Engineers and contractors could end up holding the bag if the finances of state and local governments continue to deteriorate, risk experts warn.
Government clients can be especially hard to collect from because they are unlikely to place money in escrow accounts. Private-sector protective measures, such as filing a pre-lien against assets, may not apply to public owners. Yet contractors and prime consultants may remain liable for paying subcontractors, consultants and suppliers.
That was the grim assessment at the American Council of Engineering Companies' Oct. 19-22 fall conference in Las Vegas, where a panel explored ways of safeguarding against deadbeat government clients. A total of $4.25 billion of municipal debt was in default last year, triggering 11 municipal bankruptcies, according to AON Risk Solutions, Chicago.
“Debt is a chronic problem,” says Geoffrey E. Heekin, managing director of AON's Construction Services Group. “The government is ignoring the issue. Debt has accelerated at a rate that simply isn't sustainable.”
Jefferson County, Ala., for instance, has $3.14 billion of debt from refinancing a sewer system upgrade, while Harrisburg, Pa., is struggling to pay $300 million from funding a trash-burning plant makeover. Central Falls, R.I., meanwhile, declared bankruptcy on Aug. 1 largely because of an $80-million unfunded pension hole. “There are hundreds of municipalities out there in some sort of financial trouble,” according to Heekin. “There are promises that simply can't be met.”
There are some signs of trouble to watch out for, says Kenneth E. Rubinstein, an attorney with Boston-based Nelson Kinder + Mosseau PC. They include a delayed project start, incomplete owner-furnished equipment, significant scope changes and unapproved change requests.
Carefully worded contracts can give some protection, including paid-if-paid clauses and “right to stop work” language. Illinois has recently come under fire for paying bills slowly as a budget technique to stay financially afloat. It's a tactic that could soon become common.
“These are problems we never had to think about before,” says Richard Levine, a Nelson Kinder + Mosseau bankruptcy attorney.
With cash flow sluggish and payment probles rife, A/E/C firms are tightening their belts and eyeing untapped sources of revenue.One possible source is information technology as a stand-alone billable service. Although it isn't clear if many clients will pay for such services, optimism prevails.
“Technology is a service that is directly billable to the client,” says James T. Walsh, chief technology officer for AECOM, Piscataway, N.J. However, “We always see IT as being in support of our business, making us more profitable and efficient, as opposed to a stand-alone profit center.”