Critical Steps for Handling Disputes with Clients

As much as we would like to avoid them, it's almost inevitable that there will eventually be problems with clients that you cannot resolve. That's why, in this month's column, we will examine dispute resolution. First, however, we will take a look at ways to keep situations from escalating out of control.

In my December 2004 column, I reviewed ideas for managing customer expectations in order to keep tensions defused and under control. Enough cannot be said about the importance of addressing customer concerns as soon as they arise.

The key to managing your customers' expectations is to have a clear, concise contract with detailed plans and specifications. With the correct level of detail in your contract, there should be no confusion about what is or is not included in the work you are doing for the client. It is important, however, that these plans and specifications be reviewed in detail with the client, preferably with the client initialing each page of all documents. It's also important to include a clause in your contract that makes it clear that the contract is limited to only those things included in the written agreement and does not include anything that might have been discussed but not included.

More often than any other area, it's the subjective issues that will result in conflicts issues such as variations in the color of tile, graining in the cabinetry, sheen of the paint, etc. Part of the answer to these sorts of questions comes from properly educating your clients in advance. We can usually predict what these subjective issues will be and make sure they are discussed so that your client is prepared for them.

One way to address such issues is by employing a client handbook. Such a document can include many of the issues and subjects that need to be communicated to a client. It's also a good idea to have performance standards (such as those published by the National Association of Home Builders) referenced in your contract.

There are times, however, when a client focuses on an issue and it just cannot seem to be resolved. When you reach this point, you will have to decide whether to dispute the issue or give the customer what he or she is after.

Occasionally, you will encounter someone who simply does not want to reach a settlement and will continue to string together reasons that he or she does not want to make a final payment.

Dispute Resolution

Before a dispute ever arises, it's advisable to connect with a good lawyer, one with experience in construction dispute resolution. Have the lawyer look over your contract and procedures to make sure you're not laying a trap for yourself. Taking this step before there is a problem allows you to interview several lawyers and make sure you have a "team" member should you ever need one.

As soon as you sense that a serious dispute is brewing, you should step in and meet, face to face, with your client to attempt to come to an agreeable and reasonable compromise. The first step in trying to resolve any dispute is to evaluate your position and the consequences of the various courses of action you have open to you.

We all have a tendency to be certain that our point of view is the correct and fair position and that our client is wrong and unreasonable. Clinging to this position will lead to statements such as "It's not about the money, it's the principle of it." I would argue that it is about the money, and it can add up to a substantial sum if you do not handle dispute resolution reasonably and rationally.

The key to keeping the cost of dispute resolution down is to make sure that you have procedures for it spelled out in your contract. There are several organizations that provide dispute resolution services, the American Arbitration Association being one of the better known.

A good approach is to mandate, in your contract, that disputes must be submitted to mediation first and then to binding arbitration if mediation does not resolve the dispute. Although arguments can be made for who should pay for such procedures, having each party pay their own costs seems to prevent either party from frivolously calling for these procedures.

Once an impasse has been reached, it is important that you move quickly to come to a resolution. Again, consider the cost of your various options. If you have structured your payment schedule correctly, a very viable one may be to simply walk away from the balance you are owed. A successful mediation will seldom result in collecting more than a portion of the money you are owed and will cost at least $1,000 out of your pocket and that's if you don't have to get lawyers involved. A full-blown arbitration can easily run to $10,000.

A middle-ground solution might be to hire an independent industry expert to try to help resolve subjective issues of "fit and finish." Such a solution requires that both parties agree on who such an expert should be. A variation of this is to have each party select an expert and let that expert try to assist in resolving the disputed issues.

While this "industry expert" approach might lead to a resolution, valuable time may be lost while you work through it. Most often, these disputes arise at the end of a project, when the work is substantially complete and the customer refuses to make a final payment, claiming that the work is not done. If there is any significant contractual issue left open, the situation is less controllable, but still one that should be resolved as quickly as possible. Stringing the process out only hardens positions and allows the other party time to rationalize that you do not deserve to be paid for your work.

For this reason, even if some alternative approach to resolving the dispute is going to be tried, you should proceed with initiating the mediation process as soon as the impasse is reached. Immediately open the process for mediation and push for as early a mediation date as possible; this keeps the pressure on any other resolution process you might wish to try and, if that fails, the mediation is in place. Having the mediation and its attendant costs bearing down will help add a sense of urgency for both parties.

Again, the best way to approach dispute resolution is to avoid it in the first place through use of a good, well documented contract and good communication lines with your clients. Once formal dispute resolution procedures seem inevitable, take an aggressive approach to resolving the issues by meeting with your client. Remember, hoping that the problem will go away never works!