Depending on which side of the table you are sitting at when signing a contract, will determine how the collections process at the end of project will go. Contract terms are key to a successful collection for final payment.
A good contract can help the parties by:
- Lay out the scope of work for the project so that parties are on the same page;
- Assess where attorney fees will be awarded, many contracts award to one party or the successful party;
- Allow for penalty and interest terms to add to an overdue balance;
- Providing for liquidated damages if problems arise;
- Allow for ADR clauses which can speed up the collection process.
As I discuss on this blog often, large scale projects have all these contract terms covered in the extensive documents that are executed at the outset by the parties. Most of the issues, which can really aid in collections, that I see come in with small project contracts or projects without a written contract.
Scope of Work
Having a clear and itemized scope of work is essential. Each party to the contract must be crystal clear as to who is to perform what task. Scope of work can include such items as who will pay for labor, materials, shipments and equipment rentals. Also it will spell out what work is to be performed and when. The reason why so many projects have change orders or change directives, is due to poorly written scope of work contract terms.
Attorney Fee Contract Terms
In my business, lawyers treat an attorneys fee provision like the holy grail. Its almost like the attorney feels like he has the green light to do all the work possible to collect on the claim. While this may be helpful, courts do not always award attorney fees. Despite that most cases settle and its rare that settlement include attorney fee payments.
The standard in the United States is the American Rule
, which states that each party is to pay its own costs and attorney fees when in a dispute. If a party is on the correct side of an attorney fee provision that can mean tens of thousands of dollars for that party if successful. It is a powerful negotiation tool.
Penalty and Interest Contract Terms
Penalty and interest contract terms can also work like attorney fees. They are used to incentivize the defaulting party to pay or the cost of non-payment will go up. These terms are in most contracts that we, as a public, use these days.
Typical interest rates are around one to one and a half percent per month which equals anywhere between twelve and eighteen percent per year.
Liquidated damages contract terms are not favored by courts but they are favored in practice. Courts will not enforce them when used as a single outrageous penalty, but they will allow them when they are more fair and reasonable.
As always it is very important to include alternative dispute resolution contract terms. ADR as we call it, includes mediation and arbitration. Arbitration is binding and Mediation is when the parties get together to try and work out a deal. Some contracts will pick one alternative over the other. Others will require mandatory Mediation, then if that fails subject the parties to Arbitration.
No matter how the contract terms lay out the ADR, its best to have the terms in there so that parties avoid litigation.