Professional Liability/Risk Management Brief: Risk Management Through Fee Collection
One of the most valuable proactive risk management tools a design firm possesses is the ability to collect fees. Receiving payment for services in a timely manner is essential to the financial health of a business. Establishing and enforcing contractual payment provisions can help a firm avoid professional liability claims.
Professional service firms are cash-flow operations. They are not in a position to finance their services to their clients. Firms are also incapable of staying in business for long if they allow clients to dictate all payment terms or write off a significant amount of professional time on projects.
Firms can preserve their right to payment, reduce the need to surrender part of their fee, and avoid the time, deductible costs, and the insurance impact of retaliatory claims. Retaliatory professional liability claims from clients sometimes result from attempts to collect fees. Firms should execute written agreements with their clients that contain payment terms, a schedule when payments are to be made, and clear invoicing and collection procedures. Enforcing the contractual right to payment should be considered a key practice management procedure.
Evaluate Whether Fee Collection May Be a Problem
During the risk analysis stage of a prospective business arrangement, successful firms routinely check the financial capability of the client. The client selection process works best if the firm understands the availability of funds for the services to be performed. Looking at the client’s history with other firms, internal systems, and payment authorization procedures can give an indication of how long a client takes to pay its bills and the likelihood that fees might not be collected when due.
Establish Payment Terms in a Written Agreement
Oral agreements create problems. Collecting the appropriate payment for services can be nearly impossible unless a written agreement exists. The agreement should carefully tie the fee to measurements that can be understood by the client and documented by the firm. Unclear or unspecified payment terms and untimely billing and collection often generate disputes.
A contract should also clearly state who is authorized to approve payments on behalf of the client and to increase the scope of services. While the basis for payment can vary from hourly to value-added, the application of the fee system should be documented.
Retain Control Over Services and Deliverables
Firms should retain the right to the project documents at least until all fees are paid. The right to suspend the firm’s services if payment is not received according to the contractual obligations of the client is essential.
Avoid financing the client by demanding a significant retainer. This is a basic element of good business practice. Firms that accept a termination provision for the client’s convenience should be careful to negotiate the specifics of such an option, including who has control over the documents in progress and whether lost profits are recoverable.
Avoid Giving the Client the Right to Withhold Payment
Increasingly, firms are faced with clients who want to be able to withhold fees on an arbitrary basis with no independent finding of fault. Fee negotiations can be rendered meaningless if a client can withhold professional fees to a firm at the client’s own discretion.
Remember that any client-written provision that empowers the client to make a unilateral determination of fault or responsibility for damages creates a business risk. Professional liability insurance is intended to respond to allegations of professional negligence. The withholding of fees is not the same as a demand for money or services that would trigger professional liability insurance coverage.
Develop a Collection Strategy
The professional services agreement should contain appropriate payment terms and a payment schedule and invoices that follow that schedule. If a firm does not have a system of pursuing unpaid balances or of resolving payment problems, it is increasing its business and professional exposures. A collection strategy should incorporate contractually provided steps, such as the charging of interest on late payments and the suspension or termination of services for payment defaults. Such a collection strategy must be followed consistently.
A collection strategy can be used at all stages of the billing process. The strategy should include:
Frequent communication with the client so that there are no surprises to either party;
Timely and accurate billing; and
Invoicing procedures that meet the client’s information needs and accounting requirements.
Some firms include contractual language that allows them to collect legal fees if they have to pursue collection through litigation. Such “prevailing party” provisions, however, often work against the firm when a retaliatory claim is filed. The threat of having to pay the client’s legal fees can result in coercion that ends up causing a greater loss than the write-off of the fee. Such contractual obligations are not within the scope of professional liability insurance coverage.
Positioning a firm through researching a client’s history, contractual language that details fees and procedures, and practice management systems that carry out the fee collection process is basic to firm viability and professional liability risk management.
© 2008, Victor O. Schinnerer & Company, Inc. Statements concerning legal matters should be understood to be general observations based solely on our experience as risk consultants and may not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with a qualified advisor. Victor O. Schinnerer & Company Inc. is managing underwriter for the CNA/Schinnerer Professional Liability Insurance Program, commended by NSPE/PEPP since 1957.
Engineer Contract Document Survey
The Engineers Joint Contract Document Committee, sponsored by NSPE, the American Counsel of Engineering Companies, the American Society of Civil Engineers and the Associated General Contractors is requesting feedback on the documents, document delivery system, and pricing. If you use contract documents, your input is valuable —whether they are EJCDC documents or not. Click here to take the short survey.[ return to top ]
NSPE Education for You and Your Firm
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For more information on any of the following Web seminars, please visit the NSPE Education page.
NSPE member price: $119.00 per session per connection.
October 14, 1:30–3:00 p.m. (Eastern)
Community and Media Relations (1.5 PDH)
October 15, 1:30–3:00 p.m. (Eastern)
Slips, Trips, & Falls Part II (1.5 PDH)
October 22, 12:30–1:30 (Eastern)
NSPE ETHICS FORUM:The Engineer's Obligation to Employers/Clients (1.0 PDH)
November 5, 1:30–3:00 p.m. (Eastern)
Construction Phase Risk Management: Critical Issues in Construction Contract Administration (1.5 PDH)
November 12, 1:30–3:00 p.m. (Eastern)
How to Gain Recognition for your Projects Through Public Relations (1.5 PDH)
November 19, 12:30–1:30 (Eastern)
NSPE ETHICS FORUM:The Engineer's Obligation to the Profession (1.0 PDH)
NSPE/PEPP HR RT West
Embassy Suites Frisco, Texas
The HR Roundtable is a valuable forum for human resource directors and principals of engineering firms to network, benchmark current activities, identify trends, and discuss emerging issues. Topics include teaching HR how to speak the language of business, succession planning, effectively capitalizing on the mature workforce, employment branding to increase the ROI of recruitment and retention, compensation, and rewards. Click here to download a registration form and view a preliminary agenda.
PEPP Presents Prestigous Awards
PEPP presents several awards each year to recognize noteworthy contributions to the consulting engineering field.
The purpose of the PEPP Award is to honor an individual who has made an outstanding contribution to the role of private practice serving in the public interest.
Robert S. Miller, III, P.E., F.NSPE
Miller is president/CEO of MSA, P.C., which he founded in 1973. Having created and sustained a successful engineering consulting business, Miller now devotes his time to the advancement of professional engineering. When mentoring young engineers at MSA — another top priority — his focus is on teaching professional ethics and an attitude of service to the client, the profession, and the community.
Miller has held numerous positions within the National Society of Professional Engineers, including NSPE president, 2006–2007, NSPE treasurer, PEPP chair, and PEPP regional vice chair. He is an active member of both the Virginia Society of Professional Engineers and the Tidewater Chapter of VSPE and is a three-time recipient of the VSPE “Engineer of the Year” award.
Miller is famous for his leadership presentations, part of which he delivers while standing on a table and having the audience stand on their chairs.
PEPP Professional Development Award
Since 1960, NSPE has used this award to recognize engineering employers who have made significant contributions to the advancement and improvement of engineering practices.
WilsonMiller — Naples, Florida
Building on the solid foundation established in 1956 by company founder Bob Wilson—one of the pioneers who charted the route for the Tamiami Trail through the Everglades—WilsonMiller has evolved from a small, local consulting firm into a multi-disciplinary planning, design, engineering, and surveying company with a staff of 500 and ten offices spanning the Gulf Coast of Florida. The company’s civil engineers, transportation specialists, planners, landscape architects, ecological experts, surveyors, and GIS analysts provide a broad spectrum of services for the land development, public infrastructure, and transportation markets. Now serving public and private clients throughout the southeast United States, the Caribbean, and Latin America, WilsonMiller continues to expand its geographical reach and broaden its progressive Human Resources practices in terms of workplace environment, employee benefits, and professional development opportunity.
PEPP Merit Award
This award is presented to committee chairs or members who have made significant contributions to the Interest Group.
Peter J. Sheridan III, P.E.
Sheridan is director of engineering and CEI at Keith and Schnars, P.A. in Jacksonville, Florida. Sheridan was the 2007 recipient of the Florida Institute of Consulting Engineers A.W. Gilchrist Award presented to a registered professional engineer who has brought recognition to the profession through public office and/or civic leadership with significant participation in FICE and other professional and technical activities and societies. Sheridan has served in various positions in the Florida Engineering Society at the chapter and state levels, including spearheading the Lauderdale Manors Playground Project in the City of Fort Lauderdale.
PEPP Outstanding Service Award
The PEPP Outstanding Service Awards are presented to recognize outstanding service by PEPP Executive Board members, committee chairs or members, PEPP members serving in liaison functions or on joint activities, or to any other member who has made significant contributions to PEPP.
Bobbi Claybrooke, E.I.
Dawn Edgell, P.E.
Steve Theno, P.E.
PEPP Chair Award
The PEPP Chair Award is presented to a person or organization that has contributed to the engineering profession, the practice of consulting professional engineers, and the public’s understanding of the role that the professional engineer in private practice plays in advancing the quality of life.
Peter Koval, P.E.
O'Brien & Gere
Koval has served PEPP at the national level for many years. Most recently he has served as PEPP Secretary. Koval's most important service has been invaluable and somewhat behind the scenes. Koval has lead the succesfull PEPP Human Resource Directors’ Roundtables and the Chief Financial Officers Roundtables. Pete's input and viewpoint and his willingness to champion a good cause but not be afraid to test and challenge issues that arise are qualities greatly appreciated His support and encouragement and belief in PEPP programs is unwaivering.
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Top 10 Mistakes in an Internal Ownership Transition
Herbert M. Cannon, President of AEC Management Solutions Inc.
10. Making Someone an Owner for the Wrong Reasons
You know he/she won’t make a good owner. They have been with the company for a long time and are technically competent, but can’t sell and have no leadership skills. However, you are making some younger employees an owner and are afraid he/she would be offended and leave the company if you don’t offer them ownership. You decide to make them an owner. Big mistake.
9. Using the Wrong Outside Advisors
When you decide to start an internal ownership transition, you need to deal with advisors (consultants, attorneys, and accountants) that have experience with A/E firm transitions. Unless they have experience in the A/E industry, there is a better than even chance they will screw up the deal.
8. Setting up an “Us vs. Them” Scenario
When offering ownership to a group of employees, it must be done on an individual basis. I have seen a group of potential owners hire their own attorney and negotiate as a team. This only sets up the likelihood of a failed negotiation and hard feelings. Ownership is a personal issue.
7. Not Separating Ownership From Employment Compensation
Ownership receives a return on investment. Employment receives compensation based upon performance. Don’t confuse the two.
6. Not Dealing With the Personal Side
People want to feel important. Don’t forget that fact when bringing in a new owner. Do your best to make them feel important; it is not a strictly business transaction.
5. Not Dealing With the Leadership Side
When transitioning from a first generation firm to the second generation, you usually wind up with more owners. Management by committee is overrated. Clear lines of responsibility need to be established if the transition is to be successful.
4. Assuming the New Owners Will Go Along With Whatever You Offer
I am amazed that many owners expect the potential new owners to go along with whatever deal you offer. In fact the opposite is true. There is usually a sense of entitlement to deal with. Many potential new owners are offended that they are being asked to pay anything at all. After all, haven’t they worked here for the last 15 years?
3. Setting the Price too High
Many owners have an unrealistic assumption on what their practice is worth. This is often fueled by an unrealistic valuation performed by someone with no experience in the industry.
2. Too Short of a Payback Period
Seven to ten years is realistic for a payback. Anything shorter sets up the risk of failure.
1. Waiting too Long
I once received a call from a potential client who wanted to start an internal transition. While talking with him on the phone, I discovered that he was 74 years old, had just fired the person he intended to transition to, had no other employees with the leadership potential, and wanted to “get out” as soon as possible.
When I suggested an outside sale rather than an internal transition, he readily agreed and then mentioned he was an MBE firm. While he was proud of this fact, he didn’t understand that it restricted the number of potential purchasers. In the end he wound up with a fraction of the value he should have received for his life’s work.
Herbert M. Cannon, president of AEC Management Solutions Inc. and publisher of AEC Managing Partner Newsletter, is a management consultant, seminar provider and speaker exclusive to the A/E industry. He is available to speak at company meetings and conferences. For more information, contact Herb via e-mail or visit his Web site.
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NeXt Generation of Leaders
Some baby boomers will retire (not all, we hear!), leaving a leadership shortage. PEPP is talking with the future generation of leaders and listening for ways to attract younger generations to the profession — and retain them. Each month PEPP Talk plans to profile a young engineer who exemplifies what is in the pipeline for leadership — that is when these young engineers aren’t too busy!
Timothy J. Schultheis
Title: Electrical Designer, Engineer II
Company: H.F. Lenz
Been There: 3+ years
# of employees: 180
Previous Gigs: IBEW Local #5 Electrician, Internship w/ Allegheny Power
How did you first get into engineering? I basically grew up around electrical construction and everyone respected the engineers. They were the “go to”person when there were questions and problems. I also thought it would be a great fit for my personality; you get to work with all types of people, construction workers, facility managers, architects, end users… It is just such a diverse group of people and it never gets boring.
If you weren’t an engineer you’d be… Probably something with forestry or wildlife management.
What’s your peak experience as an engineer so far? I don’t have a ton of experience yet, but being lead designer on the University of Pittsburgh Engineering Building renovation was interesting and challenging. Other than that, maybe passing the LEED exam.
What do you value in the people you work with? The most important or valuable thing to me would be the willingness of senior engineers and technicians to teach and explain things to young engineers. Good work ethic and honesty are also valuable.
What do you think engineering firms need to do to attract younger generations into the engineering industry? Advertise all of the opportunities and diversity in engineering. Once you have a technical background there are so many roads that you can choose to go down.
What does leadership mean to you? Leadership is the ability to bring out the best in everyone, including yourself and keep everyone focused on constant improvement.
Leaders you admire? Both of my parents, Steve Prefontaine, W.E. Deming, Dan Gable, and so many more.
Football or baseball? Football
Sneakers or flip flops? Sneakers
Favorite cereal? Kashi
Something readers would be surprised to learn about you? I was on the NCAA Division III Academic All-American Team in 2002 for cross–country.
You wake up tomorrow as CEO of your firm – what’s the first thing you’d change? I would revamp the continuing education program our firm has. I think it is underutilized and needs a few tweaks. I would also go to flex time with core hours from 9–3.
Finish this sentence: In 10 years, I will have… passed my P.E. exam and [will be] leading the design on the most cutting edge educational and healthcare projects on the East Coast.
Book you can’t go a year without rereading? It will now have to be The Last Lecture By Randy Pausch.
Facebook or My Space? Facebook
How do you strike a work/life balance? When I am at work, I work as hard as I can, and when I go out to have a good time, I have a great time. I have a great wife that keeps me in check as well, but to this point in my career, I haven’t had a problem enjoying both work and life outside of work.
Are you a young engineer interested in getting more involved in NSPE? Interested in being profiled? Know of a young engineer we should profile? Contact Kim Granados.
Are you a baby boomer trying to understand the Generation X and then the Millenials? Check out the new free Motivation Factors of Young Engineers Report produced by the PEPP YEAC. View the free two-part PEPP Council of Principals video on Leadership and the Emerging Generations. Or purchase the Future Leader Focus report.[ return to top ]