Staying Current and Heading Off Trouble
Experience shows that many firms fall behind in their collection efforts and accrue large, overdue receivables because they find discussions of such issues with clients to be awkward, uncomfortable, and even “unprofessional”. In reality, it should be seen as unprofessional to not address the issues. There are professional ways to pursue such issues without their becoming a point of conflict with the client. If they do become a point of conflict, it is better to know sooner rather than later.
A good collection procedure will typically follow a rational path of escalation. Such a procedure may include some or all of the following:
- Even if a payment is not technically “due”, consider sending a reminder notice. For example, if an invoice has a thirty (30)-day payment period, it may go to the bottom of the pile. A reminder fifteen (15) days before the due date will often move the invoice back to the top of the pile.
- If a payment is not received by the due date, a prompt written reminder should be sent. It should be succinct, courteous, and professional.
- If payment is not received within a short time of the reminder letter (e.g., 10-15 days), it is time for a personal contact. It may be in person or by telephone. Avoid asking questions such as: “Is there a problem?” Rather, ask: “Is there a reason we did not receive payment on time?” This is less likely to suggest a vulnerability. Confirm the conversation, any explanation, and the commitment to pay in writing. The explanation and the commitment may often be useful in a later collection effort and to defeat any differing excuses offered later. Even if no explanation is offered and no commitment made, the conversation should be documented for later use in establishing notice and the lack of any criticism.
- No later than thirty (30) days after a payment becomes overdue, all strategic options and requirements should be considered. This would include contractual options such as suspension of services, enforcement of guaranties, and notifications to owners and lenders. It would also include statutory remedies, such as lien notices and stop notices. Again, none of these measures is unprofessional, but are simply tools to be used to keep a project on track.
Ideally, any collection effort will be held separate from any claim resolution. This avoids unnecessary entanglement and the almost inevitable counter-claim for negligence and breach of contract. This is also, quite candidly, one of the most difficult separations to make. Nevertheless, there are some procedures which have demonstrated themselves to be useful. Those procedures include the following:
- Statutory Remedies
- Statutory remedies, such as liens and stop notices, often have much shorter time tables and durations for resolution than do client claims for breach of contract and negligence. Accordingly, these protections should be expressly retained and never waived. Such procedures often also create pressure points with third parties, such as lenders, which prompt clients to make payment.
- Third-Party Guarantees
- If a third party holds the project funds and has guaranteed payment, the design professional may often take its fee claim directly to the guarantor without any threat of a counter claim, since the third party is not the client.
- No Set-Off on Related Claims
- The provision for no set-off referenced above can often also avoid an intermingling of claims.
- Waiver of Fee Disputes
- A provision requiring immediate notice of disputes over fees can preclude intermingled claims.
- Short Duration of Fee Disputes
- The Agreement may provide that all fee and cost disputes will be resolved within a short duration (i.e., within sixty  days), and that during the dispute the client will place the disputed funds into a trust fund. Experience demonstrates that design professionals are much more likely to receive their fees if the funds are out of the client’s account.
Where a discount or a free service is provided, seek to obtain a release for any services related to the discounted fee. Such releases are most easily obtained during the project and often have a value far in excess of the discount, since they may preclude future claims.
The end of one project should be viewed as a critical opportunity for preparation for the next project. While the project is fresh, the design professional should review all aspects of the project, including the financial performance. Relevant considerations include:
- Was the project profitable? If not, why not?
- Were payments made in full and on time? If not, why not?
- What project risks were encountered and avoided, and how?
- Were all aspects of the contract closed out and documented?
- What steps can be taken on subsequent projects to avoid or minimize negative experiences identified above?
A sample “Post-Project Evaluation Form” is attached.