How Firms Can Effectively Manage Sub-Consultants Like Employees
July 10, 2020
The contributions of sub-consultants (or “subs”) can be critical to the success of small architecture/engineering (A/E) firms. However, as these firms know, managing subs can be a major headache. In fact, two industry trends are making the management of subs an even bigger issue.
First, the industry is moving more toward lump sum contracts. Historically, A/E firms billed their time hourly and clients were fine with that approach. But today, clients don’t want to have to worry about budgets, hours worked, etc. They simply want the work completed for a predictable or fixed fee.
This shifts the obligation for managing the budget to the A/E firm. But it also gives the firm the opportunity to come out ahead. If they can complete the work in fewer hours than estimated and still collect the agreed-upon fee, that’s a bonus.
Addressing New Management Responsibilities for A/E Firms
The second trend impacting the A/E industry is that clients don’t want to have to manage multiple A/E firm relationships. This means that the A/E firm that is the prime contract holder (a.k.a. the “prime”) must take responsibility for all interactions with the subs it will have to engage to complete the project.
That includes ensuring that the subs do high-quality work and complete it on time, and also managing the financial aspects of the many sub-to-prime and sub-to-client relationships. Unfortunately, subs tend not to bill primes in any kind of straightforward or predictable way. For example, they may not take the time to generate an invoice until they realize they need more operating capital to keep working.
That’s a problem when the client wants an invoice every 30 days and the prime, who receives the payment, has no idea how much of that revenue belongs to the firm since an unknown amount will be going back out to pay subs. Plus, in addition to the unpredictable billing from subs, they all perform their work at different rates and at different times during a project. For example, the company that pours a foundation may complete its involvement in a project before other subs have even started.
Dealing with this chaos is a hassle. However, not addressing it properly can lead to a very awkward financial situation: the prime spends money paid by the client and then subs submit invoices the firm doesn’t have the funds to pay since its system doesn’t keep track of bills they haven’t received yet.
"One way to address this problem is for firms to have a system that enables them to treat subs like employees. This means dealing with them as if they will be paid on a regular basis."
A New Way to Manage Prime-Sub Relationships
Every accounting system has functionality for accounts payable, of course. However, when a firm has not yet been billed by one or more subs, those amounts tend to slip through the cracks. Then, latent bills from the subs erase profits the prime thought it had. So, initially the financial results for a month can look great, but down the road, a significant portion of the revenue goes away.
One way to address this problem is for firms to have a system that enables them to treat subs like employees. This means dealing with them as if they will be paid on a regular basis. They aren’t sent a check until they’ve completed work, but when a contract is issued to a sub, the system creates a “potential payable” so that the firm knows that on a given date it will owe a sub a certain amount of money (i.e., a percentage of their total contract). Then, at a later date, the second payment will be due, etc.
No entries are created in the firm’s accounting software, because the sub hasn’t billed them. But this approach gives firms something to compare to when the sub does submit an invoice. We’ve found that this unique functionality is very helpful because it provides information needed to pay subs who have completed their work as soon as the client pays their invoice.
Getting a Handle on Change Orders
Another headache for primes is that subs sometimes do work that is out of scope and assume that they’ll be paid for it. But they don’t get it approved, and the prime ends up receiving a number of bills they weren’t expecting after the project is completed and it is too late to go to the client to ask for more money.
Ideally, a project management system should allow for new “change order” work phases to be recorded as additional project needs are discovered. These phases have their own payment schedules to ensure it is clear how much is owed to the subs.
That way, as the end of the project approaches, the prime can see that there are pending payables that have been approved by the client. The project manager can then contact the subs and encourage them to submit their bills promptly. In other words, this enables more active management of finances and helps prevent surprises.
Better Control for Better Results and Better Relationships
The features in Factor AE that enable a firm to deal with subs as if they are employees can improve the management of those relationships and potentially increase profitability by preventing the financial losses that occur with unexpected bills. Those features can also help improve relationships internally between project managers and the accounting department, since they are supported by a process that gives PMs first review of incoming invoices from subs and full control over what gets billed, thereby ensuring both sides have a clear and comprehensive picture of project finances.
Manage Sub-Consultants Like Employees with Factor AE
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