Budget Monitoring (an idea ahead of it’s time?)
Ian Moxon, Costs Lawyer at PIC, provide a clear-cut case as to why practitioners should adopt a Costs Budget Monitoring process to ensure the best outcome in your final costs claim, even though it’s not yet a widely adopted practice.
Costs Budgeting: where are we now?
Back in 2013 we were all faced with setting up systems of work to deal with the new requirement to costs manage Multi-Track cases. In response, most injury solicitors set up systems simply aimed at just overcoming the hurdle created by the new rules, rather than systems aimed at implementing the intention of the rules.
Since then, PIC and our solicitor clients have dealt with lots of Costs Budgets, some of those Budgets have been agreed, many Budgets have been approved by the Court and some claims have settled prior to the costs management conference. We have now also dealt with many final claims for costs were there is a costs management order in place (an approved or agreed Costs Budget). On many of those final inter partes costs claims there has been expenditure on the claim in excess of a particular phase of the agreed or approved Costs Budget (an over-spend). Costs over any particular Budget phase are difficult to recover requiring a ‘good reason’ for the over-spend. Costs under budget tend to be recoverable in full (Merrix v Heart of England and CPR 3.18(b)).
So, why monitor expenditure on the claim as it progresses against any agreed or approved Costs Budget?
It is important to know, as a Multi-Track claim progresses, whether your client’s costs are still within the individual Budget phases under a costs management order – remember, costs recovered from an opponent in litigation belong to the client (not the retained solicitor) so that he may then use those costs recovered towards payment of his solicitor’s own invoice:
Client care issues
If your retainer provides that your own client will be responsible for any costs that cannot be recovered from the Defendant at the end of the case, then, in my opinion, you are in breach of your duty to act in your client’s best financial interests if you do not monitor expenditure on the claim against the agreed or approved Budget as the claim progresses. The financial outcome of the claim for your client is the net outcome after payment of your solicitor/ own client costs invoice. It is, therefore, incumbent on you to make every effort to minimise unrecoverable costs, which your client will ultimately be responsible for. Now it might be that you have agreed a cap on unrecoverable costs with your own client but, technically, that does not make any difference and, in a case where the damages are substantial, the solicitor/ own client shortfall costs might well be less than the damages held back. If you are not going to do any Budget monitoring, or if you don’t have the right tools to do the job, you should declare those points to your client at the time of setting up the retainer (in my opinion, you are negligent if you do not).
If you are doing no Budget monitoring or if you are only using the ‘manual method’ described below, the risk is that you might incur an overspend so large that it could damage your firm. Someone reading this article will, mark my words, incur such an overspend. It is utter folly not to protect yourself from such an event. Don’t ignore this advice.
The approved or agreed Budget confirms the recoverable (proportionate) costs for the case
Costs Budgeting has been seen by many litigators as a pointless exercise. However, once a Budget is agreed or approved that is confirmation, to a large extent at least, of the recoverable (proportionate) costs of the claim (see Merrix v Heart of England and CPR 3.18(b)). If you successfully conclude the claim within that approved or agreed Budget, you can expect near enough 100% recovery of the budgeted costs – a bonus you have never had before. You would have to be absolutely crazy not to gab that opportunity with both hands.
Profits to compete in the race to the bottom
The big money to be made as a solicitor is from fixed costs (you will never get mega wealthy from the billable hour because the hourly rate is a limiting factor. Fixed costs reward talent/ ability, whereas hourly rates act as a constraint to those with talent/ ability). All solicitors will soon be competing for new business on price (either a price agreed in advance for the work to be done or widespread fixed costs in the Fast and Multi-tracks) – because that is what consumers of legal services want and the Courts and government are responding to that. The ability of solicitors to price up potential work in that new era will be the key to success. Those who have come to grips with ‘budgeting’ will be the ones who succeed (i.e. those who can plan in advance the work to be done around a limited monetary budget and then come in within budget). Those who cannot work within a budget will fade away through market driven competition.
How to monitor the spend on the claim against an agreed or approved Costs Budget
Time recording under the costs budget phases
The key to Budget monitoring is to record your times spent and disbursements under the individual costs budget phases. Such time recording is easy but only once individual fee earners have gained an understanding of what work they should allocate to each of the budget phases (the Court’s Guidance Notes about what work should be allocated to which budget phase are poorly drafted/ unclear and it is currently possible to allocate the same item of work/ costs to more than one budget phase depending on how you interpret the Guidance Notes).
As I mentioned above, the key to Budget monitoring is to record costs under the costs budget phases. I had previously recommended that firms and individual fee earners simply allocate every item of costs to an individual costs budget phase (that is now my minimum recommendation). At the time of re-writing this article a new Bill of Costs is imminent which requires use of the J-codes or similar. The Courts will expect parties to be able to populate the new Bill of Costs quickly and cheaply using J-code style data from their computer time and disbursement records (and if solicitors cannot do that, I expect they will be incurring Costs Draftsmen’s fees which cannot be recovered inter partes). It is, therefore, now my advice that all firms of litigation solicitors should adopt the J-codes or similar i.e. recording of their time and disbursements under ‘task’, ‘phase’ and ‘activity’. Using the J-codes isn’t difficult and I would say that an hour of training would have most fee earners up and running. At PIC we are ready and waiting to make full use of that recorded data.
Fancy new software
You need the right tools to do any job properly. Try changing the head-gasket of your car engine with a teaspoon and you’ll soon get the picture. You don’t necessarily need the very best computer software to effectively monitor expenditure on each Multi-Track claim against an agreed or approved Costs Budget but bearing in mind that, across the board, the average fee earner is probably losing at least £5000 per annum on unnecessary overspends, the investment in good software isn’t a bad idea. However, most of the commonly used litigation software now includes provision for recording of time, at least, under the costs budget phases. It’s now time to starting using that ability (at least).
Costs Management Reports
Many solicitors haven’t been recording their time under the costs budget phases, despite our various recommendations. Don’t worry. For those matters we can prepare, at little expense, mini-costs management reports which tell you simply how much you have spent under each phase of the agreed or approved Budget so far and how much you have left to spend under each phase. We also provide any relevant costs advice in that report. For most of our solicitor clients we can do that remotely or we will happily attend at your offices so that you can retain the live file of papers.
The Manual Method of monitoring expenditure on a claim against an agreed or approved Budget
Don’t do this (unless you are happy to take the chance of incurring a massive overspend). Don’t just enter the total Budget amount into your system with an alert to tell you when that limit has gone. Not only is that akin to working under a costs capping order (a very negative thing compared to a budget), but you could easily overspend under one or more of the Budget phases to the tune of tens of thousands of pounds (or even hundreds of thousands) before the alert pops up. If you must use this method, only enter the details of the costs off the agreed or approved Budget to the end of the next phase.
Monitor expenditure against an agreed or approved Costs Budget frequently, so that you know, in advance, when the money under a particular phase is running out.
What to do if the money is running out
Costs budgeting is not meant to be retrospective. The idea is that you (and the procedural Judge from the allocation stage onwards) plan, in advance, the proportionate work to be done on a claim. You cannot ask for an increase to the Budget once the costs have been incurred.
At PIC we have seen very few solicitors seek to amend existing agreed or approved Costs Budgets. Now rumour has it that, if you make an Application for the Judge to re-consider the Budget either that Application will fail or the Judge will somehow take a hatchet to the Budget just to teach you a lesson. Now in my opinion those rumours are nonsense and I think there are many modern, budget friendly, Judges out there who are asking the same question – where are all the Applications to change costs management orders? I think the reality is that most solicitors have no idea, until the final Bill of Costs is prepared, whether the costs are within the Budget phases, over Budget or anything else. Monitor expenditure against an agreed or approved Costs Budget frequently, so that you know, in advance, when the money under a particular phase is running out.
Establish the reason why the money is running out and do something about it:
- Significant change in the case
Imagine, for example, the Defendant makes an Application, after the allocation stage, to file an Amended Defence (perhaps, say, resiling from an earlier admission of liability). At that point in time it should be obvious to you that the agreed or approved Costs Budget (which, say, provided for a quantum only dispute) will no longer be enough. Therefore, at that point in time, you should make an Application to amend the Budget (otherwise, at the end of the case, you will be limited to the existing Budget, which won’t be enough). There will be many other situations when an Application to change the Budget is appropriate – and it is much better, in my opinion, to make such a sensible Application whilst the issue is live, rather than try and argue ‘good reason’ to depart from the Budget at the end of the claim (because, as we have seen from the emerging case law, the ‘good reason’ test is a hurdle no one is ever supposed to get over). At the time of asking for the Budget to be amended you need to be able to show what additional expenditure, over and above the existing Budget, is likely to be required (so get us involved at that stage too).
- Opponent’s conduct
My advice is to ALWAYS, ALWAYS kick up a stink if your opponent’s conduct is causing costs to be incurred unnecessarily. Always do that, so that, when costs come to be recovered at the end of the claim, we can refer to that correspondence as a ‘good reason’ why a particular phase of the budget has been exceeded. Better still, ask the Defendant, at the time the unnecessary costs are being incurred, for an increase to that phase of the Budget. Remember, the rules allow the parties to agree amendments to an agreed or approved Budget. If the Defendant asks for an extension of time for exchange of expert evidence (for example), add a line into their draft Consent Order increasing the experts phase of the Budget by, say, £250.00 (or, at the very least, only agreed to a costs order that states: ‘Costs in the case. The costs of and occasioned by the Defendant’s Application be costs outside of the costs management order’). You must be pro-active in this respect.
- Costs outside of the Budget
It might be that you need to incur expenditure on the claim that was not provided for when the Budget was set. For example, you might want to hold a joint settlement meeting but the agreed or approved Budget did not provide for such expenditure. In those circumstances give the Defendant the option to agree the costs of the JSM in advance or invite them to explain why those costs would not fall outside of the Budget. Again, be pro-active.
Now it might be that the money is running out faster than everyone anticipated because either you or your firm aren’t progressing the claim efficiently enough.
At PIC we are in the privileged position of seeing files from thousands of different fee earners and hundreds of different firms. We have provided many fee earners and firms with confidential and objective feedback as to whether they are efficient enough and where improvements can be made. If you are constantly running up overspends ask us to investigate why.
Also, in this new era, it is inappropriate to record time in the very enthusiastic way that became the norm prior to April 2013 under CFA-lite funded injury claims. That style of time recording is not only now against your own professional duties, but the resulting figures make Budgeting and Budget monitoring less accurate. You should be able to look your own client in the eye when recording your time spent.
If something is in short supply use it sparingly
Imagine when you get home from work tonight, you only have half a bottle of milk left in your fridge, but you aren’t going to the shop again for two days. In that case, you would use that remaining milk sparingly. You would have toast for breakfast instead of Weetabix. You would just put a splash of milk into your tea instead of the huge glug you normally do. And by doing that, the milk would last just fine. The situation is exactly the same with your litigation claims. If your Budget monitoring tells you the money under a particular phase is running out, you use the costs remaining sparingly. Since it is human nature to do that, you will struggle not to. Monitor expenditure against an agreed or approved Costs Budget frequently, so that you know, in advance, when the money under a particular phase is running out.
And the costs of doing all this Budget monitoring work are recoverable inter partes, albeit limited to the 2% allowance (and I have never yet seen a final costs claim where that 2% allowance was exceeded).
- In any case where a costs management order has been made, when assessing costs on the standard basis, the Judge will not depart from such agreed or approved Budget unless satisfied that there is good reason to do so.
We’ve been involved, more recently, with lots of final costs claims where there was an agreed or approved Budget on file – and it is dawning on us that CPR 3.18(b) (explained in the case of Merrix v Heart of England – a rule which applies equally to Receiving Parties and Paying Parties) might just be the best thing to happen to Claimant injury Solicitors for many years. This new ‘good reason’ test appears to be a test that no one will ever overcome.
If you have won the claim within Budget (and especially if the hourly rates were agreed as well), then there is unlikely to be any good reason why the final claim for base costs should be reduced at all.
Historically, final claims for inter partes base costs would be reduced by about 15% and sometimes much more. However, you can now expect your final costs claims for budgeted costs to be assessed as drawn, provided you have come in within Budget – and that is why you should carry out Budget monitoring…
To contact him regarding any matter raised in this article, please click here.