Unpaid client bills create dilemma for architecture, engineering firms

Architects and engineers walk a fine line when it’s time to to collect their fees.

Clients often let invoices languish unpaid. Getting that money can be tough, said Jessica Myers, counsel at Harter Secrest & Emery LLP who specializes in working with design professionals.

“Sometimes the design professionals are kind of at the mercy of the credit of the developers and their investment partners in getting paid,” she said.

In theory, architects and engineers can take legal action to collect delinquent fees, but many are hesitant to do so, according to Tim Hughes, Buffalo office principal for C&S Cos., a national design and engineering firm. Design work is a relationship-based business, and getting pushy with a client can mean the end of relationship.

“It burns the client relationship for keeps, potentially,” Hughes said. “We have to handle these collection issues pretty delicately in our business.”

Myers said firms can sometimes wait too long to take action. By the time they come to her, it’s often a last-straw scenario.

“I know a lot of design professionals are hesitant to file a lien at all; they don’t want to impair their business relationships,” she said. “You want to have your client base; you don’t want to alienate them. Oftentimes I will see design professionals write off balances due, which could be in the tens of thousands of dollars.”

It’s an age-old story, but one that is becoming more urgent as interest rates rise. Letting invoices linger was a little less worrisome when interest rates were near zero, but now firms are missing out on substantial gains by not putting that money to better use, Hughes said.

“Without volunteering for such a role, we’ve become America’s interest-free banker,” he said. “Especially on the private side.”

Governments, school districts and public agencies typically pay fairly promptly, and when there’s a delay it’s typically due to bureaucratic hangups, Hughes said.

For private customers, it’s often a different story. Architects and engineers typically start work on a project early, before financing has been secured.

While many developers pay their bills promptly, some don’t want to pay out of their own pocket until they’ve secured a loan.

“They’re not paying us until they get everything in order,” Hughes said. “And that’s not what we agreed to.”

The standard C&S contract gives clients 30 days from the receipt of an invoice to pay.

The law does provide recourse for architects and engineers who are stiffed on their bills. A mechanic’s lien allows anyone who provides materials or labor for a project — like a contractor or engineer — to file a lien on a property they’ve worked on if their bill is unpaid.

“The mechanic’s lien ultimately gives them the option to foreclose against the property, that’s the remedy,” Myers said. “It’s a powerful form of security that they can use.”

However, the clock is ticking. In New York state, design professionals have eight months from the time they complete work on a project to file a lien.

If they miss that window, they can still claim breach of contract in court, but it’s much harder to get money out of a company without a lien, Myers said.

The legal process also comes with risks. Often, developers facing a lien will fire back with a malpractice lawsuit, alleging the architect or engineer in question did their work improperly, Myers said.

Still, she said it’s important for design professionals to keep their options open.

“At least pick up the phone and call your attorneys, call your insurance representatives who can maybe point you toward an occasion,” she said.

C&S will usually try to talk to a delinquent client before getting the lawyers involved, Hughes said. Established clients often get more leeway, because the company doesn’t want to put those relationships in jeopardy.

“There’s not that many that are chronically, deliberately exploiting us, but there are a few,” Hughes said.

The next step is turning to Jennifer Smith, C&S general counsel. She’ll start by sending a letter to the delinquent client, and often that’s all it takes.

“Sadly, for whatever reason, sometimes when you get a letter from a lawyer, that gets people’s attention and we get paid,” she said.

Most delinquent clients never make it to Smith’s desk, and of those that do, less than a quarter of cases result in a lien. That’s almost always enough to get a client to pay, she said — it almost never escalates to foreclosure proceedings.

Though legal action is rare, Smith said C&S has stepped it up recently as higher interest rates make the matter more urgent.

“We’ve gotten a little more aggressive, because it costs us a lot of money,” she said.

Link to original article on Buffalo Business First.

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