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 come off at the pre-bill review and the invoice goes out for $45,000. 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 beforehand does nothing for them 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 somebody can address. Five reasons cover most of them:

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

The original entry stays, and the reduction records against it. Editing the hours down makes the file understate the work. The next quote for similar work then starts from the wrong number.

Decide who can reduce what

Without a written limit, whoever prepares the bill decides each reduction case by case. The limits go in 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. Fresh at 0 to 30 days, caution at 31 to 60, red alert at 61 to 90, and write-off territory beyond 90. 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 on $120,000 of monthly revenue carries 45 days. That sits 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. Anything over 60 days gets billed, or gets a reason written against it.
3. Total the month's reductions by reason and by matter.
4. One client's matters usually 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.