MEP Consulting, money collection

[EE123]

I am an engineer in a small MEP Consulting firm (15 people). The other day I had a conversation with the CEO of the company which was complaining about not being able to collect money from the clients. Now the company has been in business for 25 years. I was just wondering if any other companies have the same problem when it comes to collection and what you have done to deal with it. Sometimes we do not answer RFIs until we get some money from the architect/client but that seems like too much hassle.

what is the best way to ensure timely payment from clients or is this just a problem that all MEP companies have.

Thanks,

 

[MiketheEngineer]

ALL companies have this problem.

Set guidelines up front - in writing. Get payment when that portion is done or suspend work and let them know that.

Keep to your rules.

Pay in advance when needed - for slow or no pay client.

Search this forum - Think I have seen MANY threads on this....

 

[EE123]

Thanks, but in your opinion doesn't that discourage clients from working with you again if you push them to hard?

 

[NCDesign]

It may, but do you really want to do your work for free? Do you want to tie up huge chunks of your time (& money) to work on project(s) that you won't get paid for? I hate to sterotype but architects can be the worst when it comes to using consultants as banks. (Developers are a close second. They are always trying to minimize cash outlay until they have the building occupied or set-up to be sold. In my experience contracts directly with owners and the government tend to be the best paying in terms of time.) Architects will collect the money to pay you then use it to pay the rent on their swank office space or on anything but paying you. Then they hold out that if you don't play ball they won't bring anymore work your way. What good is more work from them when they are already into you for tens of thousands? What good is more work that they aren't going to pay for? Sorry, if I am a bit bitter, been there, done that and got the t-shirt.

Another thing is it probably won't be a shock to the slow pays that you think they slow pay. They probably do it to everybody.

 

[EE123]

I totally understand what you are talking saying about architects. Just recently we had to stop sending out information/drawing for a job that was done because the architect had not paid for 2 projects that were done almost a year ago. He claimed that he has not gotten paid from the owner. So after withholding information from contractors, the owner called in and we found out that he had paid the architect the day project was delivered.

It is really hard to know what to do. On one hand if you are too tough on the architects they may not bring you jobs (specially in this tough market) and on the other hand it seems like we are just doing jobs for free so the architect can use our money to take expensive vacations so they can get inspired.

 

[ajack1]

In a perfect world everyone would get paid up front and deliver perfect goods on the day promised, however we all know reality is not like that.

Whilst being in a different industry I used to have the same problem when we asked for 30 days payment terms. I then made a decision I would offer 90 day payment BUT with a penalty of 3% + bank base rate/ per month for late payment, this is in our terms and conditions.

Whilst this did cause short term cash flow problems for my company meaning I needed to give the company a directors loan, once the cycle catches itself up it is not really a problem any more.

On balance I feel we have gained from doing this as I spend far less time chasing slow payment and this is a very stressful thing to be doing, also because of this we have won new customers because of our payment terms. The downside is the money is in someone else’s account for longer and you are setting a new benchmark, someone will start to offer 120 day terms to better you.

However we live in hard times, car companies would not choose to give free credit or cash back any more than builders would choose to discount properties or offer other incentives, but you have to do what it takes. Of cause if you are busy enough simple refuse to work for them and move on to someone else who does pay on time.

 

[MiketheEngineer]

You could always hire an "enforcer" That's the way the Mob collects their debts...

Might cut down on new business however.....

 

[NCDesign]

Interesting ajack1 have you had to, or better yet chosen to, impose your penalty. I don't know of many people that actually enforce the penalty clauses in their invoices. But with your generous terms I think I would always apply the penalty no exceptions.
The alternative is a quickpay discount. I think this is more applicable to material products than a professional service. I know plenty of people that won't hesitate to let payment slide to 90 days or later that jump at the chance to pay in 10 days and save 2%.

 

[ajack1]

I have never had to enforce this but could have done on about four occasions. We did check out the legal side of this and have a series of final demands we send out, in reality in the UK it takes over a month to take anything to court, it hardly seems worth the time and effort involved, but we still follow the procedure, so the wheels are in motion. Since introducing this system we have not had a single payment reach 120 days.

Prior to this we did try an early payment discount, some companies would use this but we still had problems with late payment. The whole idea behind this was to stop late payment and the hassle it creates, not to generate extra income; it seems to have worked well.

 

[DonPhillips]

First, it starts with knowing your client. Are you being hired by people with poor cashflow? Poor paying practices? Poor reputation in the industry? Too small? Too large?

Then comes the contract, when payment is due, when it is past due, and when finance charges accrue.

Then, it is the service you provide. You have to provide great service.

And then it is your business practices. Do you send invoices out right away? Do you make payments easy (credit cards, PayPal) Do you send along a statement? Does the statement show the age of receivables? Are you contacting them to ensure they received the invoice and answering questions? Do you ask how you can help them get their account current? Do you work with them by giving them time, reducing some fee, perhaps reversing finance charges?

And finally, after months of chasing, are you filing liens (some states allow design professionals to lien property), are you having your attorney write letters? Or are you writing off the debt and learning which clients to keep and which to let go.

A real PIA but that is why you get paid the big bucks.

Don Phillips

http://worthingtonengineering.com

 

[EE123]

First of all, thank you guys for the great responses. It is always good to know what other professional have to say base on their experience.

DonPhillips,

First of all, I think we do provide a very good service to our clients and they admit it too. It is just that they rather give us the pad on the back than paying their invoices. And as far as clients we work with all kinds, small to large. Right now we are getting a lot of project from a architectural firm that had $14 millions dollars in sales just during the 1st 4months of this year. however even these guys are slow payers.

I think the market is tough right now and we just rather have projects and have nothing to do. As a company we have a policy of not laying people off (as long as it is possible)so any project is a good project right now to at least keep employees busy and not having to send them home. Then again, if we are not getting paid, then it makes it tough on us too.

As far as putting lien, we have tried that, but the problem seems to be that the general contractors get the first dips and it just leave us out.

 

[PHovnanian]

About "getting left out" after filing a lien, it doesn't matter whether the general or architects get paid first. You don't release your lien until you collect.

Problems arise when the customer paid the general, but the money didn't find its way to the subs. The general could care less about a property lien (until customers' attorneys begin to gather). You are pressuring an innocent customer to collect from a deadbeat general or architect.

 

[DonPhillips]

A lien is a lien. If you have not been paid, do not lift the lien - contractor or no contractor. Eventually, they will have to pay to have you lien lifted.

I budget 10% of all my billings as bad debt so if I get more than 90%, it is a bonus.

Don Phillips

http://worthingtonengineering.com

 

[cvanoverbeke]

This is an interesting thread. As a former banker, I can tell cash flow is king. The key to collections is consistent policy towards your clients. I find the comments interesting about the architect who did not pay for a year. I was a construction lender at a large Canadian Bank and under the Construction Lien Act, the funds that the architect received are Trust Funds i.e. it was money to pay consultants. I am not familiar with US law but that architect broke the law. In Ontario, where I live that would be considered professional misconduct and the architect could lose their license if reported to the Ontario Association of Architects. I have never thought of reporting an architect to the OAA for not paying but it seems like a good idea.

I have recently become very agressive at collections with my clients. I do not have the time and energy to spend hours and hours on collection especially for small amounts of a few hundred dollars.

Engineers need to be more forceful in dealing with "deadbeat" clients. They are paying for our expertise and in my experience they save far more money than they spend on a good experienced engineer. I have had clients tell me "You already saved me money".

I think there is larger society problem in North America whereby the business norm seems to be "Screw your suppliers". I have found when the owners and designers work as a team, projects usually come in under budget and on time.

Regards
Cvanoverbeke