Costs budgeting can prove its worth

By now, most firms with a litigation caseload will have had at least some experience of producing a costs budget
(in form precedent H) and subsequently endured the rigours of at least one costs management hearing.

There has been much written about how costs budgets should be prepared and how firms should approach and deal with costs management hearings. However, what appears to have received far less attention is what happens after that first critical costs and case management conference (CCMC).

Apportioning costs

Regardless of how the budget has been set, one immediate consideration arises, namely how it should be apportioned between profit costs, counsel’s fees and other disbursements.

For example, take the expert reports phase. Your proposed budget might have included profit costs of £20,000, counsel’s fees of £10,000 and expert’s fees of £10,000. While the court can set the budget by reference to these separate elements, this is the exception rather than the rule, and most courts will set a budget for the phase. What happens, however, if, instead
of your contended-for £40,000, the court allows only £30,000?

You have to ‘cut your cloth’ to fit the budget so, if you were to agree counsel’s and experts’ fees as contended for, then you either end up with only 50 per cent
of your projected profit costs
or your client has to pay the difference, knowing it will not
be recoverable.

You will therefore need to revisit the projections and then discuss fees with both counsel and experts. These discussions could include the following.

• Can some of the proposed work that was to have been done by counsel be done by your own fee earners?
• Are counsel prepared to reduce their proposed fees by reference to hourly rates?
• Alternatively, are they prepared to accept a general pro rata reduction, perhaps by limiting their fees for the work to £7,500? The same pro rata approach to fees should be taken with your experts.

If you are uncomfortable dealing with this type of negotiation,
ask your costs professionals to advise and to be part of the discussion – it is something
that they will be familiar with. Experts have less experience
of dealing directly with your
costs representatives, but
this will surely change as the budgeting system becomes more firmly embedded.

Once you have agreed maximum fees for the phase,
you then know what is left for your own work (if your client is unwilling or unable to pay the difference). You should therefore review your processes, including grades of fee earners to be used.

Again, your costs experts should be able to assist. They will have considerable experience of costing your files (and if they are external, of many other firms too) and they will have a good insight into ‘best practice’ from
a profitability perspective.

Monitoring spend

Once you have worked out how you are going to undertake the necessary work to remain on budget, you then need to closely monitor your actual ‘spend’ against the allowed budget
for each phase.

Ideally, the conducting fee earner would have responsibility for this, but they are often too busy undertaking the necessary legal work and it is worth considering assigning this task to a more junior member of the legal team or using somebody from management or accounts.

The alternative is, once again, to use your costs specialists to do this for you. Remember that you can claim up to 2 per cent of the budgeted costs for the ongoing costs management process,
i.e. for monitoring your budget, for further costs management conferences and/or for making any justified applications to
vary your budget.

One final tip: you should record counsel and expert fees as ‘incurred’ the minute that you instruct them to carry out work. Their fee notes may not come in for several weeks, but you have taken on the liability for payment of their fees and those come out of the court-imposed budget
– you are therefore making a ‘reserve’ or, in accounting terms, an accrual.

In short, the whole budgeting exercise should be dealt with by involving the whole litigation team – your client, solicitors, counsel and experts (including your costs experts). SJ

Sue Nash is chair of the Association of Costs Lawyers

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