Getting Paid Without Getting Sued

Without payment for services, design firms will suffer, starve, and even die.  Importantly, payment issues are also often the single greatest warning sign of a project in trouble. The Collections-Claim Connection: Getting Paid Without Getting Sued, an AIA Trust risk report, discusses steps the architect can take to help ensure payment for a successful project.

The best collection strategies begin pre-project and should involve three components:

  • Client selection.  Appropriate client selection is one of the most important steps in ensuring payment for services and in any design professional’s risk management plan.
  • Client expectations. To accurately evaluate a prospective client, determine their relative expertise and expectations. Establish common ground in a client interview discussing the project in detail with the prospective client to be sure expectations are shared.  This risk report includes a sample “Client Profile” and “Client Information Checklist.”
  • Client track record. The design professional can contact past project participants to check out their experiences as well as conduct an electronic search of court and county records for any litigation on past projects and any payment issues.

It is unwise and unprofessional to get into a project which lacks solid funding to complete it. Many AIA agreements now call for funding information, providing a convenient basis to initiate that discussion with the client. It is imperative to determine how the project will be funded and financed along with ensuring that the design professional has access to project funds. If funds are held by third parties such as investors, banks, or holding companies, the firm should have a path of direct access to those funds – and the Agreement should reflect them as an obligated party. Design professionals may consider securing a title report for private projects.  It will reveal lenders and other investors who may require notice of liens and reveal properties already financially leveraged.

A project must be clearly defined so that the firm can prove its completion and receive payment. The two keys to a well-defined scope of work for collection purposes are:

  1. Detailed description of the total project and service sufficient to enforce final payment; and
  2. Identification of project milestones and related fees sufficient to enforce incremental payments.

If such a scope is not achieved at the outset, it is acceptable to proceed on a time-and-materials basis on a limited duration and commitment with sufficient protections provided.  Avoid open-ended contract obligations.

Informed clients tend to be happy and satisfied and therefore most likely to pay on time and in full.  By contrast, clients who are surprised or disappointed are those most likely to delay or stop payments. Important aspects of client education include:

  •  Process and schedule–The design professional should review the expected project schedule and process with the client and clearly understand that unexpected events or conditions may arise for which the design professional is not responsible. Document these conversations and make them part of the contract where possible.
  •  Mid-project changes–The client must be advised that delayed decisions or changes by the client (or by others, such as building officials) during the project can impact the project schedule and cost.
  • Standard of care–The client must be educated as to the design professional’s standard of care – and that there is never a perfect set of plans or specifications nor can any design fully anticipate every contingency.
  •  A Strategic no-go decision–The investigation of the client and project should not simply be an exercise but lead to a strategic “yes/no” decision. This decision may be a more holistic evaluation or based on specific criteria. The white paper provides a sample “Go/No-go Checklist” to assist.

The Service Agreement or contract is the starting point to protect and secure the future payment of fees and it should reflect the pre-contract exchanges.  Some key contract provisions include:

  1. Specific Project Procedures defining who is to receive invoices at what location and any required content and backup to avoid later excuses.
  2. A defined short period after invoice receipt for payment, to identify any disputed portion and preempt future issues, as well as a short payment duration before the next scheduled invoice to avoid progressive unpaid invoices.
  3. Stipulate that the client may not back-charge the professional or reduce payments to off-set any perceived damages but only for services improperly performed.
  4. Include a provision that the professional may suspend services until an overdue payment is received and shall be compensated for the expenses of the disruption, including a release for any claims caused by such a suspension.
  5. The Agreement should make the client’s right to use the design professional’s work product contingent upon timely and full payment of all fees and costs payable under the Agreement.
  6. Considering the importance of client education and selection, the Agreement should state that it cannot be reassigned to a third party without the design professional’s written consent.

And finally, when there is a collections problem, the paper discusses tactics useful to resolving it, such as:

  • Send a reminder notice even if a payment is not technically “over-due.”
  • Send a prompt written reminder when a payment is not received by the due date.
  • Contact the client personally if payment is not received 10-15 days following the reminder to find out any reason for not receiving the payment on time, with a written follow up to confirm the conversation, explanation, and commitment to pay.
  • By thirty days past due, all strategic options and contractual requirements should be considered including suspension of services, enforcement of guaranties, and notifications to owners and lenders as well as statutory remedies such as lien notices and stop notices.

The end of a project is a critical opportunity to review and evaluate the overall project experience, including financial performance–in preparation for the next project. This report includes a sample “Post-Project Evaluation Form” for this purpose.

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