ElevateHER is about the future of the AEC industry and Zweig Group’s commitment to recruiting and retaining the best minds in the industry. This brochure captures cohort projects from 2020 to 2022.
A Guide for Architects, Engineers and Construction Professionals on Negotiations, Contracts, Collections and Reclaiming Your Value
Emily Havelka, MBA, CPSM Laura Morton, AIA, NCARB 2023 ElevateHER® Cohort
1
3
4
This guidebook is the conclusion of a research project affiliated with Zweig Group’s ElevateHER® Cohort of 2023. Founded by Zweig Group in 2019, ElevateHER® is about shaping the future of the architecture, engineering, and construction (AEC) industry for the better with research and education. Each year, the program assembles passionate individuals from across the industry, and across the organizations within it, to come together to identify challenges within AEC particular to diversity, equity, and inclusion (DEI). By serving as an advisor and a hub of information and resources, this movement brought us together to elevate the industry by identifying and tackling an issue we saw as a hurdle to solving the recruitment and retention crisis in the industry – and it is a crisis.
6
About the Authors
Team “host AgE C risis”
2023 Cohort
Emily Havelka, MBA, CPSM
Emily has more than a decade of experience in digital marketing and communications within the AEC industry. In her current role as the Corporate Communications Leader for the national architecture and engineering firm HED, Emily leads communications and digital marketing strategy and implementation in the realms of media and public relations, online presence, social media, and advertising, among others. Emily has been a pivotal leader in growing her firm’s digital and media channels, with the mission to promote and enrich industry and market knowledge of HED’s integrated service capabilities and responsive, innovative, and sustainable design solutions.
Through industry and discipline-relevant seminars, certifications, and professional organizations, Emily continues to expand and share her knowledge in communications and marketing. She is a Certified Professional Services Marketer (CPSM) through the Society for Marketing Professional Services (SMPS), of which she is a member. Other professional memberships include the Public Relations Society of America (PRSA) and the American Marketing Association (AMA). She holds a bachelor’s degree from Alma College, a master’s degree in Rhetoric & Communications from the University of Chicago, and a MBA from the University of Notre Dame.
Laura Morton, AIA, NCARB
Laura is a Senior Associate at SSOE Group, working as a Project Architect and Project Manager on a variety of urban mixed-use developments and adaptive reuse projects. She has a passion for serving her fellow architects and dedicates her time to AIA at multiple levels within the organization. In AIA Atlanta, she served as a Communication Director, then advanced to the Executive Committee and is currently serving as Secretary. Concurrently, she is the Young Architect’s Representative for AIA Georgia, collaborating with her counterparts around the country to advocate and develop programming for those architects licensed 10 or fewer years.
Outside of her elected AIA position responsibilities, AIA Georgia provided Laura the opportunity to bolster her leadership skills by participating in the inaugural class of the Christopher Kelley Leadership Development Program in 2019, which was followed by serving on the Advisory Board for the CKLDP 2020 and 2021 classes. She also engages in several local organizations, such as Discover Architecture, Equity in Architecture, and ULI/WLI, as well as serves on the Historic Preservation & Land Use committee in her Atlanta neighborhood of Cabbagetown.
7
8
Acknowledgments
Team Mentor: Dathan Gaskill, Zweig Group Dathan has more than 30 years of corporate finance experience, which he brings to his role as a financial consultant at Zweig Group. He most recently was the CFO of Garver, LLC, a 100-year-old, award-winning, multi-discipline engineering, planning, architectural, and environmental services firm with more than 900 employees across the U.S. Prior to Garver, Gaskill was Treasurer and Head of Corporate Finance and Mergers & Acquisitions at Acxiom, one of the world’s largest data and outsourcing companies. He also spent a decade in equity research at Stephens Inc. the largest investment bank off Wall Street. As the Managing Director of Zweig Group Risk Solutions, Dathan brings experience in capital markets, both buy and sell M&A transactions, international M&A (Europe and Mexico), complex financing, risk management, governance, and investor relations. He is a team player and team builder who enjoys working with a variety of colleagues and peers. His hobbies include cycling, community service, and spending time with his wife of 35 years. Dathan holds a bachelor’s degree in computer science and an MBA with a concentration in finance from the University of Arkansas. Gratitude to the many professionals who dedicated time from their busy lives to discussing the industry and our project: Adam Pomorski, SSOE Group – Corporate Finance Manager, Procurement & Contracts Kurtis L. John, Garver – Senior Vice President, General Counsel Carrie West, DBR – Chief Financial Officer Lauren Lint, The Thrasher Group – Chief Financial Officer Kyle Ahern, Zweig Group – Employee Experience and Data Strategist Jamie Claire Kiser, Bernhard Capital Partners – Principal
A very special thank you to the woman running the show, and bringing it all together: Shirley Che, Zweig Group – Director of ElevateHER®
9
10
Table of Contents
Introduction How this Handbook Came About and the Significance of $25,000 .................................... 13 Part I Framing the Challenge: How AEC Firms Value Themselves and Think About Profitability ..................... 19 Part II The Low-Hanging Fruit: Collecting the Payments That Are Already Yours ......... 29 Part III The Contract: Positioning for Successful Collections & Valuing Your Services ............................. 37 Part IV Making Your Case: Protecting Your Contract or Language in Negotiations ........................................ 45 In Conclusion What Is at Stake?..........................................................49 Industry Resources Index Contracts ....................................................................... 51 Resources .................................................................... 51 Additional Reading ....................................................... 51
11
12
Our guidebook may seem, at the surface, unrelated to issues of diversity, equity and inclusion (DEI), but we believe the conversation around how AEC firms value themselves, the contracts they use, the negotiations they engage in, and how and when they collect their payments, is all too relevant to the solution to how we advance the industry. Because if we value our expertise and our services, if we charged and collected on our real value, then the conversation of how to plan, fund, and act on DEI initiatives would be a much easier one. If our industry could exalt the same flexibility, benefits, pay, and work/life balance as our peers in technology and other professional services industries, our recruiting challenges would not be quite so insurmountable. Introduction How this Handbook Came About and the Significance of $25,000 The attention-grabbing title we gave this handbook was slightly tongue-in-cheek initially, because we really wanted to hook the audience’s attention. However, as we really dug into the research and data, the joke was no longer funny – as illustrated throughout, our profession actually is being held hostage by our own practices. By the Numbers According to research from the American Association of University Women, women with bachelor’s degrees graduate with an average of $2,700 more in student loan debt than their male peers. 1 That gap compounds over time, as women take two years longer on average to pay off their debt, with the interest adding up. In AEC, they have 30% less total compensation (see graphic on page 14), and studies suggest that burnout, stress, and exhaustion affect women more so than men, often because they take on more work to achieve equal or less recognition of their competency and skill in the workplace due to bias in reviews, hiring, and promotion considerations. In response to the question, “In the last few months, which of the following have you felt consistently at work?” women reported feelings of burnout 10% more so than men in 2021. 2 In AEC, we sometimes treat professional stress as a perennial (despite being avoidable) problem, but in 2022 a third of female professionals considered leaving the workforce due to burnout. 3 The cost of hiring and onboarding one new employee is between $50,000- $100,000. Turnovers at this rate is not a sustainable system , employee retention is a much more cost-effective approach and needs to be the priority. 1. https://www.aauw.org/issues/education/student-debt/ 2. https://www.mckinsey.com/~/media/mckinsey/featured%20insights/diversity%20and%20inclusion/women%20in%20the%20 workplace%202021/svgz-womenworkplace2021-v11-ex4.svgz 3. https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-the-workplace
13
2021 infographic from Zweig Group for ElevateHER ®, illustrating gaps within the industry when it comes to gender and diversity.
14
Pay, leadership equity, retention, and burnout are equally dire for racial and ethnic minorities within AEC. Those existing at the confluence of being both female and a person of color face the greatest challenges. As clients begin to invest more effort into their own DEI and environmental, social, and corporate governance (ESG) efforts, their procurement values shift. This shift demands transparency and improvement for both their operations and ours as service providers. Beyond competition for clients, stronger DEI investment provides internal benefit. There is no shortage of research proving that more diversity makes organizations more profitable. Currently, diverse companies, particularly those with diverse leadership, enjoy 48% higher performance, 4 66% better decision-making time, 5 and 19% higher innovation revenues with 9% higher EBIT margins than average. 6 Research from the consulting firm McKinsey & Company shows that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians. 7 This data is nothing new. Just about any firm leader you ask would tell you that they know we as an industry need to change, and that DEI is a good investment. However, with the average budget set aside needed for a new DEI program estimated to be between $25,000-$450,000, many firms simply don’t have the resources to execute effectively on the ambitious DEI programs needed to make a dent in their own culture, recruiting, training, and retention, let alone the industry at large. The more we as a work group discussed the industry, its problems, and the challenges we faced as women, the more we came back to the same issue in our research and conversations on the topic: DEI programs at small and medium-sized firms are beginning as grassroots efforts with one or two passionate people, often overburdened women and people of color, taking on voluntary and under-supported tasks as mentors, program leaders, and educators, all while still working a full-time AEC role.
While the idea of a small, grassroots effort succeeding in changing the company culture by winning over hearts and minds in time is more heartwarming, we as business leaders know that initiatives without investment, policy reinforcement, strategic incentives, and high-level backing are often destined to fail. The unfortunate reality is that most of these efforts will die on the vine – at best having accomplished modest awareness with little or no sustained change, and at worst having created more disillusion or doubt in the efficacy of DEI. Failed programs and abandoned attempts are net negatives. They create cynicism in the value and validity of DEI initiatives and become anecdotal evidence of “we tried that here and it didn’t work.” When we looked again at that average price tag of $25,000-$450,000 just to start a DEI program and thought about the bandwidth we saw in the industry, the burnout, and how it inequitably impacts women and people of color, we thought: “The first and biggest hurdle here is time and money.” When we envision a “dream DEI program” we think of the kind of hefty time/money and culture investments made by Fortune 500 companies and big technology firms – organizations dedicated to capturing the value of diverse staffing and leadership because they understand the long-term benefits it will bring to their bottom-line, and have the willingness to invest in it. Developing and recruiting diverse leadership is a long-view strategy. It does not happen overnight, but it pays dividends. 4. https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-diversity-equity-and-inclusion 5. https://www.forbes.com./sites/eriklarson/2017/09/21/new-research-diversity-inclusion-better-decision-making-at-work 6. https://hbr.org/2018/01/how-and-where-diversity-drives-financial-performance 7. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/why-diversity-matters
15
DEI is not something that we as an industry can make substantive progress on with ad hoc volunteer programs that don’t have monetary and strategic investment. So where can a firm of fewer than 70 people suddenly find $25,000 or more to invest in a long-view DEI program? Where can a large firm discover more resources to invest in their existing programs? Where could we identify, for firms of any scale, some “low hanging fruit” to capture more funds, and maybe identify some pitfalls that contribute to burnout? This is the question that launched our journey. We spoke with AEC consultants, legal counsel, accountants, CFOs, COOs, project managers, and HR professionals, and what we heard consistently was: “We don’t value ourselves enough. We don’t charge fees that reflect the value we create for society and our clients. We consistently create unnecessary strain on ourselves by bidding too low, working with clients who don’t pay, doing free work, burning out our top talent, and not enforcing our contracts. Our people want flexible work arrangements, competitive pay and benefits, DEI and culture programs, and investment in their professional development We’re torn between needing to do more, evolve and invest in people and technology, while simultaneously self-enforcing downward fee pressures because we think it is what must be done to win work. It doesn’t need to be like this.” Many of the concepts we outline in the following pages require conviction and reinforcement from the top. Firm leaders are like gears: they must work together to shift the culture of the industry.
16
17
18
If the COVID-19 pandemic taught us one thing, it is that our industry is more capable of change than we ever thought possible, and faster than we ever imagined. Most of us became, almost overnight, completely remote practices. We learned a lot about ourselves, our clients, what we could do and how technology could be leveraged to make us effective and collaborative even at a distance. It also reinforced how essential the work performed in AEC is. While many in AEC “went home” during the pandemic, few to none stopped working. Bridges had to go up, hospitals had to be designed, building systems had to be optimized – AEC was deemed essential at the highest level of government. It is troubling to consider the economic, cultural, and physical impacts the work of AEC professionals has on our world when you realize many of its players are competing on fee at adjusted rates far lower than their peers in the legal, managerial consulting, or accounting professions. After all, who wants to walk across the most cheaply built bridge or receive care in the hospital designed the fastest? Professionals who have spent the better part of decades training and credentialing to render professional services in an industry that defines itself on artistry, quality, codes of ethics, and intense rigor are racing each other to the bottom. This is not a universal issue, certainly many construction firms do a very fine job of dictating the costs associated with safe and quality construction. So why then are architectural and some engineering firms willfully commoditizing themselves, competing on fee rather than differentiation or specialization? The simple answer is, candidly, a mix of fear and ignorance: Part I - Framing the Challenge: How AEC Firms Value Themselves and Think About Profitability Fear of losing the project Fear of the competitors submitting a low fee, and the mental trap of believing that if they compete on fee, so must you Fear of failing to demonstrate differentiation of the firm/services to the client Lack of faith in the differentiation of the firm when compared to competitors, known as “impostor syndrome” Ignorance or lack of alignment on the firm’s strategy and differentiation Lack of training in how to articulate the firm’s differentiation confidently and compellingly Losing sight of revenue vs. profit Siloing those who pursue work from project management (leading to “profitability is the PM’s job” attitudes) Misunderstanding the function and cost of activities at different stages of the sales funnel (for example, submitting a proposal to a potential client who does not know you “to introduce them to us” is a woeful misuse of time/money resources) Losing sight of the real priorities: winning the project is not the goal, profit and client satisfaction is
19
But we already know all of this. So why are so many firms in AEC still competing on fee or pushing their teams to do everything cheaper or faster instead of better or more innovative? Everything listed can be explained by what we have started referring to as the surviving vs. thriving mindset. Strategy can help you price your services perfectly, can help you define and differentiate your brand, and can imbue you with financial literacy to keep sight of revenue vs. profitability. You can find shelves of books and entire MBA curricula dedicated to these topics, but if your organization is trapped in a survival mode culture and way of thinking, your teams will continue to undercut themselves and compete on price, even with loyal clients who would pay a premium for the service you provide Surviving vs. Thriving When we first began approaching the conversation that would become this guide, we continued to gravitate to the practices we saw as harming our firms and our teams. Namely some old attitudes that were, we believed, creating problems in how our teams and firms viewed the nature of the marketplace, the attitudes of our clients, and how the world views the services we provide. We realized that the challenges of diversity, equity, and inclusion were just some of many growth opportunities firms want to pursue but find themselves limited by time and cash flow concerns. We found ourselves gravitating to the term “surviving vs. thriving” which has become a bit of a buzz term in recent self-help and mental health circles, but we came to see it as applicable to organizational attitudes as much as individual life approaches. Survival mode is often the term used for the stress response individuals might take on from trauma. It is fight-or-flight, it is the frenetic and continual repetition of old patterns, focused on reacting to external factors to keep the wheels turning no matter what. Survival mode is to exist under a constant barrage of external stimuli that those within the firm must constantly react to and are seldom if ever prepared for – often this is referred to as “firefighting.” Survival mode is where there is “no time” for truly deep strategic conversations or deep reflection on the brand or core competencies. In survival mode, new project opportunities, positioning, and client relationships are not consistently interrogated for their long-term value, or that value is somehow divorced from profitability. Survival mode often involves logic that insists that suffering today will create the potential for unspecified benefit “in the future,” and is often more concerned with heading off the activities of competitors (being reactive to their strategy) rather than in how the firm in question can better position or improve their results. Indeed, in survival mode, long-term vision is often vague, and the strategy or differentiation of the brand cannot be uniformly articulated by team members because it is not consistently communicated or reinforced. Wins are celebrated, but expected net fee or anticipated profitability is not interrogated or shared – creating fundamental misalignment in what your teams are taught to target. Survival mode celebrates winning projects and being busy as though the two were synonymous with profitability and high utilization (spoiler alert – they aren’t).
20
On the other hand, thriving is proactive, specific, and selective about goal setting, strategies, and success measurement. In thrive mode, not every opportunity is pursued because every opportunity has an ROI calculation and only acceptable profitability is pursued. Often, opportunities are created organically by the firm through refinement of core competencies, brand differentiation, and serving the right relationships well. A firm in thrive mode does not concern itself with chasing opportunities that are only marginally or not at all profitable, or with clients who are not loyal or profitable to work with, or in markets where the firm’s differentiation is not recognized. Thrive mode targets profitability and high utilization, and the firms that are high-performing and maintain thrive mode are often those that unify and communicate brand strategy and differentiation, specific goals through financial measurements, and are most transparent at deeper levels of the organization. In short, surviving puts you at the mercy of your competitive environment, thriving is your strategy shaping your competitive environment. What’s interesting about survive vs. thrive mode is that within one firm both mindsets can be active at the same time – at the highest levels of an organization there can be a thrive mindset, but if the strategy, measurements, and correct incentives aren’t communicated to the levels of the organization that are entering into pursuits, contracts, negotiations, and project management, the practice of the firm can quickly devolve into survive mode. This is how you get misalignment between C-suite leadership or principals-in-charge, who will be confused when the firm wins a large project, only to discover that the win was based on a fee with a razor thin profit margin (if any) and hefty overhead into the pursuit itself. There is a lot of literature out there on how to slow down and take control of your strategy, define your place in the market, price your services appropriately for your value*, and communicate it through your organization, but we identified a few practices we saw as symptoms of surviving instead of thriving mindsets and attitudes. Deep discussions on these can reveal opportunities for training people within your key decision-making teams, many of whom probably did not receive robust business or financial training and education in their architecture or engineering programs.
*For more on how to properly evaluate your value in the marketplace and pricing, we suggest the text “Raise Your Value: 5 Steps for Architecture and Engineering Firms to Uncover Hidden Value, Design a Winning Advantage and Charge More,” by June R. Jewell, CPA, which includes with it tools for assessing your value and was a source of much learning and inspiration for us when writing this guide.
21
Changing their mind too frequently or too late in the process Demanding out-of-scope changes Unprofessional or disrespectful treatment of your staff Do not allow you to take credit for your work or will not share in the promotion of the work Demands work or solutions while declining additional services Do not believe you should or need to make a profit, particularly on “high profile” projects (this needs to be combated internally as well) Does not value the expertise you bring to the work Firstly, “All Work is Good Work” or “All Clients are Good Clients” We know there are bad clients – yet we don’t always act in our best interests in realizing it soon enough (or at all). The short-term gains of working on a high-profile project seldom balance out the losses of working with a bad client. Working with clients who are cheap, treat your team poorly, do not appreciate your work, or do not let you take credit for or celebrate it are not worth the cost overruns, staff burnout, or mental and emotional strain. Similarly, a friendly client that is easy to work with but is unprofitable is also not a good client. The time and resources spent breaking even on their account is better redeployed on one that creates profit. Much is written on client management and improving client relations and communications. That’s not this conversation. If you have clients who your teams consistently struggle with, are unprofitable, or who do the following, it is worth it to investigate removing them from your client mix:
Does not pay on time Procures solely on fee
22
Pursuing projects and not clients is a similarly destructive ethos. If a client is difficult to work with, cheap, or has unrealistic expectations or does not appreciate your work, they should not be pursued no matter how high profile or interesting the project is. This comes back to the fundamental tenet of serving and building the right relationships. If your business development is about chasing projects and not building relationships, you will always be competing for every project. If you build trusted relationships, you will compete less, differentiate yourself more easily, win more awards, and be more highly regarded overall because your clients will be your advocates in the marketplace.
“It is Okay to Take a Loss or Break-Even to Win Work” or “Pain Now, Profit Later”
This is poisonous thinking. During the Great Recession, many firms struggled to remain in business and retain staff, creating a hostile low-bid environment where the goal was to keep staff utilized. But this faulty logic has persisted well after the recession, with firms believing that to take on loss leader projects can “win work in new markets, with new clients, or gain projects for the portfolio.”
Here’s why that rationale is flawed:
On a systemic level, this leads to continued undercutting in bidding by many firms, and self-inflicted downward fee pressures in the marketplace that impact all firms at all scales. A brand cannot suddenly go from “high-value and differentiated” to “generic and low-cost” and back again in the client’s mind: when you compete on fee, you erode your brand and differentiation in a way that is difficult to come back from. Seldom do clients react well to having costs raised on them after the first or second project. A client who was taken on at a loss usually stays at or near a loss for all projects thereafter or is immediately lost when fees are raised.
23
If these attitudes are commonplace in your firm, goals need to be reevaluated and communicated as deeply as possible in the project teams. Wins and projects that don’t generate a profit should not be celebrated, they should be reviewed with financial leadership, principals, and project leadership as learning moments. Incentive structures need to be adjusted to prioritize profitability and real, honest utilization data. If you win a high-profile project but it doesn’t make a profit, that project was a net loss to the firm, full stop. If a project is estimated and managed poorly or was set up to not make a profit to begin with, you are setting up the next equivalent project to not make a profit either because you are working from incorrect internal information. Profit has to come first, and utilization has to be honest. Attempts to contain losses often create pressures internally to perform work without charging to job codes, incentivizing “free” or “hidden” work that creates burnout in staff and destroys your firm’s utilization and estimating data – making your entire operation less measurable, more imprecise, and less profitable. Creates a bad precedent for setting hours and fees later, because the data is flawed from the start, and the issues perpetuate and can snowball. Setting yourself up as the lowest bidder is not how you create a long-term consultatory relationship, nor is it the right way to position your brand to be perceived as high-quality and high-competency. Loss leader projects create tension within your project team and external partnerships as PMs struggle to keep costs in check and limit losses.
Decreasing Fees
Decreased Value & Quality
=
Rising Utilization
The balance required to raise utilization to counterbalance decreasing fees is nearly impossible. There are too many unknowns impacting project profitability, and utilization has a very real ceiling that directly impacts quality, innovation, and company culture. The balance required to raise utilization to counterbalance decreasing fees is nearly impossible. There are too many unknowns impacting project profitability, and utilization has a very real ceiling that directly impacts quality, innovation, and company culture.
24
Setting Up To Profit The level of business acumen and education AEC professionals receive varies widely, and often we have seen even senior professionals express attitudes that do not reflect the best interests of the firm, and by extension their own careers, out of a simple misalignment or misunderstanding of project financial performance, how it impacts them, and how their team impacts it in turn. Making financial performance data available to project managers and leaders is essential, but there should also be education, training, and reinforcement of company goals with strategic incentives. Define an acceptable ROI for pursuits and a go/no go process that highlights the net profit margin rather than a projected win calculation. A target net profit margin makes profitability the goal, whereas a projected win calculation makes winning work the goal, even if it is not profitable. In examples A and B, which of these go/no go tables do you think results in a profitability discussion? Which is likely to be a go?
In this case, neither a full or letter proposal effort would result in the desired profit percentage. Perhaps augmenting the proposal assembly budget/time allocation or careful project management could extract more profit, but without consideration early on, those issues may not be effectively raised.
25
As you can see in Example B, whatever the weighted go/no go percentage reached or type of proposal (letter or full), it’s guessing at whether the profitability percentage would be reached by the effort. If pursuit teams are not working in tandem with an informed marketing department, they are not working with all the information. Even with a higher perceived chance of winning, or a streamlined proposal development process that results in less time and cost per proposal, the project may still need to be carefully managed to extract a profit, if any can be reasonably expected. Marketing leadership must be working side-by-side with whoever is making the go/no go decisions within your firm, to keep average proposal effort costs in line. An informed, analytical marketing team can grade proposals by response effort and project a range for costs associated to respond. Given the correct tools and support from leadership, an experienced marketing manager can essentially function as the project manager of the pursuit process to align, measure, and control costs in a pursuit, rather than hand off the pursuit to a PM team with higher overhead… meaning the pursuit stands a better chance at higher profitability.
Often, all it takes is education to get everyone looking at the numbers and passionate about how they can make their work more profitable, efficient, and effective.
26
27
28
Part II - The Low-Hanging Fruit:
When digging into what data was available specific to the AEC industry, particularly for identifying discrete areas for quick generation of the funds necessary for a DEI program (that elusive $25,000), the simplest of the low-hanging fruit was in accounts receivable (AR), or more specifically, the average AR being carried by architecture and engineering firms and its age. We found, to our surprise, that the average firm was carrying over 20% of their AR over 30 days. We were shocked. A simple adjustment to net 30 payment terms or collections within 60 days across the board would increase the average firm’s cash on hand by 25%! For many firms, that level of predictable liquidity and reduction in debt burden would make discovering $25,000 for a new DEI program simple. To frame this another way, imagine if employers withheld 25% of worker pay on a regular basis – imagine the chaos that would create in the average household, in your household, yet we let it happen to our firms on a regular basis. Another interesting way to frame it is not paying 25% of your monthly bills and imagining what happens. I doubt any of us has had collectors be so understanding with us as we seem willing to be with clients. Hypotheticals aside, collecting payments in a timely manner is essential for the financial health and success of any company, including AEC firms (actually more so). When payments are not received within the agreed-upon timeframe, such as after 30 days (a preferable and almost ubiquitous standard in most industries), it can have detrimental effects on the company’s cash flow, profitability, overall financial stability, and EBITDA ratio. Collecting the Payments That Are Already Yours
29
Timely collection is particularly crucial for the financial success of AEC firms because, as we know, these industries are highly competitive and capital-intensive, requiring substantial investments in personnel, equipment, and materials just to win work, let alone manage it. By ensuring prompt payment collection, AEC firms can maintain their cash flow, sustain operations, and achieve better financial stability beyond that $25,000 for a DEI program. Lack of cash on hand stemming from slow or ineffective collections, we found, is creating a substantial and pervasive ripple effect across the industry. The saying “cash is king” is an ancient adage for a reason. Incomplete, slow, or inconsistent cash flow disrupts every phase of financial planning and disrupts key business functions, such as: Cash Flow Management AEC firms heavily rely on consistent cash flow to cover daily expenses, such as payroll, purchasing materials, and equipment maintenance. Delayed payments can disrupt cash flow and hinder a firm’s ability to meet financial obligations. Timely payment collection allows firms to promptly settle their own payables and maintain a healthy balance between income and expenses. Minimize Borrowing and Interest Costs Often a symptom of inconsistent cash flow or problematic cash flow management, delayed payments can force AEC firms to seek external financing or dip into their lines of credit to cover operational costs. This reliance on borrowing comes with associated interest costs and can lead to increased debt burdens. You can see how taking out a loan with interest for a sum you should have already had in hand is obviously bad business. By collecting payments on time, firms can reduce their reliance on borrowing, minimize interest expenses, and allocate their resources more efficiently. Resource Allocation and Straining Supplier and Subcontractor Relationships AEC firms work in collaboration with numerous suppliers and subcontractors who provide materials, labor, and specialized services. Establishing strong relationships with these partners is crucial for successful project delivery. If payments to the prime firm (or any firm in the chain) are delayed, it can lead to a shortage of working capital, resulting in difficulty in paying salaries and suppliers. Timely payment collection allows firms to honor their financial commitments to suppliers and subcontractors, fostering trust and goodwill. Consistent payments also increase the likelihood of securing competitive pricing and high-quality services, improving the overall project outcome, and timely payments facilitate proper resource allocation, ensuring smooth project execution and preventing delays. What’s more, being a firm known for professionalism and on time payment makes you a preferred teaming partner, which can sometimes open doors to new project opportunities when your firm is able to be the preferred partner of suppliers and subcontractors with their own strong client ties. The impact that timely collections from prime AEC firms has on subconsultants, particularly MBE/WBE/SBE partners, cannot be overstated. Often working within paid- when-paid agreements, these MBE/WBE/SBE partners become the very last to be paid, amplifying every negative impact we have discussed thus far. In an industry environment where we desire and need quality MBE/WBE/SBE partners, paying them adequately and on time is essential not just for functional business relationships, but for the survival of these firms. To do right by our partners, we must do right by ourselves.
30
Project Continuity AEC projects are complex and multi-phase, with each phase building on the success of the previous one. Delays in payment collection can disrupt the project timeline and impact overall progress. Subcontractors and suppliers may refuse to continue working if they are not paid on time, leading to project delays, cost overruns, and potential legal disputes. Timely payment collection ensures project continuity, mitigates disruptions, and preserves the firm’s reputation for delivering projects on schedule. Financial Planning and Stability AEC firms rely on accurate financial information for strategic decision-making, growth planning, and forecasting. Timely payment collection provides firms with a clear picture of their financial position, allowing them to make informed decisions regarding future investments, expansion opportunities, and risk management. It also enhances their ability to plan for contingencies and withstand market fluctuations, ensuring long- term financial stability. Risk Mitigation Timely payment collection helps AEC firms mitigate financial risks associated with non-payment or late payment. By promptly receiving payments, firms can avoid potential cash flow gaps and minimize the impact of non-paying or slow-paying clients. Implementing clear payment terms, invoicing promptly, and actively following up on outstanding payments are effective strategies to reduce the risk of financial losses and maintain a healthy financial position. Employee Morale and Retention The financial health of an AEC firm directly impacts its employees. Timely payment collection ensures that employees receive their salaries and benefits on time, boosting morale and job satisfaction. Lack of cash flow is often a direct contributor to the level of, or lack of, investment in employee programs that build retention or recruit fresh talent. Compliance with Financial Obligations AEC firms must fulfill various financial obligations, including tax payments, insurance premiums, and loan repayments. Delayed payments can make it challenging to meet these obligations within the specified deadlines, resulting in penalties, interest charges, and strained relationships with financial institutions. Collecting payments on time ensures compliance with financial commitments, avoids unnecessary costs, and maintains positive relationships with key stakeholders and creditors. Business Growth and Investment Timely payment collection provides AEC firms with the necessary capital to invest in growth opportunities and expand their business. Whether it’s upgrading technology, hiring skilled professionals, or diversifying service offerings, having a consistent cash flow enables firms to invest strategically in their future. By collecting payments on time, AEC firms can fuel their growth, capitalize on market opportunities, and remain competitive in an ever-evolving industry. Legal Protection Collection is one of many areas in business where it is better to address the problem sooner than later. When payments are delayed or go unpaid, there is often misalignment in how much is being collected and why. Early and consistent collections and following up so amounts do not compound actually benefits your clients as much as it does you. However, the firm may need to be willing to resort to legal recourse to recover the amounts owed (later we will explore why this is necessary). Legal proceedings
31
can be time-consuming, costly, and divert resources from ongoing projects. Collecting payments on time may not be fun, but it reduces the likelihood of disputes and legal battles, safeguarding the firm’s resources and reputation. Financial Reporting and Transparency AEC firms often need to provide financial reports and statements to clients, investors, and regulatory authorities. Timely payment collection ensures accurate financial reporting, which enhances transparency and builds trust with stakeholders. If your cash flow is inconsistent from lax or negligent collections, you’re not as solvent as your clients may think you are. Reliable financial information helps foster positive relationships with clients, facilitates project financing, and attracts potential investors who seek to partner with financially responsible firms. Enhanced Competitive Advantage AEC firms operate in a highly competitive marketplace. Timely payment collection gives firms a competitive edge by enabling them to hold more cash and bid on and secure new projects more effectively. Firms that consistently demonstrate their financial reliability and ability to manage projects efficiently are more likely to win contracts and build a strong reputation within the industry. Timely payments also facilitate the completion of projects within budget, reinforcing a firm’s competitiveness and attracting future clients. Clients Prefer Clear, Timely Collections and Project Management Good clients prefer steady and reliable collections because it creates consistency in their cash flow as well. No one likes to be hit with a bill they didn’t see coming, or one that is higher than they anticipated because it covers multiple billing periods. Transparency and consistent invoicing at 30 days, clear communication, and timely collection activity makes your, and your client’s, cash cycle simple and predictable. This positions you as a reputable and professional partner and future service provider. Clients who do not want to pay on time, play games with collections, or pay inconsistently or only in part either do not respect your business by attempting to force your firm to carry debt burdens to create more liquidity for themselves, or are not consistently solvent themselves, meaning you should modify the agreements you undertake with them, or not work with them in the future at all. What’s more, collections beyond the agreed terms (the default and recommended period of net 30) can create expenses onto itself with: Increased Cost of Borrowing As stated above, to bridge the gap created by delayed payments, AEC firms may need to rely on external sources of financing, such as bank loans or lines of credit. However, the longer it takes to collect payments, the more the company may need to rely on borrowing, resulting in additional financial burdens and a cycle or reduced profitability – creating obligations that stack and increase the interest rates applied to new debt. Disadvantageous Pricing with Suppliers and Subcontractors Delayed payments to you may mean delayed payments to suppliers, which impacts relationships and also your ability to negotiate favorable terms and pricing in the future. If suppliers and subcontractors know your firm is inconsistent in collections and payment, they may alter the pricing they provide to you, potentially putting you at a competitive disadvantage when trying to win work.
32
Increased Administrative Costs Managing and following up on overdue payments require additional administrative efforts and resources. AEC firms may need to allocate staff to handle collections, send reminders, and initiate collection processes. These activities divert valuable time and resources from core business operations and can increase the administrative costs associated with payment collections. Opportunity Costs Delayed payments can result in missed opportunities for growth and investment. When working capital is tied up in outstanding payments, AEC firms may be unable to seize new business opportunities, invest in research and development, or expand their operations. This can hinder the company’s ability to stay competitive, innovate, and adapt to market changes. To mitigate and prevent experiencing the detrimental effects of collecting payments after 30 days, your firm can adopt several strategies: Clear Payment Terms Establishing clear payment terms from the outset is crucial. Contracts are your first and best line of defense in protecting the value of your services and collecting your fair payment. Contracts should include explicit language specifying the agreed-upon payment schedule, including the due date and consequences for late payments. There should always be consequences for late payments , and they should always be acted on. Requiring net 30 payment terms and communicating them transparently to clients can help set expectations and promote timely payments. Proactive Invoicing and Follow-up Whether invoicing and collections is the responsibility of accounting, the project manager, or automated through a software platform, the chain of responsibility and actions for escalation should be made clear. Proactive follow-up through reminders, emails, or phone calls are essential, and can help prompt clients to make timely payments and reduce the risk of delayed collections. Whenever possible, invoicing should be done virtually via timestamped emails, sent to the client’s accounts payable (or AP) group with the project contact copied. Submitting invoices only through a project contact on the client side is asking to be forgotten. Often, invoice approvals are not the primary function of the project contact on the client-side. However, paying bills on time is one of the core functions of a client’s accounting/AP team, so making them aware of the client organization’s obligations directly is best practice. Consider ACH setup, whether offered by the client or to the client, to reduce back and forth correspondence time between payments. Enforce Late Payment Penalties Including late payment penalties in the contract can incentivize clients to make payments within the agreed-upon timeframe. Penalties can be structured as a percentage of the outstanding balance or a flat fee, however, your firm must be willing to use them. Often as an industry we feel guilt or discomfort at insisting we are paid – remember that collecting payment for your services is not wrong. Your clients entered into agreements with eyes open, and not paying your firm directly hurts your team.
33
Monitor and Escalate AEC firms should establish internal processes for monitoring and tracking outstanding payments. We recommend automating the system as much as possible and putting it into the hands of AP professionals. There are accounting systems that can automatically issue invoices, collections reminders, and trigger automated calls and texts to designated phone numbers. We recommend emailing, calling, and texting over sending in the mail, and the point of contact should always include the client’s accounts payable or accounting team, not just their project contact. Regularly reviewing accounts receivable aging reports with your project managers can help identify overdue payments and enable timely follow-up, but firms are best served in investing in technology to remove this responsibility from PMs as much as possible. The logic that “a client is more likely to pay on time with a PM they like,” is faulty and puts the blame where it doesn’t belong. It should not be a PM’s responsibility to make sure a client pays; it should be the client’s. Every business has internal systems to pay bills on time regardless of the personal relationships involved. Often in AEC, we regard the client relationship so highly that we divorce it from standard expectations of a business relationship. Stepping outside the project relationship for a moment, do you ignore invoices from the power company until you receive a call from someone on the power company’s end whom you have a relationship with? No. You pay your bills on time because you agreed to and because you know their services will stop if you don’t pay. Hold clients to the same standard. You will always be better served by: Copying the client’s accounts payable on all project invoicing conversations. Billing automatically every 30 days. Implementing automated invoicing and reminders via email (this is important because failed delivery, bounces, or opens can be tracked and dated, creating a written record of activity around the outstanding invoice). Whatever system you use should notify administrators of bounces and opens. Include language for the escalation of collection efforts, such as implementing a collections agency, or pursuing legal action, if necessary. Keep track of which clients are consistently late in payment and flag their accounts; entering into new work with them should be weighed against issues with collection, or addenda to future agreements (such as a capital management fee) should be added to ensure your team gets paid on time. Add stop work contract language.
34
Foster Strong Client Relationships Building strong client relationships based on trust and open communication can help facilitate timely payments when disputes about services arise but should not become a part of collections. Addressing any concerns promptly is essential, but we want to emphasize that a strong client relationship is one that mutually respects the parameters of a business relationship. PMs and project leadership should be brought in to discuss the material substance of the invoice or address concerns, not to call and ask their clients to pay their bills on time. This comes back to serving the right clients well. A client who values your services and believes in your professionalism will also believe in your willingness to enforce your contract terms and be paid without the relationship souring. Capital Management Fees If a client has a track record for not paying on time, or if collections is a pain point particularly for your firm, consider establishing a standard capital management fee clause within your contracts for negligent collections over a certain amount or after a specified number of days. Essentially, charging your clients a capital management fee entitles you to sell their debt to a firm that specializes in collections at no cost to you. The capital management firm pays you the client’s outstanding amount, and the client pays the capital management firm’s fee and the debt owed to them. Education, Training and Transparency with Project Leaders Sharing data and providing training for your project leaders who negotiate and sign contracts, and project managers, who are often placed in the position of collecting, is key to their success in controlling project profitability. There is a lot written on the topic of how much of the firm’s financial information to share, with whom, and for what purposes. Building a culture of transparency fosters trust in employees, and in return creates a stronger drive to work toward shared goals. Some recommended information to share: Profits and losses – breakdown in an abbreviated version, focusing on EBITA (earnings before interest, taxes, depreciation, and amortization) and a narrowed look at expenses, like combining payroll, benefits and wages into one number. Best to do this at least quarterly. Goals – this is firm goals and employee goals, and seeing how they can align in one-, five-, and/or 10-year plans. The business – this includes prospective clients, challenges in the marketplace or with competition, business and delivery processes, and the overall health of the firm. This will lead to better engagement from employees when it comes to strengthening the firm. Outside of the firm, encourage PMs to take a mini-MBA course or other business- centric training. Recommend to summer interns and/or through student outreach and mentorship programs that they should take at least a semester of managerial accounting or a course that outlines some of the same material, especially if the university does not offer any thorough practice management courses. By establishing clear payment terms, implementing efficient invoicing procedures, enforcing late payment penalties, monitoring collections, and fostering the right client relationships, firms can minimize the risks associated with delayed payments and maintain a healthy financial position – and thrive rather than survive.
35
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52Made with FlippingBook Annual report