Write-offs and work in progress: recording what you will not bill

In a worked example from PointOne, a lawyer records 100 hours at $500, so $50,000 of work in progress. Ten hours are written down at the pre-bill review, the invoice goes out for $45,000, and the client pays $40,500 after disputing one line. That is 90% of the value billed, 90% of the bill collected, and 81% overall.

The missing $9,500 left through two different doors. A firm that records each reduction separately can see which door is getting wider. A firm that records only what was paid cannot.

Three ways work in progress leaves unpaid

1. Reduced before the bill. Time cut or removed at the pre-bill review. The client never sees it.
2. Discounted on the bill. A reduction the client can see on the invoice.
3. Billed and not collected. Part of an invoice disputed, or never paid.

The first two look alike in the accounts and do different things for the relationship. LeanLaw draws the line this way: a reduction the client sees on the invoice can build goodwill, while time removed before the bill does nothing for the client and often hides an inefficiency.

Record every reduction with a reason

A reduction with no reason is only a number. Recorded with a reason, it becomes a pattern you can act on. Five reasons cover most of them:

• Inefficiency: the work took longer than it should have, such as a junior learning a task.
• Scope: work outside what was quoted or agreed.
• Relationship: a discount chosen for the client.
• Dispute: reduced after the client queried the bill.
• Uncollectable: written off after the bill went unpaid.

Keep the original entry and record the reduction against it. Editing the hours down instead makes the file say the work took less time than it did, and the next quote for similar work starts from the wrong number.

Decide who can reduce what

Without a written limit, each reduction is decided case by case by whoever happens to be preparing the bill. Set the limits before the next billing run:

• The fee earner can adjust their own entries before the pre-bill review, with a reason for each.
• The responsible partner approves anything cut at the review, and signs off the reason.
• Reductions above a set amount on one matter in a month go to the monthly review, not a quiet edit.

What a write-down really costs

LeanLaw's example is a $50,000 bill reduced to $40,000. The discount looks like 20%, and it argues the true impact is more than double that.

The reason is that the cost of doing the work does not fall with the bill. If the work cost the firm $30,000, the $50,000 bill made $20,000. At $40,000 it makes $10,000. A 20% discount has halved the profit on the matter.

Read work in progress by age

LeanLaw's guide to work in progress reports sorts unbilled time into four bands: 0 to 30 days is fresh, 31 to 60 is caution, 61 to 90 is red alert, and over 90 days is write-off territory. It suggests the strongest firms keep 75% of their work in progress under 30 days old. Those are one American vendor's benchmarks, not a standard.

The same guide measures the whole book in days: total work in progress divided by monthly revenue, multiplied by 30. A firm holding $180,000 of unbilled time with $120,000 of monthly revenue is carrying 45 days, inside the 35 to 55 day range the guide calls healthy.

The monthly review

1. Pull unbilled time by matter, with the age of each matter's oldest entry.
2. Bill, or write a reason against, anything over 60 days.
3. Total the month's reductions by reason and by matter.
4. Look for the client whose matters carry most of them.

The last step matters because, as PointOne notes, a firm wide figure can look steady while one client's matters carry most of the write-downs.