If you’re an architect, engineer, or other design professional, you may find yourself in a precarious situation when it comes to fee disputes. Attempting to recover unpaid fees can put you at risk for a claim made by a client, resulting in money spent simply trying to recover owed fees. While every scenario is different, being proactive and protecting your business with clear contract provisions can help you effectively collect necessary fees while maintaining a healthy relationship with your clients.

Understanding Fee Claim Disputes

Whether you’ve been down this road before or been fortunate enough to avoid a fee dispute in your career so far, understanding how these situations unfold can be helpful when considering how to establish contract provisions to protect your work and revenue. Consider the following true example.

Example

In a tough economy, the project proved a benefit to our insured. The engineering firm was hired to provide design services. However, following completion of the design work, the firm had trouble collecting $40,000 in fees for additional design work they had performed. After numerous attempts at obtaining payment, the firm hired an attorney and filed a claim against the developer in the amount of $40,000.

Any architect or engineer who has ever filed a fee claim can probably guess the next part of the story. The developer filed a counterclaim against the engineering firm, alleging negligence and lost profits. The developer asserted that the firm’s surveying errors had led to the incorrect siting of the homes, depriving many homes of the much-publicized mountain and lake views, thereby decreasing the value of the lots.

The insured maintained that the developer understood that many of the homes would not have the views because the developer had declined to undertake an expensive earth-moving project. In the insured’s opinion, the developer’s failure had more to do with the real estate market than with the lost views.

Lacking any documentation of the developer’s earth­moving decision, the insured was forced into an “our word vs. their word” dispute. The resulting litigation, which began over $40,000 in unpaid fees, dragged on for five years.

This is just one example of the costly predicaments in which you can find yourself when you file a fee claim. Filing a claim against your client — albeit an honest, final attempt at collecting fees — will almost certainly bring a counterclaim against you.

Strategies to Navigate Claim Concerns

Most clients want a successful project and will pay what they feel they rightly owe, especially the fees of a design professional who is helping to translate the development concept into reality. When clients take a drastic action, such as refusing to pay fees, they know that some push back is likely. A client may be hoping to use the opportunity to air grievances with the designer and work out some relief, either by negotiating all or part of the unpaid fees or by getting an explanation or help regarding their concerns.

In this case, there are some specific risk management strategies the firm could have implemented to help avoid or mitigate the dispute and resulting claim:

Had the insured taken these steps, the likelihood of receiving full payment would have been much higher, and there would be no question of whether to file a fee claim or not.

 

Missing Payments Slow Your Progress

Unfortunately, uneven accounts receivables processes at design firms can contribute to complications with collecting fees. The average receivable across the sector is about 63 days, but for subconsultants, the average jumps to almost 115 days because of the “pay-when-­paid” provisions in sub consulting agreements. For firms not working as subconsultants, this can mean relying on borrowed money for 30 days to pay staff or reducing the profit across all other projects to subsidize the carrying cost. The situation can be more dire for designers working as subconsultants, often subsidizing the owner’s project with an interest-free, 90-day loan in exchange for working on the project.

The effects of late payment can have a cumulative effect on your business. Various costs, both In terms of time and money associated with collecting past due receivables, can be an anchor on a firm in many ways.

Protect Your Work With a Contract

To be effective in collecting your fees, you cannot focus solely on the billing and payment terms in your agreement. You must also have policies in place that will assist you in enforcing them. Agreements should specifically address when payments are due, penalties for non-timely payments, and your rights in the event of nonpayment.

Your contract should address the following:

These provisions can protect in cases where clients are inconsistent in payments or fail to make payments altogether. It is also important to document all communications with the client when payment issues are being discussed, especially in the case where the client is asking for additional work to be performed outside the scope of the original contract.

Unpaid invoices can be a thorn in the side of any design professional and their company. It is best to take a proactive approach when it comes to collecting payments. The best solution of all is to prevent the issue from evolving into a dispute/claim in the first place with a contract that protects your business.

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If you’re a design professional looking for insight and support with contract creation and fee collection, we can help. Reach out today and let’s start the conversation!