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Suits for Fees - ways to avoid them and their liability
You've provided professional services for your client, delivered the work product, sent them a bill for your services, and...nothing. What do you do? Collecting fees is a critical and often difficult part of your practice, and one which raises one of the most frequent and serious questions to our risk management hotline; Should I pursue litigation to collect my outstanding fees?
Proactively taking steps to reduce the potential for unpaid fees is your best defense to avoiding potential suit for fees. There are three basic billing practices which, when implemented regularly and effectively, can dramatically reduce the number of collection problems your office will face.
Retainers work especially well for smaller engagements for which you should always request a retainer in the amount of the total estimated or quoted engagement fee. However, retainers should also be utilized on larger engagements and can be a good indication of your client's sensitivity to fees. If you request a retainer, and your client refuses, you may use this information in your evaluation of taking the engagement. Typically, your relationship with your client is at its best at the outset of an engagement and a refusal to pay a retainer may spell trouble down the road. If your client pays a retainer for all or part of the estimated engagement, you have eliminated most of the problem associated with the collection of fees.
There are clear and practical business reasons for billing clients frequently. It provides a steady, predictable cash flow for your business, and allows your clients to budget smaller payments. In addition, it allows your clients to understand the progress of the engagement which will most likely encourage them to pay promptly. Should a collection issue arise, you will catch it sooner, have performed less work, and it will involve a smaller amount of fees than if you wait to provide one bill at the end of the engagement. You are mitigating the potential for a collection issue.
Payment on Delivery
The preparation of tax returns and financial statements lend themselves directly to requiring payment on delivery. When stipulated up front, this incorporates the simple principle of leverage. Your client needs the work papers you've prepared and you are leveraging this need to obtain payment. Discuss such arrangements in advance and have them clearly outlined in your engagement letter.
In the event that you implement the above procedures and still find yourself with a collection issue, there are certain steps you should take before consideration of a suit for fees. By implementing these steps, you should arrive at a sensible course of action in any situation.
There are typically two reasons for unpaid fees; either your client is having financial difficulties, or they were dissatisfied with the outcome of your work. By initiating discussion with your client you will be better able to understand their point of view and hopefully, negotiate a course of action that is acceptable to both parties. If the fees are unpaid because of financial difficulties you may consider developing a payment plan, or offering a reduction in fees for immediate payment. A dissatisfied client is a more sensitive situation, but by discussing the reasons for their dissatisfaction you may uncover an unrealized problem with your own practice and, furthermore, reach a compromise that is suitable to your client. Remember, collecting a reduced fee for your services in this situation is better than no fee at all, and may certainly be less costly than litigation. A release of claims letter in return for a fee reduction should be considered as well.
What if you've tried your best to negotiate and your client still refuses to pay what you feel is a valid fee? Before jumping to litigation, assess the situation.
A suit for fees should purely be a business decision. Yes, you delivered services and deserve to get paid, but don't make it personal. Only a certain level of outstanding fee will make it practical to consider pursuing. Assess the resources and costs necessary to pursue unpaid fees and establish a threshold for which you will consider litigation. Write off amounts below this threshold. In the long run, it will be cheaper than litigation.
Assess the Risk of Counterclaim
There are certain things that when considered will allow you to assess the potential for a counterclaim should you file a suit for fees. Always review your work with a critical eye for potential pitfalls before considering a suit. You need to be confident that there are no errors and comfortable with all decisions you made. In addition, assess your client's personality, temperament, and satisfaction with your work. All of these are clues that should alert you to the potential for a counterclaim.
As mentioned, whether you should sue for fees is a frequently raised question by accountants. There is no doubt that pursuing delinquent fees through litigation increases your chances of being sued yourself for malpractice. A malpractice suit, even if frivolous, will be time consuming and require resources. As a professional liability insurance agency we recommend that you follow guidelines like these listed here to minimize the potential for such a situation. We also recommend that you always discuss your procedures and actions with legal counsel. Suit for fees cannot always be avoided, but by implementing some standard procedures you will reduce your potential for such situations.