In the current economic environment, avoid costly payment disputes and counterclaims by choosing clients carefully and staying on top of your receivables and collections.
During the COVID-19 pandemic, many design firm clients are facing financial challenges. In this environment, AEC firms should closely monitor their receivables and diligently manage any collections. It’s not just a matter of your firm getting paid; pursuit of outstanding fees often can prompt clients to allege your work was somehow deficient, leading to errors and omissions claims.
Here are some best practices to help design firms avoid and manage collection issues:
- Be diligent about accepting projects. Many design firms conduct periodic credit checks on clients from which they have large upcoming receivables and all new clients. Those subscribing to popular credit reporting services may be able to obtain credit reports on current or prospective clients at nominal costs. Additionally, you can ask for references – typically from clients’ banks and firms they’ve worked with in the past.
- Know your contact at the client. Be sure the contact is empowered both to authorize your services and to pay you for them.
- Watch relationships with slow-paying clients. Be wary of accepting work from historically slow-paying clients. If your firm accepts the work, consider requiring a retainer to apply against the final bill. If the client is not the project owner, try arranging to be paid directly by the owner.
- Communicate internally. Senior professionals and managers in your firm should know of any potential financial exposures associated with their clients. If one or two clients represent the bulk of your receivables, monitor them more carefully.
- Insist on written, signed agreements for all projects. The contract should include: the client’s (correct) legal name; individuals authorized to bind the client; timing and frequency of your firm’s invoices; timeframe for the client to question them (but an obligation to pay you for unquestioned portions of any bill); payment timing and terms; consequences to the client for failure to make timely payments (such as interest charges, reimbursement of collection costs, and your firm’s right to stop working); and the process for dispute resolution.
- Take added precautions on international projects. Firms doing business internationally should know their options upfront for collecting from clients outside the U.S. Failure to be paid remains a nearly universal concern among AEC firms doing international work, prompting some to withdraw completely from that market.
- Submit bills promptly. Establish a billing and invoice follow-up schedule, and stick to it. Be diligent about enforcing internal procedures for submitting all billable hours and invoicing clients on a timely basis – expect delays on some payments and plan, accordingly.
- Understand the elevated risks of billing delays. A client’s staff and financial condition can change quickly. If your firm has a slow invoicing process, you may fall down the list of firms they owe; and delays may result in a more difficult environment for collection.
- Watch additional services. Payment disputes often arise from additional services – change orders. A common complaint: the architect or engineer performed services not ordered. Thus, avoid negotiating requests with anyone other than an individual the client authorized to amend the scope of services and only accept written requests.
- Know when to suspend services. Receivables can mount simply because the design firm keeps working while ignoring ever-increasing outstanding invoices for a client. Set an amount or number of days outstanding as triggers – once exceeded you stop working (assuming you have that right contractually).
- Check clients promptly regarding any payment delays. Whenever a client’s payments lag or cease, contact the client to determine the root cause. If the client cites service issues as the reason they’re not paying, get details and address them. Once you resolve an issue document it in writing.
Assessing final collection options. When receivables have exceeded 120 days and your firm hasn’t been paid, you might consider the following options:
- Negotiate a settlement. Depending on the circumstances, you may agree to a discounted lump sum, a payment plan or deferred payment, with the latter two defined in a promissory note.
- Make a claim for payment. When it’s clear your client will not pay, you can file a claim or lawsuit seeking payment. A well-drafted contract may include an expedited process for resolving payment disputes, as well as the right to recover your attorney’s fees.
- File a lien. Sometimes, just the threat of a lien on the project can trigger payment. Depending on the state, the time for filing a lien can be short. Investigate your deadlines as soon as you have a payment problem. A lien may secure preferred rights if the client declares bankruptcy.
- Go to the owner. If your firm works for an AEC firm or contractor other than the owner, you can threaten to contact the owner about the payment problem. If the owner has paid them, but they haven’t paid your firm, this might change the discussion.
- Engage a professional collection. While this puts some distance between your project personnel and the enforcers, the downside is that your firm must incur additional overhead or give up a portion of any funds collected. And these firms can be somewhat strong-armed, which may adversely reflect on you.
- Write off the receivable. At the start of any formal collection procedure, determine if your costs to pursue payment may exceed your maximum probable recovery. In some cases, it may be best to cut your losses and move on.
Managing counterclaims. Professional negligence often is part of a counterclaim to a claim for fees. As soon as you learn of a potential counterclaim, contact your insurance broker and/or insurer. If your insurer provides pre-claims assistance, consider contacting it before initiating formal legal action.
Some carriers include an additional coverage in the professional liability policy that allows for payment directly to the insured design firm for resolving a fee claim that extinguishes a potential E&O claim. Note: This coverage is not universally offered, typically is sub-limited and may be subject to additional limitations.
In the current economic environment, choose clients carefully and stay on top of your receivables and collections. Along with implementing formal and consistent procedures, these measures can help your firm maintain productive client relationships and avoid costly payment disputes and counterclaims.
Rob Hughes, senior vice president and partner, Ames & Gough. He can be reached at email@example.com.