Pairing a material deviation clause with your AFA / Fixed Fee Arrangement (and sample language)

A common concern about fixed fee arrangements (or most AFAs), is that they aren't appropriate for a matter unless you know exactly (or close to exactly) what will be required of the scope.

PERSUIT's most AFA savvy clients use Material Deviation clauses in their initial engagements as tools to address these concerns, and there's a clause for every AFA type. 

In this article, we'll be providing some example Material Deviation clauses to pair with the most common AFA types. Refer to the table below for our recommendations on arming your AFAs with the right Material Deviation Clauses:

1. Activity Collar

Best suited to: Fixed or Flat Fee Arrangements with key cost driving activities in the scope

Identify the 5-6 major cost drivers in the matter and assume the number of times they will be required. For example, in a litigation # of Fact Witness Depositions, # of Expert Depositions, # of Documents for Review, # of Dispositive Motions and # of Court Conferences. 

Sample clause:

Material Deviation

The firm selected will periodically review the actual work performed in connection with this matter against the above Scope of Services that underlie the Fixed Fee. The firm will contact the Company promptly if it believes that the actual work performed to defend the Company in connection with this matter has significantly changed from the Scope of Services as detailed above. Based upon a standard of good faith and fairness, the Company and the firm may then review the work performed and may consider accelerating or decelerating the invoicing schedule and/or increasing or decreasing the amount of the Fixed Fee.  The Company may also request that the firm conduct such a review of actual work against the work contemplated by the Scope of Services. This review of the status of the work and material change discussion between Company and the firm may occur more than once during the pendency of the matter.

Unless otherwise agreed, Material Deviation shall be defined as a 30% increase or decrease in the following key cost drivers:

• Motion to Dismiss (assume 1)
• Answer (assume 1)
• Motion for Summary Judgment including Hearing (assume 1)
• Depositions:
• Taking Deposition - Fact Witness (assume 5)
• Defending Deposition - Fact Witness (assume 5)
• Taking Deposition - Expert (assume 5)
• Defending Deposition - Expert (assume 5)
• Daubert Motion (assume 1)
• Document Review and Production - (assume 1,000 Documents)
• Trial Days (assume 15)

If there is a Material Deviation then we would use the fixed fees set forth in each phase or phase sub-part to determine how much to increase or decrease the price for any particular phase.

EXAMPLE: The proposed total price is $400,000 with a Material Deviation of 15%. If the price per deposition proposed was $5,000, and the matter required 18 depositions instead of the 15 that were assumed, then the total price would be increased by $15,000 (3 * $5,000) + $400,000 to a new total of $415,000. Likewise, if the number of actual depositions required was less than the number assumed, the total price would be decreased based on the price per deposition provided.

Short Form Version

Material Deviation shall be defined as a 30% increase or decrease in the number/quantity of activities described in the assumptions listed above, If there is a material deviation then we would use the proposed phase/activity-level prices to determine how much to increase or decrease the total price by.

For example, if the proposed total price was $200,000 and the price per deposition proposed was $10,000 and the number of depositions actually required was 10 instead of 5 (>30% deviation), then the total price would be increased by $50,000  to new total of $250,000.

Non Litigation Capped Fee Variant

Material Deviation

The firm selected will periodically review the actual work performed in connection with this matter against the above Scope of Services that underlie the Capped Fee. The selected firm will contact the Company promptly if it believes that the actual work performed to represent the Company in connection with this matter has significantly changed from the Scope of Services as detailed above. 

Unless otherwise agreed, Material Deviation shall be defined as a 30% increase or decrease in the quantity of contracts (35) (e.g. a change of 10 or more contracts) described in the assumptions listed above. If there is a material deviation, then based upon a standard of good faith and fairness, the Company and the firm may then review the work performed and may consider accelerating or decelerating the invoicing schedule and/or increasing or decreasing the amount of the Capped Fee.

2. Matter Quantity Collar

Best suited to: Portfolio or Retainer fee arrangements

Where a law firm fixes it annual fees for a portfolio of work that can include multiple matters and bills the client monthly, an Activity Collar may be too granular or difficult to enforce given the volume of what are typically repetitive and predictable matters captured in portfolio arrangements. Apply a Material Deviation based on the number of matters, rather than activities.

Sample clause:

Material Deviation

The firm selected will periodically review the actual work performed in connection with this matter against the above Scope of Services that underlie the Fixed Fee. The firm will contact the Company promptly if it believes that the actual work performed to defend the Company in connection with this matter has significantly changed from the Scope of Services as detailed above. Based upon a standard of good faith and fairness, the Company and the firm may then review the work performed and may consider accelerating or decelerating the invoicing schedule and/or increasing or decreasing the amount of the Fixed Fee.  The Company may also request that the firm conduct such a review of actual work against the work contemplated by the Scope of Services. This review of the status of the work and material change discussion between Company and the firm may occur more than once during the pendency of the matter.

Unless otherwise agreed, Material Deviation shall be defined as a 10% increase or decrease in the number of matters per [month / year / 6 month period], assuming there will be [30] matters per [month / year / 6 month period].

If there is a Material Deviation then we would use the [annual fixed fee / 30 matters per year OR the fee obtained per matter] to determine how much to increase or decrease the price for any given [month / year / 6 month period].

EXAMPLE [adjust as appropriate]: If the proposed total price per year is $300,000 based on the assumption that there will be 30 matters per year, and there were 40 matters in one year, then the total price would be increased by $100,000 ($10,000 per additional matter). Alternatively, if there were 32 matters in one year, the price would remain the same as there was only a 7% increase in the number of matters.

3. Billing Collar with Risk Sharing

Best suited to: Collared Fee Arrangement

A risk collar takes a total budget estimate and sets a "collar" around that budget such that if the hourly billings exceed the collar, there is an added discount. If billings finish under the collar, savings are shared. This encourages firms to bill under budget and share those savings with the client, however this fee type still depends on hourly billing so is not considered a true AFA. 

To fairly distribute risk sharing, apply both a material deviation clause and a billing risk collar to a collared fee arrangement.

It is essential to designate key cost drivers so that if there is a significant change in the scope of work, the total budget estimate can be adjusted to accommodate the change. Otherwise, the collared fee arrangement risks either under compensating the firm when the volume of anticipated tasks increases, or providing firms a "bonus" when the volume of anticipated tasks decreases.

Sample clause:

Material Deviation 

The firm selected will periodically review the actual work performed in connection with this matter against the above Scope of Services that underlie the Budgeting Estimate. The firm will contact the Company promptly if it believes that the actual work performed to defend the Company in connection with this matter has significantly changed from the Scope of Services as detailed above. Based upon a standard of good faith and fairness, the Company and the firm may then review the work performed and may consider accelerating or decelerating the invoicing schedule and/or increasing or decreasing the amount of the Budgeting Estimate.  The Company may also request that the firm conduct such a review of actual work against the work contemplated by the Scope of Services. This review of the status of the work and material change discussion between Company and the firm may occur more than once during the pendency of the matter.

Unless otherwise agreed, Material Deviation shall be defined as a 30% increase or decrease in the following key cost drivers:

• Motion to Dismiss (assume 1)
• Answer (assume 1)
• Motion for Summary Judgment including Hearing (assume 1)
• Depositions:
• Taking Deposition - Fact Witness (assume 5)
• Defending Deposition - Fact Witness (assume 5)
• Taking Deposition - Expert (assume 5)
• Defending Deposition - Expert (assume 5)
• Daubert Motion (assume 1)
• Document Review and Production - (assume 1,000 Documents)
• Trial Days (assume 15)

EXAMPLE: The proposed budget estimate is $400,000 with a Material Deviation of 15%. If the price per deposition proposed was $5,000, and the matter required 18 depositions instead of the 15 that were assumed, then the proposed budget estimate would be increased by $15,000 (3 * $5,000) + $400,000 to a new total of $415,000. Likewise, if the number of actual depositions required was less than the number assumed, the proposed budget estimate would be decreased based on the price per deposition provided.

Billing Risk Collar

Unless otherwise agreed, the firm will apply a 10% collar around each phase of the budgeting estimate. The firm will apply a 50% discount to all billings above the collar. Likewise, if the firm bills below the collar, the client will pay the firm 50% of the difference between the collar and the actual billed amount. 

EXAMPLE: If the budgeting estimate for Phase 3 Discovery is $300,000 and the billed amount for phase 3 is $350,000, the firm will apply a 50% discount to the $20,000 above the collar. 

4. Tiered Value Bonus

Best suited to: Supplement a capped, fixed or collared fee with an additional value/outcome driven bonus that incentivizes firms to achieve results early in the scope of work. 

Sample clause (as an add on to a standard Material Deviation clause):

Material Deviation

Unless otherwise agreed, the total fee payable by the Company may be supplemented by a Bonus Fee contingent on an outcome achieved in the matter. The Outcomes and associated Bonus Fees are outlined below. If an Outcome is achieved before completion of a phase, the firm will receive the fees payable having regard to any Material Deviation in addition to the Bonus Fee.

EXAMPLE: If the proposed fixed fee for a matter is $100,000 and the case is dismissed in pleadings during Phase 2 of the scope of work, the firm will be paid the total billed fees according to the Material Deviation term above as well as an additional $30,000. 

Material Deviation Clauses for Fixed Fees

Key:

• Variable information to consider amending for each matter

Single Matter

Only a material deviation in the scope of work (requirements and deliverables) may be considered grounds for making an adjustment to the fee arrangement. The number of hours performed or billed shall not be considered for purposes of determining whether there has been a material deviation. 

The Selected Firm will periodically review the actual work performed in connection with this matter and will contact the Company promptly if it believes that there has been a material deviation. The Selected Firm may request that both parties meet to conduct a “True-Up,” or a review of the actual deliverables completed to compare with those assumed in the scope of work and agree on an appropriate fee adjustment amount. Multiple true-ups may be conducted throughout the duration of the engagement.

Unless otherwise agreed, a material deviation shall be defined as a 30% increase or decrease in the quantity of those assumptions set out in the scope of work below (e.g. 3 more depositions than the 10 originally assumed).

If there is a material deviation, then the fixed fees set forth in the pricing items and subitems below shall be used to determine the amount by which the fee should be adjusted.

Portfolio of Matters (Annual Fee)

Only a material deviation in the scope of work (requirements and deliverables) may be considered grounds for making an adjustment to the fee arrangement. The number of hours performed or billed shall not be considered for purposes of determining whether there has been a material deviation. 

The Selected Firm will periodically review the actual work performed in connection with this matter and will contact the Company promptly if it believes that there has been a material deviation. The Selected Firm may request that both parties meet to conduct a “True-Up,” or a review of the actual deliverables completed to compare with those assumed in the scope of work and agree on an appropriate fee adjustment amount. Multiple true-ups may be conducted throughout the duration of the engagement.

Unless otherwise agreed, a material deviation shall be defined as a 10% increase or decrease in the quantity of matters year. (e.g. 2 more matters than the 20 originally assumed).

If there is a material deviation, then the annual fixed fee shall be used to determine the amount by which the fee should be adjusted.

Portfolio of Matters (Fee per Matter / Fee Schedule)

The Company intends only to pay for those matters as and when they are completed. Each matter may vary in length or complexity, however given the size of this portfolio and in an effort to maintain cost predictability, only a material deviation in the requirements or complexity of a matter that results in significantly more work to be performed by the firm may be considered grounds for making an adjustment to the fee arrangement. The number of hours performed or billed shall not be considered for purposes of determining whether there has been a material deviation. 

The Selected Firm will periodically review the actual work performed in connection with this matter and based upon a standard of good faith, will contact the Company promptly if it believes that there has been a material deviation in the scope of work for that matter, significant enough to warrant a review of the firm's fixed fee for that matter. The Selected Firm may request that both parties meet to review a specific matter and based upon a standard of good faith, agree on an appropriate fee adjustment amount.