Can a lawyer charge the client a percentage markup on a subcontractor's bill for managing that subcontractor?

Plain-English summary

A lawyer was retained by a governmental entity under a written professional-services contract. Part of the engagement required the lawyer to hire a subcontractor (an actuary), monitor the actuary's performance, and scrutinize the actuary's billings. The client wanted the lawyer to add a 10 percent surcharge on the actuary's charges, submit a single billing for all services, and receive a single check from which the lawyer would then pay the actuary. The opinion defines the surcharge as profit: charging the client more for the subcontractor's services than the lawyer's own cost of obtaining them.

The committee framed the question as one of fee reasonableness. It said the sine qua non of a lawyer's fee is that it must be reasonable and the client must be informed. It pointed to the RPC 1.5 criteria for a reasonable fee, including the terms of the fee agreement and whether the agreement shows that the client received a reasonable and fair disclosure of the material elements of the fee. On that basis the committee concluded that a lawyer may charge a fully informed client a 10 percent surcharge on a subcontractor's billing in payment for monitoring the subcontractor's performance.

Currency note

This opinion was issued in 2003, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. RPC 1.5 kept its number in 2006, but its text and the way the reasonableness factors are stated were revised. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

In practice

Under the Washington rule as it stood at the time of the opinion, the committee treated a percentage override on a subcontractor's bill as a fee question rather than a per se prohibition. It held that the arrangement was permissible where the total fee is reasonable and the client was fully informed of the surcharge, tying both requirements to RPC 1.5. The committee's conclusion was specific to the facts presented: a 10 percent surcharge paid in exchange for the lawyer's work of hiring, monitoring, and reviewing the subcontractor's billings.

Common questions

Q: Can a lawyer add a markup to a third party's bill and pass it to the client?

A: The committee said a lawyer may charge a fully informed client a 10 percent surcharge on a subcontractor's billing as payment for monitoring the subcontractor, provided the fee is reasonable under RPC 1.5.

Q: What makes the surcharge permissible?

A: The committee tied it to RPC 1.5: the fee must be reasonable, and the client must have received a reasonable and fair disclosure of the material elements of the fee agreement, including the surcharge.

Q: Was the surcharge treated as the lawyer's profit?

A: Yes. The opinion expressly defines a surcharge as charging the client more for the subcontractor's services than the lawyer's cost of obtaining them, and still concluded a fully informed client may agree to it.

Background and rules framework

The opinion interprets RPC 1.5 (Model Rule 1.5, fees), which requires that a lawyer's fee be reasonable. The committee quoted the rule's reasonableness criteria, including the terms of the fee agreement and whether the agreement demonstrates that the client received a reasonable and fair disclosure of the material elements of the fee. The committee did not treat a markup on outsourced services as categorically improper; it analyzed it under the general reasonableness-and-disclosure standard.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.5 / Washington RPC 1.5 (fees; reasonableness and disclosure of material fee terms)

See also

• ABA Formal Op. 00-420: Surcharge for Contract Lawyers
• WSBA Ethics Op. 1039: Contract Lawyer Markup
• ABA Formal Op. 93-379: Billing for Fees and Expenses
• WA Ethics Op. 1103: Contingent Fee Plus Staff Costs

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1289

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 2046
Year Issued: 2003
RPC(s): RPC 1.5
Subject: Billings involving subcontractors

The inquirer asks if a lawyer may, when instructed by the client, ethically charge the client a 10 percent override (surcharge) on a subcontractor`s billing in payment of services for managing the subcontractor. (A “surcharge” is made when the lawyer charges the client more for the services of the subcontractor than the cost incurred by the lawyer for obtaining those services; in other words, a surcharge is profit.)

The lawyer was hired by a governmental entity pursuant to a written professional services contract. In addition to other services, the lawyer is required to hire a subcontractor (actuary), to monitor his performance and to scrutinize his billings. In exchange, the client wants the lawyer to charge the client a 10% surcharge on the actuary`s charges in addition to the lawyer’s other professional charges and to submit one billing for all services. The entity will issue one check to the lawyer from which the attorney is expected to pay the actuary.

The committee opined that the sine qua non of a lawyers fee is that it must be reasonable and the client must be informed. The criteria set forth in RPC 1.5 to be considered in determining a reasonable fee includes “. . . the terms of the fee agreement between the lawyer and client . . . and whether . . . the . . . agreement . . . demonstrates that the client has received a reasonable and fair disclosure of material elements of the fee agreement . . .” Accordingly, a lawyer may charge a fully-informed client a 10 percent surcharge on a subcontractors billing in payment of monitoring the subcontractor`s performance.