There are many ways to get a client to pay, starting with frank communication and looking out for red flags.
How do you cope with a client reluctant to pay what they owe? The best advice is to apply certain preventive measures to avoid the problem in the first place. Whether the client is suffering from the slowdown or is simply a deadbeat, paying attention to your business can forestall future headaches.
And yet many architects tend to be more interested in the execution of projects than in managing their firm as a business, says Michael Strogoff, AIA, president of Mill Valley, California—based Strogoff Consulting. Designers may be tempted to jump eagerly into a new project without adequate contract negotiation. But this, he notes, and a general tendency toward conflict avoidance, make architects vulnerable to exploitation. Strogoff recommends frank, up-front discussions with clients about fees to avoid trouble later on. “A big part of negotiation is to address what-ifs,” he says. “It should be a collaborative discussion. A lot of architects view that as a negative discussion they want to get beyond.”
Rule number one for avoiding problems is “know your client.” Public and institutional clients tend to be the most reliable because they typically don’t commit to spending money they don’t have, according to Kenneth E. Louder, AIA, president and C.E.O. of Salt Lake City, Utah—based FFKR Architects, a firm that has successfully avoided such problems. “The most notorious for nonpayments are developers,” Louder says. “It’s all speculative, with developers promising they’re ‘about to get financing,’ so the opportunities are attractive. But I’ve heard horror stories from architects who did work to get work, and when that work never came about, they didn’t get paid.” If you’re uncertain about the history of reliability of a potential client, you can protect yourself by performing a credit check or simply calling other professionals who may have worked for this client.
Once an architect is selected for a project, but before work begins, it’s important to negotiate terms and discuss the many factors that influence fees. According to Strogoff, a client’s eventual reluctance to pay may stem from their not understanding the complexity of the design-construction process, and not appreciating why costs may escalate over initial estimates. It is a sensitive subject, he admits, because no architect wants to predict errors and omissions. But a client who understands it will be more likely to provide the necessary contingency funds and less likely to balk at extra payments. Strogoff recommends thorough dialogue — before actual fees are discussed — about the full scope of the work. The list of variables is a long one: project description, roles and responsibilities of architects and their consultants, design and construction, schedules, deliverables, construction-delivery method and number of phases, compensation methods, payment terms, and much more.
Strogoff adds: “After clients understand how each of these parameters affects architects’ and engineers’ fees, the creative problem-solving part of negotiating can begin. For example, presenting different fees for various numbers of bid packages or for different design schedules might lead a client to decide that segregated bid packages or an expedited schedule are more important than lower fees. Or discounting a fee if an owner preselects a contractor might lead to greater profits for the design professional and a less expensive building for the client.” In any case, clients will understand the causal relationship between various factors and fees. When the client and architect have agreed on all these matters, it is easier to persuade the client to establish three contingency funds as a hedge against the unexpected. First, an allowance for additional professional fees will compensate for the difficulty in determining ahead of time the precise scope of work by each design professional, and it can head off contentious renegotiations if the scope of work changes. Having to negotiate additional fees for changes as they occur during design can place the architect in an uncomfortable position and jeopardize the owner-architect relationship. Second, a contingency fund should be set aside for the inevitable change orders and construction cost increases. This should be either a specified dollar amount or a percentage of the construction budget. Admit to your client that change orders are inevitable!
A third contingency fund should be dedicated to other unexpected project costs such as those caused by delays, changes in agency requirements, or unusual site conditions. With these three funds in place, any cost increases can be dealt with quickly and relatively painlessly. This is particularly helpful with institutional clients, Strogoff points out: “These contingency funds eliminate the need for the owner to obtain formal approvals — a huge barrier for many project managers — because the funding has already been encumbered.”
In addition to these contract terms, architects should try to negotiate a retainer and emphasize the importance of getting paid regularly. Scott A. Kuehn, AIA, managing principal of H+L Architecture in Denver, Colorado, also serves on the advisory group for the AIA’s Practice Management Knowledge Community. Kuehn reports: “When we negotiate a contract, we always talk about getting paid a fair fee, and about how important it is that our cash flow is continuous so we can provide the service they expect.” Unfortunately, says Louder, architects may now be feeling especially insecure. He states: “The economic downturn probably makes them increasingly vulnerable to being exploited because the fear of not having any work attracts them to work for which they don’t get paid. But I’ve always held that working for free is worse than not working at all.”
Sometimes, Louder says, FFKR negotiates a “pay-then-work” system whereby the client puts money in the bank up front. “We work till it’s almost gone,” Louder explains, “then put them on notice. We all understand that if their cash flow stops, so does our work flow.” Both Louder and Kuehn agree that if the client is reluctant to talk about finances, this is a red flag.
Regardless of how much you trust your client, it’s vital to maintain communications during design and construction. Strogoff recommends following up every bill with a phone call to make sure it was received and understood. Billing more frequently can reveal problems more quickly.
He also suggests contract language stipulating how disputes should be tackled first at the project-manager level, but if they can’t be resolved there, between C.E.O.s of the architect and client firms. For example: “Prior to any claim, dispute, or controversy between Owner and Design Professional under this Agreement, the parties shall first attempt to resolve the matter by a negotiation between the parties’ designated project managers. If the designated project managers are unable to resolve the matter, the matter will be referred to negotiation between the parties’ chief executive officers or managing principals. Only after the chief executive officers or managing principals are unable to resolve the matter shall the matter be submitted to mediation, arbitration, or other legal proceedings.” Strogoff notes that resolving arguments at the lowest possible level also helps junior staff develop communication and management skills valuable in deterring future disputes.
Even when architects are engrossed in their projects, they need to take time to review billings and respond quickly in the event of late payments, according to Louder. “It’s important to understand the idiosyncrasies of your clients’ billing procedures,” he says. “If you want to be paid monthly, know what their monthly cycle is and what they need in terms of information backup. There’s no one-size-fits-all. Billing the client the way they want to be billed is one way to make sure you have an ongoing cash flow.” In Kuehn’s firm, the management team looks at the status of accounts receivable every other week, and notifies the principal in charge and the project manager if payments get behind. The firm even goes so far as to establish personal relationships between the architect’s accounts-receivable person and his or her counterpart in the client’s accounts-payable department. “If there’s a late payment, we need to understand what’s going on,” Kuehn says. “Usually, nonpayment isn’t really a contractual remedy, so we make a point of talking. If we have a dispute, let’s resolve it, but not paying us will exacerbate the issue.”
Louder points out that delayed payments do not necessarily mean nonpayments. He notes that when his firm works for another architecture firm, they’re at the end of a chain of dominoes. Payment delays at the top of the chain ripple down to all the consultants.
Even after instituting all these preventive measures, problems still occur. What are the architect’s options? Fortunately, there are remedies short of a lawsuit. Strogoff says: “The key is to make it in the client’s interest to pay. Make the alternative to not paying unattractive. When it becomes clear that a client does not intend to pay, the first thing is to get someone else in your firm, preferably your partner, to call the client and communicate the urgency and your firm’s intent to take whatever action is necessary. Some clients don’t expect architects to pursue this and will take advantage. If your contract allows, I’d withhold deliverables until you get paid.” The architect can also offer a prompt-payment discount, a relaxed payment schedule, or credit on the next set of services. In the current economy, there are honorable clients who want to pay but who are having their own cash-flow problems. If the architects trust that they’ll eventually get paid, they could offer a relaxed payment schedule.
Kuehn says that in rare cases his firm has to hold drawings, noting, “That usually gets some attention.” If it doesn’t work, they may hire a collection agency or file a lien on the property. But that is a last resort because it destroys any possibility of a long-term relationship. Legally speaking, an architect is entitled to file a lawsuit if nothing else works. But Strogoff points out several reasons this is a bad idea. An architecture firm doesn’t want to develop a reputation for suing clients; it is time-consuming and expensive, and, he says, “clients who are really intent not to pay are probably going to outlast most architects.” Your best bet, according to these experts, is to maintain close communications throughout the project and stay alert for danger signs before they become serious problems.