Retainer Fee: Definition, Uses, and How It Works

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A retainer fee is an advance payment a client makes to a professional, such as a lawyer, accountant, consultant or freelancer, to secure that person’s services. Depending on the agreement, it either prepays future work, which is then billed against it, or pays for the professional’s availability.

How a Retainer Fee Works

The client and the professional sign a retainer agreement and the client pays the agreed amount, usually before work begins. The agreement typically states:

• the scope of services the retainer covers
• the billing basis (hourly rate, flat fee per task, or milestones)
• the number of hours or the volume of work included, if there is a cap
• whether the balance must be topped up when it runs low
• the period the arrangement covers
• how unused money is handled when the engagement ends

No general rule sets the maximum hours worked under a retainer; the agreement does. In an hourly arrangement, the cap is usually the retainer amount divided by the hourly rate. In a monthly arrangement, the contract may name a fixed number of hours per month.

As the professional works, they draw down the retainer by the value of the work performed and usually send the client a statement showing the hours, tasks and remaining balance. Work beyond the retainer is billed separately, or the client replenishes the account.

Lawyers are the most common users of retainers. Under the American Bar Association’s Model Rules of Professional Conduct, which most U.S. states have adopted in some form, a lawyer must keep client funds paid in advance in a trust account separate from the firm’s own money and withdraw them only as fees are earned.

Retainer Fee Example

Hypothetical example. A client pays a lawyer a $500 retainer, and the lawyer bills $100 per hour.

• Hours covered by the retainer: $500 ÷ $100 = 5 hours
• If the matter takes 10 hours, total fees are 10 × $100 = $1,000. The retainer covers $500 and the client is billed the other $500.
• If the matter ends after 3 hours, the lawyer has earned $300 and refunds the remaining $200.

This assumes the retainer is a pure advance against hourly fees. Many agreements bill court filing fees and other costs on top.

Earned vs. Unearned Retainer Fees

Unearned retainer is the portion held in the trust or retainer account for work not yet done. It still belongs to the client. The professional cannot use it, and unused amounts go back to the client.

Earned retainer is the portion the professional is entitled to once work has been done. It can be earned gradually as hours are logged, or in steps tied to tasks or milestones. An agreement might release 25% of the retainer to the lawyer when the pretrial phase is complete, for example.

Types of Retainers

The word “retainer” covers arrangements that work quite differently:

• Advance fee (security) retainer: a prepayment held and drawn down as work is performed.
• General or “true” retainer: a payment for the professional’s availability over a period, such as being on call for a business. It pays for priority access rather than specific work, so it may be treated as earned on receipt where the jurisdiction allows. Courts and bar rules look closely at nonrefundable labels.
• Monthly or annual retainer: common with accountants, bookkeepers, marketing agencies and freelancers. The client pays a recurring fee for a defined amount of service each month, or an annual fee for ongoing support. Unused hours may or may not roll over, depending on the contract.

Why Professionals Use Retainers

For the professional, a retainer confirms that the client is serious, provides working capital at the start of an engagement, and reduces the risk of unpaid invoices. For the client, it reserves the professional’s time and often gives priority over clients without a retainer. A lawyer who accepts a retainer has taken on the matter and is obligated to do the legal work for that client.

Accounting Treatment

The two sides record a retainer differently until it is earned:

• Recipient: cash received for work not yet performed is recorded as a liability (unearned revenue or a client deposit). It becomes revenue as the services are delivered.
• Payer: a business that pays a retainer records it as a prepaid expense, an asset, and expenses it as the services are received.

Limitations

• No guaranteed result. The fee pays for work and availability, not a particular outcome.
• Not the total cost. Complex matters often exceed the initial retainer, and replenishment clauses can require more payments.
• Refund rules vary. In the U.S., the handling of unused retainers and the enforceability of nonrefundable retainers differ by state.
• Retainer is not retention. A retention fee or retainment bonus is usually an employer’s payment to keep an employee, not a prepayment for professional services.

FAQs

The Bottom Line

Clients hiring lawyers, accountants, agencies or freelancers should read the retainer agreement closely, since it controls what the payment covers and what happens to unused money. An advance retainer belongs to the client until earned, but it rarely represents the total cost of a complex matter. Refund rules and nonrefundable labels vary by state, so the contract terms and local rules decide the outcome.