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The billable hour is out of time

Timekeeping was invented to make lawyers faster. Used as a price it does the opposite, and the courts are drawing the consequence.

Peter Poleacov18 min

A round wall clock with a white face and black hands, taken down and leaning against a concrete wall

On 13 May 2007 Charlie Munger stood in front of the graduating class of the University of Southern California law school. He was a lawyer himself, and incentives were his life’s subject. What he gave the young lawyers was not encouragement.

Read closely, Munger is not aiming at billing by the hour. He is aiming at the hours target: at the incentive system, not at the price. The flaw sits a level below that, though, and the target is only its most visible consequence. The hour was never meant to be a price. It was a tool to make lawyers faster. Raised to a price, it does the opposite.

In 1913 Reginald Heber Smith was counsel to the Boston Legal Aid Society, with roughly two thousand cases a year and almost no money. Together with a professor at Harvard Business School he built an accounting and timekeeping system, the smallest unit a tenth of an hour. It worked. Cases closed rose by 65 percent, and the cost per case fell from $3.93 to $1.63.1 The stopwatch forced efficiency, which is what it was built for.

Then it became a price. Smith, by then managing partner of a Boston firm, converted the internal measuring tool into the client’s invoice between 1920 and 1940. He considered measured time “a fair, logical, transparent and indisputable method for valuing legal services”.

That sentence is the founding error. You cannot value a service by measuring the effort of the person providing it. This is not decay through later excess, it was wrong on the first day.

The party that made the clock universal was not a client but a trade association. In 1958 the American Bar Association published a pamphlet titled “The 1958 Lawyer and His 1938 Dollar”. The concern behind it was that lawyers earned less than doctors and, worse, than dentists. Its recommendation was to abandon fixed fees and replicate mass-production manufacturing, on an assumption of 1,300 fee-earning hours per year.2 Later the hour had a substantive occasion too. In 1975 the Supreme Court struck down minimum fee schedules for lawyers as price fixing in Goldfarb v. Virginia State Bar, and the hour filled the vacuum. But an occasion is not an argument.

The conflict is in the model, not in the people

In every other purchase both sides pull the same way. The customer wants it done quickly, and so does the supplier, because quicker means more orders. The hour reverses that. Every hour the lawyer saves costs the lawyer money.

The rest follows from there, and no amount of careful drafting in the fee agreement repairs it.

Experience is punished. Whoever knows the answer after twenty years in ten minutes earns less on that question than the one who needs ten hours for it. What is paid for is not the knowledge but its absence, and the client funds the learning curve.

The pragmatic solution does not pay. The short clause instead of the long one, the call instead of the memo, the third negotiation round nobody needs: every time the better outcome for the client, every time the worse one for the invoice.

Least of all does investment in efficiency pay. Whoever maintains templates, builds clause libraries and organizes his knowledge so he can find it again is cutting his own revenue. A model that punishes the building of tools does not get tools.

None of this is a charge against lawyers. It is the description of an incentive system that pushes decent people in a direction they did not choose. It is exactly what the passage this article opens with warns against.

The target Munger warned about

Turned inward, the same incentive works more sharply still. What reaches the client as an invoice is, for the lawyer, an annual number to hit.

In August 2025 an international law firm told its associates they were expected to contribute a minimum of 2,400 “productive” hours a year, generally including at least 2,000 billable ones; the rest was to go to business development, professional development, recruiting and firm initiatives. Whoever misses the number is no longer in good standing, and good standing decides the bonus. The formal bonus threshold of 1,950 billable hours stayed in place alongside it.3 Spread over 52 weeks, 2,400 hours is 46 hours in every week of the year, with no holidays and no days off.

In 2007 Munger named that exact number as the thing he could not have lived with. Eighteen years later it is the condition for being in good standing.

The reason for targets like these is mundane, and it is also the heart of the matter. Hours can be counted. What makes legal work valuable cannot: the proceedings that never happen, the negotiation that does not escalate, the call that disposes of a problem before it becomes one. Whoever needs a number takes the only quantity that has one and turns it into the target. That measures effort and calls it performance. Trust is the only currency that counts in this business, and it appears in no target.

What the law demands of your lawyer, and what you get to see

Here is something the international debate on the billable hour lacks. German law named the problem long ago.

When your lawyer bills by time, he does not owe you the time he took. He owes you the time he was entitled to take.

What is decisive, the court held, is not the time actually spent but only the time objectively required when the matter is handled with the concentration and dispatch it calls for. The court called this the duty of economy in the client’s interest. This is not theory. The lawyer had billed 92.75 hours. The senate struck 5.37 of them as nothing but the rounding up built into the increment clause, and 9.58 as time that had never accrued. Of the 77.80 hours left it held two thirds to be required. What remained was 51.87. It expressly carried over what the Federal Court of Justice had decided for architects and engineers.4 Whoever is paid by time owes economical conduct of the work.

A fine sentence that is of little use to you, and the same decision says so a few lines later. It cites the Federal Constitutional Court for the finding that the time actually spent remains hidden from the client, so that a dishonest lawyer can bill his client to a large extent without any check on his actual performance.5 Your lawyer therefore owes only the time required, and you cannot see it. That is not consultants’ literature talking, that is Germany’s highest court. A model whose central duty may be enforced only by the party who cannot observe it is not an agreement. It is trust with an invoice attached.

At European level the same thought is already a legal consequence, so far only for consumers: a time-based fee clause that contains nothing beyond an hourly rate is not plain and intelligible, the Court of Justice of the European Union held, because the client cannot tell before signing what they are letting themselves in for.6 At home the same line has been falling for sixteen years: in 2020 the standard-form 15-minute increment before the Federal Court of Justice, at least against consumers,7 six years later before the Düsseldorf Court of Appeal against business clients as well, with the consequence that the work must be billed to the minute.8 At the highest level the point is still open for business clients.

Weeks afterwards the clause fell under which your silence in response to a timesheet counts as acknowledgement of the hours, expressly in dealings with business clients as well.9 The sums at stake show in the same case. The appeal court had ordered repayment of 77,905.49 euros to the client; the Federal Court of Justice set that aside and remanded. Disputes over hourly fees are not decided over the hours. They are decided over the paper the hours sit on.

Sixteen years, two courts, one direction. The instruments that make hourly billing workable are falling one by one.

The same fight, 35 million dollars, in London

On 24 March 2026 the Senior Courts Costs Office in London opened invoices from Wilmer Cutler Pickering Hale and Dorr for 35,343,213.96 dollars to detailed assessment.10 The firm is the successor to the Boston partnership whose managing partner, Reginald Heber Smith, turned the hour into a price.

Not a word of it turned on the hours. The costs judge held the time records to be as detailed as anyone could reasonably expect of a law firm’s computerized record, and called the objections to them a quibble. What decided the case was a standard line in the invoice footer: that the invoice included only services and disbursements posted to date. On that wording no invoice was final, none was a statutory bill under the Solicitors Act 1974, and the time limits never began to run. The whole series of invoices became a single bill, assessable in full.

The second point goes to the hourly rate itself. The firm had raised its rates twice during the retainer without telling the client; a unilateral right to raise them, the judgment holds, cannot sit inside a binding fee agreement.

English law, an English costs procedure, of no direct application to a German engagement. The point is a different one. Where time billing fails in court, it does not fail on the hours: before the Düsseldorf Court of Appeal on the increment clause, before the Federal Court of Justice on the acknowledgement clause, in London on a line in the invoice footer.

The hourly rate is the wrong number

The most common objection is that the hour is at least transparent and comparable. Neither is true.

It would be comparable only between people of equal qualification, and nobody compares those. More importantly, the rate is only one of two factors. The other is the number of hours, and you cannot see them. A lawyer with the lower rate can cost you twice as much without your ever being able to prove it. Whoever negotiates the rate negotiates the factor they can control and leaves the other one open.

Clients tell me regularly what this does. An acquaintance had negotiated a pointedly low hourly rate with his commercial firm. What followed was a quarter of an hour billed for every mere forwarding of an email, performed by the assistant, not the lawyer. The total reached five figures, and the engagement ended. Smith thought a tenth of an hour was the smallest sensible unit.

The incentive works in the other direction too. Whoever does not want to raise the hourly rate can just as well suggest writing down more hours. In plain terms, that is an invitation to bill time that never accrued. That the suggestion is even conceivable within the hourly model says more about the model than any study.

Finally, a point that is rarely said out loud. Which client enjoys picking up the phone when a taximeter starts running at the first second? The short call that would have prevented a problem never happens. And what high billing targets do has been measured since 2015 by the psychological study What Makes Lawyers Happy?: the higher the target, the lower the intrinsic motivation and the satisfaction, and the more frequent the alcohol abuse.11 Nobody wants an exhausted lawyer on their matter.

What a US corporation refused to pay for

Some years ago a US corporation wanted to engage me. Invalid clauses across hundreds of live B2B contracts in Germany, a problem its own legal department had failed to solve. What was needed was someone to develop a strategy in the first place – legal, communicative, commercial.

The enquiry arrived together with the corporation’s fee policy, and it is worth reading closely.

It expected, first of all, a ten percent discount off standard rates, as a rule rather than as the outcome of a negotiation. A price that is required by the fee policy to sit ten percent below the one quoted is not a price. Either the rate was too high before, or it will be next time. Both sides know it, neither says it.

It required tenths of an hour, that is a six-minute increment. Market standard, and still the wrong unit. The solution to a contract problem does not arrive in six-minute blocks. It arrives while reading something else, in conversation, on the way to a meeting. What does divide cleanly into six-minute blocks is execution.

And it excluded payment for documents and research produced for another client and then used on this engagement. How that is to be established is not stated. The thought behind it matters more: this is precisely the knowledge that makes a specialist faster and better, and in a knowledge economy it is the real asset. The fee policy pays the lawyer who starts from zero, and it pays him for the hours.

Then the list of what would not be paid for either: preparing cost estimates and budgets, discussing staffing, conferences, instruction, training. What it would pay for was execution.

Except that the engagement consisted of nothing but what would not be paid for. Working it out was the job. A fee policy that declares estimating, discussing, and thinking together non-billable assumes that the lawyer executes what the company has already worked out. Here the opposite was true, or the enquiry would never have been sent. I declined.

Both sides are punishing the same thing. The model pays the lawyer nothing for building knowledge, and the fee policy pays him nothing for bringing it along. What is left is the hour, starting from zero.

Why the question is breaking open now

Artificial intelligence is making visible a calculation that was always wrong. Jordan Furlong put it precisely in the American Bar Association’s trade press in June 2026. Businesses in other industries welcome efficiency gains because they cut production costs.

So every client is now asking why they pay by the hour when the work takes seconds. And every lawyer is asking why they should become more efficient. Both questions have the same answer, and it is the fixed fee.

Little has moved so far. Across the legal-department budgets running through one of the large e-billing platforms, 90 percent of legal fees still flow through hourly arrangements.12

How hard the profession finds this shows in a scene two authors reported in the same journal in July 2026. Asked by an in-house counsel why the firm’s much-publicized AI initiatives were not translating into lower fees, her partner answered that the technology gave him more time to think about her matters. Clients are not buying hours, they are buying judgment and solutions. Why that judgment also needs to be organized inside the company is the subject of the article “AI gives answers. Your company needs the right ones”.

The strongest objection, refining the hour instead of abolishing it

The best counterposition also comes from the ABA trade press and deserves an honest answer. It holds that the hour should not be abolished but refined, with technology raising the share of valuable work inside each hour.

The example the author uses to illustrate it refutes him. A partner quotes $350,000 for a deal and then goes through the timesheet striking whatever strikes him as not valuable. That is not hourly billing. That is a fixed fee through the back door. The price was set in advance, on value, and the timesheet is made to fit afterwards.

What to do instead

The German statutory fee regime shows the principle, and you need not love it to see it. It ties the fee to the amount in dispute, not to the effort. Crude, but the right axis. It becomes finer when the value to your business and the complexity of the matter come in. More complicated than reading a clock, with an advantage no clock offers. Both sides know from the outset what is owed and what is paid.

That it works without a clock is no outsider position. One of the most profitable law firms in the world has put it in its own billing terms:

The same terms record that the firm furnishes no breakdowns of individual lawyers and hours. Whoever works that way sells a result and carries the risk of having misjudged it.

The value-based fee has a limit that should not be concealed. The Federal Court of Justice has held that the presumption of unreasonableness above six times the statutory fee applies to value-based fees as well, and that above that line the lawyer must prove the fee reasonable.13 A fee oriented on the value to the client can breach that line. That is a genuine tension, and it is unresolved.

That leaves the honest objection, and it holds. There are matters whose effort nobody can seriously predict, above all in litigation. The court, the opposing side, the evidence, the course of the proceedings, all outside anyone’s control. But the answer to that is not the clock.

In the interest of not claiming a purity that does not exist: Since founding INN.LAW in 2015 I have billed a fixed fee by preference, though not exclusively. Where the scope cannot be seriously outlined, or where a client expressly wants it, I agree an hourly rate, record in quarter-hour increments, and round down in the client’s favor. What the courts condemn is rounding up, not the increment.

The last point of that recommendation leads to the legislature. Section 4a RVG permits contingency fees only in narrow exceptions. The provision visibly rests on the assumption that the lawyer executes what others have decided and therefore carries no entrepreneurial risk. Other jurisdictions moved past this long ago. It is the same assumption that underpinned that corporation’s fee policy, and it was wrong there too.

Munger said in 2007 that he had no solution for the hours target. For the model underneath it there is one. It is almost seventy years old, and it was abolished in 1958 because lawyers earned less than dentists.

Frequently asked questions

Is hourly billing unlawful?

No. It is lawful, and there are matters whose scope cannot be seriously outlined at the outset. The objection is about incentive and about control. The model rewards effort rather than outcome, only the time objectively required is owed in any event, and that is precisely what the client cannot see.

How is a fixed fee calculated, if not by time?

By the value to your business and the complexity of the matter. German statutory fee law (Rechtsanwaltsvergütungsgesetz, RVG) offers a first orientation by tying the fee to the amount in dispute. It is crude, but it shows the principle. Effort is the floor, not the yardstick.

What about matters whose scope nobody can predict?

They exist, above all in litigation, where the effort depends on the court, the opposing side, and the course of the proceedings. The answer is not the clock. It is a fixed fee for an initial assessment, then fixed amounts per phase, caps, and, where Section 4a(2) RVG permits it, a sharing of risk.

Notes

  1. The 1913 figures are recorded in the firm history of Smith’s own successor firm, WilmerHale, A Slice of History, 2010. ↩

  2. The pamphlet itself is hard to obtain today; its occasion, its recommendation, and the assumption of 1,300 hours are attested secondarily, among others in the report of the ABA Commission on Billable Hours, 2002. ↩

  3. Internal firm policy, reproduced in Rubino, Above the Law, 18 August 2025. ↩

  4. BGH, judgment of 17 April 2009 – VII ZR 164/07. ↩

  5. BVerfG, order of 15 June 2009 – 1 BvR 1342/07. ↩

  6. CJEU, judgment of 12 January 2023 – C-395/21, on Article 4(2) of Directive 93/13/EEC and therefore on consumer contracts. ↩

  7. BGH, judgment of 13 February 2020 – IX ZR 140/19. ↩

  8. OLG Düsseldorf, judgment of 13 January 2026 – 24 U 65/22. ↩

  9. BGH, judgment of 19 February 2026 – IX ZR 226/22. ↩

  10. Senior Courts Costs Office, [2026] EWHC 703 (SCCO). ↩

  11. Reported by Stephen E. Embry, ABA Law Practice Today, 2019. ↩

  12. Thomson Reuters, 5 Critical Insights from the 2026 State of the US Legal Market Report, drawing on Legal Tracker data. ↩

  13. BGH, judgment of 8 May 2025 – IX ZR 90/23. ↩

Reference: Poleacov, P. (2026). The billable hour is out of time. INN.LAW. https://inn.law/en/perspectives/billable-hours/