June 18, 2014

Throwing Good Money After Bad: Collection of the Small Receivable


Over the years, I have been contacted by a number of clients with small collection problems. Typically, the invoice is seriously overdue and there has been a problem with receiving prompt payment during the course of the project. Frequently, the receivable is somewhere between $5,000 and $10,000. The contract for services provides for attorney fees, and the client wants to initiate litigation.

Before filing the complaint, several questions need to be asked:

First, is the value of the receivable worth the cost in time and money required to recover it? Is there any reason the client is a slow pay? Is there any merit to charges by the client that work was slow or incomplete? A vigorous and candid analysis of this question should be made, because if you file a complaint and there are any open questions, rest assured they will become part of a counterclaim.

Because the contract includes an attorney fee provision, the stakes are increased further. Typically, the provisions call for reasonable attorney fees to be awarded to the "prevailing party." The prevailing party is the side who, when the dust settles, is owed more money. If a counterclaim is filed and its value exceeds the receivable, the other side will become the "prevailing party" and will recover attorney fees. Thus, if you collect $8,000, but the counterclaim for $10,000 succeeds, the other side is the prevailing party. Therefore, your $8,000 collection case may actually draw a counterclaim worth $20,000-$30,000 because of the attorney fee provision.

Second, ask yourself what the actual cost in down time will be to key personnel. If your personnel are involved in estimating or business generation, every minute devoted to pursuing the claim is time away from generating new business. In the heat of battle, this may not seem like a large cost, but when you are out several months with less-than-expected new business, it will be a significant factor.

Third, consider morale. A long litigation is like having yesterday's breakfast sitting on the table, day after day. Right or wrong, revisiting a project months or even years after it is over wears on those involved. It is seen as "unfinished business."

Consider also those whom you will need to prove your case. Is every employee associated with the project still with the firm? Are they on good footing with the firm? A disgruntled employee can create havoc.

Finally, examine your motives. Frequently, the level of frustration with the client over billing issues clouds decision-making. Phrases like "it's the principle of the thing" are very expensive. So are phrases like "bury them" or "make them pay every cent." Try to look at the situation dispassionately and understand not every business transaction is a home run. The secret is not to anticipate being an absolute winner every time, but to maximize the victories and minimize the defeats.

Spending huge sums of money on questionable collections is tantamount to throwing good money after bad.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

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