with their clients caught in the credit vise, architects learn the fine art of bill collection.

Source: residential architect Magazine
Publication date: 2009-07-01

By cheryl weber, leed ap

Midway through year two of the grimmest recession in decades, many architects are wondering where their next projects are coming from. Across the spectrum of project types—from large public commissions to private homes—the pickings are slim. But those lucky enough to still have clients—and the staff to serve them—are faced with yet another worry: how to collect payment for work completed. Chasing down debt is unpleasant, and it's a task architects are doing more of these days. Until the banking industry regains its footing, the reality is that many clients are dealing with shrunken or frozen credit lines—or worse, bankruptcy.

Getting paid requires constant vigilance even in good times. It's accounting 101, the topic on tap at industry conventions and business round tables. But these days, the standard advice—ask for a retainer up front, bill promptly for services rendered, and work only with clients you trust—is no guarantee of solvency. Now, previously reliable patrons are months behind on their payments. That leaves design firms, particularly those who've maxed out their own credit lines, in financial limbo and straining to cover operating costs. Residential architects are many things to many clients, but banker is a role no one wants.

If it's any consolation, almost no one is immune from the economic fallout. There's the sense that we're all in this together. So, as we wait for the tide to turn, what's an architect to do? Everyone wants the job to go on. Even a token paycheck is better than none.

But with lending at a virtual standstill, what does it mean to be resourceful in your various financial relationships? And when it comes to debt collection, what's the right balance between persistence and patience? This is no time to burn bridges, after all. A fine line must be walked.

At many architecture firms, work was continuing apace until a year ago, when the mortgage crisis turned the credit markets to ice. A recent phone call to Steven House, AIA, House + House Architects, San Francisco, found him penning a reminder to a client that an invoice was six months past due. The delinquent client is a developer with whom the firm has a solid 20-year relationship. But after working together on two successful resorts in Honduras, the third one has stalled. “He began the project right when the economy started turning and has sold only two units this year,” House says. “It couldn't have launched at a worse time.”

As House tells it, after he sent out the $30,000 invoice for completed working drawings, months went by. The developer promised to send $10,000, but more time passed. House got on the phone again and negotiated a payoff of $5,000 increments. Recently, with the balance down to $7,500, the client offered to pay $3,750 and the other half the following week. But no checks have arrived. “I think architects need to realize that the developers, who in many cases are their primary clients, are in the same boat that architects are in,” House says, adding that a two-way phone conversation is more effective than a letter. “You don't want to create an adversarial situation, so you're as patient as possible,” he explains. While it's frustrating to get paid in small chunks, these are unusual times. The bill will eventually be paid off, House adds, and there will be no hard feelings.

A similar scenario is playing out at GYMO, an architecture and engineering firm in Watertown, N.Y. One bright spot in this town, near the Canadian border, is the demand for new army housing at Fort Drum. “We aren't seeing a decrease in billables, but we are seeing an increase in receivables,” says principal Stephen W. Yaussi, AIA, LEED AP. That's because most of the work is being done off-base and with private developers, at least three of whom owe the firm money. They say the financing they counted on is not there.

“Some of them we believe will come through in the long run, but others we're worried about,” Yaussi continues. “We sent our smaller clients to collection agencies, but you're not going to do that for a big developer who owes you six figures.” Until the lending situation thaws, several of his clients are chipping away at their bill.

One defensive strategy is to break up payments into small chunks to reduce the amount left on the table if a client shuts down the project, suggests Daniel R. Long, RA, NCARB, of Daniel R. Long Architect + Associates in Geneva, N.Y. Another is to drill clients on the importance of speaking up when they're troubled about how things are going. That discussion heads off accusations about the quality of work as an excuse for not paying the bill. “We've had to play chicken with a few clients to obtain payment prior to sending out drawings for permitting,” Long says. “It's a hard thing to do, but the good clients don't question it.”

Since last fall, collections have been a problem across all project types at Grew Design, an architecture and construction management firm in Woodbury, Conn. Lump-sum payments are almost a rarity these days. A private client who lost his Wall Street job is honoring a stretched-out installment plan for design work on a major house renovation. Two developers are also paying in increments each month, hoping to refinance to free up money. But a third has “just plain bailed. We'll have to pursue collection or suck it up and say, Is it worth the time and effort?” says CEO Milton Gregory Grew, AIA. Either way, it will take each of his three other clients a year to pay back the money they owe. While he waits, Grew has had to borrow money to make payroll.

The banking sector troubles are a nightmare for homeowners-in-waiting too. When IndyMac Bank was seized by federal regulators last spring, one of Grew's clients received a phone call assuring him that his construction loan was intact. The client hasn't seen a dime since. Meanwhile, work on the roughed-in, 12,000-square-foot house is at a virtual standstill. “They're trying to keep one lonely superintendent puttering there,” Grew says, while they figure out other options.

With one eye on their frayed balance sheets, architects are also scrambling to keep the cash flowing. Last fall and into the dark first quarter of 2009, as consumer confidence plummeted and projects went on hold, many firms were forced to trim staff. While some reductions do help staunch the bleeding financially, layoffs also mean fewer bodies and fewer billable hours from which to pay fixed expenses, such as the mortgage, utilities, and liability insurance.

With receipts down, House is reviewing his firm's fixed costs line by line. “Working with our accountant last year, we made a chart and tracked every penny to determine where to cut costs.” He and co-principal Cathi House reduced monthly expenses by 25 percent by making operational changes, such as delaying equipment and book purchases and switching to less expensive phone and Internet service providers.

Hearing rumors that banks might shut down lending, some architects stored up cash by emptying out their credit line accounts while they still could. “We just took a chunk, figuring it would be enough to help us weather the storm but not so ridiculous that the payments would sink us,” Grew says. And at a time when others are lowering their fees to get work, his firm is charging 5 percent more to help cover costs.

Cultivating a relationship with a fiscally healthy lending institution is another survival strategy. When he needed to finance the construction of a small building for his firm last fall, Dan Shipley, FAIA, of Dallas-based Shipley Architects, bet that the local community bank was a safer place to borrow from than a debt-ridden megabank. He's happy he did. “I was hearing about credit markets drying up and was concerned that even if my bank could continue to make loans, the terms might not be the same,” Shipley says. “But they were, because the bank is prudent and hasn't gotten itself overleveraged. I deal with the bank president; he knows and cares about us.”

With snipped credit lines becoming commonplace, architects are resorting to unusual business arrangements that let clients temporarily keep their hard-to-come-by cash. As a sole proprietor, Kenneth Crutcher, RA, Crutcher Studio, Farmington, Mich., is more nimble than larger firms. He's agreed to delay billing on a low-income, market-rate housing project until his client's tax credit financing comes through. “He couldn't provide us with a retainer, but we're going ahead anyway, figuring that funding will be there when the job is done,” says Crutcher, who teaches part-time in Lawrence Technological University's College of Architecture and Design. With the Detroit area's economy in the deep freeze, he'd also consider a barter: a portion of his design fee in exchange for an ownership stake in a future development project.

Diversification—a classic plan for maintaining a financial lifeline when the economy sours—may be less effective this time around, but it helps. When investment banks began to crumble last year, Rogers Marvel Architects, New York City, quickly cut 10 percent of its staff to conserve cash. Now that most residential work has stopped or slowed, the partners have a backlog of institutional and government projects. Still, they haven't completely avoided collection woes. A housing developer owes the firm for design work on a 20-acre mixed-use master plan in Jersey City, N.J. “He's not seeing any roll of his property, so he's going to be out there for at least a year,” explains principal Jonathan Marvel, AIA. “There's simply no cash flow at his end, so we're being patient.”

As Marvel suggests, architects who maintain positive business relationships in difficult times may find those bonds strengthened when recovery takes hold. It's a principle that Irvine, Calif., attorney Randy Koenig says works for his architect clients. “View client relationships as a partnership you share in good times and tough times,” says Koenig, a partner at Koenig Jacobsen, which has a second office in San Diego.

To minimize exposure, Koenig recommends continuing to work with trustworthy clients who owe you money, if you can, but only on small projects. Another collection tactic: Offer a free service on a new project in exchange for getting paid on an old one. “You're extending more good will with the understanding that you will get paid on the old stuff,” Koenig says. “It worked for my client.” The advice may seem counterintuitive, but it not only kept both parties busy, it also kept them in contact and created a little psychological leverage. In times like these, he says, “you have to go for the creative solution.”

Of course, the surest way to get paid is to choose projects with care. In the overbuilt Phoenix market, two of Circle West Architects' large jobs went on hold this year. But the Scottsdale, Ariz., firm hasn't been left holding the bag. To avoid that fate, principal Peter M. Koliopoulos, AIA, tries to keep one eye on local conditions, gauging them against what his team members are being asked to design. “We have a pretty strong awareness of what we can reasonably build and sell condos for, and what apartments can be leased for,” he explains. “We [strive to] have a good discussion with clients about time frame, how they'll brand and present it to the public, and how they'll structure their financing.” A solid prospect right now is troubled construction projects, at various stages of completion, being snapped up for a fraction of the price they would have brought a year or two ago. “The strategic design thinking from two years ago doesn't necessarily align with what's going on now,” Koliopoulos says. “We help developers evaluate the design and suggest something that better meets current conditions.”

About those current conditions: The architecture profession is witnessing historic lows in billing activity. But a tiny bit of encouraging news came recently when The American Institute of Architects' Architecture Billings Index—a monthly work-on-the-boards survey—detected a creep up in new project inquiries. The housing market is still anemic, to say the least. Although no one is having an easier time walking out of a bank with a loan, some see an uptick in activity stemming from federal stimulus money and rising consumer confidence. People with cash are seizing the chance to get a project done quickly and inexpensively.

“January and February looked very bleak; we just barely had enough work to get by,” says Grew, who is down to four employees from seven a year ago. “But a funny thing happened in the past few months. The phone literally has started ringing. We have a fair amount of work already in place. Fortunately, it's clients with cash who are calling; these are not people who are dependent on lending.” One new client is taking advantage of the slow period to design a home, which he'll put off building until later. Another is building a “big guys' room” in which to hang out and store his Porsches, Grew says.

Work has also picked up for Yaussi, thanks to new stimulus money for U.S. Department of Housing and Urban Development-sponsored housing. “Our first quarter, nothing was coming in the door, but now we've gotten about 35 RFPs from a dozen housing authorities around the state,” he says.

In this period of scarcity, competition is up too. Architects must work smarter, and that means making themselves as valuable as possible to clients. For Circle West, that has meant investing heavily in Building Information Modeling (BIM) software in order to integrate sustainable design more thoroughly into its projects and provide clients with energy-modeled options. As a result of using BIM, Koliopoulos says the firm can design a building better and more quickly than it could a year ago.

“We all hope this is going to get better,” Koenig adds, “and we say that most of our work comes from our good clients, so we have to keep them happy. But you have to stay in business, too, and that takes creativity.”

It's basic, but it bears repeating these days: The best way to ensure payment is to vet clients carefully. Check references and credit scores, and study a prospect's website for signs of substance and longevity, advises Irvine, Calif.-based attorney Randy Koenig, who represents architects and engineers. A red flag is the architect's cue to either walk away quickly or be extra vigilant by demanding a larger retainer and billing more frequently. Here are Koenig's other fundamentals for collecting what's due.

Rule No. 1: State in the contract that you'll suspend work if the client fails to pay in the agreed-upon time frame, and that interest—say, 1.5 percent per month—will accrue on overdue invoices. Putting it in writing sets the tone that your client is on the hook for services rendered. A caveat: “In a one-off relationship, I'd definitely ask for the interest. But things are so tough, I would waive it for good clients,” Koenig says. “Then you generate good will by giving up something.”

Rule No. 2: The contract should also spell out that clients who don't pay forfeit the right to use the plans. “That's our leverage, and the law,” Koenig says. “In addition to the breach of contract, the owner is susceptible to copyright infringement charges. That carries a pretty severe penalty, and owners don't want to be in that position.”

Rule No. 3: Bill at least every 30 days, maintain a “short fuse” on receivables, and enforce the interest charge, when appropriate. “Don't give the client the opportunity to say, ‘I never thought it would cost this much,'” Koenig says.

Rule No. 4: To head off the inevitable offensive move, the contract should specify the outstanding amount—$50,000, $75,000, $100,000—that will trigger mediation or arbitration. “If you start writing threatening letters, the firm becomes susceptible to a cross-complaint,” he explains. “That's the ultimate leverage a client has.”

In short, he says, being proactive is the best defense, and that includes “keeping up a rapport and the expectation that you'll get paid”—let's hope sooner rather than later.