Staying Afloat in Uncertain Economic Times
This article was published February, 2011 in Podium, a publication of AIA Long Island, a Chapter of the American Institute of Architects.
Although cautious optimism is today's watchword, many construction projects continue to be "put on the shelf" or abandoned totally. The following guideposts should assist your firm's navigation through this turmoil until construction financing starts to flow, enabling owners to once again grow and expand.
An important step is to avoid starting significant services without receiving a monetary retainer. You have ramped up and have shown your good faith to get the project, and it is not too much to ask your client for a similar show of good faith. If your client's commitment to the project and to your firm is not in place from the beginning, can you reasonably expect it to be there as the project continues and as your firm's value to the project wanes? Asking for a retainer may be difficult to do when you need the work, but you don't need to work for free. Get a retainer before you start and hold it until you seek your final payment.
If payments slow down, become sporadic or totally cease, you should review your contract to determine whether you are able to cease, suspend or otherwise adjust the level of your services accordingly, without penalty. Must you really continue to act as your client's lender? Design professionals are giving by nature, but it is not beneficial to your business to continue to give your services without receiving compensation for them. Your contract should provide for the ability for you to suspend services, or terminate them completely in the event of non-payment, without incurring responsibility for damages claimed to result from your delay in providing services. Protecting your firm against a client's failure to pay is paramount. If your firm's contract does not presently address this situation, consider adding this mechanism with the assistance of counsel.
When negotiating contracts for new projects, avoid permitting your client to have the unlimited ability to withhold payment of your fee. This ability is often disguised in the client's obligation to pay only those amounts of your fees that are "not in dispute" or that are "undisputed". When faced with these watered-down payment obligations, you should question the amount of time your client may withhold your money, whether your client may withhold your entire unpaid fee, how you will pay your consultants during the time that your fee is withheld, and importantly, whether you and your consultants have to continue to provide services during the time period that fees are withheld. The short answer is that if your contract permits your client to withhold payment of disputed fees, you may not be able to suspend or terminate your services as a result. If your client insists on the right to withhold payments in dispute, try to establish a contractual procedure to address the monetary and time limits on your client's ability to withhold payments prior to your being permitted to suspend or terminate your services. Propose a procedure that requires you to be apprised of the basis of the withheld fees and that expeditiously resolves the dispute. The obligation to continue to perform your services should be made only upon full payment, or an amount withheld that you and your consultants are able to tolerate for your services.
Keep your eye on the receipts ledger. You may believe that your client has been paying for your services, but your bookkeeper knows otherwise. Check on receivables early and often in the project, and do not avoid the difficult discussions with your client regarding why you may not have been paid for a while. It is better to learn of slowdowns in payment when the earned amounts are relatively low. It will be less painful than when those unpaid fees mount up.
Now more than ever you must know the identity of your client. You may start off the relationship dealing with an individual, but when it comes time to enter into the contract, a limited liability company or corporation is presented in that individual's place as your client. This is the time to be concerned, since not only is collection of your earned fees at risk, but so are certain of the protective provisions that may have been carefully negotiated and planned for. What does the new client-company own? If it has assets, how leveraged are they? The time to address this issue is before the contract is signed, when another party may be made jointly responsible for payment of your fees and for the enforcement of the protective contractual provisions.
Being mindful of these guideposts during your review and discussion of your contract should significantly assist in keeping your practice afloat in these still uncertain economic times.
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