs budgets is essential. In Mitchell v News Group Newspapers [2013] EWCA Civ 1537, the Court of Appeal enforced the strict CPR 3.14 sanction, limiting the claimant’s costs to court fees. This was later refined in Denton v TH White Ltd [2014] EWCA Civ 906, which introduced a three-stage test for relief: (1) seriousness of the breach, (2) good reason, and (3) all circumstances. While Denton softened Mitchell’s severity, it reaffirmed that budgeting failures remain serious.

Right Support Management Ltd v London Borough of Hillingdon [2025] EWHC 1680 (KB) applied the Denton test and reaffirmed the consequences of serious breaches under CPR 3.14. The Claimant filed its costs budget over two years late; the Defendant, one day late. Relief was initially refused but granted on appeal due to lack of intentional default, capacity-related delays, and minimal impact on the court. Nonetheless, the Claimant faced a 20% costs reduction as a proportionate sanction under CPR 3.10, 3.14, and 44.

Practical Tips for Preparing a Costs Budget

1. Clarity of Assumptions

Budgets are more persuasive when accompanied by clear, detailed assumptions. Simply stating “time for disclosure” invites reductions. By contrast, an explanation that includes the number of documents reviewed (as dictated by the issues), and the team members involved, demonstrates careful planning. 

Tip: It is useful to prepare assumptions with the same care as you would a witness statement, as precision is likely to reduce the scope for reduction. Don’t forget that guidance on what should be included in each stage is set out in Practice Direction 3D.

2. Early Engagement with Opponents

The CPR encourages parties to seek agreement on budgets before any listed hearings. While agreement is not always possible, active engagement with budget discussion reports can narrow issues and demonstrate reasonableness to the court. 

Tip: Where appropriate, considering an exchange of reports well in advance of the CCMC could avoid ambushes at the hearing and demonstrate cooperation between the parties. When the Court or an opponent flags issues with your budget, you ought to engage meaningfully - it’s an opportunity to revise/negotiate and most importantly, avoid adverse orders. 

3. Evidence of Efficiency

Judges are likely to be receptive to evidence of efficient case management. 

Tip: Demonstrating use of technology-assisted review, resource allocation, or phased approaches can reassure the court that costs are being incurred on a proportionate basis. 

4. Record Keeping

Budgets are often challenged months after filing. Without detailed contemporaneous notes of how figures were calculated, it may be difficult to defend them. 

Tip: Keeping a clear paper trail of assumptions, resource allocation, and document counts assists if your budget is challenged or if a variation application is required under CPR 3.15A.

5. Managing Client Expectations

Budgets approved by the court do not guarantee recovery of all costs incurred. Clients must be advised early that the approved budget is a ceiling of potential recovery, not a promise. Equally, they should understand that costs incurred outside of an approved budget, are still chargeable to them.

Tip: Building budget explanations into client care letters and providing interim reporting reduces difficult conversations later.

Looking Ahead

Cost budgeting continues to be criticised for being too rigid and arduous for simpler, low value claims. The Civil Justice Council’s 2022 review called for more tailored, proportionate approaches, noting that “one size does not necessarily fit all.”

To address these concerns, the Costs Budgeting Pilot Scheme launched on 1 April 2025 (running until 1 April 2028), introducing PD51ZG1 and PD51ZG2. Applicable in select Business and Property Courts, it aims to simplify budgeting for lower-value or less complex multi-track cases. 

It introduces new forms, such as of Precedent Z (Simplified Costs Budget), Precedent ZR (Simplified Budget Discussion Report) and Precedent ZT (Simplified Precedent T) for varying approved/agreed costs budgets. Parties are required to file and serve a simplified costs budget 21 days before the CCMC. The scheme is designed to reduce administrative work and increase efficiency, while ensuring that cost estimates remain accurate and compliant.

It is too early to tell whether the pilot will be deemed a success but it is clear that whatever reforms emerge, the core skills required - clear planning, careful drafting, and detailed justification - will remain essential.

Conclusion

Though cost budgeting is often seen as onerous and overly complicated, parties and practitioners should not be disheartened by the process (even in the face of further reform). It’s a chance for solicitors to show professionalism, planning, and proportionality and a well-prepared, budget can still provide strong protection. The key to success lies in clear assumptions, efficient resourcing, and justified figures. 

Finally, and somewhat ironically, one thing is clear: failing to prepare or file a budget properly can lead to the very sanction it seeks to prevent - adverse costs consequences.