How to Budget for Costly Litigation

Before launching into litigation, prepare for costs involved by applying typical construction project controls.

Construction industry professionals typically have a very structured system for preparing bids, creating a budget against an award and tracking resources and costs against that budget as the project moves forward. These project controls help business owners avoid going over budget. And most would never dream of embarking upon a construction project without these controls in place.Why then do these same companies launch into litigation without preparing for the cost involved ahead of time?

Litigation can consume years, substantial man-hours and dollars without a budget, periodic meetings to review progress, unit pricing to plan for changes and an accounting system to anticipate overruns and intelligently discuss how to resolve them.

Many lawyers protest that they can no more predict the costs of litigation than weathermen can predict next summer’s weather.

But for quite some time, larger corporations with substantial amounts of legal business performed by outside law firms have been using cost codes for legal activities. The American Bar Association (ABA) has developed a Uniform Task-Based Management System, including a set of codes specific to litigation. Other third-party providers have developed software systems to code legal activities and formalize a budget, progress review and associated tasks, and some have developed their own proprietary systems.

With or without these tools, however, the key is to break litigation into a series of defined tasks, and then separately budget for each task. A simple excel spreadsheet, like many contractors use for their bids and budgets, will usually suffice. Here is an example of what should be listed out on a spreadsheet to determine the cost involved in a document review:

No. of Pages – 75,000   

Pages per hour – 1,000   

Hours – 75    

Timekeeper – Associate

Rate – $250  

Extended Cost – $18,750

Imagine that you are an excavation and heavy civil contractor working on an industrial building. You have encountered much more rock than the geotechnical survey suggested, and last-minute design changes have pushed most of the concrete pour from summer into early winter. However, the owner has denied your change order requests.

You discuss the dispute with your lawyer and ask about litigation costs, but he deflects the question, discussing litigation’s vagaries and uncertainties.

While you cannot anticipate everything that might occur in the course of litigation, you can be more prepared for the cost by applying your project controls experience.

Take-Offs

Start by performing a take-off similar to the cost-estimating process in construction projects. The result of this process is a task-based budget that delineates these quantities and assumptions.

This involves gathering the following information:

• Find out how many banker’s boxes hold your entire file. For instance, your entire file might be held in 30 banker’s boxes.
• Ask your IT manager (or software provider) about the project’s electronic data size. For instance, you could find that you have 40 gigabytes of material, 8,000 emails and 30,000 digital documents.
• Develop a list of 12 key people who know the most about this dispute to be key witnesses for potential interviews and depositions.
• Present your attorney with all of this information to get his help with developing the cost estimate. An experienced construction attorney should know:
• How many pages a banker’s box holds (about 2,500 pages) and the time needed to review a banker’s box, the digital documents and email
• The hourly billing rate of the people within his office 
• A “guesstimate” about the amount of documents and electronic material that will have to be reviewed for the owner and third parties 
• Unit pricing- for example, the cost for each additional deposition if two additional witnesses are needed

The Review Process

Discuss your chances of success with your lawyer. You should return to this central question in each review: If the costs are excessive for the risk-reward, are there any alternatives? One option might be arbitration or mediation. Or maybe some optional work proposed by your lawyer should be eliminated (such as an extra deposition).

You should require that the bill be broken down into dollars for each of the budgeted activities along with an estimate of the percent completed.

Lawyers are risk adverse by nature, whereas contractors are familiar with exposing themselves to quantifiable risks for an anticipated profit. Therefore, it is more than appropriate for the construction client to be involved in deciding whether to incur an additional cost for another witness or for the review of 5,000 more documents.

Project controls are not simply about controlling cost. They also identify whether or not costs overruns are avoidable and if any changes should be paid by the client. Any increased costs can be identified early so that informed decisions can be made and alternatives explored.

Alternative Fee Agreements (AFAs) are the buzz in the legal industry today. AFAs allow some variation to the typical hourly rate fee agreement, which is a cost-plus contract.

Before your next litigation, ask your lawyer about an AFA. And tell your lawyer that you expect a task-based budget with billing against the budget and regular progress meetings to review performance.

Questions to Ask

You should also have regular conferences to review progress versus the budget. This will help raise important questions, such as:

• Why has the budget for the documents exceeded the limit?
• Was the budgeted number of documents accurate?
• Why did the person assigned to the documents achieve only 75 percent of expected productivity?
• Is there an explanation for the poor productivity (such as a court ordered deadline requiring very long hours)? Or was the original person assigned to the task unavailable requiring someone less experienced or more expensive to be assigned?
• Who should pay for that change?
• If the deposition budget has exceeded the limit, is it because more witnesses were added?
• Who are the additional witnesses, what is the cost for this, and does the added cost make sense?

Construction Business Owner, June 2011