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Managing Your Subconsultant Relationships with Factor AE
June 10, 2020
Our position on how much accounting detail should be added to Factor AE is that less is more. We say that because it’s been our experience that the high degree of complexity in many accounting systems starts to counteract the benefit of doing the accounting to begin with. Architecture and engineering (A/E) firms get drawn into situations where they start to experience “junk in, junk out” in regard to their data, and there are no understandable metrics being reviewed. Plus, even if there are metrics that can be understood, there’s no reliability in how they’re being calculated.
However, the argument can be (and has been) made that there’s a functional side to accounting detail aside from metrics and performance tracking. One important area is the separating of labor and subconsultants (subs).
A Tendency Toward Teaming
A/E firms are well aware that there has been a growing preference among clients for using “teaming” on their projects. In other words, companies will, for example, have one firm tackle parts A, B, and D of a project and another handle parts C and E. And that’s simplified, of course. In many cases there are multiple firms being asked to partner on a project, and firms who want to land the business respond with, “Yes,” even though working this way makes the financial aspects much more complicated.
The result is a scenario where one firm is named the prime contractor and the others take on the role of subs. While these types of relationships are familiar to firms, sometimes the strategies for managing the accounting aspects of collaborations are not. Complicating the issue is the fact that the industry is, for good reason, moving toward lump sum contracts in which an owner pays a specified fee for a deliverable rather than everyone having to deal with the hassle of hourly billing.
This requires that the prime and subs work to negotiate the percentage of the lump sum that goes to each firm. The prime, of course, has a bit of an advantage since the client will pay them and they get to distribute funds to subs as agreed upon. The subs, on the other hand, need to ensure they get enough work to meet their projections for this project and that the fee they’re paid aligns with that amount of work.
"Our position on how much accounting detail should be added to Factor AE is that less is more."
More Detail = Less Need for Separate Projects
In order to manage these kinds of situations, many primes will essentially set up separate projects in their systems to track the sub work. They use these projects to track the work that their project manager will do to coordinate the contribution of the subs and also the invoices they’ll receive from the subs.
However, if Factor AE is set up properly, this type of approach isn’t necessary. What is necessary is enough detail inside the system to keep things straight—things like the amount of labor the prime’s team is putting into the project and the proportion of that labor relative to the contributions of the subs. The prime then has to ensure that the invoices for the project align with that breakdown.
It’s important to remember that every firm that submitted a bid for a job did so thinking that they would be the prime. And each had its own ideas about how the work would be done to make the project successful. The client then selected their “team” for the project, and the work done by the subs doesn’t always add up neatly to 100% of the work needed. When the fee expected by contractors A, B, and C totals to more than the client agreed to pay, that is, of course, a serious problem. In other words, being the prime who has to manage the work of subs is not easy!
Using Separate WIP Accounts for Labor and Subs
One way to simplify the prime/sub financial relationship is to create two work-in-process (WIP) accounts in QuickBooks [or whatever accounting package is being used]: one for labor and one for subs. In this way, when you, as the prime, prepare to send a bill to the client, you can measure the total billings from your staff and the subs without mixing them on your balance sheet. As a result, you can see whether your percentage complete is matching up to the billings that the subs sent you.
This is something that many larger accounting systems do. However, they do it poorly because they come at it from the accounting point of view, such as saying that the prime’s labor is marked up differently than the subs, so there has to be two WIP accounts. That’s a little bit of the tail wagging the dog.
However, there’s a project management reason for having multiple WIP accounts, as it helps you keep your subs in sync with your billings and ensure they don’t get too far ahead or behind. When the needs of PMs are driving this approach, we agree that it’s the right thing to do and are happy that Factor AE supports that model.
This tactic is also helpful for other expenses like mileage, printing costs, etc., which might be coming off a timesheet or accounts payable, but that create a nightmare if they’re all combined in one WIP account. Accounting is then forced into the role of detective to determine how they can get all that information onto one invoice prepared either for the client or the prime.
Ultimately, increasing the complexity of the data in Factor AE is acceptable (and even helpful), as long as it's driven by what’s best for your PMs and not for your accountants!
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