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!