Financial Analyst and Attorney specializing in law practice management and professional service finance.
Determine the minimum billable hours your firm needs to cover costs. Enter any three variables—Monthly Fixed Costs, Avg. Collected Rate per Hour, Avg. Variable Cost per Hour, or Breakeven Billable Hours—to solve for the fourth.
Law Firm Breakeven Calculator
Law Firm Breakeven Formula
The breakeven formula for a law firm finds the number of billable hours (Q) you must bill *and collect* for your revenue to cover all monthly fixed and variable costs.
Q = F / (P – V)
Solve for Monthly Fixed Costs (F):
F = Q * (P – V)
Solve for Avg. Collected Rate (P):
P = (F / Q) + V
Solve for Avg. Variable Cost (V):
V = P – (F / Q)
Variables Explained
- Monthly Fixed Costs (F): Your total, recurring monthly overhead (e.g., office rent, support staff salaries, malpractice insurance, legal research software, phone/internet).
- Avg. Collected Rate per Hour (P): Your average *realized* rate per billable hour. This is not your “sticker price” rate, but what you actually collect after write-downs and non-payment.
- Avg. Variable Cost per Hour (V): The average cost directly tied to a single billable hour (e.g., client-billable expenses like court filing fees, eDiscovery costs, expert witness fees, processing fees).
- Breakeven Billable Hours (Q): The total number of collected billable hours your firm needs each month to reach $0 in profit.
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What is a Law Firm’s Breakeven Point?
A **Law Firm’s Breakeven Point** is the exact number of billable hours (Q) your firm must collect on each month to cover all of its costs. It is the minimum level of utilization required to stop losing money and begin generating partner profit. Understanding this number is the most critical aspect of law firm financial management.
**Fixed Costs (F)** are your consistent monthly overhead, whether you bill 10 hours or 1,000. This includes your office rent, salaries for paralegals and administrative staff, malpractice insurance, legal research subscriptions (Westlaw/Lexus), and debt service on the practice.
**Variable Costs (V)** are costs that occur *only* when you work on a client matter, and are often passed through. This includes court filing fees, deposition costs, expert witness fees, and eDiscovery processing fees. For this calculation, you only include costs *not* directly reimbursed by the client.
The **Contribution Margin** (P – V) is the profit from a single collected hour that goes toward paying your fixed costs. If your average collected rate is $350 (P) and your non-reimbursed variable costs are $25 (V), your contribution margin is $325. This calculator finds how many $325 “profit chunks” you need to cover your total fixed costs.
How to Calculate Law Firm Breakeven (Example)
Let’s calculate the breakeven point for a small law firm.
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Identify Monthly Fixed Costs (F):
Your office rent is $10,000, staff/paralegal salaries are $15,000, insurance is $2,000, and software/utilities total $3,000. Your (F) is $30,000.
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Identify Avg. Collected Rate (P):
Your sticker rate is $400/hr, but after write-downs and non-payment, your realization rate is 87.5%. Your (P) is `$400 * 0.875 = $350`.
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Identify Avg. Variable Cost (V):
You find that for every billable hour, you incur about $25 in non-reimbursed variable costs (like processing, etc.).
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Apply the Formula: Q = F / (P – V)
First, calculate the contribution margin per hour: $350 (P) – $25 (V) = $325.
Next, divide the fixed costs by this margin:
Q = $30,000 / $325 = 92.31 -
Conclusion:
Your firm must bill and collect on 93 hours (rounding up) each month just to cover costs. All hours billed after the 93rd hour contribute directly to partner profit.
Frequently Asked Questions (FAQ)
Always use your **Collected Rate** (also called Realized Rate). Your breakeven point is based on actual cash received, not just what you bill. To find it, divide total collected revenue by total billable hours in a period.
It depends. If you pay the associate a flat salary, their pay is a **Fixed Cost (F)**. If you pay them a percentage of their collected billings (e.g., 33% of collections), their pay is a **Variable Cost (V)**.
Contingency work makes this calculation difficult. This model is best for firms with a high volume of hourly billing. For contingency firms, you should treat (F) as your total *annual* overhead and (Q) as the *number of cases* you need to win, with (P) being your *average fee per case*.
Add the new paralegal’s monthly salary (e.g., $5,000) to your (F). If your (F) goes from $30,000 to $35,000, your new breakeven point becomes `$35,000 / $325 = 108` billable hours. You must decide if your firm can bill those extra 15 hours per month to cover the new hire.