A retainer fee is an amount of money paid upfront to secure the services of a consultant, freelancer, lawyer, or other professional. A retainer fee is most commonly paid to individual third parties that have been engaged by the payer to perform a specific action on their behalf. These fees, almost always paid upfront, only ensure the commitment of the receiver. In addition, retainer fees usually do not represent the total final cost of the services provided.
- A retainer fee is a payment made to a professional, often a lawyer, by a client for future services.
- Retainer fees do not guarantee an outcome or final product.
- Portions of retainer fees can be refunded if services end up costing less than originally planned.
Understanding Retainer Fees
A retainer fee is an advance payment that’s made by a client to a professional, and it is considered a down payment on the future services rendered by that professional. Regardless of occupation, the retainer fee funds the initial expenses of the working relationship. For this reason, these types of fees usually remain in a separate account from the hourly wages of the consultant, freelancer, or lawyer. This ensures that money is not used for personal purposes before the services are fully performed.
The most common form of retainer fee applies to lawyers who, in most cases, require potential clients to provide an upfront retainer fee.
Example of a Retainer Fee
For example, a lawyer may charge a $500 retainer fee. If the lawyer charges a total of $100 an hour, the retainer covers all services up to the five-hour limit. The lawyer then bills the client for the cost of any additional hours they invest on behalf of the client.
In this example, if a trial case takes 10 hours of the lawyer’s time, the lawyer charges the client an additional $500, which comes to $1,000 when including the retainer. If the client’s case is resolved prior to reaching the five-hour limit, the lawyer refunds the remaining portion of the retainer to the client. If the case is resolved in three hours, for example, then the lawyer would refund $200 to the client.
Earned Retainer Fees vs. Unearned Retainer Fees
An unearned retainer fee refers to the initial payment of money that is held in a retainer account prior to any services being provided. Retainer fees are earned once services have been fully rendered.
In the example above, the retainer is considered unearned until the court case is closed and finalized. These unearned fees do not belong to the person performing the tasks, in this case, the lawyer until work actually begins. Any unearned retainer fees that are not used can be returned to the client.
Earned retainer fees, on the other hand, refer to the portion of the retainer that the lawyer is entitled to after work begins. Earned retainer fees may be granted to the lawyer bit by bit, depending on the number of hours worked. Distribution of retainer fees can also be based on tasks or milestones. For example, a lawyer may receive 25% of the retainer fee after completing the pre-trial process.
By Olivia Lagarde in Investopedia