With more firms’ clients facing financial problems than in the past, managing collections more diligently has become a necessity. The impact of not getting paid is significant. Depending on a firm’s profit margin, writing off a $100,000 receivable is the equivalent of giving up $1 million to $1.5 million in gross fees.

Billing and collection practices — Avoiding problems with collections starts with client selection. Trust your gut. Even a good client’s financial circumstances can change quickly. Many design firms perform periodic credit checks for clients with large upcoming receivables and for all new clients. One approach is to subscribe to a credit service, such as Dun & Bradstreet or Experian. Or, ask for references from their banks and from firms with which they have done business in the past.

Be cautious about accepting more work from clients that have been slow-pay or no-pay in the past. If the firm decides to accept the work from these clients, request a retainer to apply against the final bill.

After deciding to accept a project, the most critical component is a written, signed contract. A well-drafted contract will clearly set forth the legal name of the client and identity of the people authorized to bind the client, the time when invoices will be submitted, the time the client has to raise questions about them, the time when payment is due, the additional consequences to the client for failure to make timely payments, and the process and forum for resolving disputes.

Note that if a firm is doing business in a foreign country, any or all of the rules may change.

Billing promptly — Assuming a client has good credit and the job moves ahead, establish a billing and invoice follow-up schedule and stick to it. Firms need to be tough on enforcing internal procedures. Failure to keep up with submitting hours slows the entire process and often causes invoices to be sent months after the work was completed.

Managing the billing process — The following guidelines are an example of one firm’s approach to managing the billing process:

• Project managers (PMs) submit billable hours and the initial invoice is sent with a cover letter or e-mail and appropriate backup material in accordance with the billing schedule.
• If the terms are 30 days and the client has not paid, PMs must start calling the client on day 31 or 32 to determine the issue.
• For the next 60 days, the PM is responsible for the receivable and makes calls to check on the status of the bill.
• PMs are advised to pay attention to their clients’ payment habits and to meet and communicate with the client at the first hint of a problem.
• PMs are encouraged to be flexible about the time frame — not about extending it, but about reducing it. They don’t need to wait until day 91 to escalate.
• After 90 days, the invoice is written off for the PM (so the project profit isn’t artificially inflated and the PM “feels the pain”) and turned over to accounting.
• After 120 or more days, take one or more of the following final options: negotiate a settlement; sue for payment; file a lien; for subconsultants, go straight to the owner; turn to professional collection; or accept that payment will never be received and write it off.

Sticking to the plan — Setting the tone for effective collections begins with PMs understanding the importance of their role in the process. Firms that have the most success managing collections typically make it a part of their PMs’ bonus calculations.

Handling additional services — Disputes over payment frequently arise out of additional services or change orders. Following are three key steps to avoiding this situation:

• Do not negotiate requests with just anyone. Requests must come from an individual the client has designated as authorized to amend the scope of services.
• Accept only written requests.
• Make sure the design firm employee is up to the task. Not everyone is equipped to match scope and fees.

The Council of American Structural Engineers (CASE) is a coalition of the American Council of Engineering Companies (ACEC). CASE provides a forum for action to improve the quality of structural engineering through enhancement of business practices, decreased professional liability exposure, and increased profitability. To learn more, visit www.acec.org/case
David Collings is a partner with Ames & Gough in Atlanta. He can be reached at 770-552-4225 or at dcollings@amesgough.com. He is a member of the CASE Executive Committee and is the chairman of the Insurance Engagement Committee.