Do You Always Need a Costs Budget in Commercial Litigation?

Costs budgeting has become a central feature of civil litigation in England and Wales, particularly in complex and high-value commercial cases. For solicitors and litigants involved in commercial disputes, a common question arises: do you always need a costs budget in commercial litigation?

The short answer is no. But in practice, costs budgets are required in most commercial cases unless a specific exemption applies or the court orders otherwise. Understanding when costs budgeting applies, how it operates, and how it affects costs recovery is essential to managing risk and protecting recoverable costs.

ARC Costs explains when a costs budget is required in commercial litigation, how the procedure rules apply, and why budgeting plays such a critical role in controlling legal costs.

What is a Costs Budget?

A costs budget is a forward-looking estimate of a party’s anticipated legal fees and disbursements for each stage of the litigation. It is prepared using the prescribed format (Precedent H) and is designed to show what costs are reasonably required to take the case to trial or settlement.

Costs budgets are not simply administrative documents. Once approved by the court, they have a direct impact on the level of recoverable costs at the end of the case.

The Rules Governing Costs Budgeting

Costs budgeting is governed by the Civil Procedure Rules, primarily CPR Part 3 and the associated practice directions.

Under the procedure rules, parties are generally required to file a costs budget and exchange budgets with the opposing party in advance of the first case management conference (CMC), unless an exemption applies.

Failure to comply with the rules can have serious consequences, including being limited to recovery of court fees only.

When is a Costs Budget Required in Commercial Litigation?

In commercial litigation, costs budgeting usually applies where:

• The claim is allocated to the multi-track
• The value of the claim is below the automatic exemption threshold
• The court has not disapplied costs management

Most commercial disputes fall within these parameters, meaning that costs budgeting is the norm rather than the exception.

Budgets are typically prepared shortly after service of the claim form and must be exchanged and filed no later than 21 days before the first CMC, unless the court directs otherwise.

When is Costs Budgeting Not Required?

There are circumstances in which a costs budget is not required, including where:

• The claim is valued at £10 million or more
• The case falls within a specialist exempt category
• The court orders otherwise

Even where an exemption applies, the court retains discretion to impose cost management if it considers it appropriate. In commercial litigation, judges are increasingly willing to engage in cost management where costs risk is high.

Filing and Exchanging Costs Budgets

Where costs budgeting applies, parties must file a costs budget and exchange it with the opposing party in accordance with the rules.

The budget sets out estimated costs for each litigation phase, including:

• Statements of case
• Disclosure
• Witness statements
• Expert evidence
• Trial preparation and trial

Accuracy is critical. Underestimating can restrict recovery, while overestimating can lead to reductions at the budgeting stage.

The Budget Discussion Report

Before the case management conference, parties are required to engage constructively and prepare a budget discussion report.

The purpose of the report is to:

• Identify agreed phases
• Narrow areas of dispute
• Assist the court in managing the budgeting exercise efficiently

Courts expect meaningful engagement. A failure to cooperate can be reflected in adverse cost consequences later in the proceedings.

The Case Management Conference and Costs Management Order

Costs budgets are usually considered at the case management conference, which often doubles as the budget hearing.

At this stage, the court may:

• Approve the budgets as submitted
• Revise specific phases
• Disallow or reduce elements
• Make a costs management order

A costs management order records the court’s approval of a party’s budget, subject to any revisions. Once made, the approved budget becomes the primary reference point for costs recovery.

What is the Effect of a Costs Management Order?

A costs management order has significant consequences. When costs are later assessed, the court will not depart from the approved budget unless there is a good reason to do so.

This means that even if legal costs are reasonably incurred, recovery may be limited if spending exceeds the approved figures. The budgeting stage therefore plays a crucial role in protecting recoverability.

Incurred Costs and Their Treatment

Costs budgets distinguish between:

• Incurred costs (costs already incurred at the date of the budget)
• Future estimated costs

While incurred costs are not formally approved by the court at the budgeting stage, they remain fully open to scrutiny at detailed assessment.

High incurred costs can influence how the court approaches future phases and may raise concerns about proportionality.

Proportionality and Costs Budgeting

One of the core purposes of costs budgeting is to promote proportionate costs, in line with the overriding objective.

Even in commercial litigation, the court will consider whether the overall legal fees bear a reasonable relationship to:

• The value of the claim
• The complexity of the issues
• The importance of the case

Budgets that do not reflect proportionate costs are likely to be reduced.

Hourly Rates and Costs Budgets

While the court does not usually fix an hourly rate at the budgeting stage, rates are not irrelevant.

Excessive hourly rates can influence the court’s view of proportionality and may result in reductions to phase totals. Ultimately, hourly rates remain subject to scrutiny at detailed assessment, even where a budget has been approved.

Costs Budgeting and Detailed Assessment

At the conclusion of the case, costs may be agreed or subject to detailed assessment.

Where a costs management order is in place, the approved budget acts as a cap on recovery for future costs, unless a good reason for departure is shown. However, approval of a budget does not guarantee full recovery and costs must still be reasonable and proportionate when claimed.

The Impact on Costs Recovery

Effective costs budgeting significantly improves prospects of costs recovery in commercial litigation. A realistic and well-justified budget:

• Provides predictability
• Reduces disputes at assessment
• Strengthens negotiating position

Conversely, poor budgeting can lead to irrecoverable expenditure and reduced recovery, even where a party is successful.

Why Costs Budgeting Matters in Commercial Litigation

Commercial litigation often involves substantial legal costs, sometimes rivaling the value of the claim itself. Costs budgeting helps ensure that litigation is conducted efficiently, in line with the overriding objective, and without unnecessary expense.

For solicitors and clients, engaging properly with the cost management process is essential to controlling risk and avoiding unwelcome surprises at the end of the case.

How ARC Costs Can Assist

ARC Costs provides specialist support to solicitors and law firms navigating costs budgeting and cost management in commercial litigation.

Our team of qualified costs lawyers can assist with:

• Advising on whether costs budgets are required and when exemptions apply
• Preparing, reviewing, and revising costs budgets in line with the procedure rules
• Assisting with budget discussion reports and strategic engagement before the case management conference
• Representing clients at budget hearings and securing effective costs management orders
• Advising on proportionality, hourly rates, and the impact of budgeting on costs recovery
• Supporting negotiations and representation at detailed assessment

Involving ARC Costs at an early stage helps clients benefit from clearer costs strategy, improved recoverability, and reduced exposure to irrecoverable legal costs, ensuring litigation is conducted efficiently and in accordance with the overriding objective.