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Engineers: 8 Ways to Make Sure You Get Paid

PROLINK Blog

Engineers: 8 Ways to Make Sure You Get Paid

January 24, 2023

The success of any business relies on its cash flow. But what do you do when clients don’t pay their bills on time? Or worse, if they don’t pay them at all? Whether they’re having technical issues, running low on funds, trying to delay, or they simply just forgot, clients can miss payments for any number of reasons. And while larger engineering firms have entire departments to deal with accounts receivables, smaller practices and sub-contractors might not have the time or support to set up proper billing procedures, settle invoices, or investigate past-due bills in a timely manner.

But chasing after delinquent accounts is more than just an administrative headache; even one outstanding invoice can have a domino effect that impacts every aspect of your business, leading to wasted capital, project disputes, performance issues, costly litigation, insurance claims, and more.

With a recession on the horizon, the potential for payment disputes—and lawsuits—is higher than ever. It’s critical for all engineering firms to batten the hatches, protect their cash flow, and recover lost revenue wherever possible. Here’s how non-payment can affect your business and the top risk management tips to make sure you get paid on time, every time.

 

Disclaimer: Please note the information provided herein offers guidelines only and is presented from a liability-based perspective to help you avoid insurance claims. It is not exhaustive and should not take the place of legal advice, nor will it apply to all businesses, settings, and circumstances. For specialized guidance, please consult a lawyer or a licensed insurance representative.

How does non-payment affect your business?

1. Wasted Capital

 

Start-ups and smaller engineering firms often feel pressured to take on clients they shouldn’t or offer more lax payment terms to get the ball rolling and build working capital. However, delayed payments can backfire by tying up your cash flow and causing serious damage to your balance sheet.

Without a consistent source of income, you might have trouble making payroll. After all, how will you cover salaries every two weeks when your clients are paying you every 3-6 months? And if your people aren’t getting paid, they might consider taking their talents to greener pastures. You also won’t have the financial resources you need to cover your rent, buy new equipment, make strategic hires, or fund overhead expenses.

Think of it like this: by offering a delayed payment schedule, you’re basically giving your client an interest-free loan. And while your client can take advantage of the extra cash and time to grow their business, your firm might have to take out a loan from a partner or a line of credit (and pay interest!) to stay afloat.

2. Client Disputes 

 

Depending on the client, you might be inclined to let things slide and absorb the loss. Or you might opt to sue them for non-payment of fees. But while it may be tempting to call your lawyer, suing a client typically has more risks than rewards. Most of the time, they’ll turn around and point the finger back at you. Some might even report you to your governing body (like the PEO in Ontario) and once a claim is filed, it can’t be withdrawn; you’ll have to defend your actions to them until the claim or complaint is closed.

Unpredictable and aggressive clients could even accuse you of professional negligence, breach of contract, or even poor quality and countersue you to recoup the funds. But like regulatory complaints, you’ll still have to defend, even if the allegations are groundless. And what’s worse than not getting paid? Spending the funds you have left fighting an expensive, time-consuming, and frivolous lawsuit. Client suits generally take about three years to resolve, with the average settlement cost at $250,000. And since you’ll be busy dealing with lawyers, you’ll have fewer billable hours to make back what you’re losing in legal fees. More often than not, the total time and cost of suing to collect unpaid fees ends up being significantly more than the actual value of the fees.

In addition to legal expenses, there’s also the cost of lost business. Even if you’ve done nothing wrong, lawsuits can cast a shadow of doubt that’ll strain your relationships with existing clients and discourage any new ones from signing on. Once you’ve lost that trust, it’s hard to gain back. Clients know this and count on the fact that you’ll walk away and write off the amount rather than taking your chances with the court of public opinion.

 

RELATED: All Aboard: Onboarding Risk Management for Engineers

3. Contractual Liability

 

If your client is late on their bill, you may decide to stop working on their project until you get paid instead of suing them outright. But if your refusal to work leads to construction delays, scheduling conflicts, or any other kind of disruption, your client could terminate your contract altogether and sue you for holding up the project.

And unfortunately, the courts won’t side with you: unless it’s stated otherwise in your proposal or contract, you’re still legally obligated to keep working, do your due diligence, and meet the agreed deliverables—all while sinking deeper and deeper into a receivables hole. If you stop working, you’re in breach of your contract. Even worse? You can be held liable for any subsequent losses incurred by the client, like the cost of hiring a new consultant to review and take over your work.

4. More Mistakes

 

The emotional and mental stress of non-payment can take a toll on your business. If you’re not getting paid regularly, you might try to make up the difference by taking on more work than your people can handle. Then what? Either you’ll have to abandon the project midway because you bit off more than you could chew. Or you might end up dropping the ball and making costly and easily preventable mistakes that diminish your clients’ goodwill.

Overworked and stressed out employees that are juggling too many projects are likely to fall behind on critical delivery milestones, field inspections, and peer reviews. Alternatively, they might try to maintain efficiencies by skipping key protocols or taking shortcuts, resulting in more errors, or accidents. That means even a single slip-up or miscalculation could lead to a lawsuit against your business for negligence, third-party injury, or property damage.

 

RELATED: Work, Sleep, Eat, Repeat: Managing the Burnout Crisis

5. Premium Hikes

 

In the event of a lawsuit, your Professional Liability Insurance can defend you and your business from allegations of errors, omissions, or negligence committed within the scope of your activities as an engineer. It can also cover your legal expenses, administrative costs, court settlements, and more, even if the claims made against you are groundless.

But the higher the damages, the more your policy will have to pay out. That means a long, drawn out litigation process or a few major claims could cause your premium and deductible to spike at renewal time. And that’s on top of the already-high costs for certain engineering disciplines.

If coverage isn’t mandatory in your field, you might be tempted to cut costs after a premium hike by reducing your coverage limits. Keep in mind though: given the high-stakes nature of engineering as a profession, it’s already hard for most Design Professionals to qualify for coverage or secure low rates. If you have to increase your policy limits again and you have a few claims on your record, you’ll be hard-pressed to find an insurer willing to take you on at all, much less at a decent price.

 

RELATED: Can your engineering specialty affect your insurance rates?

PRO Tips for Managing Your Accounts Receivables: 

 

Whether you’ve gotten your first unpaid invoice or you’re dealing with clients that are chronically late, the best way to handle overdue accounts is to prevent them altogether with an effective billing and collection strategy. Here are 8 tips to help you encourage timely payment, improve your liquidity, and reduce lawsuits.

1. Vet your clients. 

 

Good client selection is one of the best risk management practices an engineering firm can follow. Good clients are reasonable when problems arise, work with you to find a solution, and pay on time because they value what you do.

When bringing on new clients:

  • Be selective. Even if you’re hungry for revenue, stay away from clients that have a reputation for being litigious or who insist on cutting corners. Although it might seem like a good idea at first to build your network, if clients are willing to take shortcuts during the design process, they’ll also be more likely to turn on you when push comes to shove.
  • Be thorough. Implement a screening process for all prospective clients. Run credit checks and find out if they have a history of non-payment or if they’ve been sued recently. Survey your network for feedback and check review sites for complaints. Diligent vetting will help you learn more about a client’s reputation and financial profile and determine if they have the resources to meet payment.
  • Be vigilant. Run regular credit checks on your larger or longstanding accounts every year to get a more accurate picture of their business health. This way, you’ll be alert to any potential insolvencies, bankruptcies, or other financial issues well ahead of time.

 

RELATED: 3 Common Engineering Mistakes—and How You Can Avoid Them

2. Set up a retainer. 

 

Most engineers are weary of asking for payment upfront because they don’t think clients will be open to it, they’re worried about causing friction, or they just don’t know how to ask. But don’t shy away from the tough conversations; you’re providing a service and you deserve to be paid what you’re worth on time. Plus, engineering fees tend to be a small part of the overall job budget so you’re not asking for something that’ll cause significant financial strain on the project or on your client.

While the retainer or deposit amount will vary by project, here are some general guidelines:

  • Smaller Projects: For projects that are under $5,000 in fees, insist on full payment upfront and don’t begin work until the invoice is settled. Why? Given the time and cost associated with collecting overdue bills, smaller projects tend to pose the greatest accounts receivable risk, with most firms writing the expenses off.
  • Larger Projects: Ask for 25-50% of the payment upfront, but apply it in the final invoices of the project and don’t start work until the retainer is paid; this ensures that your firm will always have good working capital.

 

Retainers are crucial, even for your most loyal clients who provide ongoing work. You don’t want to be caught off-guard in the event a slow-but-steady payer suddenly goes out of business. Having a client pay some or all of the fees in advance guarantees that you’ll have the resources necessary to fund your operations and provide services as requested.

If your client refuses to pay a retainer, look into a Project Commencement or Project Start-Up fee instead as a way to get some money up-front; many firms have had success with this. But keep in mind: if a client is unwilling to pay you upfront, you’re probably better off without them, since they’re likely to have payment issues throughout the project.

3. Set up an invoicing schedule. 

 

  • Be Timely: Instead of billing by phase completion, invoice projects weekly, or even daily if possible. Here’s why: if you wait 30 days to invoice and then give your client 30 days to pay, you’re essentially giving them 60-day terms, which heightens the chances of delayed payment.
  • Be Efficient: When you provide drawings, include your admin or accounting personnel on the email so they can send out an invoice right away; this will start the clock for payment and help reduce the internal steps to get invoices out later.
  • Be Clear: Invoices should be professional and clear, with instructions on how to pay (i.e. e-transfer, wire transfer, cheque, etc.) and interest terms.
  • Be Thorough: Be sure to track what’s been invoiced and what hasn’t using invoicing software; some programs, like QuickBooks Online, can even show you if an invoice email was opened and when. This might come in handy during the collections process; if clients say they never saw the invoice, provide them with a screenshot as proof.
  • Be Vigilant: Send out reminder emails as needed; try to automate them if possible. Once you hit a certain timeframe, start following-up via phone. However, be sure to tailor your practices based on whether you’re dealing directly with the client (who’s paying who directly) or going through another consultant (who might get paid before you get paid)

4. Get it all in writing. 

 

Outline an invoicing schedule in your initial client proposal and provide specific terms in the resulting contract. Even if you have a regular roster of clients, having a detailed agreement will help you set expectations about billing practices from the start and resolve claims faster and at a lower cost.

In addition to your project’s terms and conditions, your contract should also detail:

  • The scope of your work and services you will—and won’t—provide;
  • Any disclaimers, references, or assumptions you’ve made (i.e. base building drawings, single phase construction);
  • Price escalations, extra charges, and any additional forms that must be filled out to extend the contract or account for services may arise during the construction process. Consider putting your client on an hourly rate for these extras so your client is only paying for the time spent;
  • Your payment schedule, interest terms, how often clients will be invoiced, and preferred payment methods;
  • What constitutes an “excusable delay,” parameters for notice of the delay, and how long the delay will be;
  • Your client vetting and late payment policies, including the steps you’ll take to reach out, collect fees, or terminate business.

 

Include a clause that gives you the contractual right to stop working if an outstanding invoice isn’t paid in full by its due date. The language should be clear and state that you are not liable for any added costs for suspension of services related to non-payment. This is particularly important if you’re being sub-contracted by another design firm. As a sub-contractor, you’re not obligated to follow another firm’s account receivable practices; be sure to set your own contract so their project disputes don’t impact you.

 

RELATED: 3 Things Every Engineering Proposal Should Include

5. Track your progress. 

 

Set up metrics to track the success of your AR efforts. Adopt a key performance indicator (KPI) approach with specific targets that measure your working capital, or the money available to meet your short-term needs. Examples of KPIs for accounts receivables include: days sales outstanding (DSO), unreconciled items or accounts, the percentage of customers who pay late, the percentage of monthly write-offs, and collection rates on receivables past due or “bad receivables,” to name a few.

Routine assessment will help you determine your firm’s overall progress, identify areas of improvement, and maximize performance. If your initial procedures fail to produce positive results, update your procedures accordingly.

6. Practice good risk management.

 

Risk management isn’t just limited to accounts receivables. As a general rule of thumb, all engineering firms should take preventative measures to avoid claims and mitigate any resulting fallout. With detailed records and processes, you can catch mistakes early on and keep a frivolous countersuit from ever reaching the courts. Best practices include:

  • Implement quality control processes. Review your work constantly and keep a list of active clients to make sure you don’t bite off more than you can chew.
  • Document everything. Maintain a complete record of all provided services and interactions, including phone calls; always follow-up a phone call with an email to outline what was discussed. In your records, note down: the date and time, all discussed topics, any issues, and any recommendations you made and why, along with the client’s refusal if applicable.
  • Communicate. Keep all relevant parties informed of updates to: design plans and layouts, pricing and deadlines, and bylaws, government, and safety protocols. Be particularly mindful of budget and scheduling changes or anything else that could drive up the total cost (and lead to non-payment).

 

To learn more about engineering best practices, check out our top 8 tips here.

 

RELATED: Why Engineers Might Get Sued and What You Can Do About It

7. Strengthen your insurance coverage. 

 

No matter how much you try to avoid non-payment, you might still come out empty-handed. That’s why it’s critical to bolster your billing and collection strategy with a comprehensive insurance policy so that a few missed payments don’t jeopardize the firm you’ve worked so hard to build. Unfortunately, while your Professional Liability Insurance policy will respond if a client countersues you for negligence, it won’t cover delinquent accounts.

That’s where Trade Credit Insurance comes in. It’ll help you protect your cash flow by insuring your receivables and covering some or all of a client’s bad debt, including your largest, high-value, and high-risk accounts. If a client defaults on their payment, your policy will pay out a percentage of the remaining debt (up to your policy limit of course).

Trade Credit Insurance coverage also offers ongoing credit monitoring and collection services for your clients. Your insurance company will monitor your clients’ credit 24/7 and if there’s a concern that could affect payment, you’ll be notified right away so you can take appropriate action.

 

RELATED: How Can Businesses Blunt the Impact of Bad Debt?

8. Work with a risk advisor. 

 

In the engineering world, sometimes late payments are inevitable. But with a proper strategy, you can manage your account receivables, strengthen your financial footing, and maintain high-caliber clients. You can work to control your exposures—and your costs—long-term. You can focus on your business’s growth instead of your losses and debts.

For more guidance on accounts receivables and how you can control your liability, consult with a risk advisor that specializes in the engineering sector. With over 40 years of experience, a licensed broker like PROLINK can help you navigate industry trends and adopt a proactive approach to risk management to control your costs long-term. Our dedicated team of risk advisors will:

  • Identify exposures based on your business operations and engineering discipline;
  • Share what steps others in your industry are taking and advise you accordingly;
  • Conduct a robust assessment of your existing insurance policies to detect any coverage gaps;
  • Align you with specialized risk management and insurance solutions, tailor-made for your unique needs and strategic objectives.

 

To learn more about your exposures—and how you can protect yourself—connect with PROLINK today!


PROLINK’s blog posts are general in nature. They do not take into account your personal objectives or financial situation and are not a substitute for professional advice. The specific terms of your policy will always apply. We bear no responsibility for the accuracy, legality, or timeliness of any external content.


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