On the Level-Fees, Claims and the Economy
May 1, 2007
In “The Business Side” column of the February 2007 issue of POB, Milt Denny drew our attention to the beginning of a slowdown in the economy. By the time this issue of POB comes out, we’ll have a better idea of the extent of a slump in the land development business.
It is an axiom of the surveying business that at the beginning of a slowdown in land development, surveyors feel the hurt first. Now is a time for surveying companies to be vigilant about their ongoing projects as developers and entrepreneurs respond not only by reducing production, but also by putting a damper on cash flow. An early sign of trouble for the surveyor/proprietor is a delay in accounts receivable; the time may even arrive when proprietors are confronted with the question whether to sue for nonpayment of fees.
However, when you sue a client for nonpayment of fees, the client looks for a reason to sue you right back-usually for a supposed instance of negligence or nonperformance. The client’s suit need not be very well founded; it only needs to be enough of a nuisance to convince you to drop your action. If you persist in your suit, you may find yourself embroiled in a defense that costs you far more than the amount of fee you were suing for in the first place. According to a recent article published by Victor O. Schinnerer & Company Inc.,1 “Claims experience suggests that suing for fees is one of the top generators of claims.” The article suggests the following, with my added observations:
ï· The contract for services should be clear on scope and billing method. We have always preached scope, scope and scope for good contractual content.
ï· A fee dispute resolution should be included in the contract. An agreement to submit to mediation or arbitration before a dispute arises minimizes the potential cost of formal legal action. This removes some of the sting from the client’s tactic of counter suit.
ï· Clients should recognize what constitutes a change in services and a corresponding change in fee. This comes back again to the need for clearly defined scope in the contract, and an understanding that a change of scope results in a change in fee.
ï· A retainer or other method of collecting a fee before services should be negotiated. Retainers should be big enough to cover the first billing cycle and should only be credited on the final invoice, at the end of the job.
ï· Invoices must be consistent with contractual billing and compensation methodology. This one speaks for itself.
ï· Itemized invoices must be promptly sent to the appropriate client representative in the prescribed manner. Be sure to know who your client is. If your client forwards your bill to another party for payment, continue to look only to the one you have contracted with for payment.
ï· Collection procedures should promptly pursue payment of invoices. Collection must be consistent with the contract’s provision for collection.
The article goes on to advise firms to “keep the collections process current. The older a receivable, the less likely the collection effort is to succeed.” This is good advice and also suggests that an aging receivable is an early warning of bigger trouble to come. If there is a real economic slump, your client may have decided to close down his operations and/or may be in financial trouble with big equipment loan payments and low cash flow. You should hope that it is the first case because then you still have hope of being paid. If it’s the second case, get in line with the rest of the creditors.
Note that much of this advice goes back to a need for good contracts. There are many clauses a surveyor should include in his/her agreement to provide services: clear and complete scope of services; anticipated (not guaranteed) schedule; fee basis; assumptions on which fee and schedule are based; client responsibilities; right of entry to project; change of scope provisions; termination and suspension of services provisions; billing procedures and prompt payment of periodic invoicing; retainer; surveyor’s ownership of instruments of service; specified delivery items; and provision for mediation or arbitration in case of dispute.
But a surveyor holding a $2,500 receivable that is 120 days old, for services she provided based on a poorly written contract, cannot go back and rewrite the contract; she is faced with the decision whether to sue or not to sue. The Schinnerer article has a few bullet points on this issue, too:
ï· Is the amount at issue critical to the firm and worth the risk of a counterclaim? This is a business decision and involves considerations of issues beyond the risk of counter suit. There is future work to be considered. Owning the instruments of service, e.g., plans and notes and control data and land-use design, and so on, the surveyor has something of value to a future developer, maybe even the current delinquent client.
ï· Did the client receive satisfactory services, or is the lack of payment an indication of a reasonable dissatisfaction? This is a difficult evaluation for the surveyor/proprietor who always believes his work to be above reproach-naturally-and leads to the next bullet.
ï· Has an objective party reviewed the services and found them above criticism? An objective party in this sense may not be another surveyor, who by definition has an objectivity problem. Maybe it should be a purchaser of surveying services who knows something about the type of project in question. It should also be obvious that the services agreement by which the surveyor provided the services in the first place should be reviewed by the attorney who is poised to bring suit against the recalcitrant client. Most attorneys want to know that they have a winnable suit, especially if they take the assignment on a contingency basis.
ï· Would any judgment actually be collectible? Ah, there’s the rub. And if it is collectible, is it worth chasing? And how long will it take, and can you hope to collect the costs of collection, and how much will you share with your attorney?
Nobody said that being in business is easy. When times are good and clients are more concerned with getting the work done than how much it costs, and when the fees roll in on time and the biggest problem is employing enough good technicians and professionals, the surveyor/proprietor may not pay enough attention to her contracting. It is when times are bad that we find out just how good or how bad our contracting and collection procedures are.
If we are talking about collecting a fee too big for small claims court, and if there is a counter suit for alleged negligence, we can be sure that at the rate the judicial system handles these cases (in my home state of Massachusetts, at least) the economic slowdown will probably be over before the cases are adjudicated. Sometimes it is just as well to wait it out rather than become embroiled in a lengthy court battle, especially if it may involve a defense against a negligence claim.
Some practicing surveyors have suspected that a professional liability (errors and omissions) insurance policy is a magnet for claims. I recently testified on behalf of a surveyor sued for negligence in a case that raises the issue. The claim was that he should have given his client engineering advice. I testified that a surveyor does not have a duty to provide engineering advice and in fact he would have been in violation of the board of registration’s rule about providing services only within the professional’s area of competence. The jury quickly accepted my testimony and found the surveyor not liable. I believed that my affidavit to the same effect should have been enough to convince the claimant to drop his charge against the surveyor, but no. And I believed that the judge should have accepted the surveyor’s motion to dismiss him from the case since the claimant’s own “expert” (an engineer) was disallowed by the judge from giving testimony on the duty of a surveyor. But no, we had to go the whole way and convince the jury.
In retrospect, the surveyor believed the only reason he was included in the suit (a developer and an investor were the other defendants) was that he was insured. The surveyor’s E&O policy provided the deep pocket, he believed, and he may have been right. On the other hand, he was not about to drop his coverage even though he expected his premium to go up (if it does he is probably insured by the wrong company). The point is that when he was sued, his policy kicked in and he was protected. Of course he lost his deductible and several days sitting in court, but he didn’t lose sleep over a possible judgment of many thousands of dollars.