Strategies For Getting Paid On Time

Today's clients are demanding. In some ways, that is good. In others, it can be intolerable. The expectation that you and your colleagues will cheerfully finance a healthy portion of the front-end costs of construction falls at the latter end of the scale. It is not reasonable and increases your exposure to unnecessary claims of professional liability.

Old Habits Can Be Costly

According to a PSMJ financial statistics survey, the average firm carries its receivables for a period of 70 days, a number that has not changed significantly in nearly a decade. What this means is: from the day a cost is incurred to the day payment is received, something in the order of three months' time elapses. In other words, for the average firm, some 20 to 25% of annual income is outstanding every day of every year. At today's interest rates, this represents a cost of 2.5 to 3% of gross receipts. That is a lot of money. While the PSMJ statistics are based upon U.S. experience, there is no reason to believe that the situation is any different in Canada.

Furthermore, interest expense is not the end of it. The cost of seeking to collect the virtually uncollectible can be far greater. Clients who, for whatever reason, have absolutely no intention of paying your most recent invoices have a very nearly impregnable defense for their refusal to do so - there are errors in your plans and specifications!

They may not be unusual errors; they may not even be significant. But they can still be used to raise the ante - to make your collection efforts potentially so costly that the idea of settling for pennies on the dollar (or for nothing at all) will begin to seem to make great good sense. The answering of a suit to collect fees with a cross-complaint alleging negligence may well be owner's cost containment in its crudest form, but it happens all the time.

Casting About For A Cure

Things do not have to work out this way. Your clients expect you to perform your services in a timely fashion, and you have every reasonable right to insist upon prompt payment in return. You can do so without compromising either your professionalism or your professional relationships if you can come to grips with the idea that sound business practices are fully compatible with both. Consider the following suggestions:

Manage the process carefully. It has to be viewed as an integrated whole. It begins with an evaluation of the credit risk you assume every time you take on a new project, it extends to being candid with your client about your expectation of prompt payment and it ends with routine and persistent follow-through on each and every invoice. Set a 45 day average as your goal. Establish clear policies and procedures which escalate from polite inquiry to firm demand. Assign clear responsibility for collection, ideally to the project manager or principal in charge of each project and incorporate a review of the results of your efforts into your routine management activities. Make exceptions when accommodations are necessary, but treat them as what they are - exceptions.

Keep your contractual options open. You just may need to exercise them. If your client intends to pay you on time, there is little reason to expect resistance to a provision calling for interest, within the constraints of the law or, alternatively, for service fees on amounts outstanding for more than 30 days. Nor should you find it necessary to give up any lien rights you may have. Insist, as well, on the right to stop work without liability for consequential or other damages if payment is not received within some reasonable (and reasonable short) period after notice of your intent to do so.

Adjust your approach to the risk involved. If your credit evaluation of your client gives you cause, be prepared to step up the escalation of your collection procedures. Consider insisting on a retainer covering at least 30 days' service, and provide that the retainer be credited only against your final invoice. This will give you time to react without placing huge sums at risk in the event one of your invoices should remain unpaid after 45 days. Recognize, too, that the smaller the amount outstanding, the less worthwhile a costly collection effort. Asking for a retainer on all small projects, those involving fees of, say, $10,000 or less, may be a useful precaution.

Address the idiosyncrasies of your client. Depending on your perception of your client's organization, you may want to incorporate a copy of your invoice into you agreement to avoid a later, time-consuming dispute over its format. If you are dealing with a government agency (or with a large, corporate client with an equally Byzantine administrative structure), walk your first invoice through the system. This should give you a better understanding of how its twists and turns can best be accommodated. You may have to be prepared to bill separately for reimbursables, for example, to avoid delay in the payment of a $50,000 invoice because of questions about a $5 item.

Initiate collection efforts immediately. Begin before the first alarm sounds at 30 days. Have your project manager follow through at 15 days - both to make certain the invoice has been received and to ferret out any problems that might cause hesitation or delay. The sooner these problems are addressed and resolved, the sooner you will be paid and the less likely it will be that they will mushroom into a later crisis. Send a statement at 30 days, including interest on the unpaid balance. You might forward it with a letter asking for an explanation for the overdue account.

Exercise your remedies if you must. If you have not been paid by the end of 45 days, something may well be wrong. Check it out. It may be time to send a notice of your intent to stop work if payment is not received within the notice period provided for in your agreement. Do so, if necessary. If your services are complete but you are still in a position to withhold the results, withhold them. At 60 days, have your attorney send a demand letter. At 75 days, you may well have exhausted your reasonable options. File a lien if you are entitled to do so under the law and if your attorney believes it to be an appropriate strategy. Otherwise, you may have to be prepared to sue. Approach this final option with caution, however, for the likelihood of a cross-complaint alleging negligence is high.

Information provided by Encon Group Inc.
http://www.encon.ca/english/lcb/