My accountant asked me, “Can we get the supplier to agree to a retainer to deliver the test stand next year”? I ask naively, “aren’t retainers for law firms, wait, what is a retainer!?”

If you want a well-equipped lab (or be broadly successful in large engineering projects) you need to get to know your department’s accountant, understand their goals, learn their language, and treat them like a person, not the enemy!

Engineers typically don’t understand the purpose of corporate accounting. Experience tells us their job is to say, “No, you can’t buy that!”, but in our defense, our engineering curriculum was already overpacked with core classes and prerequisites, and a business operations class was not in the ABET requirements, so it isn’t our fault that no one taught us why accounting exists.

One of the key functions of accounting is to provide clear financial picture to management, thus one of accounting’s priorities is predictable cash flow. A simple approach to predictable cash flow is smooth cash flow. If an engineering team spends the same amount every month, and next month is just like last month, accounting’s job is easier. The idea of a “use it or lose it” budget is unproductive for an engineer, but a reality driven by a simplistic budgeting process – next year you will spend the same as last year. If you underspent this year, you will underspend next year.

Engineering project cash flow is rarely smooth. Engineering labor costs are often smooth, but early in a project during the planning phase, labor is the only expense. The prototype and test expenses (the external hard dollars) are usually backloaded, and any project delay will push the big external expenses into the next budget year. If your company is like those I have worked for, your reward for underspending this year will be a smaller budget next year. You don’t have an engineering bank account – you don’t get to carry this year’s underspend into next year! However, there are loopholes, and your accountant is the key to unlocking them.

We first need to understand when money is spent from accounting’s perspective.

Generalizing engineering procurement:

Project budget approval -> Quotations -> Purchase Orders (PO) -> Receiver -> Invoice -> Payment

Most companies account based on accrual. As a naïve engineer, I thought my project budget was spent when I issued the PO. I had a budget, once I ordered hardware, my job was done; however, accounting rarely even looks at outstanding POs . An accounting accrual is ‘when the hard part is done’. Typically, accounting will accrue a project expense when shipping and receiving receives the goods on your loading dock, or when the supplier sends the invoice, often months after the PO was issued.

Normally, accounting can’t accrue an expense until the work is done, but the retainer is an exception. When I hear “retainer” I think of ‘I’ll call my attorney, she is on retainer’, but retainers are used for IT services, and even machining time at a local shop. The retainer represents a commitment to provide future services.

Over simplifying, think of the retainer as a gift-card. Your company buys a retainer on a PO, accounting accurses the expense today, as the money has been spent. The liability moves to your supplier’s books, as the service that was already paid for, but the work will be done in the future, when you need the work done. The result is you spend today’s budget for work that will be completed in the next budget cycle. Engineer’s must return unspent budget, but accounting can move money between budget years. If you are underspend this year, and know you will need work done next year, a retainer is a tool that can help.

A good relationship with accounting pays. The retainer is one a tool accounting may have to help you!

I hope this wasn’t Too Much Information - Sincerely, Tom