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04.08.2020

Collections Strategies for Design Firms: Tips for Avoiding Client Disputes

Mark Blankenship - Assistant Vice President - Architects & Engineers Professional Liability Lines

Successful collections begin with pre-project planning and extend through post-project evaluation.  What follows is an overview of collections guidelines to sustain the financial viability of the design firm over time.

Successful collection of design professional’s fees and expenses requires a written and signed agreement of contractual provisions. Without such an agreement, the task to secure full, timely payment of services could present challenges due to contract ambiguity or client misunderstanding of the professional design firm’s contractual terms and conditions.

Some projects may have limitations on collection rights and procedures, which should be evaluated carefully at the outset. Public sector projects, for example, typically do not have lien rights against the project property. Contracts also may attempt to limit collection efforts by waiving lien rights, thereby reducing the design professional’s leverage in the event of a dispute.

Collection resolution efforts should be kept separate from any claims resolution activities. One argument against allowing a client to withhold fees as an offset against claimed damages is that the design firm is entitled to due process. Allowing the client to unilaterally withhold fees makes the client judge and jury in its own claim. While distinguishing each as an unconnected action can be difficult, there are alternative approaches that have proved useful for collections under certain scenarios.

Statutory remedies, such as liens, and work stoppage notices based on violation of licensing agreements, often are much shorter in duration and could avoid prolonged litigation inviting client claims for breach of contract and negligence. These contractual provisions should never be waived and can create pressure on third parties, thus motivating the client to make payment. If, however, a third party holds the funds and has guaranteed payment, the design professional may often take its fee demand directly to the guarantor, if not the client, without threat of a counter-claim. 

Legal advisors recommend that the agreement set forth a short duration when fee claims may be asserted, typically within 60 days of when the alleged deficiency became known. If a design firm is pressured into allowing the client to withhold fees, it would be beneficial to require the client to place the monies earmarked for payment into a trust fund, in recognition of good faith that funds will be available upon acceptable resolution of the matter. 

Post-project evaluations should include review of collections issues with the goal of determining any lessons learned. The project’s financial performance and profitability should be the foundation of the review. At completion, there are two over-riding questions that should drive final project assessment. Was the project profitable and if not, why? What steps can be taken to avoid or minimize adverse collection experiences on subsequent projects.

Neither Ironshore nor any other Liberty Mutual company (the “Insurer”) are engaged in the practice of law. The foregoing information is for informational purposes only. It is not a substitute for legal advice from a licensed attorney, nor does it create an attorney-client relationship. The Insurer disclaims all liability arising out of this resource.