2008 Issue

UTAH ENGINEERS COUNCIL JOURNAL 47 Sole proprietors and partnerships largely rely on the financial strength of the individ- uals that make up these types of businesses. Their personal assets are also exposed to any judgment obtained against the individuals. They will be personally liable for the failures of their businesses. In most circumstances, the recovery from a corporation or limited liability company is restricted to the assets of that business. It is now common for developers to organize a limited liability company with the property to be developed as the single asset. The reasoning is that if the project fails, only the property is exposed to those seeking payment. What interest does your client have in the property your services benefit? If your professional services benefit real property, you can potentially claim a mechanic’s lien against that property in the event of non-payment. The lien is limited, however, to whatever interest your client has in the property. For example, if your client owns the property outright, a mechanic’s lien will attach to that inter- est and the entire property your services benefit. Conversely, if your client is only leasing the property, a lien will only attach to the lessee’s interest, not the lessor’s more permanent interest. Similarly, a client who only has an option on property or is merely contemplating purchase has a limited or no interest, in which case your lien may have little or no value. How will your client pay for your services? If your client has obtained financing for the project costs, including your services, ask for proof of the financing. Your client should be able to produce to your satisfaction documenta- tion supporting the financ- ing that has been obtained, together with information on the lender. If there is any doubt, contact the lender to verify that the financing has been approved and how it will be paid. In many cases, the lender will make payments directly to you if payment applications are submitted. It is prudent to ask for a deposit or re- tainer to be applied against your fee if your client has resources at the time of entering into a contract. This is especially impor- tant for large projects where the amount of services to be provided is extensive in a short amount of time or where dealing with a large client that will only pay for services on a bi-monthly or less frequent basis. The deposit or retainer ensures that if the client becomes behind in payment, the reserve funds can be drawn upon to compensate you for the services rendered. In the event your client has the resources to pay your fee in full at the time of entering into the contract, ask that the monies be set aside in a dedicated escrow account. Your client will earn interest on the money while you perform services, and you will have the comfort of knowing the money has been reserved specifically for you. A personal guarantee can provide much comfort when a client is a single asset lim- ited liability company or other entity with limited or doubtful assets. The guarantee allows you to pursue and collect from the guarantor and their individual assets. If the member of a limited liability company or corporation does not have enough faith in the future of his or her company to person- ally guarantee the debt for your professional services, why should you be asked to have faith in payment? Beware of projects that have conditions precedent to payment for your services. For example, must the planning commis- sion grant a variance? Must the zoning be changed? Does the plat need to be finished and recorded? The danger to you is what happens if any of these conditions are not met. There is a chance that your client will abandon the project and leave you “holding the bag.” If you are not assured of payment, you essentially become an investor in the project and accept the risks that accompany the failure of the project. Does your client have experience with this type of project? The client’s level of sophistication can greatly affect their expectations for a project and the amount of interaction with you dur- ing the project. More sophisticated clients, such as established developers, are likely to be knowledgeable in the types of issues that arise and must be dealt with. Their expecta- tions will be grounded in past experience, which will provide stability in the face of uncertainty. Less sophisticated and inexperienced clients are more prone to having unrealistic expectations for you and the project. It is important to educate them before entering into the contract on what your services include and exclude, along with what they can anticipate from a successful project. As obstacles arise during the project, these clients will require more thorough com- munication and interaction to reassure or counsel them on what can be expected. Budgeting for this increased activity can mean the difference between a profitable project and one on which you are simply hoping to limit the loss. What is the reputation of your client? Discovering your client’s reputation can provide reassurance or an early warn- ing. If you are approached to complete an unfinished project, ask the client and the previous design professionals why their relationship ended. If issues such as non-payment continued on page 51 If you are not assured of payment, you essentially become an investor in the project and accept the risks that accompany the failure of the project.