94-10: Legal Fees; Percentage Surcharge

Lawyer may charge percentage surcharge in lieu of billing actual expenses and costs if agreed to in writing, approximates actual costs, and overall fees are reasonable.


The inquiring law firms have asked if the practice of billing clients for costs on a percentage of the total fee basis, in lieu of itemizing and charging for expenses, is a per se violation of the Code of Professional Conduct. As an example, the engagement letter of one of the inquiring lawyers provides:

Costs:  Some costs represent out of pocket amounts which my firm advances, some represent an allocation of overhead Costs, and others represent a combination of both factors. Rather than attempt to keep track of all of these costs and assign them to individual clients, I will add five percent (5%) to the amount of services on each statement in lieu of such costs. The only disbursement I will track and bill separately to you are travel, lodging, meals, outside expert fees and computer costs. Moreover, where expenses involve substantial payment to third parties I may request that you pay those expenses directly.

The engagement letter is sent to each client at the commencement of the representation. The lawyer asks each client to acknowledge the client's agreement to the terms of the engagement letter.

One inquiring attorney indicates that for a number of years his law firm has kept track of the costs and expenses (e.g., copying charges, long distance telephone charges, mail, overnight delivery, messenger charges, filing fees, document certification fees, and recording fees) that would all be typical direct charges to the clients. According to the history that has been developed by the inquiring lawyer, 5% is a reasonable estimate of the actual expense for those items.



Is it a violation of the Arizona Rules of Professional Conduct to charge a client for costs and expenses on a pre-determined percentage of the total legal fees in lieu of billing actual costs and expenses incurred?



ER 1.4(b)

ER 1.5(a) and (b)

ER 7.1



It is recognized that the Rules do not provide specific guidance to the lawyer on how much a lawyer may charge over and above the charges for the fee to cover disbursements. In ABA Formal Opinion 93-379 (December 6, 1993) it is stated that ER 1.5[1] and its reasonableness requirements prevails in both fees and costs determination.

An excessive fee constitutes grounds for disciplinary action. Matter of Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984). Charging a fee greater than that agreed to between a lawyer and the client is not permitted. Matter of Burns, 139 Ariz. 487, 679 P.2d 510 (1984). Charging the services of secretaries without an express agreement permitting the lawyer to do so was found to be a violation of DR 2-106(A) in Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 ( 1983). DR 2-106(A), provided that:

(A) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee.

The court in a footnote noted the facts did not require the court to address the issue of charges for paralegals and messengers without an express agreement from the client. In passing, however, the court stated "Suffice it to say that it would be better practice to have client agreement before such charges are billed." 706 P.2d at 357.

In previous ethics opinions relating to billing practices, the Committee has agreed that interest could be charged on past due accounts so long as (1) the client is advised before services are rendered of the fact that interest will be charged on the delinquent account, (2) both the rate of interest and the period of delinquency are reasonable and (3) the client consents. Opinion No. 81-14 (May 18, 1981). All of the foregoing must be in writing. Opinion No. 86-9 (August 1, 1986). Use of credit cards evidencing a line of credit extended to the client by a financial institution is permissible but the attorney and client must enter an agreement as to who will bear the lender's discount. Opinion No. 89-10 (December 20, 1989).

In ABA Formal Opinion 93-379 (December 6, 1993) billing for professional fees and disbursements is discussed. That opinion makes clear that disclosure to the client and consent from the client is the key. The opinion specifically approves an agreement between the client and the attorney for charging copying at 15 cents per page and messenger service at $5.00 per mile. When the client is told only that costs will be charged to the client, the ABA opinion finds it permissible to charge a client no more than the direct cost associated with the services plus a reasonable allocation of overhead expense directly associated with the service. The example given is for copying. It is permissible to charge the direct cost for the copying plus a reasonable allocation of overhead expenses such as a portion of the salary of the operator.

The ABA opinion recognizes that in addressing ethical standards, it was not appropriate to opine on the various accounting issues as to how one calculates direct cost and what may or may not be included in allocated overhead. The Arizona Committee recognizes the same limitation. The Committee notes that the inquiring attorney indicates he has historical data proving that in his practice the 5% percentage surcharge on fees approximates the actual expenses.

So long as the billing practice is clearly disclosed to the client, the amount charged is reasonable and approximates the actual expenses associated with such costs and the client consents in writing at the outset of the representation, the Committee is of the opinion that charging a percentage of the fee to cover disbursements is permissible.[2]

The arrangement, however, remains subject to the overall requirement that each fee be reasonable. The attorney who adopts this billing practice should, therefore, be prepared to show that the percentage surcharge indeed approximates the actual expenses. The Supreme Court has indicated that a review of the fees charged should be made by the attorney at the conclusion of the matter and, if necessary, an adjustment be made. Matter of Swartz, supra.

NOTE:   This formal ethics opinion was issued by the Committee on the Rules of Professional Conduct. The Committee is not part of the Discipline Department of the State Bar of Arizona, and asserts no disciplinary function. This opinion is advisory in nature only, and is not binding in disciplinary proceedings or any other legal proceeding.


Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.

©State Bar of Arizona 1994 

[1] ER 1.5(a) and (b) provide:

(a) A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent.

(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.

[2] The disclosure must be evidenced by a writing which complies with the requirements of ER 1.4(b):

A lawyer shall explain a matter 'to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

The disclosure to the client shall also comply with the requirement of ER 7.1(a)(1):

(a) A lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services. A communication is false or misleading if it:

(1) contains a material misrepresentation of fact or law or omits a fact necessary to make the statement considered as a whole not materially misleading;