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Your Own Cooking September 6, 2009

Posted by Jason in Insider's View Relapses.
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Interesting times are afoot in the land development industry, providing several opportunities for exploring alternatives to the traditional client-consultant relationship. Firms may be facing big receivables as clients struggle to pay the more pressing bills, leaving engineers holding the bag. The situation may even reach a point at which the owner of an important project offers the firm an “opportunity” to accept a stake in the property and substitute equity for cash. This arrangement can clearly benefit the owner, since there may be much less cash paid out and the ownership risk is spread out just a bit more. But, what about for the engineer? Is this a losing proposition or a legitimate business arrangement?

Like any other contract, both parties are free to enter into any agreement that is mutually beneficial, and it may be tempting for the firm to simply take what it can get. On the surface, this is simply an exchange of one asset for another. The difference, of course, is in the risk and the relative liquidity of those assets. Further, while the owner is presumably knowledgeable when it comes to buying and selling property, the engineer may be in unfamiliar territory. However, rather than dismiss the offer as too risky, it may have great potential for differentiating your firm, if you proceed with caution and seek some education.

Lawyers have an old saying about “having a fool for a client” when contemplating self-representation in a case. However, this is not to say that they would have a colleague review each and every personal legal document. The situation is instead more similar to financial advisers who often boast of “eating their own cooking” when it comes to their recommendations, and demonstrate faith in their programs by investing their own money. Where does civil engineering fit along this continuum? On how many projects are engineers performing work in which they have a personal interest or financial stake? Are we properly distancing ourselves from emotional involvement and conflict of interest, or missing an opportunity to become more aware of our client’s and owner’s operational decisions and intangible goals?

The simplest approach to educating ourselves about our clients is, of course, to have direct, personal discussions with them. At the most basic level, we can inquire as to how they started in the business, what types of projects they developed, what financial investment was involved, and what has kept them going over the years. Just as there must be internal mentorship within the firm, the client may turn out to have some of the most valuable advice for those engineers who do not otherwise get the chance to experience their day-to-day concerns. We value the experiences of those who have managed to survive this and other recessions, and anyone with the fortitude to remain in land development over the decades surely has some pearls of wisdom.

Taking this a step further, it may eventually become feasible for the firm to seriously consider an arrangement similar to that mentioned above, perhaps purchasing a piece of land for development, entering into a partnership with a new client, or accepting an equity stake rather than a cash payment. Without some up-front knowledge, this is a risky transaction. But it may end up providing further incentives and learning opportunities. Staff could be incentivized with a property that they helped develop, the firm could share in the revenue potential of a lease, or it could simply acquire land upon which a new office could be built.

Though the firm must raise its tolerance for risk, the scenario is not without merit. If the firm’s leaders can develop the experience and knowledge to accept it, then even the exceptional uncertainty in the land development markets is not unbeatable. However, there is the important consideration that our objectivity declines as we gain a financial interest in a project — especially if there is an emotional attachment to a property. Though not necessarily a conflict of interest, our own psychology can be as demanding a client as the one that actually pays the bills. I’d be interested in hearing about your own experiences with novel means of remuneration and how it worked out.

— from Insider’s View, August 2009

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