It’s a tale as old as business. A client hires you to do a job, and you get to work. Everything is going swimmingly until the day your client suddenly stops paying. You’re only midway through the project, but you’re already staring at a backlog of $25,000 in unpaid fees.
The first logical thing you can do in order to get paid is to ask your client for payment. Unfortunately, they have a reason. Maybe they’re unhappy with your work. Maybe they’ve run out of money. Maybe they’re just old-fashioned scam artists. Whatever the excuse, your only recourse is to file a lawsuit.
However, they’re going to fight back. A counter-suit alleging negligence will quickly rack up legal fees as litigation costs can easily surpass the open balance. And that doesn’t even factor in the cost of business interruption.
Nobody likes to leave money on the table, but you need to pick your battles carefully and be prepared to walk away rather than seeing the inside of a courtroom. We advise our architect and engineering clients to implement these best practices to avoid even getting to the point of a costly legal battle.
Get your billing in order. First things first: hire an accountant. You may be a small firm just starting out that can’t afford the additional human resource. You might think your team has it all under control. In reality, without a dedicated person behind the billing desk, details will go unnoticed and you’ll be open to risk. Your accountant can establish and maintain a regular billing schedule – every 30 days or less is ideal – while allowing you and your team to focus on delivering the work.
An accountant also acts as the first line of defense in contentious discussions, allowing you to stay out of fray and preserve the good relationships you have with your clients. Of course, work often continues while clients are in arrears; it all comes down to taking issues of non-payment seriously and being willing to confront a client that is not up-to-date.
Face the facts. Fool me once, shame on you. Fool me twice, shame on me. It’s hard to turn down work, but if a client has failed to pay in the past, it’s only prudent to pass on future projects. Instead, use the time you would have spent on a proposal for a delinquent client pursuing new business. It’ll pay off in the long-run.
Create rock-solid contracts. You may have been burnt in the past; now learn from your mistakes. Where were the weaknesses in the last contract? What could you have done differently? It’s tempting to get right back to work after a financial loss, but don’t rush to sign any contracts until they’ve been reviewed and revised to provide the most airtight protections and coverage for you and your business. Ensure clauses are in place that allow your team to cease work on a project if payment stops. If possible, bill on a retainer basis.
And at the very least, do not set foot onto a new site before the ink is dry on a signed proposal with an hourly rate schedule. It’s surprising how often architect and engineering firms are still without any signed documentation at the time of a dispute, in which case they’re left with zero leverage.
Communicate with your client. Scope creep is a term with which most firms are familiar. A project is coming along nicely, everything is going smoothly, and everyone’s happy. Slowly but surely, your client begins adding more work – just a little -- here and there. Before you know it, you’re significantly over-servicing the project and not being paid for the extra work. Many legal disputes begin at exactly this point. But arguments over scope and fees can be avoided with clear, open communication from Day One. It’s critical to be up-front and transparent at the start of every project so that both parties are in agreement when it comes to scope as well as your fees and terms for additional work.
While issues of non-payment and subsequent legal disputes are a common issue for architects and engineers, it’s a problem that’s ubiquitous across most service industries. Any business doing work with third-party vendors is susceptible to costly litigation and can benefit from implementing best practices to mitigate the risk. To get in touch with a broker who can help you navigate the issue, email us at aepro@risk-strategies.com.
