By Reno Caldwell and Michael Weibel.
How simple was the process of projecting the firm’s revenue for the years 2006, 2007 and 2008? Most firms simply increased their prior year’s revenue by 20%. As we all know, much has changed in the economy and revenue forecasting is no longer a simple process. While attempting to pinpoint a revenue projection today, a common question is asked by many Architectural and Engineering firms: “If client A, B and C pay, our revenue should only be down X%.” The unpaid fee is now a major problem for most (if not all) design professionals. How is your firm dealing with unpaid fees? Perhaps a nasty letter demanding payment “or else” has already been sent. The question is what does “or else” mean to you? More importantly, what does it mean to your client? Most likely, your client will translate any “or else” statement into litigation and litigation may not lead to a favorable outcome to your firm. There are several factors that need to be considered when your fee becomes disputed. Please consider the following precautionary measures when dealing with a fee dispute, especially if litigation looms on the horizon.
Insurance: All professional liability insurance polices exclude coverage for unpaid fees. The cost of all legal expenses in connection with collecting such fees will be borne solely by the firm.
Review your Contract: If your immediate response is “What contract?”, you may have a problem with collecting your fee. All contracts should include payment and termination provisions. It seems generally understood that one will only work if one is paid. Unfortunately, many owner drafted agreements contain provisions that limit the service provider’s ability to stop working in the event of non-payment. These provisions take many forms. In some cases the owner is permitted to withhold payments in the event of a disputed billing or if the work is deemed unacceptable. At the same time the service provider is required to continue working.
In one of our previous newsletters titled “How to Get a Design Professional to Work for Free”, Brian Stewart and Christine Bodnar Swiss, Esq. provide the following example of one-sided contract language which favors the owner and should be avoided: Owner reserves the right to reject all or any portion of an invoice. If Owner disputes Architect’s entitlement to payment for Architect’s services for any reason, Owner may withhold the Disputed Amount until the dispute is resolved by settlement, dispute resolution and Architect shall be obligated to continue to perform Architectural Services… without interruption.
Provisions such as the one above are precarious given that the service provider might be faced with the dilemma of either continuing work without being paid or being in breach of contract. Even in the best economic environments, it makes no sense wasting valuable resources providing unpaid services. If you discover such language, you should consult an attorney before initiating the collection process.
Hopefully, the following steps will lead to a favorable outcome:
1. Check’s in the Mail: Your client may not be aware that a payment is due, having forgotten the payment schedule agreed to in the contract-LOL-and needs a reminder. The reminder should be in the form of a timely, non-threatening letter. People who are not collectors are generally reluctant to remind a client of its past due invoices. This may be due in part to a fear of alienating the client or may simply be an effort to avoid confrontation. The fact is that the longer these amounts are outstanding the harder they are to collect. Not only must you be diligent in following up on past due invoices, you need to bill in a timely manner.
2. Documentation: A non-threatening letter is a good first step in addressing a late paying client. The letter should highlight the payment schedule that was agreed to in the contract, and should note the danger of becoming in breach of the contact’s payment provision: possible termination. The letter should also include a “please respond no later than” date. Documentation is always important, but more so when fees are not paid.
3. The Client’s Response: Within days of you sending your non-threatening letter, you will be receiving, by overnight carrier, the full amount owed, right? Unfortunately, the best outcome may not be likely in this economic environment. The more plausible response from your client will be a request to modify the amount owed. Ouch! This is the official beginning of a fee dispute. What now?
4. Back to the Contract: You will be highly motivated to write a second letter that is loaded with demands and, of course, “or else” statements. Such a letter will certainly put the firm on the cusp of legal action. Before reaching for the red pen and a sheet of paper, a more thorough review of the contract is needed. What is the contractual process of resolving disputes? Did the firm agree that time is of the essence? Does work need to continue during disputes? Who is responsible for the cost and legal fees of the dispute resolution process? Understanding the ramifications of each of these provisions is very important, and a reasonable effort should be made to avoid breaching any contractual provision that could be used against the firm during the dispute resolution process. Arbitration has become a popular method for resolving disputes; therefore, we will use arbitration as an example. The client’s offer of a reduced fee is unacceptable, and you are ready to press the arbitration button-but wait!
5. Arbitration: What happens after you make a demand for arbitration? It is likely that your client will make the dreaded counter demand! When you receive a counter demand, you should contact your insurance broker who will notify your professional liability insurance carrier. Most professional liability policies state that any demand for money or service needs to be reported. The arbitration process can be frustrating and a favorable outcome is not automatic. Remember that the arbitrator is not bound by the same legal remedies set forth by law. For example, arbitrators are not obligated to review your contract or other evidence that supports your position, you may not be allowed to subpoena supporting evidence from your client, and the arbitrator’s decision is final and may not be appealed. By pressing the arbitration button, a disputed fee can soon become the least of your worries. Remember that, regardless of the dispute resolution process, a firm seeking past due fees by way of any formal means will likely be faced with some form of counter demand.
6. Worst Case Scenario: The arbitrator favors your client’s position and awards your client a payment for damages. In all likelihood, your professional liability carrier will cover the damages awarded by the arbitrator (minus your deductible obligation). However, you are now the losing party. If you were contractually obligated for the
payment of the prevailing party’s attorney fees, this financial obligation may not be insurable. By taking legal action for a fee dispute, the firm may lose the fees, pay a deductible, and be financially responsible for your client’s attorney fees.
What to do: At this point in time, litigation is on the rise. Accepting a lower payment from your client may be the most reasonable approach to settling a fee dispute. It is important to modify the contract with the new payment terms, and also make it known that accepting a lower payment is not the firm’s standard practice. Most importantly, remember to protect yourself by avoiding contractual provisions that limit your options in the event of a fee dispute. Do not allow the client to get too far ahead of you. In other words, if an invoice is more than 30 days overdue, you need to know why it is not being paid. Is the client unhappy? Or is the client unable to pay? You also need to have a definitive response from your client as to when you might expect payment. The client needs to know the consequences of continued non-payment. If payment is not forthcoming when promised, you need to take prompt action to protect your firm’s economic interests.
Reno Caldwell is Vice President of lOA Insurance Services in Pleasanton, CA. Michael Weibel is the President of M.G. Weibel and Associates in Chicago.
This article was originally published for a/e ProNet. a/e ProNet is a National Association of insurance brokers who specialize in providing professional liability insurance to the design professionals. a/e ProNet provides an independent source of professional liability information, risk management, loss prevention and continuing education services for design professionals and their professional societies. Visit our web site at www.aepronet.org.