For the majority of architects in Australia, the awarding of new work represents an exciting opportunity to create something beautiful which will be enjoyed for years or decades.
Should you not get paid, however, the viability of your entire practice can be placed into jeopardy. Apart from the direct cash flow impact associated with being paid late and/or recovering less than the full amount owed, costs associated with bad payers accrue from lost interest, staff time in following up outstanding amounts and fees associated with lawyers and debt collection agents.
Furthermore, not being paid jeopardises your own ability to meet commitments to your own financiers and creditors. This affects your credit rating and ability to borrow money, and in turn your ability to invest in the best technology, hire the best people, and grow your business. Cash flow problems associated with late or non-payment, San Francisco-based manager of Blue Turtle Consulting Ian Motley said, ‘can ultimately destroy your business.’
In order to avoid this, consultants say it is important to check the background of your perspective new clients and find out about their prior credit history, any insolvencies in which they have been involved, and whether or not they are likely to have the capacity to pay you.
Motley says the importance of this cannot be understated and doing this before you agree to work with new clients can ‘help you avoid becoming one of the (business failure) statistics.’
Contractors Debt Recovery managing director Anthony Igra agrees, saying architects have a tendency to suffer from romantic notions associated with the work at the expense of details associated with ensuring they will get paid.
“I see this all the time in the correspondence the architects give me when they haven’t been paid,” Igra said. “There are reams of pages about the project and how wonderful it’ll be and what changes the clients wants and so on but almost no due diligence at all. The architects get so caught up in the creativity of their work, and the vision they have of the finished project, that they ignore the most important thing; the bona fides of the client who’s meant to be paying them."
Igra noted that newcomers to the development scene with spotty or nonexistent track records - some of which come from overseas - have exacerbated the problem in recent years.
“I say if a client wants the resources of your business devoted to their project, you ought not to be shy about doing a check on their ability to pay you,” he said.
When doing checks, Motley and Igra say you need to find out:
- Exactly who your client is (which legal entity), their precise role on the project, who will be paying you and accuracy of company details they have provided to you.
- Their background with regard to the type of project in question, including whether or not they have prior experience in delivering projects of the scale and size in question and what their record has been with regard to such projects.
- Whether or not they have a good payment history and or whether or not any directors associated with your client have been involved with previous insolvencies of other entities or any adverse court actions.
- Where they are getting their money from, who is set to provide finance for the project, and whether or not they have sufficient financial capacity to complete the project.
The final point is particularly important for architects, as their developer clients will typically not derive any cash inflow from the project until the units or buildings associated with the development are leased or sold, meaning they need deep pockets in order to be able to pay you for your work.
Given that finding all this out on your own can be difficult, many architects may instead purchase reports from credit check providers such as VEDA or Dunn & Bradstreet. As well as credit risk scores, these reports include information about the history of the client and the correct details about the entity engaging you as well as any insolvencies or adverse court actions your prospective client, their directors, or entities associated with the directors have been involved. This information can be used not only to determine whether or not you should take on a particular client, but also the payment terms upon which you will deal with them, including how often payments should be made (monthly, fortnightly etc.) and whether or not initial mobilization payments should be required.
If after having done all this, payment still fails to materialise after work has started, Motley says work should not be released until payment is made. Igra, meanwhile, advises architects to discontinue working for that client in such cases. He is aware of one architect who designed no fewer than six shopping centres for a client without getting paid and ended up becoming bankrupt after not receiving more than $1 million in fees owed.
Winning a new project is exciting.
Before agreeing to start work, however, architects would be advised to check who their client is and whether or not they are really likely to come good on payment.