The following article appeared in the “News” of the Philadelphia Chapter of American Society of Civil Engineers, October, 2003

The Importance of Credit and Collection Controls
in Managing Engineering Firms:

By Andy Harmelin

President A.I. Consulting, LLC

 One of the main challenges facing Project Managers in engineering firms is realizing the importance of the credit and collection function, and its effect on the prosperity and financial well being of their firms. When clients take too long to pay, or do not pay at all, the firm loses profits, cash flow, and incurs additional costs to try and collect receivables. Too often we hear our clients in the engineering field saying “I wish I had done a credit check on that client” or “why didn’t my Project Manager get a retainer on that project?”
 
In the past two years, the economy has undergone a contraction in key local markets. As a result of that heightened sense of risk, bank financing has, in many cases, been put on hold. As engineering firms face mounting pressures with the current slowdown, the need to collect every penny of hard earned fees becomes as important as obtaining new business. In fact, for every dollar firms write off as bad debt, 10 times that amount is needed to be generated in new business to just break even.
 
The main challenge facing managers is that the young engineering graduate and unfortunately some with many years of technical experience have never been exposed to the financial requirements that lending institutions exert on engineering firms. The pressure of not upsetting the customer becomes sometimes one of the many reasons a receivable is left to age. The reality of today’s market is that the squeaking wheel gets the oil, and unless your client is advised, in a professional way, of your cash management procedures, you will not make the “priority” list for payment.
 
Sometimes, invoices are lost, misplaced, never mailed, or simply ignored. As a manager, you would like to prevent that by having some simple and effective ways to confirm that your client has in fact received the invoice, and more importantly, she or he has no objections to paying the bill. This interaction with your client during the course of the project alerts your firm whether there is a problem. This additional warning system will provide an opportunity to cost effectively resolve issues and avoids extending the exposure of the firm to substantial rework or the possibility of a termination of services.
 
The good news is that firms can improve their cash flow positions by implementing a Credit and Collection program to tighten up loose credit and collection areas and improve cash flow. Based on the firm’s size and types of clients, the credit and collection effort will vary and can be customized to meet special contractual needs. A common plan is described below and is broken down into three phases.
 

Phase I: Implement Standard Operating Procedures (SOP’s). 

 

These SOP’s are readily available for the engineering industry and address the following important credit and collection areas:

¨      Policy on the Credit Approval Process. This provides a framework to establish a policy to provide credit for client contracts and protection of Accounts Receivables.

¨      Policy to Describe the Review Process for Contract Compliance. This function involves the fleshing out of the process and is designed to ensure that all contracts are thoroughly scrutinized and deemed fiscally sound, prior to the start of services.

¨      Policy for the Control and Authorization of Credit Memos. This establishes the criteria for the issuance of all credit memos for services rendered and billed.

¨      Procedure to Allow for accelerated Billings. This measure, when applicable, will boost cash flow.

¨      Procedure to Outline the Process for Invoice Mailing. As an adjunct to the Contract Compliance process, this measure provides audit data on the mailing and receipt of invoices.

¨      Policy for Project Invoicing Terms. This policy provides contractual items to be considered in negotiations with clients.

¨      Policy for Contract Overruns and Out of Scope Work

¨      Policy for progressive A/R Calls. This starts with a 7-day courtesy call and progresses with follow-up calls and other formal notifications.

¨      Policy on Credit Reference forms

¨      Policy on Contract Compliance Review worksheets. This policy will be used by project management staff and senior management.

 

Phase II: Provide Training to key staff in both Credit and Collection and modify the SOP to suit the firm’s individual management needs.

 

Phase III: Perform periodic audits to determine whether the SOP’s are followed and to measure the effectiveness of the process.
 

Some firms have the in-house capabilities and resources to implement the above measures. Others choose to outsource some or all of the above functions to Credit and Collection firms to save internal overhead costs.
 

A.I. Consulting, LLC is a Credit and Collection firm representing over 25 engineering firms in Pennsylvania, New Jersey, New York and Delaware.  Andy Harmelin, President can be contacted at (610) 667-3422 for any inquiries.

View a PDF file of the actual print article.

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Text of the following article can be viewed on the website of AIAPhiladelphia in their News section.

A.I. CONSULTING, LLC

PO Box 611

Narberth, PA 19072

Office: (610) 667-3422

FAX: (610) 667-3425

The firm has recently performed Peer Review for several of our A/E client firms. This review is designed to assist our client firms in balancing contractual terms and conditions with providing professional and aesthetically pleasing production within budgetary guidelines. As an independent 3rd party A.I Consulting is able to evaluate the subject firm’s credit and collection practices and procedures with a “fresh set of eyes”. It has been said that “a peer review is as important to (a) firm’s health as a physical is to yours”.

A.I. Consulting has developed the following Peer Review evaluation to better assess a firm’s present credit and collection operations. The areas examined all pertain to boosting the firm’s cash flows and preventing disputes. The evaluation consists of meeting with key operations and office staff to examine the firm’s credit policy towards prospective clients, contracting process, routine collection efforts and key personnel involvement in the resolution of client issues and collection process. A.I. Consulting interviews each staff member involved with the following areas for about 30 to 45 minutes getting their feedback on what is working well and what needs improvement.

Ø Credit Policy

Ø Contracting Policy

Ø Routine Collection Efforts

Ø Key Personnel Participation

Typically A.I. Consulting takes an objective and positive approach while interviewing the firm’s employees with their responses kept in strict confidence. They record the firm’s strengths, reaffirming good practices within the firm, and note issues that need modification, providing suggestions for change. Every effort is made to draw out as much information from employees in an optimistic participatory spirit while avoiding their fear and embarrassment. Their goal is not to pass judgment on a firm, just to help them improve. Sometimes the answer is to tell a principal that they have good people but need a better process. A good Peer Review helps to save the design professional from costly write-offs as well as the expense and embarrassment associated with errors and omissions that could occur as a result of a faulty credit and collection program.

View a PDF file of the article.

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A.I. CONSULTING, LLC
P.O. Box 611
Narberth, PA 19072
Office: 610-667-3422
Fax: 610-667-3425
info@ai-consultingllc.com