SAMANIEGOMORGAN
BOBZBLOGZ A Series of Informal Articles from a British Architect working from The Philippines. Bob has worked throughout the Middle East and South-East Asia. He established his own Practice near Manila in 2010.
BLOG 18-05 April 2018
Payment Protocols
The ‘Finer Points’ of an Architect/Client Agreement Dealing with ‘Slaves to ERP’ and ‘Purchase Order Targets’ How to Devise a Payment Mechanism under a Contract How to Ensure Payment ON TIME!
Do you really want this ‘Dream Project?’ Let us suppose that you have won an Important and Substantial Project after bidding to a New Client. Your Offer was based on a 30 Day Payment Period, and a 20% Advance Fee was requested. However, your Client has written back to confirm the Headline Items – Before you had chance to return to the Office! Gone is the 30 Day Payment Period, in favour of 90 Days; and there will be no Advance Fee! – He wants you to accept it without question! Is this a ‘Dream Project’ – Or is it a ‘Nightmare in the Making?’ At this point, you are probably thinking, “Pinch me! – I must be Dreaming” – The whole situation becomes like winning tickets to ‘Last Year’s Cup Final! – But still having to Pay at the Turnstile!’ However, there are also several immediate options to consider. Viz., 1. 2. 3. 4.
Due to other work, Politely ‘Regret’ their ‘Kind and Generous Offer’ Renegotiate Revise and Resubmit the Offer Withdraw the Offer and Walk-Away
Your Initial Offer would have been calculated, not only upon the ‘Cost of doing the Work,’ but would also have reflected factors affecting Mobilisation and Cash Flow – Hence the requirement for an Advance Fee. It would also have taken account of the Scope of Work and Project Programme, from which you will have determined a Schedule of Resources. No doubt, ‘Pencils had already been Sharpened,’ and your offer had little room for manoeuvre. However, concessions sometimes have to be made should a Project come along that will elevate your Practice into the ‘Premier League!’ Here, extreme care should be exercised, as ‘Success’ will be dependent upon converting Fee Accounts into Cash as quickly as possible. Firstly, we can observe a ‘Level of Posturing’ on the part of the Client, and there is little point in making immediate contact – After all, it looks as though he is going to appoint your firm; yet he is attempting to ‘Steal’ a Lower Fee! – Just let them ‘Stew’ for a while! – However and even at this early stage you should be considering an ‘Honourable Withdrawal!’ BOBZBLOGZ 18-05 April 2018 Payment Protocols
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Even if your Bid appears to be a ‘Lost Cause’ it is important that you ‘Formally Withdraw’ in Writing! Some more ‘Unscrupulous’ Clients might argue that ‘Joinder’ has been achieved and an ‘Implied Contract’ exists. Without you even becoming aware, Legal Proceedings might ensue. Here, we can see the importance of formally ‘Withdrawing an Offer!’
MEMO TO SELF Must create a ‘Plan B’ for the Big Job Bid! Must Create a ‘Withdrawal Plan’ for the Big Job Bid! Therefore, any representations you make to the Client should be based upon ‘Polite Informatives’ – Without appearing to be ‘Patronising.’ However, anticipate the worst! Although the Questions might be Hypothetical the Answers can prove to be Very Real indeed! – As I know to my cost! Viz.,
ARCHITECT: Do you know precisely WHAT an Architect does? CLIENT: Surely that’s evident from your ‘Bottom Line of the Bid?’ ARCHITECT: Do you know HOW we will ‘Deliver this Project?’ – What ‘Benchmarks’ do you have, by way of Comparison? CLIENT: We installed an Air Conditioning Machine to Sarah’s Office last year! The Project took as little as Six Weeks for the Installation of the Machine. Tendering took place over a Three Month Period beforehand, and involved 12 Suppliers/Contractors. The Contractor was paid ‘Promptly’ after 6 Months! – Oh, and we still hold a Retention Sum of 10%! – We then needed another Machine for Harry’s Office – But cannot understand why the Contractor declined to bid? ARCHITECT: Are you aware of how Architects have to ‘Capitalise’ for Projects? CLIENT: Surely from ‘Personal Wealth?’ – What else? ARCHITECT: Are you aware as to how your Revised Terms make this Project ‘Untenable’ for us? CLIENT: Could you ‘Rephrase the Question’ please? ARCHITECT: Of course you must realise that any ‘Offer’ we give will require an Advance Fee! CLIENT: Why? OUR Company Policy dictates that we cannot give Advance Fees! – So, can you start tomorrow? In such circumstances, it is often worthwhile making comparisons to situations that are rather more fundamental?
ARCHITECT: When you go Shopping at the Weekend, do you tell the CheckOut Operator “There will be no payment today! – If I ‘Like’ the items I will come back and pay next month!”
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CLIENT: Your Hourly Rates are far too high! ARCHITECT: (Changing the Subject) What car do you drive? CLIENT: It’s the ‘New Jaguar’ outside! (Client says with ‘Aplomb!’) ARCHITECT: Do you realise that you pay a Jaguar Mechanic £45 More Per Hour than me, just to Change the Oil? – Now tell me that my Hourly Rate is too High! ARCHITECT: When your Window Cleaner arrives each month, do you insist on a Performance Bond, and hold a 10% Retention? Thirty Days is more than sufficient for any Organisation to ‘Pay a Bill.’ Most large Public Companies have Contingency Arrangements – Although these are not necessarily made public. Credit Periods in excess of 30 Days should be avoided at all costs! In some instances, it might be ‘Illegal’ to impose a longer period. However and irrespective of the Credit Period duration, you should have agreed a ‘Payment Procedure’ in order to define precisely what happens. This avoids the situation where a Client prevaricates for 30 Days, and then begins to issue a string of individual and consecutive queries. In many instances, this is ‘Allowed to Happen’ due to the inadequacy of Architect/Client Agreements. In many situations, a ‘Client Demand’ for 60, 90 and even 120 Day Payment Periods is an almost ‘Neanderthal’ demonstration of ‘Client Might!’ – A ‘David and Goliath!’ However, such Clients often demonstrate a ‘Naivity’ as to the process of Building Procurement. Whilst they might regard their terms to be ‘Smart and Clever’ – No doubt citing their ‘Unquestionable Record of Shareholder Satisfaction,’ they are merely creating a potential ‘Log-Jam of Payments’ for the future! – Hence, 30 Days becomes 60, 60 becomes 90, 90 becomes 120 and 120 becomes “In Your Dreams!”
Advance Fees – Bonds and Guarantees Here we enter what can be described as the ‘Dark World of Banking!’ In many instances Clients (When confronted with Advance Fees), will react by requesting a Bank Guarantee! – At this point, you really MUST consider implementing ‘Option 4’ – Withdraw the Offer and Walk-Away! Covering an Advance Fee with a Bank Guarantee, even for a relatively short period will create ‘Banking and Commercial Mayhem’ for the Small Practitioner! Let us take a Small Practice with a ‘Money-In Money-Out’ Current Account with a High Street Bank. The ‘Big Project’ arrives and the request is made for a ‘Bank Guarantee.’ Firstly, be prepared for an ‘Exhaustive Probe’ of both your Business and Personal Finances! In order to cover the Guarantee, a ‘Credit Equivalent’ will be ‘Frozen’ in your account! If your Bank Deposits are insufficient, expect a ‘Property Charge’ to be required. Your Bank might also withdraw Overdraft Facilities – And, of course this will occur upon the ‘Cusp’ of a Payroll or VAT/Corporation Tax Settlement! Therefore, consider several Bank Accounts with different Banks! BOBZBLOGZ 18-05 April 2018 Payment Protocols
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The Bank Guarantee will incur Monthly Service Charges – Even though the Bank could still be holding YOUR money! It should be plain to see that in these circumstances a Bank Guarantee becomes a ‘Millstone around your Neck!’ Cost will ultimately have to be recovered, making the whole exercise somewhat futile. No one benefits apart from the Bank, and a raft of associated Lawyers! Even when the necessity for a Guarantee has past, it will be your Client (Beneficiary) that will be responsible for extinguishing it! Should this not happen, your account will continue to incur Monthly Service Charges. Therefore, the Request for an Advance, met with the consequences of a Bank Guarantee somewhat negates ‘Trade!’ – What is the point in doing business, when you are unable to pay Staff Salaries and are effectively ‘Insolvent?’ It should be evident to see why most major contractors have a dedicated team that deal with the management of Bank Guarantees, Performance Bonds, and Retention Sums. Given that the duration of an Advance Fee is relatively short, the Progress and Delivery of Work will often overtake Banking Commitments. Of course, you then have to ‘Wait’ for everything to be ‘Unfrozen’ and the consequent ‘Release’ of the Guarantee by the Beneficiary! – Even given this case there are still some Practitioners who ‘Sign-Up’ merely to ‘Appease the Client!’ An alternative would be to Engage with the Client using Time Based Fees which are ‘Capped’ with a ‘Not to Exceed Figure.’ Payments could be scheduled to occur more frequently, using Timesheets as substantiation. This route enables ‘Work’ to commence, yet still mitigates ‘Risk’ on the part of the Client. We should therefore, examine other options. Without the Advance Fee, the ‘Structure’ of the offer will undoubtedly change. Any alternatives should therefore, be submitted and discussed with the Client. Your options here might be limited, and rely upon extending the Project Programme, or ‘Massaging’ your Schedule of Resources.
The Payment Procedure The Payment Procedure should establish the ‘Routing’ of Preparation, Service, Validation, Processing and Ultimate Payment. This is particularly relevant where you might be ‘Working’ for a Specific Branch or Division of a Large Organisation; with ‘Payment’ being made from a different ‘Payment Regiment’ in another part of the Country – Or even in a different Country altogether! Indeed, your Client might even ‘Outsource’ his Procurement and Payment Processes entirely. Here, it is essential that you deal with your Client Organisation at two distinct levels. As a Principal/Director your Prime Point of Contact will be with the ‘Commissioning Division’ – The people who you deal with on a Project ‘Dayto-Day’ Basis. There will then need to be contact with the Client’s ‘Functional Payment Process.’ BOBZBLOGZ 18-05 April 2018 Payment Protocols
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Personally as Practice Principal, I deal with the Commissioning Client; yet keep a ‘Watching Brief’ over the entire Architect/Client Relationship. It then becomes the rôle of a Practice Manager or Accountant/Bookkeeper to monitor the ‘Process’ and ‘Flow of Money.’ This ‘Best Practice’ also ensures a level of continuity with a Commissioning Client, should matters go awry with Payment – With the Principal/Director, only becoming involved as a last resort.
Architect/Client Agreement Given the above and what follows, it might well be that your Standard Architect/Client Agreement might be in need of a ‘Rewrite’ for a particular ‘Client Species!’ With the Private Residential Client, Agreements tend to be at a more ‘Gentlemanly’ level, given a more ‘Intimate Relationship.’ Your ultimate goal will be to evolve a ‘Catalogue of Agreements’ that reflect not only the ‘Client Species’ but also the ‘Fee Basis.’ This can and will allow ‘Risk’ to become evident. As far as possible, your In-House Agreements should follow accepted and tested Model Forms such as AIA, RIBA or FIDIC. On the other hand, you might be required to ‘Engage’ under a Client Form of Agreement. Here, a separate series of negotiations will be required to ensure that the Agreement is ‘Equitable!’ There will also be more ‘Far Reaching Consequences’ of Engagement under such terms. On many occasions I have been told by Clients “No one has ever questioned our Agreement before!” Here, you can respond with the comment that “All Client Originated Agreements have to be approved by our Professional Indemnity Insurer! These are merely his observations! If I fail to consult him, I can be left without Professional Indemnity Cover!” – This has become a very real Commercial Reality! In addition to your Professional Indemnity Insurer making comment, you will also need advice from a Lawyer – However, many Architects versed in the preparation of Fee Agreements will be able to spot obvious transgressions. Before incurring substantial Legal Fees, it might be worthwhile discussing matters with a more experienced practitioner from your ‘Local Network.’ CONTRACT 101:1 Never include anything in a Contract or Agreement that cannot be Enforced!
“Architect shall continue Work even when Payment has not been made!”
CONTRACT 101:2 Never include anything in a Contract or Agreement that is ‘Ultra-Vires!’ (Above the Law)
“Architect shall not engage in Civil Action against Employer”
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CONTRACT 101:3 Never include anything in a Contract or Agreement that is capable of being construed as being ‘Unreasonable’
“Architect shall give a Daily Report of ALL Fee and Contractor Expenditure”
A Letter of Intent This is precisely what it says! – A Letter demonstrating the ‘Intent’ of two or more parties. Letters of Intent should be seen as being ‘Temporary’ in nature, and are used commonly to ‘Enable Business’ until a more formal Contract is in place. However, some Legal Knowledge will be required in order to digest content. This is especially so where particular clauses will not be ‘Binding’ upon any specific party. For instance, you might hold a Letter of Intent from a Client, from which you rely upon to Commence Work. However, ‘Payment’ for your work might not be ‘Binding’ upon the Client! – The whole exercise becomes somewhat pointless – For the Architect at least! For larger and more substantial Projects, my own maxim is one of “Never lift a Pencil before the Architect/Client Agreement is in Place!” The ‘Pre-Contract Period’ is better dealt with by an ‘Exchange of Letters.’ Here, the Client makes known his ‘Intent’ to Commission the Project. This letter is then mated to a ‘Reply’ (Architect), that ‘Accepts’ the work, and confirms terms.
Mitigating and Spreading Risk Many Architects run the risk of their Payments being ‘Hijacked’ by giving too much information on their Fee Account/Invoice. Historically, our Fee Accounts are ‘Verbose’ – Describing precisely what work has been carried out – Rather than a ‘Trade Invoice Format,’ based upon Labour and Materials. The ‘Fee Basis’ will usually dictate the Format of the Fee Account narrative. Often, ‘Expenses and Disbursements’ will then be incorporated in the Invoice. My own Architect Client Agreement uses Three Schedules (Appended as part of the Fee Agreement) to define the following. Viz., 1. Contractual Fees 2. Tariff Fees 3. Change Orders Fee Accounts/Invoices are then prepared separately, for each category. Contractual Fees (Schedule 1) will undoubtedly account for the Lion’s Share of a Payment. If the ‘Payment Event’ has been defined clearly in the Fee Agreement, it should not be prejudiced by giving the ability for a Client to ‘Query’ a minor item of expense! – Thus, suspending an entire and substantial Payment!
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Expenses fall under Schedule 2 (Tariff Fees). These will take account of Travelling, Printing, and other Expenses permitted under the Fee Agreement. They should be Invoiced separately, and preferably under a different Payment Cycle – Benefitting YOUR Cash Flow! Schedule 2 Fee Accounts/Invoices will be in the form of a ‘Headline Document,’ listing ‘Total Gross Items of Expenditure.’ A ‘Narrative’ of individual items can then follow. Personally, I do not entertain ‘Client Disbursements!’ (Payments made to Statutory Undertakers and/or Local Authorities on BEHALF of a Client) These should be made DIRECTLY by the Client, and can be ‘Scheduled’ to coincide with Fee Payments! – If a Client can issue a £4,000 Cheque for a Planning Application to a Local Authority, then surely he can pay for the work done in order to achieve this? ‘Statutory Events’ such as Planning Application Submissions provide an ideal opportunity for a Payment Request. In the past I have ‘Refused’ to Open Tenders where the Client was several months behind in terms of Fee Payments! – The Tenders sat in a drawer until the account was brought up-todate. The ‘Mechanism’ for this was part of the Architect/Client Agreement. Here, your Architect/Client Agreement should address the matter of ‘Withholding,’ in order that you are not held liable for consequential delays to a Project Programme.
Dear Client I have received Tenders from the ‘Six Preferred Contractors’ you requested in your letter of 18 January 2018. However, these will NOT be Opened, Analysed or Reported Upon until our Outstanding Fee Account of 15 February 2018 has been Paid In Full. (Contract Clause 121.15.8) In accordance with Contract Clause 125.11.1 we shall NOT be held liable for any consequential delay in the execution of the Project. I remain,
Schedule 2 Fees SCHEDULE 2 FEE ACCOUNT Project Expenses Travelling Expenses: Printing Costs:
£ £
1,215.65 3,244.50
Total: 20% VAT: GRAND TOTAL:
£ £ £
4,460.15 892.03 5,352.18
In many instances ‘Headline Charges’ will suffice, and proceed for Payment. However, be prepared to submit ‘Qualifying Information!’ – And, also be prepared to submit this IMMEDIATELY upon request! Qualifying Information will list each item of Individual Expense. The submission of Qualifying Information might well be an integral part of the Fee Account/Invoicing process. This will be particularly relevant to Time Charged Fees, where Staff Timesheets will be an integral part of the Fee Account Submission. BOBZBLOGZ 18-05 April 2018 Payment Protocols
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Change Orders or Variations, will fall into a category of their own; as once more, they can be ‘Contentious’ and must NOT be included with Contractual Fees! Change Orders are dealt with in a separate section of the article below.
Fee Schedule Your Fee Schedule should have been investigated thoroughly before it was included in the Fee Agreement. Invoice Dates, Payment Dates and Submissions, must NOT fall over Weekends or Public Holidays. The same, therefore applies when these dates are Projected Forward by 30 Days. Your research should have also identified whether such payments can be made within a Client’s Payment Cycle – Otherwise, you could have inadvertently given an additional and substantial ‘Credit Period!’ This process will require that your Practice Manager/Accountant/Bookkeeper, ‘Engages’ with the Client at a more ‘Functional’ and ‘Financial’ level, to deal with ‘Payment Logistics.’
Stage-by-Stage Sign-Off The Fee Schedule, will define ‘Project Events’ and ‘Work Stages.’ This in-turn ‘Initiates’ the Payment Process. It is important that ‘Confirmation’ is made at the Beginning and at the End of each Work Stage or Event. This can be via a simple ‘Exchange of Letters’ defined in the Fee Agreement, and can take a relatively ‘Passive Nature.’
Dear Client, We have now completed Work Stage 1 (Preliminary Design) and have submitted all Deliverables. Please acknowledge this by Return; and include your Instruction to Proceed to Work Stage 2 (Detailed Design). Dear Architect, Thank you for your letter. We confirm that Work Stage 1 (Preliminary Design) has been Satisfied and Delivered in full. Therefore, you are authorised to proceed to Work Stage 2 (Detailed Design). This helps to deter any obstacles to Non-Payment in the future – For instance when a ‘Client Finance Department’ states that a Fee Payment has been delayed due to ‘Non-Submission of Deliverables’ – In an attempt to conceal procrastination. Here, you merely refer him to the Preceding Correspondence, and confirm by letter – Closing with “We look forward to your Immediate Payment!” It might also be worthwhile considering an ‘Appending Paragraph’ which would read as follows. Viz.,
Unless we hear from you within the next 7 Days (Seven) in Writing, stating to the contrary, we shall deem that Work Stage 1 (Preliminary Design) is Complete and has been Delivered. Therefore, Work Stage 2 (Detailed Design) will commence immediately, unless advised otherwise.
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This advice is given under Clause 121.2.1 of the Architect Client Agreement (Dated 12 September 2017) for reasons of Project Programme and ‘Time is of the Essence.’
Serving the Invoice Whilst it is not necessary for Invoices to be served as part of a Lawful or Statutory Process, it is however, ‘Recommended!’ – How many times have we heard, “I never received your Invoice! – Can your send a Copy?” And, then several months later, “Why do we have Duplicate Invoices? – This is YOUR FAULT and is Delaying Payment!”
“I never received your Invoice! – Can your send a Copy?” “Why do we have Duplicate Invoices? – This is YOUR FAULT and is Delaying Payment!” Fee Accounts/Invoices should be served as ‘Original Documents’ and NOT Photocopies. They should also be signed ‘Personally in Name’ by a Principal or Director in ‘Wet Ink!’ For some Partnerships a ‘Conforme Signature’ might also be required. (Two Partners sign the Document) Finally, they should be Stamped and/or Sealed, according to Local/Territorial Practice. The ‘Nominee’ who signs, might also need to be ‘Declared’ in the Architect/Client Agreement. The same applies to all ‘Project Related Personalities.’ Here we can see the intent of the term ‘Signed, Sealed and Delivered!’ Although this procedure appears overly ‘Pedantic’ it is common practice throughout the Middle East, and most of Asia. For Local Clients, I ensure that Fee Accounts/Invoices are ‘Hand Delivered’ and signed for! Initial Service will be with the ‘Commissioning Client’ or his ‘Nominee.’ According to your agreed Payment Protocol a COPY might be served on the ‘Payment Branch’ purely as an ‘Aide-Memoire’ – However, this should be labelled clearly as ‘COPY FOR INFORMATION ONLY!’ Copies of the ‘Signed as Received’ documents should be filed in the Project Fee File, as they could have a later ‘Evidential Value’ – Particularly where a Client denies ‘Service’ has taken place.
Acknowledgement of Service It is not practical in all circumstances to ‘Hand Deliver’ Fee Account Documentation – Especially for International Commissions. Therefore, consider Recorded Delivery, or Courier Delivery. With each, there will be a ‘Record of Delivery.’ If either method has been used, it could be worthwhile sending a Confirmation Letter or Email, attaching a Copy of the Delivery Docket. Irrespective of the Delivery Method, a Letter is recommended, which advises all concerned that the Payment Process has ‘Commenced!’
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Dear Client, I note that as of the Time of Corresponding, our Fee Account (Ref: 90163-F01 Dated: 12 January 2018) was delivered via UPS (Docket 180113-PH-88324) at 14:13 GMT (18 January 2018) and acknowledged by Polly PERKINS (Finance Technician). We therefore, look forward to payment under the terms of our Contract (Ref: 90163-180102-C01) on or before 15 February 2018.
Payment Pro-Forma Many Large Organisations, Local Authorities and Government Organisations, require a ‘Payment Pro-Forma’ or ‘Application for Payment’ as part of the Payment Process. However, it should be realised that the Pro-Forma is merely for the benefit of the Client! – It will be your Fee Account/Invoice that has ‘Legal Standing!’ – Irrespective of a Client Fee Agreement claiming otherwise! A ‘Client Pro-Forma’ will NOT carry weight during a VAT or Tax Inspection! – The Revenue & Customs Department need to see ‘Real Invoices!’ The Pro-Forma is NOT a Substitute for a Fee Account/Invoice! – It is merely a document that ‘Runs in Parallel’ and is there for the Client’s Convenience – NEVER accept Instructions to ‘Withdraw’ your Fee Account/Invoice, otherwise you could be denying yourself ‘Satisfaction of Judgment’ in the future with regard to Debt Recovery. In most Jurisdictions a Formal Invoice will be required under Company Law, in order to demonstrate ‘Trade.’ When submitting both (Common Requirement) it is important to ensure that ALL details, ‘Tally’ from one document to the next! It is also important to ensure that the ‘Payment Bundle’ (Fee Account/Invoice and Pro-Forma) is Signed-For and Receipted. With International Projects, Fee Accounts/Invoices might well have to comply with local requirements in order to be Valid Instruments. Again, this will be a requirement of your preliminary research.
Validation Your Client will no doubt initiate a ‘Phase of Due Diligence’ – Ensuring that what he is paying for, matches the Architect/Client Agreement, and also as to what has been ‘Delivered!’ Personally, I allocate 10 Days of the 30 Day Payment Period for Client Due Diligence AND the Query/Clarification Process. Ten Days is allocated for the Payment Process itself, with a further Ten Days covering Mail, and the Exchange of Documentation.
The Project Manager In many instances we will find that a ‘Project Manager’ has been Commissioned as a member of the Project Team. Invariably and on Larger Projects, his aegis will extend to the ‘Approval of Fees.’
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However, it is important to determine whether his ‘Involvement’ has been defined within the Architect/Client Agreement – If not, his involvement is unnecessary, and could be construed as an ‘Imposition to either Delay or Avoid Payment!’ At the very least his involvement will contribute little more than a duplication of the Client’s Validation Process. He might well have been commissioned by the Client to fulfil this rôle – However, unless it is included within the Architect/Client Agreement it has no effect whatsoever! – Back to you, Mister Client!
Queries and Clarifications The Architect/Client Agreement, should define a ‘Cut-Off Period’ for the resolution of any Queries or Clarifications. As above, I set my own at 10 Days; at which point I write to the Client, and Confirm that no Queries or Clarifications have been requested; OR that they have been answered. A copy should also be appended to the Client Fee File. However, this is not to say that Clarifications can arrive after the due date. Therefore, the Payment Process needs to be capable of dealing with this without causing unnecessary delay.
CONTRACT CLAUSE The Employer shall make ALL Claims, Queries and Requests for Clarification, relating to Fee Accounts within 10 Days (Ten Days) AND in Writing from the date of Fee Account/Invoice Submission. However and by establishing a 10 Day Guillotine, it should be clear to see, that any Client Queries or Clarifications MUST be dealt with IMMEDIATELY! For instance, the failure of the Architect to respond to a trivial ‘Printing Cost Query’ will not only cause delay to payment (Possibly shifting to the next Client Payment Cycle), but will also ‘Ring Alarm Bells’ with the Client as to the Validity and/or Value of the information requested – “Are they making-it-up as they go along?” In addition to Queries and Clarifications, the Architect might well be required to ‘Substantiate’ any variation in Deliverables. From Day One, a Schedule of Deliverables becomes ‘Set in Stone!’ However and as a Project proceeds, Specific Deliverables will become unnecessary, and others will be introduced. However, many Clients and Project Managers are unwilling to accept this. Reassurance is, therefore required in order to ‘Dispel the Myth’ that a ‘Drawing Count’ is a measure of Documentation Quality. Reliance upon a ‘Drawing Count’ also ignores other activities necessary in order to produce drawings.
Primary Sign-Off Having submitted your Fee Account/Invoice, and having passed the Validation and Query/Clarification Stages, some form of ‘Internal Sign-Off’ will be required within the Client Organisation. This will usually be at the ‘Commissioning Level;’ and will become a ‘Green Light’ for Payment to take place. Again, a Telephone Call, or Confirmatory Letter is advised, in order to achieve a Contemporaneous Record of Events. BOBZBLOGZ 18-05 April 2018 Payment Protocols
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Payment Preparation and Sign-Off At this stage the ‘Bean-Counters’ should be busy in ‘Effecting Payment,’ having all of the ‘Payment Evidence’ from the Commissioning Branch. A Cheque might be prepared or details prepared for inclusion within a Bank ‘Batch Process’ of Payments. However and before either can take place, a Client Financial Officer, will need to Sign-Off. This part of the process should be monitored by your Practice Manager/Accountant/Bookkeeper. From here, it should be relatively easy to determine when a Cheque can be anticipated, or when Cleared Funds, will be credited to your Bank Account.
Receipts A Cheque Payment might be ‘Delivered by Hand,’ or have to be collected in Person – Some rather more ‘Pedantic Clients’ will insist that the person collecting a Payment, is duly authorised to do so. The Client will also be requesting a Receipt for Payment – However, with a normal Bank Cheque, ‘Cleared Funds’ have NOT been received. Therefore, the only Receipt that can be issued will be a ‘Provisional Receipt.’ This merely acknowledges the receipt of a ‘Piece of Paper!’ – The Cheque, ‘Subject to Clearance.’ Different procedures will be required for Banker’s Drafts and a Manager’s Cheques. Once a Cheque Payment has been Deposited and Cleared, an ‘Official Receipt’ can then follow. This might also be the ‘Trigger Mechanism’ for the liability for VAT (Sales Tax), according to Territory. Much here also depends upon the VAT Scheme being adopted by your Practice. It is important NOT to issue a ‘Carte-Blanche Receipt’ when a Cheque has been received! – Especially where there is the distinct likelihood that a Cheque might well be ‘Returned Unpaid!’ Here, a Client will NOT have made Payment, but WILL hold a Receipt confirming Payment! – Any subsequent Litigation and Enforcement on your part, will at the very least become ‘Difficult!’ Should a Cheque be ‘Returned,’ it is also worthwhile consigning a copy of Bank Correspondence to the Project/Client Fee File, for later review and incorporation as part of an Evidence Bundle. Whilst the use of Cheques might appear a little ‘Passé,’ in many parts of the world, they are the prime form of payment – Especially so throughout the Middle East, and South-East Asia. In the Middle East a Series of Post-Dated Cheques are often used as ‘Security’ and a form of Sharia Compliant Credit. It should be remembered that Dishonouring a Cheque in the Middle East is an Indictable (Felony) Criminal Offence – A ‘Payee’ can present a Returned Cheque at a Police Station, and the ‘Drawer’ will be Arrested and Detained until the matter is settled. In the case of Company Cheques, the ‘Drawer’ will be determined as being the Designated Manager of the ‘Business/Establishment.’
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The VAT Double-Edged Sword Above, the ‘Trigger Mechanism’ for VAT (Sales Tax) Payments was alluded to. Dependent upon Territory and the VAT Scheme being operated, VAT Liability can vary considerably. A ‘Cash Basis VAT Scheme’ will operate on the principle of ‘Pay when Paid!’ Alternatively, VAT on a Fee Account/Invoice will become due at the end of a VAT Period (Monthly or Quarterly dependent upon Territory) whether the Fee Account/Invoice has been paid or not! Therefore, you could be liable for VAT (Sales Tax) yet have not have received a Client Payment! Base Rate VAT for the UK is 20% For the Republic of Ireland 23% Some Member Countries of the EU have rates as high as 26% for certain goods and services. Therefore, Non-Payment or Delayed Payment can have greater implications for the Practice. Internationally, VAT is Zero Rated. However and although Nil VAT is Collected or Paid it still has to be accounted for on a Monthly or Quarterly VAT Return. Your Fee Schedule should also take account of VAT Settlement Dates, especially where they operate around Legal Quarter Days. To an extent this can be anticipated, with the initiative being taken by the Architect, who will ‘Offer’ to extend terms by a few days, as gesture of Goodwill.
Recovery of Costs Again, this should have been incorporated within the Architect/Client Agreement. The Fees for Returned Cheques are now substantial, yet overlooked by many. Your agreement might also address the ‘Management’ of a Client Account in such circumstances – Again substantial! This will not only address the ‘Bank Charges,’ but will also include ‘Account Management Charges’ that could operate on a Daily, Weekly or Monthly Basis. Invoicing for same will be covered under Schedule 2 Tariffs. Although many of these will remain ‘Unpaid’ you will have the benefit of recording the Debt Liability as a Business Asset.
Contingency Arrangements The Payment Procedure above, is a typical ‘Road Map of Events!’ – However and until now, it has not been affected by the ‘Human Factor!’ Your Payment Procedure should therefore, include some level of Contingency! This should ideally include ‘Deputies’ who are authorised to sign and respond in an ‘Executive Capacity,’ in case of Termination, Sickness and/or Holiday Commitments, etc. The Fee Schedule also has to be ‘Geographically and Culturally Sensitive!’ My own activities operate in the United Kingdom, Middle East, and The Philippines. Business in the UK is only interrupted by Christmas (Usually a Two Week Shutdown) However, VAT Settlement for Large Companies can create a hiatus around Legal Quarter Days. BOBZBLOGZ 18-05 April 2018 Payment Protocols
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The ‘End of Year Activities’ for some larger Public Companies can also result in a temporary ‘Payment Famine’ when the ‘Books are Closed!’ Each UK Business is able to determine its own ‘Year End’ – Add this to your ‘Client Research List.’ Ramadan and Summer Months will generally create problems in the Middle East. Companies work Reduced Hours during Ramadan, and often Key Personnel will take holidays from July through to September. In The Philippines, the Fourth Quarter of the Year is best avoided! Long Shutdowns occur over the Christmas Period, and a Cluster of Public Holidays occur during October and November. December is also a Financial Year End for many Companies, and also a month where all Employed Staff receive an additional Salary Payment. Consequently, The Philippines begins to ‘Save for December’ from September onwards.
The Failure to Pay Clients generally fall into the categories of either ‘Cannot Pay’ or ‘Will Not Pay’ – However, there are various flavours of both, and many ‘Shades of Grey’ in-between! During the course of a Commission other events (out of your control) could have had a serious effect on a Client’s finances. Much here will be down to your own Due Diligence before ‘Engaging’ with a Client. This is particularly relevant since the Bankruptcy of ‘Carillion Plc’ in the UK – A company described by some pundits as being ‘Too Big to Fail!’ It is important that any difficulties are defined via a swift and thorough dialogue – If only to instil a level of ‘Comfort.’ It is therefore advisable to have your ‘Plan B’ to hand! A separate article will deal with Fee and Debt Recovery.
Suspension of Work This is always a difficult decision to make – Even when afforded the ‘Power of a Contract,’ there could be substantial reasons why this should be postponed, or left as the ‘Ultimate Sanction!’ The effects of ‘Suspension’ could also be far reaching in terms of becoming the ‘Word on the Street!’ However, and just like ‘Non-Payment’ your ‘Paper Trail’ will have to be 100% as your Routine Record Keeping and Filing will possibly become ‘Evidence’ in future Litigation. Personally, my approach is to extract Fee Correspondence to a separate file, when Invoices are ‘In Progress.’ Do not worry about the ‘Amount of Paper’ or your ‘Carbon Footprint’ as these cannot be held as substitutes for ‘Hard Cash!’ An ‘Evidence Bundle’ prepared for Litigation or Debt Recovery has to be able to tell a ‘Complete Story – From Cover to Cover!’ Unlike Criminal Law, the Civil Process requires that the Plaintiff/Claimant demonstrates Harm, Damage and Loss. Procedures will also vary considerably from one Territory to another. In much of the Middle East the Court Process does NOT rely upon ‘Rules of Precedent!’
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Your ‘Exposure’ to Non-Payment will have to be examined carefully, as it will undoubtedly affect those you have either Employed or have engaged as SubContractors. The effects on other Projects will also have a bearing – These being in addition to the problems of Cash Flow! Also keep in mind that a ‘Suspended Project’ could ‘Rise from the Ashes’ at the most inopportune moment. Therefore, your Architect/Client Agreement should be based upon what ‘Could’ happen, in such circumstances. In order to ‘Ease’ such a situation, consider including a Programme for Remobilisation; and a ‘Reasonable Time’ in order to create one. ‘Financial Remobilisation’ will also have to be considered, together with the validity of the Architect/Client Agreement itself. For my own part, this is dealt with in the Agreement, and a Remobilisation Fee, together with a Fee Basis (Future Fees) established. Commonly, ‘Bean Counters’ in an Anonymous Financial Department, will ‘Enjoy’ stalling a Payment for no reason at all – Completely forgetting the implications of Suspension and Remobilisation. At times, a Client will need to be advised ‘Discretely’ via the ‘Commissioning Arm,’ at other times a more direct and confrontational approach will be required.
Arbitration and Litigation Although Civil Recovery Procedures vary considerably from one Territory to another, Mediation and Arbitration might be viable alternatives in the first instance. Such ‘Mechanisms’ will need to be incorporated into the Architect/Client Agreement. However, keep in mind that adequate mesures for ‘Enforcement’ should be paramount.
Change Orders and Variations Firstly, we need to examine the Project, Client, Agreement and Fee Basis, in order to define a ‘Mechanism’ that will keep everyone ‘Happy’ without endangering Programme or Project Outcome. Variations can be substantial, and will be both Positive and Negative in terms of Effect and Value. Variations might have NO EFFECT with regard to Construction, yet can have SUBSTANTIAL consequences for Project Documentation – Especially where this is ‘In Progress.’ The same applies to Construction Work that might be Physically Complete. It should be recognised that Construction and Building Procurement is far from being a Precise Science – There are many factors that will influence how ‘Change’ is to be managed, and a ‘Basis’ for this should have been incorporated within the Architect/Client Agreement – Especially where a Lump-Sum Fee Basis is being followed. A separate article deals with the Management of Change Orders, where thorough documentation is essential.
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Work under Contract Many Large Client Organisations, could be following defined ERP (Enterprise Resource Planning) Procedures, in terms of ‘Corporate Procurement.’ Although their methodologies might be fine for the Manufacture of several million ‘Widgets,’ the same cannot be said for the procurement of a Single Building Project! – This falls well outside of the ERP Box! – Usually filed in a cabinet marked “Too Difficult!” Procurement, Manufacture, Distribution and Sale of ‘Widgets’ will normally involve a ‘Bidding Process’ on the part of Approved Suppliers. Initiating the ‘Supply Chain’ will be a ‘Purchase Order’ issued by the Commissioning Company. The Purchase order will be ‘Precise,’ in that it will request a Specific Amount of Material from a Supplier. It will also define the Supply and Delivery of Raw Materials; and finally it will define the Purchase Price, and Payment Terms. Often the maxim of such companies is “No Purchase Order? – No Payment!” However, there MUST be exceptions to the rule! – Is a Purchase Order issued to the Electricity and Water Companies every Month? Are Purchase Orders required prior to making Salary and Petty Cash Payments? Of course not! – Therefore, there must be ‘Exceptions.’ However, even where there are Defined Exceptions, Procurement Managers will still aim for 93-95% of Purchase Value being under a Purchase Order System. “Why the obsession with Purchase Orders?” – You might ask. The answer is simply that it is a requirement of a Client’s ERP Software, and ‘Managing Exceptions’ requires additional resources and ‘Workaround Solutions.’ Some ERP Systems even prevent ‘Retrospective Purchase Orders’ – Leading to a situation where the ‘Tail Wags the Dog!’ When planning your Payment Protocol with a Client, it is important to establish that your payments are made ‘Under Contract,’ and will require a ‘Defined Workaround’ on their part. The ‘Consequences of Delay’ should also be made plain. Here it is also worthwhile confirming that your Commission and Payment, is ‘Under Contract’ and does NOT require Purchase Orders. Of particular importance will be the way in which Variations are handled.
Let us Re-Address the Original Question! - Do you want this ‘Dream Project?’ Having read the article, quite possibly the answer will be “Withdraw the Offer and Walk-Away!” – An eminently sensible idea, given the first demonstration of ‘Client Behaviour!’ However, given what has been stated, there are no real reasons why you should not proceed, given that various safeguards have to be established along the way.
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In one recent instance, I was presented with identical circumstances. I did nothing after receiving the Client’s Letter of Revised Terms. After several days they paid a visit, and were prepared to renegotiate on MY terms. What followed was ‘Simple Business!’ Viz., A Robust and Amicable Architect/Client Agreement!
When done well, it remains in the Filing Cabinet and does not see the ‘Light of Day!’
A Developing Relationship – Based upon ‘Mutual Trust!’
No Problems with Fee Payments or Contractor Payments! A Separate Subsidiary Company was created specifically for the Project, keeping it well outside the ‘Black Art’ of ERP!
A Demonstration of Good Faith – Architect Delivers the Work and Client Pays!
Fee Payments made frequently BEFORE the due date!
A willingness to both Negotiate and Agree solutions!
Demonstrated whilst administering the Bankruptcy of a Contractor during Construction
The same Client has now approached me directly (Without a Bid Process) for a similar Project! – Hopefully, without the Contractor being Declared Bankrupt! – I missed including ‘Lack of Sleep’ in the Fee Agreement!
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