AEC firms struggle to retrieve all of the revenue they bill out, however there are some solutions firms can use to counteract commonplace issues.
The AEC industry is a complex collaboration comprised of architects, engineers, developers, owners, contractors, and sub-contractors, to name a few. With all of the different parties involved, it can be hard to trace where all of the money pertinent to the project is going. It is common to have to wait for the money to trickle down to your company.
Say your team bills more than $100,000 for the month. You feel like you are doing great and will have plenty of profit left over, but at the end of the year there is no money left over. Where did it all go? The bottom line is that AEC firms struggle to retrieve all of the revenue they bill out. We are seemingly one of the only industries that struggles to be compensated for the work we do; but why? Here are some of the problems with how our industry handles invoicing:
- Work first, invoice second. Our companies do all of the work and deliver the product before receiving the cost. Our society cannot go to a grocery store and take what we want, just to be billed for it 30 days later, but that is exactly what we are doing with our documents. Our clients are not motivated to make timely payments if they have already received what they need.
- Late billing. Project managers and principals juggle a lot on their plate, and it is easy for billing to be the task that gets moved to the bottom of the pile, keeping us in a constant state of trying to reconcile debts.
- Lack of follow up. We can get in the habit of sending the invoices out, checking the project off of the list, and moving on to the next task at hand. We can forget to follow up with the client and the invoice is out of sight and out of mind.
- Fear of our clients. Revisit once more the analogy of a grocery store; should the cashier feel bad for making you pay for the products you want and the price you were made aware of before you ever made it to the check-out line? If you fear your client will be upset for paying for your services then they may not be the best client to serve.
- Collection period. Studies show that the average period to collect cash is more than two months from the invoice date.
While these issues have become commonplace and seemingly unavoidable in our industry, I’d like to provide some solutions we can use to counteract them. Here are some of the ways we can avoid having a large accounts receivable balance:
- Accounts receivable review. In order to reduce your account receivable, you must first know how much you are owed and by whom. We can get stuck in the mindset that billing the client is all that matters, but without proper cash flow, we cannot run a business. It is important to have an accounting software that can show you which clients have an outstanding balance, for how much, and for how long. We can waste countless hours trying to keep track of accounts receivable if it is not tracked for us.
- Consistent communication. Let your client know where you are with the project and what you are billing for. If they have an issue that they are withholding payment for, you should be informed and resolve the issue. In addition to your accounting department, the project manager or principal who has a relationship with the client should be reaching out to all of our clients who have exceeded the pay period set in your contracts. Do not surprise your client by suddenly charging them more or withholding documents without first extending proper communication.
- Consistent billing. Establish a billing schedule with your employees and clients. By invoicing at the same time every month, not only will they establish a rhythm of regular payments, but you will be more aware of when they are exceeding this 30-day timeframe.
- Pay by phase upfront. It may be that we need an industry change to shift the cost to the owner to be paid upfront per each phase of work being performed. This will ensure you are getting paid for all of your work as well as protect the client from having to pay for the entirety of the project all at once. Alternatively, we can add a “stamp only after payment” clause that requires all outstanding invoices to be paid before sending stamped drawings.
- Project hold. When an invoice has not been paid in the time agreed upon in the contract, all work associated with that project can be put on hold until payment is received. It is also important to push the entire schedule back by the amount of time the project was put on hold.
- Late fees. Many contracts have a fee for late payments, charging a set percentage of the outstanding amount in interest per month. The language in the contract is there for a reason; use it!
- Be polite. Rather than demanding your money, it is always better to start off by asking when we can expect payment to be processed.
- Know your client. If the client you are sending a proposal to has a history of being slow paying or even owes your firm money, consider finding another client or requiring a retainer to start the work.
- Signed agreements. Make sure you have a signed contract that lays out the client’s name, frequency of your firm’s billing, the timeframe for payment to be received, and the consequences for late payment.
Implementing these can help your firm build trusting client relationships and keep getting paid for what we do best.
Stephen Dominguez is the principal in charge of the structural division of WT Group. Contact him at sdominguez@wtgroup.com.