The facts

A consulting engineering firm was hired to renovate an apartment building. Their job included creating plans and specifications for the building’s mechanical system and supervising part of the work. They budgeted $180,000 for these services. As the project progressed, the client paid most of the fees, but $20,000 remained outstanding—with no explanation for the delay. 

The result

Once the project wrapped up, the engineering firm still had not received full payment for its services. After further delay, the firm decided to take action—filing legal proceedings to recover the unpaid fees and even registering a lien on the legal title of the apartment building to protect its interests.

In response, the client counterclaimed for negligence against the engineering firm. The client argued that some tenants complained about not having enough heat in their units, which the client claimed was due to the firm’s heating system design. The client also alleged they had incurred costs on repairs and lost a lot of rental income. In total, the counterclaim requested damages of $200,000.

After receiving the counterclaim, the engineering firm reported the situation to their insurer, who hired a law firm to defend them. The legal battle dragged on for three years, taking time and resources from the engineering firm.

Many disputes can stem from poor communication between the contracting parties. In this case, the engineering firm could have taken extra and more timely steps to understand why they were not getting paid. While some disagreements are unavoidable; a friendly, open dialogue often leads to better—and less expensive—solutions for everyone.

In Victor's extensive claims experience, when engineers pursue unpaid fees, clients frequently respond with counterclaims for damages based on alleged negligence. Often these counterclaims exceed the amount the engineer is trying to recover. That is why it is crucial to consider the overall benefits when deciding to initiate a lawsuit for unpaid fees. Early and open communication with your clients can help resolve issues early, salvage your relationship with your clients, and most importantly, avoid a lengthy and costly legal battle for everyone.

Risk factors

Risk factor #1

Unclear payment terms.

• If payment terms are not clearly defined in the contract, it can lead to misunderstandings and delays in payment. Ensure that there is an agreement executed prior to the performance of services which specifies the payment schedules, milestones and conditions for payment.
• Provide clients with dated invoices and implement a system that sends dated unpaid balance reminders to document attempts to resolve payment problems. These practices can assist firms in managing their financial risk, preventing claims and maintaining a positive working relationship with the client.

Risk factor #2

Undefined scope of services.

• The scope of services the firm is providing must be clear, detailing the manner and method for delivery of these services, as well as clarifying what is not included so that there is no ambiguity about the scope of the agreement. The timeframe for the execution of services should be included as well so that both the client and design firm have clarity on the project schedule. Having a clear and transparent scope of services which details the project timeline will reduce the likelihood of disagreements that would otherwise lead to a fee dispute.
• Lack of regular communication with your clients can result in unresolved issues, leading to disputes over fees and project expectations. Regularly check in with clients throughout the project. Address any concerns promptly and keep them informed about progress to build trust and reduce misunderstandings.

Risk factor #3

Addressing changes as they arise.

• As part of the pre-project planning, a charter outlining the objectives, constraints and business requirements of the client should be well defined. This should also include all information available that relates to site conditions or government-imposed requirements.
• As more information comes to light during the project, modifications may be required, and the design firms will need to provide solutions to address the changes. The services agreements should address how the parties will handle questions or problems that arise during design and construction which require alteration of the initial design solution, whether they are required because of a change in scope or unforeseen site conditions.

Risk factor #4

Inadequate documentation and communication.

• Ultimately, ongoing communication with the client is essential to avoid payment disputes, and failing to keep thorough records of communications, project changes and approvals can weaken your firm’s position when there is a dispute over payment.
• Regular and prompt communication with the client detailing the services provided, including invoices which clearly identify the services provided, is a must. The client relies on your firm’s expertise to see their project through its completion and expect that any problems on the status of the project will be promptly reported to them. Lack of clarity on the status of the project can lead to the erosion of trust between the client and the firm, and potentially the withholding of fees until the problem is resolved.  

This claim scenario is for illustrative purposes only. Please remember that only the insurance policy can provide actual terms, coverage, amounts, conditions and exclusions.