Getting costs budgets right (but wrong)

There seems to be a bit of an obsession with getting the figures in a costs budget right. By 'right', I mean the figures included in it will be stuck to down to the last penny. Anybody who prepares budgets regularly and continues to take that approach will soon need to be locked away in a padded cell.

Calculating costs budgets

The sooner we all accept that every budget will be wrong, the better. After all, the glossary of the CPR defines a budget as an 'estimate', so wrong is fine. Of course, some may be more wrong than others. To stand a chance of approval, a budget has to be reasonable, proportionate and justifiable. The first two elements could be said to be capable of measurement in monetary terms; the third requires more than that, and relates to the assumptions behind the numbers.

Over the last year or so, I have been visiting solicitors' offices, delivering practical training on preparing costs budgets. Using information based on a real case and a real budget, I give the fee earners a case scenario and a mock budget with the costs already incurred included and ask them individually to draft a budget for the future costs.

They all want to get as close as possible to the figure in the budget that was actually filed in the real case, and the excitement builds as I get ready to read out the actual amount. They want to be right. To date, the lowest figure I have seen is £15,000 and the highest is £180,000.

There is palpable disappointment when I tell my victims they are all wrong, even if their figure is the same as the real total, but there is some relief when I tell all of them that if the figures in their budget are reasonable, proportionate
and justifiable by reference to assumptions, they are as close
to 'right' as the next person, whether their figure was £15,000 or £180,000.

Reasonable assumptions

It is not necessarily the figures that are of primary importance, but rather the assumptions that they are based on. For example, you might reasonably assume that your client's case is going to be settled the following day, so the only costs in the future budget will be for a handful of letters, a draft consent order and the court fee. On the other hand, you might reasonably assume that your case is going to be fought tooth and nail, to the death, and that there will be experts and counsel at every stage.

I admit the first example is somewhat extreme and unlikely, as from a budgetary perspective it will be assumed that most, if not all, cases will get to court. But it demonstrates the point that the total future estimated cost will be based on the reasonable assumptions you make in respect of the litigation. Those assumptions have to take into account the conduct of your opponent, as well as that of your own client. They are therefore key to justifying your £15,000 or your £180,000.

If, as you will frequently find, your case then takes a different path to the one you reasonably anticipated, then you have good reason to amend the budget, relying on whatever 'significant development' has occurred.

Your assumptions will, and should, change. One of my former school teachers recently reminded me of a quote attributed to author Isaac Asimov: "Your assumptions are your windows on the world. Scrub them off once in a while or the light won't come in." A piece of litigation can be looked at in much the same way - your assumptions will need to be challenged and changed, maybe on more than one occasion, or else your budget will become meaningless, even more than you may think it is already.

Amending the budget

If a change in assumptions amounts to or results from a 'significant development' and the budgeted figures change, either upwards or downwards (remember that the parties are required to amend budgets downwards if necessary), then an application will need to be made to amend it before you have exceeded the particular budgetary phase.

If the budget needs to go down rather than up, then there must be a fair chance that your opponent will agree to it, but increasing the budget may be more problematic. However,
as long as the assumptions
made in the original budget were sufficiently narrow and specific, there will be identifiable grounds to persuade the court
to allow you to amend it.

That is where budgeting becomes an art more than a science. While it is important to have a good stab at calculating how long the required work will take, these assumptions are paramount in justifying that work in the first place, and in subsequently amending it successfully when the case changes. SJ

Jon Lord is a council member of the Association of Costs Lawyers