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Contractual Provisions

Pre-project interviews and investigation are only a preparatory education. The true starting point to protect and secure payment of fees is obviously the Service Agreement. First and foremost, if you do not have a written Agreement signed by both sides, you will often have an almost impossible task in securing payment. To be binding, that Agreement should reflect the key elements of the pre-contract education and exchange. Otherwise, that information is not binding on the client and is of no ultimate benefit to the design professional. Assuming that a written Agreement is in place, several key provisions have proven critical to securing prompt and appropriate payment.

agree on your terms

Specific Payment Procedures

Either in the contract itself or by separate written confirmation, establish who needs to receive the invoice at what location and the required content and backup for the invoice. This avoids later excuses that the invoice was sent to the wrong location or lacked sufficient detail or backup. Often, this can best be resolved by including an exemplar invoice to the Agreement as an Exhibit. Experience indicates that it is best to include this in the Agreement where it is more likely to be binding and can less readily be disputed later. By including the clause in the Agreement, the firm may also impose a short duration for the client to request additional information.

Early Identification of Disputed Issues

The Agreement should provide that the client has a very short time period after receipt of an invoice to identify any disputed portion. For example, the Agreement could provide that the client must identify any disputes with the invoice within ten (10) days of receipt or shall be presumed to be in agreement with all portions of the invoice.

Short Payment Durations

Keep the period between receipt of invoice and the date for payment as short as possible. Ideally, payment should be due before the next scheduled invoice to avoid a mounting series of unpaid invoices.

Payment of Undisputed Portions

In the event the client does dispute a portion of an invoice, the Agreement should provide that they will make prompt payment of all undisputed portions.

No Set-off

Provide that the client may not back-charge the professional or reduce payments as a set­-off to perceived damages arising out of the professional’s services. Such set-offs frequently subject the professional to the double impact of lost fees and liability payments. Provide that the client may only withhold fees for that portion of the services improperly performed.

Right to Suspend

Include a provision which provides that, in the event payment of an invoice is not received within the prescribed time period, the professional may suspend services at their option until payment is received, and shall be compensated for the expenses of the disruption. However, such a provision is only useful if the professional is willing to use it, or at least threaten to use it. Often, design professionals do not use such provisions because they are fearful of liability from the project impacts. Solve this by providing a release for any claims caused by such a suspension. Furthermore, the professional should protect against these risks by providing that the client shall defend, indemnity, and hold harmless the design professional from any and all claims, damages, or losses arising out of such a suspension. In this way, the professional is protected not just from the client, but from third parties (such as contractors) as well.

Non-Payment Precludes Right to Use Documents

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. In the final analysis, such provisions are often the last and best means to compel an otherwise recalcitrant owner to live up to his or her obligations and make payment to the design professional.

No Assignment

As indicated before, good client selection is one of the most important steps towards securing collection. That entire process can be lost if the selected client can assign the project and the design professional’s obligations to a third party. Accordingly, the Agreement should provide that the Agreement and the design professional’s duties and responsibilities may not be assigned to a third party without the design professional’s subsequent written consent. Where lenders require an assignment, make it contingent upon an assumption of all client obligations under the Agreement and a contract amendment, as necessary, to protect the design professional and the project in light of the assignment.

Parties To The Agreement

If a third party holds the project funds, consider adding it as a party obligated under the Agreement. Alternatively, require a guaranty of the payment of the fees and costs. Either way, the key is to have the party with the money bound to the design professional.

LIMITED Right to Recovery of Collection Costs

As referenced before, one of the great dangers in any counter-claim for professional negligence is that there will be a right to prevailing party attorneys’ fees, which is not insured and which can quickly overwhelm the design firm financially and make even the defense of the allegations cost prohibitive. By the same token, the unrecoverable cost of pursuing many collection actions will also undermine the value in doing so. As a result, a prevailing party attorneys’ fees clause can be incredibly valuable as a means to enhance payment opportunities, but it should be limited in both purpose (e.g., collection) and, more importantly, dollar value such that it is consistent with a collection action and not a much broader claim for professional liability.

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