-Partners in Practice -

What do accounts receivable have to do with professional liability? At first glance, the answer would seem to be, "nothing at all." But, a closer look may convince you otherwise, for it turns out that careful control of your accounts receivable is not only a sound business practice, but an effective loss prevention technique, as well.

An aging account can be one of those early warnings that something is not as it should be. Where this is the case, prompt attention may be the only appropriate response. The alternative at any rate, a suit to collect fees, turns out to be no alternative at all: too many architects and engineers have found their complaint answered by a countersuit alleging professional negligence. They learned, much to their chagrin, that it would have been far less problematic had they recognized the warning in the first place.

Part of the problem may be that architects and engineers tend to be less than enthusiastic about spending their time on administrative tasks. This is understandable. By training, experience, and personal inclination, their interests lie in other directions. Yet, the business aspects of professional practice have to be dealt with, and there are some compelling reasons, both professional and financial, for seeing to it that they are dealt with effectively.

Few would question the fact that the personal goals that motivate most professionals have served society well for hundreds of years. Nevertheless, it does not seem unreasonable to suggest that these goals are best advanced in a professional environment unmarred by conflict and supported by a condition of financial health.

Although it may seem surprising, this is not inconsistent with your clients' point of view. Most are either successful business people or high level administrators. They did not achieve their positions of responsibility by being casual about business matters, and they expect that the people they deal with will behave just as prudently as they do. They operate on the assumption that you will take reasonable steps to keep your costs under control.

With the prime rate still as high as it is, it makes little economic sense for you to extend any more interest-free credit to your clients than is absolutely necessary. Yet, if the figures cited for 1981 by Birnberg & Associates are correct, it is clear that architects and engineers are financing a healthy portion of the front-end costs of construction in the United States. Birnberg reports that the typical A/E firm carries receivables for an average period of 69 days.

This explains why some professionals have chosen to work only against a retainer for their services. It also explains why others take great care to see that work in progress is billed promptly and that client invoices are paid within a very short period after they are submitted. If this strikes you as somewhat curious behavior, you might want to take a hard look at your own billing and collection practices. If your invoices are not out by the fifth working day of the month, or if your receivables are outstanding for more than an average of 45 days, they may need your attention.

You can implement steps to reduce both your costs and your exposure to claims, without detracting from the reputation for professionalism you have worked so hard to achieve. The following suggestions, drawn from the successful experiences of other firms, may give you some ideas on how to get started:

1. Recognize that accounts receivable are part of a process that needs to be managed carefully from beginning to end. Start by checking the credit and payment history of any client you are not personally familiar with. Ask for financial statements, and have your accountant or your banker assist you in evaluating them. Remember, unless your clients have the financial wherewithal to complete the project they have so enthusiastically embarked upon, they may wind up enlisting you as an unwilling partner in their venture. Some clients are simply not worth the risk.
2. Take time with the payment provisions of your contracts. Review them carefully with your clients, and make certain you have a common understanding of how and when your invoices are to be submitted and paid. Seek monthly billings, and specify a period (such as 30 days) within which payment will be made. You may also want to work with your attorney to draft language which would give you the right to stop work, without liability to your client, if your invoices are not paid within the specified period.
3. Send your billings out promptly, using temporary help or overtime, if necessary. The cost will be insignificant compared with the cost of delay. Consider adding late payment interest to your invoice, to take effect if payment is not received on time (you may not collect it, but it will communicate to your clients that you are serious about the payment provisions of your agreement).
4. Consider making the professional who is in charge of the work responsible for prompt and continuing follow-up until the invoice is paid. Many firms make this process easier and more personal by requiring that clients be contacted before the invoice is submitted. This gives the project manager an opportunity to explain work that is included on the invoice and to make certain that no unresolved problems exist which may need immediate attention.
5. Recognize the tendency of some clients to delay final payment, and take steps to head off the problem in advance. When the job is complete, there is often a period of euphoria that surrounds the participants. This may be an appropriate time to ask your client for a letter expressing satisfaction with a job well done. Such a letter can not only help in the development of new business, but it will also be difficult to ignore should reluctance to make the final payment later set in.

-------------------------
*Birnberg & Associates, 1982 Financial Statistics Survey for Professional Services Firms (Chicago: Birnberg & Associates, 1982), p. 12.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
© 2000 Hilb Rogal & Hobbs Professional Practice Insurance Brokers, Inc. All Rights Reserved. California License #0641361.