Harry has been a client of your firm for several years. Eventually, you have come to regard him as a trusted client who promptly pays for services rendered. This morning he called you with an urgent message. It seems that he is involved in a large matter and your fees will go well beyond any amount previously billed to him by your firm. If you are successful, you know there will be funds available to cover your fees and costs, but you are not certain it will succeed.
While all businesses have credit extension concerns, professionals have factors to consider that require special considerations. The services of a lawyer, doctor, CPA, architect and other professional are unique and, once engaged, cannot generally be suddenly terminated. The savvy professional improves the chances of avoiding collection problems by conducting prudent credit checks like other businesses, even for existing clients who request more extensive credit.
Prevention
Additionally, the professional should candidly discuss the prospects of success in the enterprise, e.g. the risks of the medical procedure or the likelihood of reversal of the IRS ruling. Explain in detail the estimated fees and what factors can effect these charges. Do not forget to reveal expenses such as photocopies, travel, filing fees, investigations, subcontractors, etc. Tell the client how to keep the total bill down. Very importantly, tell the client when bills are expected to be paid. Not only will these types of explanations allow the client to budget, but it will avoid surprising the client with an unexpectedly large bill.
Do not assume that your client can afford your services. Ask for an upfront retainer even with a good credit history. Bills can be monthly, at project stages or other predetermined dates. For example, architects normally obtain a 5% retainer, 15% upon production of the schematic design, 20% upon detailed sketches drawn to scale, and so on with varying percentages due at specific phases of construction. Put the payment agreement in writing to avoid differing recollections.
Unless the matter is handled on a total contingency fee, the final bill should not be the majority of the account due. The final bill is the most difficult to collect, especially if the work is unsuccessful or the bill is unexpected.
Dunning the Client
When, despite your efforts, your receivables become delinquent, the part of the business that most professionals find disagreeable has to be undertaken. Most lawyers would rather argue before a jury than with a slow paying client. Furthermore, if you too vigorously emphasize prompt payment of bills, your client may feel you are more concerned about your fees than his case. Still a balance must be struck between a too-strident policy, at the cost of a lost client, and one that is too permissive, at the cost of profitability.
When it becomes necessary to go after a delinquent client, the question arises as to how the contact should be made and who in the firm should make it. A carefully edited letter, which is sent soon after payment is due, can be a good reminder. Relationships will not be damaged if regular, reasonable reminders are provided. In some cases a letter will not be sufficient and a telephone call must be made. A call from the professional handling the matter is not advisable because it can tarnish the working relationship and can be very awkward for the professional and the client. The bookkeeper or a secretary, whose duties are removed from the client, should place the call. As a final effort, an associate or partner should speak to the client about the implications of a failure to pay.
Firing the Client and the Fear of Counterclaim
Firing the nonpaying client creates a set of particular concerns to the professional.
1. Do you have the right to discontinue services? For example, can an orthodontist leave complex and potentially dangerous devices in a patient's mouth?
2. Must the client's records, books and your work product be given over?
3. Are you going to be sued for malpractice despite competent efforts to that stage of the work? Should you worry about the next psychologist ruining all the progress and you getting the blame?
Answers to many of these questions can be obtained from professional associations and by reference to ethical codes; get a written opinion for your files.
If you perform your work to the best of your abilities and meet the standards of your profession, sue your former client if they owe you a significant fee. Threats of a counterclaim based upon negligence are usually just a ploy to avoid payment. Of course, you will need some nerve and confidence in your performance, as well as good documentation. Finally, hire a good collection lawyer who can be your professional.
A Final Thought
Remember a line from the classic 1967 movie Cool Hand Luke: "What we've got here is a failure to communicate." If you keep the lines of communication open with your clients, you will establish mutual trust and will probably be rewarded by prompt- paying clients.
***
The above is not meant to replace legal counsel. To speak to an attorney at Gross & Romanick, call 703-273-1400 or fill out our Online Information Request form here.
