Factoring for Engineering Firms

Why engineering firms run short of cash

Engineering is a labor-heavy business. Civil, structural and environmental firms pay licensed engineers, technicians, drafters and field staff every payroll cycle. Projects can run for months or years, and payment arrives in pieces tied to progress.

Several features stretch the wait. Many contracts bill monthly against a percentage of completion, and the client checks that percentage before paying. Some clients hold back part of each payment until the work is finished. Public clients add approval layers, and an engineering firm working as a subconsultant to a prime contractor may not be paid until the prime is paid.

Field-heavy work adds up-front costs. Environmental sampling, lab analysis, survey crews and drilling subcontractors all must be paid before the related invoice goes out. A firm that wins a large municipal or state contract can find that the new work drains cash in the first few months, even though the contract is profitable.

How a factoring cycle works for engineering firms

1. Your team completes work for the billing period.
2. You prepare a progress invoice, often with a percent-complete summary, hours by task, and any reimbursable expenses.
3. The client or prime contractor approves the invoice, or at least confirms it has been received and is in line for payment.
4. You send the invoice and backup to the factor. The factor verifies it with the client and advances an agreed share, usually net of any retainage.
5. The client pays the factor directly.
6. The factor releases the reserve, minus its fee.

What factors look at

• Who the client is. Factors generally treat federal, state and municipal agencies as low credit risk, but their payment processes can be slow and formal. Private developers carry more credit risk. Prime contractors are judged on their own payment history.
• Billing method. Time-and-materials and monthly progress invoices are easier to fund than lump-sum invoices due only at completion.
• Approval trail. Factors want proof that the client agrees the work was done: signed progress reports, approved pay requests or written acceptance of a deliverable.
• Retainage terms. The factor will calculate its advance on the amount currently payable, excluding money held back.
• Assignment rules. Public contracts may have specific procedures for assigning payments, and the factor will want them followed.
• Payroll taxes and liens. As in any service business, unpaid payroll taxes or an existing lender's lien must be resolved first.

Retainage and withholding on public work

Retainage is common in engineering contracts and it ties up money for a long time. On federal fixed-price architect-engineer contracts, the payment clause in FAR 52.232-10 has the contractor submit monthly estimates of work done. The contracting officer may withhold up to 10 percent of each payment, but only if that is needed to protect the government, based on the firm's performance. Once the work is substantially complete, any amount held beyond what is needed must be released, and the rest is paid at final acceptance.

Federal payment timing for architect-engineer contracts has its own rules in FAR 32.904, which sets separate due dates for that type of contract. State and local agencies follow their own prompt payment laws. For example, under Texas Government Code chapter 2251, a payment by a Texas governmental entity is generally overdue on the 31st day after the later of receiving the goods, completing the service, or receiving the invoice, and on the 46th day for a political subdivision whose governing body meets once a month or less. Check the rules in each state where you work.

Factors usually do not advance against retainage. Plan your project cash budget as if retained amounts will arrive only at closeout.

Costs and how they're quoted

There is no published standard rate for engineering factoring. Factors quote each firm based on monthly invoice volume, the credit of the clients, and how many days those clients actually take to pay. Public agencies that pay predictably can support better terms than a private developer with a mixed track record, even if the agency is slower.

Fees can be flat or tiered, rising the longer an invoice is open. Because public payment cycles can be long, model your cost at the real number of days your clients take, not the contract terms. Include setup, verification, wire and minimum-volume fees in the comparison.

Pitfalls specific to engineering firms

Disputed percent complete

If a client disagrees with your progress estimate, it may approve a smaller amount. Under UCC 9-404, the factor takes your invoice subject to the client's defenses from the same contract, so a short-paid invoice usually comes back to you under a recourse agreement.

Pay-when-paid as a subconsultant

When you work under a prime design firm or contractor, your subcontract may tie your payment to the prime being paid. Factors read these clauses closely and may lower advances or decline invoices if the prime's client is slow.

Federal assignment of claims

Assigning payments under a federal contract requires a formal process. Under FAR 32.802, the assignee must be a bank, trust company or other financing institution, the contract must not prohibit assignment, and written notice must go to the contracting officer, any surety and the disbursing officer. Start this paperwork early.

Lump-sum deliverables

If a phase is billed only when the final report or plan set is accepted, there is nothing to factor until then. Ask clients for monthly progress billing where you can.

Long recourse windows

Recourse periods that are shorter than your public clients' real payment cycles can force buybacks on invoices that will eventually be paid. Match the window to your slowest agency.

When to look at other financing

• A bank line of credit. Established firms with steady backlogs often qualify for a receivables-based line at lower cost.
• SBA CAPLines. The SBA's Contract CAPLine is designed to finance costs tied to specific contracts, which can suit firms with large public awards.
• Contract changes. Negotiating monthly billing, reduced retainage once work is substantially complete, or a mobilization payment can shrink the gap.

Factoring is a weak fit when most of your receivable is retainage, when invoices are frequently disputed, or when the real problem is unprofitable fixed-fee work.

Frequently asked questions

Can I factor invoices to a city or county?

Often, yes. Factors tend to view municipal clients as sound credit, though approvals can take time. The factor will want to confirm the agency accepts a notice of assignment and will send payment to the new address.

Will a factor advance against retainage?

Rarely. Factors normally advance on the amount currently due, net of retainage, because retained funds are paid only after completion and are more likely to be reduced.

How long does setup take for a firm with federal contracts?

Longer than for commercial clients. The assignment notices required by FAR 32.802 must be prepared and acknowledged, which adds steps before the first funding.

Does factoring help with reimbursable expenses like lab fees?

Yes, once those costs appear on an approved invoice. Factoring cannot fund costs before they are billed.