What is a Retainer Fee
A retainer fee is an upfront cost incurred by an individual in order to pay for 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 his behalf. These fees, almost always paid upfront, only ensure the commitment of the receiver, and they do not guarantee an outcome or final product.
BREAKING DOWN Retainer Fee
A retainer fee is an advance payment that's made by a client, usually to a lawyer, that is considered a down payment on the future services rendered by the lawyer. 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 isn't used for personal purposes before the services are fully performed.
The most common form of retainer fees applies to lawyers, who in most cases require potential clients to provide an upfront retainer fee. For example, a lawyer may charge a $500 retainer fee. If she charges a total of $100 an hour, the retainer covers all of her services, up to the five-hour limit. The lawyer bills the client for the cost of any additional hours she invests 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, or $1,000 in total, 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.
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 anyone earning them. 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. After a lawyer completes the pre-trial process, for example, he or she may receive 25% of his or her retainer.