Do you know the difference between Hard Cost vs Soft Cost?
As in any other industry, Legal practices have regular expenses, however, in the legal field there are some expenses directly related to a specific matter/client. It is really important to know the difference between Hard Cost and Soft Cost in order to track them properly. This has two main advantages, first and foremost you will be able to get reimbursed for some of these costs from your clients, and the second reason is for accounting purpuses.
Most Law Practice Management Software already include this feature for tracking separately Hard Costs and Soft Costs, but the key is to know how to recognize the difference between them to handle it correctly.
Hard Cost or Direct Cost:
Ask yourself, Did I pay this cost directly to a vendor? If your answer is “Yes”, then most likely it is a Hard cost. These kinds of expenses are usually services paid on behalf of the client and considered necessary for the evolution of the case, therefore, you can allocate them to their specific matter and then be reimbursed for it when billing the client.
Depending on how you want to track your Hard Cost in your accounting system, this can be considered as a loan to a client -if you record them as “Advanced Client Cost” it will show in your Balance Sheet- or you can enter them as “Reimbursed Client Cost”. This last one is going to be shown in your Profit and Loss and is considered to be recovered in a short period of time.
Some of the most common Hard Cost are:
Court Filing Fees
Medical Records Expenses
Soft Cost or In-house Cost:
These are some known overhead expenses of your firm, unlike hard costs they are not directly paid to a vendor on behalf of the client. The most common example is photocopies. Think about this, you already paid for your printer and bought the ink, but you still are indirectly using it to make necessary copies for your clients. You can easily allocate this cost to your client’s matter and billed for it.
Be mindful when billing, it has to be a sustancial and reasonable cost, it is probable that your client refuses to pay this kind of costs because they may consider this included in the service they are already paying for. If this is your case, you may consider outsourcing and then bill as a hard cost, charge an Admin Fee at the beginning to cover some of these costs, or include these estimated costs when you are calculating your hourly or Flat Fees. If you end up billing, make sure you map this to a separate income account like In-house Income.
Some of the most common soft cost are:
Legal Research cost
Phone and Internet
By recording all of the expenses related to a matter or client, then you can see which services are more profitable and help you make decisions about the direction your business should take. You can also see which services are not profitable and decide to increase the price, find ways to be more efficient, delegate it, or just stop providing it completely. Proper accounting gives you accurate information and Financial Reports to understand the health of your business that will guide you to make better decisions. If you found this information helpful please like and share. Need help? Contact us at firstname.lastname@example.org or book a call