The "Cost of Collection" Clause

In this post, I’ll explain the meaning of the “Cost of Collection ” clause and I will tell you why it’s so crucial that you integrate this provision into the agreements you create with customers.

When you own a business of any sort, the business must generate revenue. Without these funds, your company cannot stay afloat. That’s just the reality of running a company.
So after your business provides services or supplies products, you naturally expect to get paid. But if you send out all of your bills and find that nobody is paying you or a client decides he’s just going to pay you whenever he wants, your business can quickly slip into a financial crisis.
Therefore, to avoid this cash flow nightmare, you have to give your customers an incentive to pay your bills to them. This incentive comes in the form of a provision within your contract called the “Cost of Collection.” By including this specific provision, you’re spelling out very clearly that there are consequences if your clients or customers ignore their responsibility to pay you.

The Last Ten Percent
Sadly, I’ve seen many of my clients lose out on the last ten percent of money owed to them by their own customers on multiple occasions. It’s a helpless feeling when you’re unable to collect the full amount of a bill after you’ve done all of the work.

What these wily customers have figured out is that this last ten percent is just small enough that a business owner won’t take them to court. It’s not worth the legal fees. Therefore, the owner is forced to abandon the recovery of that ten percent (10%) balance of his Contract, even though the money was legitimately earned.

However, this entire scenario changes if the “Cost of Collection” clause is written into a signed contract with clients or customers. The tables are turned now because you as the business owner have the enforcement rights to defeat that nonpayment strategy.

How the Cost of Collection Clause Works

If you build the “Cost of Collection” clause into your agreement with a customer and this individual fails to timely pay for services rendered, you now have a legal recourse at your disposal. You can take this customer to court to secure a judgment for the full amount of the unpaid contract balance, plus all of your attorney’s fees incurred in enforcing your contract rights.

Illinois law says you can get reimbursed for legal costs under the following circumstances:

• If the recovery is written into a contract; or
• If the recovery is written into a statute such as Consumer Fraud, which is designed to be a disincentive for deceptive business practices.

In other words, this “Cost of Collection” clause gives you the power to force a non-paying customer to promptly pay your contract balance, since it will be the customer, not you, who pays for the attorneys fees incurred in enforcing your contract rights.

By making sure that every client or vendor agreement contains a “Cost of Collection” clause, you’ll find that the people you do business with will become far more cooperative when it comes time to pay you.