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03.03.2020

Contractual Provisions For Timely and Successful Payment of Professional Fees

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

Businessman and engineer handshake

Provisions for payment of professional design fees and expenses are essential elements of a written contract signed by both the firm and client responsible for the financing of the project. A written agreement stipulates the terms and conditions under which payments will be made, helping to avoid potential ambiguity when and if project disputes arise. If the financing of the project is contingent or deferred or if the funds are being held by third parties, such as investors, banks or holding companies, the firm may require third party signatory to the contract to assure access to those funds. The following overview sets forth key contractual provisions that have proven critical to secure prompt and timely project payment.

Clients should fully understand the design professional’s standard of care. Specifically, design professionals should advise the client that there is never a perfect set of plans or specifications as most every project can face unanticipated contingencies. Additional expenses related to design clarification and corrections may be incurred during the project and, thus, be anticipated within the contract. 

            The agreement should state the contract’s terms and conditions to help assure the financial success of a project commitment. Key provisions for inclusion in a design firm’s contract are as follows*.

  • Identification of disputed issues: The agreement should provide a time period in which the client must identify any disputed items on the invoice, typically within 10 days.
  • Payments Due: The period between the client’s receipt of the invoice and date of payment should be before the next scheduled invoice is issued to prevent accumulation of unpaid invoices.
  • Payment of undisputed items: The agreement should state that the client is responsible for full payment of all undisputed items on any particular invoice.
  • No Set-Off: Agreement terms should stipulate that the client may not back-charge the professional firm or reduce invoice payments as a set-off to the client’s perceived damages arising out of improperly performed firm services; thereby avoiding the double financial impact of lost fees and liability costs.
  • Assignment Consent: The agreement should specify that the design professional’s duties and responsibilities may not be assigned to a third party without the firm’s written consent. If a lender requires an assignment, permission should be contingent upon an assumption of all client obligations under the agreement, which would be amended accordingly.

In addition to contractual provisions, design professionals working on a construction project have statutory lien protections.  Such protections can be useful tools for securing project payments as the statutes can invoke pressure from third parties, including lenders, investors or buyers, who may demand a “clean title” on the project.   Related statutory tools often utilized to protect a design professional are copyright, patent, and professional licensing provisions, which limit unauthorized use of a design professional’s work product.

 

*Review of contractual terms and conditions by legal counsel is advised.

 

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.