- SPECIAL REPORTS
- THE MAGAZINE
In the last article (POB February 2013), we discussed presenting the proposal to your prospective client. The notes you took during that presentation (you did take notes, right?) will form the foundation for the fixed-price agreement (FPA).
The FPA, of course, is a contract. However, in some regions, demanding a contract is viewed as an insult. Reaching an agreement with a client is not the time to hit a sour note by questioning the client’s honesty or integrity, which is how statements like “you’ll have to sign a contract” can be perceived. The phrase “fixed-price agreement” sounds better and is one you’ll want to use with most clients.
A well-written agreement protects both parties. Some states even require that surveyors have a written agreement with each client.1
For clients who don’t see the necessity of a FPA, their concern can be alleviated by explaining that the agreement is the best way to avoid misunderstandings. The agreement is nothing more than putting in writing what has already been discussed. There shouldn’t be any surprises. The document spells out the rights and responsibilities of both the surveyor and the client.
The notes you took as you presented the proposal (Step 4) are critical to getting the details correct. But do not assume your notes are completely accurate; make sure the client reads the document and agrees to each point. Include a detailed list of what you will do for the client as well as a list of items you thought the client might need/want but did not choose. The list of “we will not” items can be as important as the “we will” items. It is not uncommon for a client to forget the details. Many times I have had clients ask about a service not performed. They are easily satisfied when shown that they chose for us not to provide that service.
There are many other resources on contracts for professional services. This article is in no way comprehensive. However, a basic contract, at a minimum, should include the following:
- Contact Information. Name, ad-dress and contact information for both parties, as well as the appropriate licensing information for your company.
- Purpose of the work. If the purpose of the work is for the benefit of third parties (lenders, title companies, etc.), include their contact information as well.
- Work to be done. A detailed description of the work to be performed, ideally in a checklist format. It is equally important to include items that are not part of the agreement--products or services that were discussed but rejected by the client. These items can be added later if the situation changes. However, do not add additional products or services without explicit approval of the client, and never do so without revising the cost.2
- Client obligations. What actions must the client take (providing access to the site, providing documents, revealing known hazards, etc.)? Spell out any applicable items.
- Terms of compensation. The total price is only half of the financial equation. You must also spell out how you are to be paid. As discussed earlier, upfront money is essential. A deposit demonstrates how serious the client is about you and the project. Those who hesitate or make some excuse as to why they cannot come up with a deposit are better off being someone else’s headache. Requiring all of the payment in advance is a good negotiating tool for clients who want to beat you down on the total price. There may be circumstances where payments will be made over time. You don't want to be your clients’ banker, but if you must implement a payment schedule, be sure to charge an appropriate rate of interest.3 Include fees for late or missed payments. If the work is being done in anticipation of a closing, make certain that you will be paid from the closing proceeds, if not sooner.4
- Change orders. Few projects proceed exactly as planned. We’ve all had clients who changed their minds about needing or wanting some service after an agreement was reached. Some firms plan on these changes to make an otherwise unprofitable deal into a good deal for the company. Change orders are critical to help you prevent scope creep. Spell out what will happen when circumstances change, and make certain you get a change order and agreed-upon price before doing the work.
- Termination clause. How will the agreement be terminated if either party wants out? What happens if the surveyor finds some fact that changes the need for the work?5
- Important dates. List the projected start and completion dates, along with any critical benchmarks. If the completion date is critical, the client may insist on penalties for being late. If so, be prepared to insist on bonuses for early completion. When time is critical for the client, take a look at the value you can add by finishing early. The greater the value, the larger the potential bonus. A timeline can be a great tool to help keep the client happy and allow you to gauge the success of your efforts. Use the timeline to help you avoid over-promising.
- Ownership of data. Who owns the surveyor’s data, maps and files used to generate the final plat and/or report? Spell out what the client will receive and that the rest of the data belongs to the surveyor.
- Certification. Spell out the certification you will use. If you are being asked to conduct an ALTA Survey, include the ALTA certification.
- Limit of liability clause. Strictly speaking, this clause has little or nothing to do with value-based pricing, but it is so important I am compelled to mention it’s an essential element of any agreement. Several parameters will increase your odds of making this clause enforceable.
Negotiate the limit. This means not having a standard amount that is preprinted in all agreements. Leave the amount of the limit blank. Have the client fill in the amount and initial next to the figure.
Make the limit reasonable. A free company t-shirt if you screw up a $1 million project will almost certainly be rejected as unreasonable.
Your contract should be written in plain language. This is not the place to try to impress clients with the amount of jargon you can use. The goal is to help the client understand why you do what you do, and using words they do not understand defeats this purpose. Worse than that, jargon is certain to increase the odds of a disagreement over the meaning of the document.
Your first few fixed-price agreements should be carefully crafted in consultation with an expert. When you start insisting on a proper, written contract for each client, seek the help of an attorney--one who truly understands contracts in your jurisdiction.
In Step 6, we’ll dive into managing the work after the contract is signed.
- See California Business and Professions Code 8759, online at www.bpelsg.ca.gov/laws/contractlawlanguage.shtml.
- The classic example of an additional service is when an attorney, bank or title company calls and wants you to revise your standard certificate to include something that puts you at higher risk. When you explain that considering this change will mean a corresponding revision of the fee, they will usually back down.
- No, 4 percent simple interest is not appropriate. Consider charging 18 to 25 percent compound interest for unsecured debt.
- Note that doing surveys where your compensation is dependent on whether a deal closes is illegal in most states. Anyone who asks that you be paid only if and when a deal closes should understand that this contingent fee basis is never acceptable.
- In the 1980s, I was asked to survey a vacation house an out-of-town couple wanted to buy. I found seven different items that had to be fixed or their bank would not loan the money for the purchase. The deal fell apart, and the couple refused to pay the invoice because “we didn’t use your work.”