Why a $1.2M contingency pipeline and a $340,000 P&L can both be correct

A personal injury attorney we work with had 14 open contingency cases she had been building for an average of 9 months. Her best estimate for those settlements was $1.2 million. Her Profit and Loss report (P&L) for the year showed $340,000 in collected revenue.

The books were not wrong. No case had settled, so no revenue had been recorded. But she was making staffing decisions based on the $340,000 P&L while her view of the pipeline was $1.2 million, a number with no adjustment for stage or probability built into it.

When we built a WIP schedule for the firm, the probability-adjusted value of those 14 cases came out to $413,000. The partner’s estimate was not fabricated. It was undiscounted.

Why contingency cases create a bookkeeping gap

In a contingency arrangement, the firm’s fee is a percentage of the recovery. No invoice goes out until the case closes. No revenue appears in the books until the check arrives, which might be 18 months after the client signed the retainer.

In the meantime, the firm spends real money. Filing fees go out. Medical records are ordered. Expert witnesses are retained. Those costs are recorded when they occur, but most firms post them to a general expense account rather than tying each cost to the specific matter it belongs to.

The result is a P&L that shows costs accumulating and revenue arriving in irregular deposits, with no visible connection between them. The books are accurate. They are incomplete without a WIP schedule alongside them. WIP, or work in progress, is what the firm has invested in open matters that has not yet produced collected revenue.

Three things a partner estimate leaves out

Litigation stage. A demand letter sent before suit is filed is not the same asset as a case scheduled for mediation next month. Both may carry the same demand value. The probability of collecting at those two stages is different. A partner who estimates at full demand value treats every case identically, regardless of where it sits in the process.

Collection probability. Stage tells you how far along a case is. Probability tells you whether the defendant can and will pay. A $300,000 demand against a commercial insurer with adequate limits is different from the same claim against an individual with limited assets. Both may be at the same stage. Only one of them belongs at full demand value in a financial forecast.

Matter expenses. The firm advances real costs on each case: filing fees, deposition transcripts, medical record requests, expert witness retainers. When those costs sit in a general account, the firm cannot see the net economics of any individual matter. A $200,000 settlement looks different before and after accounting for $48,000 in case advances.

What 14 cases look like on an adjusted basis

Here is what the attorney’s caseload showed once stage and probability factors were applied to each group of matters.

After netting $62,000 in matter expenses that had been tracked by case number, the probability-adjusted net WIP was $413,000.

The partner’s estimate was $1.2 million. The adjusted number was $413,000. Both describe the same caseload. Only the $413,000 belongs in a staffing or distribution decision.

Three decisions contingency firms get wrong without a WIP schedule

Hiring. Adding a paralegal or associate is a 12 to 18 month commitment. If the adjusted WIP does not support that overhead across the next few quarters, the hire creates a cash shortfall even when the raw pipeline looks large.

Overhead commitments. Leases, subscriptions, and equipment purchases are funded by future cash. If cases expected in Q3 slip into the following year, the shortfall shows up in the bank account, not in the partner’s estimate.

Partner distributions. Equity partners often draw distributions based on how the pipeline looks. A distribution taken against a $1.2 million estimate creates a cash problem if the probability-adjusted WIP is $413,000 and only a portion of that settles in the current year.

What working WIP tracking looks like for contingency firms

For the firms we work with, the WIP schedule is updated at each major case milestone: demand sent, suit filed, discovery opened, mediation scheduled, trial date set.

Matter expenses are tracked by case number from the first disbursement. When a case closes, the net recovery is compared to the last adjusted WIP estimate. Cases that settled for more than 25 percent above or below the adjusted figure are reviewed to recalibrate the stage and probability factors going forward.

The schedule is reconciled to the P&L at quarter-end. Settled cases come off the schedule, and their recoveries flow into collected revenue.

Best practices for contingency WIP tracking

• Assign a matter number to every case and code all expenses to it from the first disbursement. A general expense account makes it impossible to see the net value of any individual matter at settlement.
• Update the stage factor at every material event. A case at mediation is a different asset than it was in discovery.
• Keep the raw partner estimate and the adjusted WIP in separate columns. The raw estimate has context value. The adjusted figure is what belongs in financial decisions.
• Compare each closed case to its last adjusted WIP estimate. The misses are the calibration data for next year’s factors.

Three questions worth asking

1. What is the total estimated recovery across your open caseload, and what would that figure be after applying a stage discount and a probability factor to each matter?
2. Are case expenses tracked by matter number, or do filing fees, expert costs, and medical records sit in a single account with no connection to the cases they belong to?
3. In your most recent staffing or distribution decision, which number drove it: the raw partner pipeline estimate, or a stage-adjusted view of what the open caseload is worth?

If those answers are uncertain, the firm is making decisions against a number that is not actively managed. A WIP schedule takes about two hours to build and 20 minutes to update each month. Send us your open case list with current status and estimated recovery. We will build the first version with you.