Design a Contract That Protects Your Payment
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.
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:
- Communicate with the developer on a personal level (principal to principal) when receivables fell behind. Apply consistent accounts receivable collection methods throughout the project.
- Document all decisions especially the discussions surrounding the developer’s decision not to authorize the earth-moving project.
- Amend the contract with the developer to include the additional design work requested.
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.
- Time — The time cost of money, or the erosion in the actual buying power of money, over time caused by interest rates in the general economy.
- Administrative — Your internal cost of collecting payment and fees, including the administrative and project management hours involved.
- Opportunity — The cost to the firm of what it might have been able to do with the money but could not.
- Predictability — The cost of the uncertainty of being paid and its effect on your ability to support your staff and plan strategically for future projects.
- Financing — The actual cost to the firm for paying bills while waiting for the receivable to be paid. Even if the firm is not actually borrowing money from a credit line or bank, it is still internally financing the receivable with profit from other projects. The financing can become like a tax on other projects.
- Bad Debt — The percentage that may get written off as uncollectable. For design firms, the bad debt column may be overestimated here, as most owners do eventually pay design firms for their services, but often with depreciated dollars. In this worst-case scenario, the firm that waits 120 days for its money is paid 25 percent less on the total receivable dollars. Firms are often surprised at the percentage of their receivable that simply disappears.
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:
- Payment due
- Collection costs
- Suspension of services
- Termination of services due to non-payment
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.
Our Experts Are Here for Your Team
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!
Published on: 01.29.24