Michigan Merit Summer 2013 by ABCofMichigan

SUMMER 2013

PUBLICATIoN oF ASSoCIATeD BUILDeRS AND CoNTRACToRS oF MICHIGAN

CREATE JOBS AND SAVE TAX DOLLARS BY REPEALING Also:

PREVAILING WAGE

Succession Planning for Contractors

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Inside 4

Executive Perspective Repealing the prevailing wage law is key to a healthy construction industry.

Repealing Prevailing Wage Why the prevailing wage law is bad for Michigan and whatâ&#x20AC;&#x2122;s being done about it.

Economic Outlook: Michigan in Perspective Don Wilson looks at how Michigan is doing in nonresidential construction activity as compared to other Great Lakes states.

Succession Planning for Contractors The unexpected death or disability of a business owner can mean disaster for those left behind. Find out how to create a plan to see that your business continues and your loved ones are protected in the event the unthinkable happens.

VoLUMe VII, ISSUe 3 ABC members from across the state, on the steps of the State Capitol, gather to lobby State Legislators in Lansing for the repeal of Prevailing Wage.

Government Affairs ABC Praises House Passage of Stronger, More Flexible Graduation Requirements FY 2014 State Budget Signed Ahead of Schedule

ASSoCIATeD BUILDeRS and CoNTRACToRS of MICHIGAN 2013 BOARD of DIRECTORS Chris Beckering – Chairman Pioneer Construction – Western Michigan Chapter Brian Stadler – Vice Chairman Wolgast Corporation – Greater Michigan Chapter Dave Sheffield – Secretary/Treasurer Onslow-Sheffield – Southeastern Michigan Chapter Dave Mollitor – Past Chairman Consolidated Electrical Contractors – Greater Michigan Chapter Jim Cripps Cripps Fontaine Excavating, Inc. – Western Michigan Chapter Rick Jackson Jackson Associates, Inc. – Southeastern Michigan Chapter Mike Kelly Wolverine Building Group – Western Michigan Chapter Rod Kloha Circle K Service Corp. – Greater Michigan Chapter Bill Molnar Wm. Molnar Roofing, Inc. – Southeastern Michigan Chapter Dan Murphy MAG Insulation – Greater Michigan Chapter Jack VandeGuchte – Western Michigan Chapter Dan Welch Welch Tile & Marble Company – Western Michigan Chapter MICHIGAN MERIT CONTRIBUTORS Publisher: Christopher Fisher Managing Editor: Mary Boardway, CAE ABCMI Economist: Don Wilson Design and Printing: Keystone Millbrook Advertising: Strategic Value Media Michigan Merit (ISSN# 1938-9051) is the official publication of Associated Builders and Contractors Inc. of Michigan (ABC of Michigan) and is published quarterly at 230 N. Washington Sq., Suite 202, Lansing, MI 48933, (517) 853-2545. Please direct all inquiries to the previous address. Articles written by outside authors do not necessarily reflect the views of Associated Builders and Contractors Inc. of Michigan. ABC of Michigan reserves the right to reject or edit all material submitted for publication. The appearance of an advertisement in Michigan Merit does not constitute endorsement of the advertiser, its products or services, nor do Michigan Merit or Associated Builders and Contractors Inc. of Michigan guarantee or warrant any claims or offers made by the advertisers. Permission to reprint in whole or in part is hereby granted, provided the following credit line is used: “Reprinted by permission from Michigan Merit, a publication of Associated Builders and Contractors Inc. of Michigan.”

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one of the most misunderstood and unintelligent laws in Michigan is the state Prevailing Wage Act. In this issue of Michigan Merit, we dig into the act a little more as we continue our efforts to repeal this job-killing and tax-dollar-wasting special interest handout. Most serious peer-reviewed academic, institutional, and governmental research concludes that when you increase the cost of construction, it becomes less affordable. This means fewer construction projects for Michigan’s work force to build. Making matters worse, Michigan’s prevailing wage law exclusively dictates that construction union agreements, which the U.S. Department of Labor says represented only 19 percent of the state construction work force in 2012, set all wage With construction rates for the rest of the industry. Such a scheme is being a leading hardly “prevailing.” equally alarming is that these requirements are not subject to any administrative or job provider in legislative oversight or negotiation. Michigan, we Union bosses should not be accomplices in fixing believe it’s time to wages on any taxpayer-funded endeavor. This is repeal prevailing especially true in Michigan’s construction industry, where the State Budget office reports that the wage to create $22.55 average free-market construction hourly more good-paying wage is already higher than the average income of all jobs and help the occupations combined, and is more than three times industry compete... higher than the state minimum wage. With construction being a leading job provider in Michigan, we believe it’s time to repeal prevailing wage to create more good-paying jobs and help the industry compete with the 43 other states that have no such artificial mandates, or that at least base wage determinations on more accurate and reliable measures. This would also put the Michigan construction industry on par with every other occupation in the state where there are no prevailing wage mandates. ABC has long championed repeal of this outdated law and remains committed to this goal. We will continue to work tirelessly to educate the legislature and the governor that the time has come to repeal prevailing wage to help grow our economy, create jobs, and provide taxpayers the fiscal accountability they deserve. Yours for the Merit Shop,

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ince its inception, ABC of Michigan has worked tirelessly to advance a free-market approach to the state’s construction industry in order to provide a level playing field for its members. To that end, ABC has been instrumental in the effort to repeal the state’s prevailing wage laws. “Repealing prevailing wage in Michigan has long been a top priority for ABC,” says Chris Fisher, president of ABCMI. “It’s a complex and convoluted issue, so we’re working hard to educate lawmakers and key decision-makers about what it does to Michigan businesses and workers, and why it needs to be repealed.” The Prevailing Wage Law was enacted in 1965 and requires workers who work on state-financed or statesponsored construction projects be paid the “prevailing wage” of the area in which the project is located. Such projects include public schools, community colleges and universities. The law controversially requires that wages be based exclusively on union wage classifications and work rules in that area. The law sounds simple enough but, according to Fisher, it is one of the most misunderstood issues. “It’s not just about dollars and cents,” he says, “it’s a common sense issue. The law is a bureaucratic nightmare because the rates workers must be paid vary from place to place and trade to trade.” For example, if a contractor sends the same electrician to two different work sites in two different cities, say Ann Arbor and Howell, the company has to pay the electrician two different rates for the same

“It causes excessive paperwork on each state job compared to a normal project. We have to monitor which wages are being used by each person on the project. This is difficult because there are different wage rates for each county and these wages are changed quarterly.” Mike Houseman, North American Division of Wolverine Group

kind of work because local unions differ in what they mandate.” Mike Houseman, president of the North American Division of Wolverine Group based in Grand Rapids agrees that the level of recordkeeping required by the law is onerous and unwarranted. “It causes excessive paperwork on each state job compared to a normal project. We have to monitor which wages are being used by each person on the project. This is difficult because there are different wage rates for each county and these wages are changed quarterly. We also need to monitor the classification under which a single worker is paid. For example, a person sweeping is classified as a laborer; if he picks up a hammer, he has to be paid carpenter wages, then if he grabs a shovel, it’s a different wage altogether. one individual’s wages could change several times throughout the day, making it a nightmare to track.” According to Houseman, it takes three in-house staff to handle the paperwork, which includes wage-rate

ABC Launches Prevailing Wage Website In order to provide Michigan citizens and legislators with the facts concerning the wasteful spending and regulatory burden created by Michigan’s Prevailing Wage Act, ABC of Michigan has launched a new website, www.PrevailingWageTruth.com. The site offers the latest news coverage of the fight to repeal prevailing wage, history and background on the law, and peer-reviewed research and case studies explaining why the current law is bad for Michigan. “Launching an informational website is an important step that ABC is taking in our statewide advocacy effort to repeal the oftenmisunderstood Michigan Prevailing Wage Act,” says Chris Fisher, president of ABC. “It is important that the citizens and lawmakers have the facts and understand the costly effects, lack of fiscal accountability, and the heavy regulatory burden that prevailing wage has had on taxpayer-funded construction.” The website also encourages grassroots advocacy and features an online petition providing citizens an opportunity to contact their lawmakers to urge repeal of prevailing wage. As part of the launch of www.PrevailingWageTruth.com, ABC members from around the state met with state lawmakers during their annual Legislative Day in Lansing. WWW.A B C M I . C o M

S UMMER 2013

verification, time cards for all individuals working on the job — for subcontractor employees as well as direct hires — and the schedule of values. The end result is that there are hundreds of thousands of different wage scenarios, explains Fisher. “In fact,” he adds, “There are more prevailing wage classifications than there are Michigan construction workers. It’s a huge regulatory and red-tape burden.” This burden increases a company’s monitoring expenses, but the law also increases labor costs above competitive levels. The current free-market average construction wage is close to $23 per hour; that’s significantly more than the average Michigan worker. “The construction industry is doing right by Michigan workers, and yet only the construction industry is subject to such rules,” argues Fisher. “There is no reason for our industry to be treated differently than every other Michigan industry.” The arbitrary nature of the law affects the ability of merit

“Repealing the Prevailing Wage law would remove barriers to state contracts, increase competitiveness, and get taxpayers more for their money. If we keep status quo, it will only hinder Michigan from moving forward.” Senator Arlan Meekhof, Senate Majority Floor Leader

shops to compete for contracts since it favors unionaffiliated contractors. Then there’s the bigger picture of how the existing prevailing wage law affects Michigan’s economy and its citizens. According to a 2007 Mackinaw Center study, it increases what taxpayers pay for state construction projects by 10 to 15%. “The wages paid on state projects are not subject to negotiation, so school districts, colleges, and universities have no seat at the bargaining table,” says Fisher. “There is zero transparency. Local and state government is forced to pay whatever the local labor union turns into the state.” Houseman offers a concrete example: “A person sweeping on a standard construction job may be paid $15 an hour; on a prevailing wage job we are forced to pay closer to $20.” Nationwide, Michigan’s prevailing wage law is in the minority. Forty-three other states either have no prevailing wage law, or at least attempt to base their prevailing wage on an accurate sampling of all construction wages.

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The prevailing wage law also negatively affects Michigan’s economy because it makes construction less affordable. As a result, important public works projects are stalled, delayed, or eliminated due to a lack of funds. Fewer construction projects means less work for Michigan contractors and fewer good-paying jobs for Michigan workers. “...A policy associated with increased costs, lower employment, and minimal (if any) benefits is ripe for repeal,” writes Paul Kersey, author of the Mackinaw Center study previously cited. Mike Houseman agrees. “The state currently spends hundreds of millions of dollars more on state-funded construction projects because of prevailing wage. Repealing the law will allow the state to pay true market value; the savings could be used to complete another fifty-five, five-million-dollar projects. These projects would require a significant number of new workers, lowering unemployment, and getting more people back to work at salaries that are still higher than most others in Michigan. This would increase disposable income and discretionary spending, which will help Michigan’s economy. More people working will increase the state’s revenue through income tax. There are only positive results from our state taking the brave, sensible step to repeal a wage mandate that is set by the average wage of 19% of the construction workforce, leaving 81% of workers’ wages out of the equation.” Members of the Michigan legislature are taking steps to repeal the prevailing wage law. In the House, a three-bill package has been introduced. House Bill 4172, sponsored by Rep. Amanda Price, R-Holland, would repeal the law statewide. House Bill 4173, sponsored by Rep. Peter MacGregor, R-Rockford, is a technical bill to facilitate the repeal. House Bill 4174, sponsored by Rep. Brad Jacobsen, R-oxford, would amend the revised school code, PA 451 of 1974, to exempt schools from the prevailing wage requirement. Senate Majority Floor Leader Arlan Meekhof has introduced a similar package of bills in the Senate. “Repealing the Prevailing Wage law would remove barriers to state contracts, increase competitiveness, and get taxpayers more for their money. If we keep status quo, it will only hinder Michigan from moving forward,” asserts Senator Meekhof. The proponents of prevailing wage proffer the arguments against its repeal, including that the lack of such a law would lower safety standards, increase accidents, and depress construction wages. “This is nonsense,” says Fisher in response to the idea that repeal would lower safety and increase accidents. “State law regulates, and MIoSHA enforces strict health and safety

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“This is why ABC is working so hard to get good information out there, so legislators and the general public can tell fact from fiction. We have brought Michigan contractors together with legislators to create a dialog about the negative impacts of the prevailing wage law.” Chris Fisher, ABC of Michigan

standards which have to be met regardless of whether prevailing wage is required.” To the idea that repeal would lower wages, Houseman suggests that repealing the law will put a significant number of the middle class back to work, something that is long overdue. “Furthermore,” he adds, “the average construction worker in Michigan makes, on average, $67,500* per year, including their benefit package. Adding more construction projects and increasing the demand for skilled labor will naturally increase wages above that already respectable average.” “This is why ABC is working so hard to get good information out there, so legislators and the general public can tell fact from fiction,” states Fisher. “We have brought Michigan contractors together with legislators to create a dialog about the negative impacts of the prevailing wage law.” Mike Housemen is one such contractor who recently testified in front of the senate economic Development Committee. In addition, ABC of Michigan has created a web site (www.prevailingwagetruth.com) that explains the complexities of the issue (see sidebar). What are the chances of legislation being passed this year? Mike Housemen believes that the support in the House and Senate is there, but that timing remains a question mark. Whether it happens this year or next, “it needs to happen,” says Houseman. “It is a discriminatory and unfair labor practice. And every ABC of Michigan member needs to step up and support ABC’s work to repeal the law.” “Prevailing wage came to be in 1965 when the majority of the workforce was unionized,” says Fisher. “Today, 81% of the workforce is not unionized, and yet Michigan still bases its prevailing wage on outdated union workforce rules and rates. even if it made sense then, it doesn’t now. It’s laden with red tape and not grounded in reality. Times have changed, and Michigan has to change with them. Prevailing Wage is a job killer that wastes tax dollars, hurts schools and unnecessarily increases the cost of public construction in Michigan. It needs to be repealed.” MM *Source: MI Dept. of Transp., Mgt., & Budget, 2013 and U.S. Dept. of Labor, 2013

Prevailing Wage FACT Prevailing Wage isn’t like minimum wage.

It is a red-tape nightmare that forces the construction industry to monitor more than 350,000 different wage classifications. That’s more wage classifications than there are construction workers in Michigan!

Sources: MI Wage & Hour Division and MI Dept. Budget, Management & Tech

FACT Prevailing Wage doesn’t “prevail.” It’s based exclusively on collective bargaining agreements that cover only 19 percent of the state workforce, but are imposed on 100 percent of workers. The state of Michigan doesn’t even get to be at the bargaining table! Sources: US Dept. of Labor and MI Prevailing Wage Act

FACT Many counties and school districts have different wage schedules within their own borders. An electrician working in Brighton has to be paid differently when he is working in Howell even though the two cities are only a few miles apart in the same county! Source: MI Wage & Hour Division

FACT No other industry in Michigan is subject to prevailing wage. Michigan shouldn’t subject the construction industry to costly regulations that don’t apply anywhere else! Source: MI Wage & Hour Division FACT Without prevailing wage, Michigan’s construction industry already pays its workforce better than the state average for all industries combined. Michigan’s construction industry shouldn’t be penalized for already doing the right thing! Source: MI Dept. of Budget, Management & Technology

FACT It is inaccurate to claim that prevailing wage laws affect safety or quality. Safety is overseen by MIoSHA, while quality is overseen by the Michigan Bureau of Construction Codes; safety and quality standards are the same regardless of whether work is subject to prevailing wage! Source: MI Dept. LARA FACT It is inaccurate to claim that union workers will see their hourly pay change by repeal of prevailing wage. Their wages are collectively bargained pursuant to federal law, not state prevailing wage laws! Source: National Labor Relations Act

FACT It is inaccurate to claim that prevailing wage ensures use of local workers. The Michigan Management and Budget Act already provides a 5% preference for Michigan-based companies. Source: MI Management & Budget Act FACT Forty-three (43) other states either have no prevailing wage law, or at least attempt to determine wages based on more reliable and accurate methods. Michigan ranks near the bottom and even the Federal Government is more accurate! Source: Columbia University; Complex Worlds of NY PW

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S www.PrevailingWageTruth.com UMMER 2013 9

outlook

ECONOMIC

Michigan in Perspective: Comparing Great Lakes Nonresidential Construction Activity

By Don Wilson

elect issues of Michigan Merit have featured, from time to time, material regarding the change in and the outlook for Michigan’s nonresidential building construction and the various markets the industry serves. Now that single and multi-family housing construction is providing extra stimulus to the economic growth initiated by revival of the automotive industry, Associated Builders and Contractors of Michigan thought the membership would be interested in knowing how nonresidential construction is developing in Michigan compared with the surrounding states in the Great Lakes region—ohio, Indiana, Wisconsin, and Illinois. Nonresidential real estate activity, including demand for lease of existing space, decline in building vacancy, and the planning, development and financing of new space or renovation of existing space tends to be slow after a recession. However, once business conditions favor it, nonresidential construction typically begins to accelerate. The question then arises, how do you track business conditions and construction? While there is no quarterly measure of statewide nonresidential space leasing, change in building vacancy, or occupancy level of owner-tenanted facilities, there is a measure of business conditions and construction. A quarterly comparison of changes in these measures is set DEDICATED TO SERVING MICHIGAN WITH WHAT WE DO BEST.

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forth in the accompanying charts. An indicator of economic conditions in each state in what is termed a “coincidental index” is portrayed in Chart #1 for each Great Lakes state and the nation. The measure for construction, an index of the value of contract awards for start of nonresidential building projects, is portrayed in Chart #2. A coincidental index is a metric that shows the current state of economic activity within a particular area by combining four indicators to summarize current economic conditions in a single statistic. The four variables in a coincident index are: non-farm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deﬂated by the consumer price index. Contract awards are for start of all types of construction based on the value of contract awards by landlords for structures with leasable space, and by owners for the buildings they occupy. An index reading of 80 during a particular calendar quarter means the coincidental index or contract awards index in that quarter was 20% lower than the average quarterly level of 2007. A reading of 103 signifies the index is 3% higher than in a 2007 average quarter. economic activity in Michigan, as tracked by its Coincidental Index in Chart #1, recorded the largest loss during the 2008-09 recession by shrinking 19.8% between 2007 and 2009’s third quarter, as the U.S. economy dwindled by 4.7%, ohio by 12.3%, Indiana by 11.7%, and Wisconsin by 7.7%. The Illinois economy

CHART 1

U. S. & GREAT LAKES REGIONAL ECONOMIC ACTIVITY BY STATE

Illinois, Michigan & Wisconsin

(Coincidental Index: 2007 = 100)

U. S., Indiana & Ohio 105

105 U. S. Illinois

Indiana Michigan

Ohio Wisconsin

100

Source: Federal Reserve 08 Q1

08 Q2

08 Q3

08 Q4

09 Q1

09 Q2

09 Q3

09 Q4

10 Q1

10 Q2

10 Q3

10 Q4

11 Q1

11 Q2

11 Q3

11 Q4

12 Q1

12 Q2

12 Q3

12 Q4

13 Q1

CHART 2 U. S. & GREAT LAKES REGION NON-RESIDENTIAL BUILDING CONSTRUCTION CONTRACT AWARDS BY STATE

U. S. , indiana & Ohio

Illinois, Michigan & Wisconsin

(Contract Awards Index: 2007 = 100)

400

U. S. Illinois

Indiana Michigan

300

Ohio Wisconsin

350

250

300 200

250

200

150

100

100 50

Source: McGraw - Hill 08 Q1

08 Q2

08 Q3

08 Q4

09 Q1

09 Q2

09 Q3

09 Q4

10 Q1

10 Q2

10 Q3

10 Q4

11 Q1

11 Q2

11 Q3

11 Q4

12 Q1

12 Q2

12 Q3

12 Q4

13 Q1

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Nonresidential real estate activity and related construction activity in Michigan is principally hampered by lack of employment growth. Statewide there was only a net increase in job creation of 178,000 in 2010-2012, following losses of 421,000 in 2008-09 and 220,000 in 2002-07. bottomed out one quarter later, with a 10.1% decline through 2009’s fourth quarter. As a byproduct of the 19.8% downturn in Michigan, the value of contract awards in the state, as measured by its Index in Chart #2, declined 71.7% between 2007 and 2010’s first quarter, 45% across the nation, 43.1% in ohio, 54.5% in Wisconsin, 64.4% in Indiana, and 69.8% In Illinois. Michigan economic activity, according to its Coincidental Index, has been on a growth track, rising 16.7% through 2013’s first quarter with year-over-year improvement in twelve out of the fourteen quarters, since 2009’s third quarter. over the same period, the nation recorded 8.4% growth, while ohio experienced 13.1% growth, Indiana 13%, Wisconsin 6.7%, and Illinois 8.1% since 2009’s

fourth quarter. Despite the economic growth profiled in Chart #1, the value of construction authorized in Michigan, as measured by the Contract Awards Index in Chart #2, posted year-overyear declines in three out of the last four calendar quarters through first quarter of 2013. This follows increases in seven out of the eight preceding quarters after 2010’s first quarter. The question then arises why is Michigan nonresidential building activity portrayed in Chart #2 still so sluggish considering the improvement in economic activity reﬂected in Chart #1? Nonresidential real estate activity and related construction activity in Michigan is principally hampered by lack of employment growth. Statewide there was only

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outlook

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a net increase in job creation of 178,000 in 2010-2012, following losses of 421,000 in 2008-09 and 220,000 in 2002-07. As there is no statewide tabulation of tenant use of nonresidential market space or its construction, data for southeastern Michigan only provides a partial view of the real estate and construction industry situation. employment in southeast Michigan rose by 107,000 jobs in 2010–12, following job losses of 256,000 in 2008-09 and 161,000 in 2002-07. Commercial and industrial building space leased grew by 3.9% in 2012 from 2011, which reduced the vacancy rate in those structures by only 0.8%, raising occupancy to 89%. As a result, construction of space completed and started into construction rose 5.3% in 2012, up from a 2.1% decline in 2011 and a 27.1% drop

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n June 6, 2013, ABC of Michigan praised the Michigan House of Representatives for passing House Bills 4465 and 4466 to strengthen Michigan high school

graduation requirements by allowing greater access to rigorous skilled trades and vocational training options. “Passing legislation that offers high school students a real opportunity to complete CTe, skilled trades, and vocational training is an important educational improvement for Michigan and our future workforce,” states Chris Fisher, president of ABC. “Strengthening high school graduation requirements will help ensure that Michigan has a well-educated and skilled workforce that is able to meet the growing demand for highly paid, twentyfirst century skilled trades jobs.” House Bills 4465 and 4466 revise Michigan high school graduation requirements so students have greater ﬂexibility to pursue rigorous and relevant career-ready CTe, skilled trades, and vocational educational options

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that count toward a high school diploma. The bills will also clarify the ability to pursue a personalized curriculum developed by the student, parents, teacher, and school district to meet a student’s specific needs. “ABC is devoted to a well-educated and highly skilled workforce,” adds Fisher. “We are encouraged that a bipartisan supermajority of lawmakers, business groups and education associations are supportive of this common sense issue and appreciate their commitment to opening up opportunities for students to succeed in a rewarding

for where you are,

skilled trades career.” The legislation now advances to the Senate. MM

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S UMMER 2013

Affairs

GOVERNMENT

FY2014 State Budget Signed Ahead of Schedule Gov. Rick Snyder has signed House Bills 4228 and 4328 into law, finishing the budget process for the fiscal year set to begin oct. 1, 2013. For the third year in a row, the state has passed its budget plan four months ahead of the constitutional deadline. The new schedule allows schools and local governments to use definite figures when putting together their own budgets for the coming year. “We should be proud of the financial stability that is now firmly established within the state budget,” Snyder said. “Through strong partnership with the Legislature, we have put the state’s fiscal house in order and we have given our residents, communities, and businesses the assurance

that Michigan is indeed the comeback state and we’re building upon the strong foundation we have laid and investing in priorities smartly and strategically.” Highlights of the 2014 fiscal year budget include: • A 0.8% increase in total spending, well below the rate of inﬂation • $449.7 million more in funding for K-12 education • $65 million more for early childhood education • $31.9 million more in funding for higher education and community colleges • $13.2 million more in funding for veterans’ programs • $20 million set aside for individual tax relief • $25.3 million more in funding for public safety initiatives • $46.6 million more for revenue sharing

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to communities, including an increase to Constitutional revenue sharing • $75 million deposited into the state’s rainy day fund, or what’s known officially as the Budget Stabilization Fund (BSF) • $351 million more for Michigan’s roads from existing revenue sources • $11.6 million more for the Healthy Kids Dental “For the past three years, Michigan has been moving in the right direction. There’s still much more work to be done, but we are making positive gains,” said Senate Majority Leader Randy Richardville, R-Monroe. “We’re investing in our communities, our schools, and our infrastructure. This budget builds upon the work we have done to reform government and ensure that the money each individual sends to Lansing is spent wisely.” The House and Senate approved the budget bills last week, after months of discussions that led to targeted increases in funding for schools, public safety initiatives, Michigan’s crumbling roads and other key priorities, while still keeping the overall increase in spending below the

rate of inﬂation. “every dollar state government has to spend comes from the pocket of one of Michigan’s hard-working taxpayers,” said House Speaker Jase Bolger, R-Marshall. “That is why it was important for us to make strong commitments to our top priorities, while respecting the taxpayers and their need to make ends meet. We were able to do both during this process, because of our conservative focus on smarter, more targeted budgeting that puts taxpayers first instead of government.” “The tough choices we made to balance the budget two years ago are paying dividends now,” added State Budget Director John Nixon. “With growing revenues and a budget in structural balance for the long term, Michigan is in a strong financial position where we are now able to make strategic investments in our future, rather than manage from a position of fiscal crisis.” The leaders pledged to continue addressing the issues of Medicaid via the proposed Healthy Michigan plan and a long-term solution for adequately funding Michigan’s roads. MM

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S UMMER 2013

SUCCESSIOn PlAnnInG FOR

COnTRACTORS By Michael Culnen and Kevin Ellman

Development

BUSINESS

onventional wisdom recognizes the importance of continuity planning in circumventing the financial ruin that can result from a business owner’s untimely death or disability. But, such plans are not one size fits all. Contractors, especially those engaging in public work, must consider protecting the financial security of their families and satisfying the concerns of additional stakeholders. Sureties, insurance carriers, financial lenders, project

To highlight the complexity of contractors’ continuity needs, consider the following scenario: A. Goode Contractor, Inc. has been executing projects for public owners successfully for 15 years, has a net worth of $10 million and employs 25 people. The company’s sole owner, Alan Goode, is 45 years old and has a personal net worth of $2 million. Several stakeholders, most recently the firm’s surety company, have expressed concern because the business lacks a continuity plan. Goode is thinking about implementing one, but is not

Each additional party that becomes a partner in a contractor’s success— from surety and insurance carriers to ﬁnancial lenders, project owners and employees—assumes a share in the risk if catastrophe strikes without the safety net of a carefully orchestrated continuity plan. owners and employees all have an interest in the business’ continuation. effective coordination of these efforts requires time, resources, strong execution and the right team of professionals. When properly handled, the investment can yield a cohesive plan, as well as benefits that reach beyond continuity to promote strategic growth and development.

sure how to start and puts it on the back burner in favor of attending to more pressing matters. While driving home from a jobsite, Goode’s vehicle is struck by a drunk driver, and he and his wife succumb to their injuries. Without the leadership of a strong business partner, and the Goode children still too young to take over, A. Goode Contractor, Inc.’s employees quickly begin

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to fear for their job security. In light of its reputation for excellence within the industry, the company’s competitors are eager to capitalize on the chaos that prevails in the wake of Goode’s death and recruit the employees. Many accept the offers, including the two most experienced project engineers, three estimators and the controller. Because the rapidly dwindling staff can neither keep up with the demands of finishing out the remaining projects in progress, nor maintain the office’s operations, the remaining jobs are soon defaulted on and claims are filed against the surety company. Cancellation of insurance coverage follows, and creditors seek to collect on defaulted loans and other debts. Within nine months of Goode’s passing, heavy taxes are levied against an already tremulous financial position, and with the now insolvent business accounting for nearly 85 percent of the estate’s value, Goode’s children

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have no hope of leveraging a healthy fair market value against their parents’ debts. Coupled with insufficient life insurance benefits, Goode’s all-too-common failure to anticipate the worst-case scenario ensures his legacy will be one of hardship for his family, instead of the bright future he hoped his labors would secure. As this example illustrates, each additional party that becomes a partner in a contractor’s success—from surety and insurance carriers to financial lenders, project owners and employees—assumes a share in the risk if catastrophe strikes without the safety net of a carefully orchestrated continuity plan. Individual factors such as the ownership pattern of the business, which governs whether a business partner or second generation assumes control, and the employees’ level of commitment to the business after the loss of an owner either can become serious liabilities or can be managed appropriately.

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Experts Answer FAQs on Succession Planning Q &A WITH TIM HUGHES, ATTORNEY BEAN, KINNEY & KORMAN, PC ARLINGTON, VA.

What are the beneﬁts of having a succession plan? Failing to plan is planning to fail. That applies not just to establishing a business plan and implementing it over time, but also to providing for the sustainability of that business over time. We all face threats to our businesses, whether from the economy or life events, including death, disability and people at the top of the company moving on. Unless you think through the ramifications of these possibilities, you’re putting your business in a very precarious position. every company needs to think about the long-term growth trajectory to develop leadership that will keep the ball moving down the field when current leadership moves on to other things. Smaller companies that rely on their founder will face a real challenge when that person is gone if they don’t prepare for it. Companies with a bigger, more established national presence that are much more corporate and have more stock ownership especially need strategic planning to develop future leadership.

When should owners begin thinking about a succession plan? You must be thinking about the end game from the start. Ideally, you should have the right foundation in terms of corporate documents from the beginning. I cannot tell you how many times I get calls from two partners with a business they own equally who can’t get along but have nothing in terms of documents. Proper documentation provides a vehicle for people to talk about what entry into and exit out of the company will entail, as well as the rules of engagement. This ensures everyone is on the same page, all participants have the same expectations, and the way risks are allocated and responded to is clear.

How long does the process usually take? Sometimes you can put documents together and knock it out quickly, but you want to have a structured conversation that allows you to set a timetable and create urgency to get it done.

What are some of the construction-speciﬁc challenges to succession planning? The construction industry is by nature heavier in real estate holdings, which implies more liquidity, greater impact of capital gains and huge losses if you exit the market at the wrong time. For example, what happens if the market crashes when a construction company is involved in a joint venture with holdings? You can minimize (sidebar continued on page 23) S UMMER 2013 21

Development

BUSINESS

A buy/sell agreement clearly delineates those to whom ownership passes, and in what time period and manner the transition will occur. Particularly essential from the perspective of surety and insurance carriers, this element goes a long way toward circumventing the confusion, vulnerability and lost time that the sudden loss of an owner typically fosters. Important Features

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Beyond the universal tenet that business continuation is preferential to interruption or cessation, contractors’ continuity plans can be crafted to include features that apply to stakeholders’ specific concerns. A trust agreement can allow a business’ key executives to smoothly assume operational control without jeopardizing its status as a financial asset of the owner’s family. Thus, the financial benefits of the deceased or disabled owner’s work remains with the family, while those best able to ensure its successful continuation are simultaneously empowered. This is especially valuable in an ownership arrangement that does not include a business partner or second generation poised for takeover. A buy/sell agreement clearly delineates those to whom

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ownership passes, and in what time period and manner the transition will occur. Particularly essential from the perspective of surety and insurance carriers, this element goes a long way toward circumventing the confusion, vulnerability and lost time that the sudden loss of an owner typically fosters. estate tax planning puts financial protection in place to shield surviving family members and the business from the tax burdens that may surface after a loss. Financial lenders find confidence in the presence of such measures. Asset transfer strategies involve various methods, such as gifting, to guarantee most of the business owner’s earnings stay within the family. The rules governing what is allowable in this branch of financial planning change frequently, presenting new opportunities. Project completion plans dictate exactly how work in progress will proceed from the point of the owner’s

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destruction if the right measures are in place to set up trust documents, guide transition of control and take care of cash ﬂow. The goal is to maximize upside gain and provide for the company’s long-term survivability.

What role do taxes play in succession planning? everybody should think about taxation, but this can get a lot more complicated when you add a real estate holding element and lack of liquidity. Taxes are tough to plan for; you can start to plan for these things and try to develop leadership, but strategic succession planning must continue to be a conversation because tax laws and corporate laws change. For example, lack of consistency on estate tax has created short-term impact in terms of how people are thinking. It has been very unpredictable because the estate tax expired and now it’s back in place.

Q & A WITH TIM SKELLY, MANAGING PARTNER, CLIFTON LARSON ALLEN CONSTRUCTION REAL ESTATE GROUP MILWAUKEE, WI

Why is succession planning important? It all goes back to basic demographics. We have an aging ownership group. The average age of a construction company owner is older than 55. That gives you an idea about what’s going to happen in the next 10 years.

What is the most common type of succession plan? one of the most prevalent options is a sale to internal management or transfer of ownership to the next generation of the family. Construction is dominated by family-owned companies more than other industries. Quite often, the sale to internal management is not a good option because they lack the finances to buy from the owner, so the owner ends up financing the deal. Then it is a matter of whether the new owner has the ability to run the company successfully enough to pay the previous owner back. It’s hard for an internal buyer to bring in enough capital for down payments compared to what an outside buyer can do. Though employee stock ownership plans do take place in the construction industry, they aren’t as prevalent as in other industries because construction is a competitive bid-based market.

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Experts Answer FAQs on Succession Planning (continued)

Who needs to be involved in succession planning? As the plan is being solidified and people are in line, it should be communicated to the proper employee group, the bank and the surety sooner rather than later. Communicating with the surety helps bring the succession plan to the table because the lack of a plan impacts contractors’ underwriting risk evaluation. Sometimes owners are very presumptive or wait too long (sidebar continued on page 25) S UMMER 2013 23

Development

BUSINESS

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death through completion and close-out. Project owners and surety and insurance carriers alike are interested in this provision’s existence and structure. A managerial succession plan identifies key employees whose premature departure would place business continuation in peril. It then uses strategically scheduled financial incentives (“golden handcuffs”) to secure continued employment.

Crucial Advisors Seamless integration calls for the combined expertise of a surety and insurance agent that specializes in coverage for contractors, as well as a coordinated effort from the contractor’s attorney, CPA, financial planner and banker. Attempting to put a continuity plan together without the involvement of these crucial advisors can result in gaps and conﬂicting strategies that prove just as harmful as neglecting the situation. Likewise, the

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resulting product remains a living document that must be reviewed periodically by experts and updated to reﬂect the inevitable lifestyle and business changes that occur over time. With so many parties’ interests at stake, adequately addressing them all can seem daunting. Remarkably, though, at the core of each lies a common thread— the desire for the business’ continued solvency and retention of full market value—which a qualified team of professionals can use to skillfully develop a cohesive plan that doubles as a powerful business tool. MM Michael Culnen is president of C&H Agency, Totowa, N.J. Kevin Ellman is chief executive ofﬁcer of Wealth Preservation Solutions, LLC, Ridgewood, N.J. Reprinted with permission from Construction Executive, a publication of Associated Builders and Contractors’ Services Corp. Copyright 2013. All rights reserved.

Experts Answer FAQs on Succession Planning (continued) to convey their thoughts or vision of where the company or ownership is going, so there may be a considerable mismatch of expectations. Most construction companies are owner-operated, medium-sized and very privately run, so very few people know a lot about the company’s financial details and even less about the owner’s ambitions. This is common because a lot of construction company owners are good at their trade first and the business management part second.

How long does creating a succession plan usually take? I don’t look at succession planning as an end game; it’s more of a process. And it isn’t something an owner does every day. It could be a once-in-a-lifetime process. Most people do not have experience in creating a plan because it’s so unique and outside their day-to-day business management practices. I’ve dealt with plans with three to four significant steps or events in the transition. That makes sense because you can test the waters and make sure the plan is working.

How will the economic rebound affect succession planning? Sales to outside companies may increase. It wasn’t a good option before because an outside buyer wasn’t able to pay much for a company, but if the market or a sector turns, the results may yield a better pricing discussion. Irrespective of the economy, contractors in sectors such as energy, oil and gas are doing very well, and probably have seen an increase in outside buyers that want to capitalize in those areas. MM

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Index

ADVERTISER

ABC Self Insured Workers Compensation Fund .............. 28

Jackson Associates, Inc. ...................................................13

Accent Window & Door ..................................................... 5

JBS Contracting, Inc. ........................................................16

AIS equipment..................................................................15

Je Johnson Incorporated ..................................................16

Alma Painting Incorporated ..............................................16

JGM Machinery Movers & erectors Incorporated ............11

Andrews Hooper Pavlik, PLC ........................................... 22

K & S Plumbing Co., Inc. ................................................. 26

Answer Heating & Cooling, Inc. .......................................17

KMR Construction Services..............................................13

ASHA Safety .....................................................................13

Lakewood Construction ....................................................17

Attitude & experience, Inc. ...............................................13

Legal Shield ..................................................................... 20

Barrett Paving Materials, Inc. ............................................12

Lighthouse Insurance Group ............................................15

BCT Benefits Plan............................................................ 24

Liquid Calcium Chloride Sales ......................................... 26

Blue Star Inc. ..................................................................... 5

Loomis, ewert, Parsley, Davis, Gotting, PC ....................... 5

Brad Lubahn Landscaping & Tree Moving Company ........17

Merlo Construction Co., Inc. .............................................17

Brigade Fire Protection .....................................................17

Metrocom Technologies................................................... 25

C&R electric, LLC .............................................................. 5

Mid Michigan Materials Incorporated ...............................10

Capital Insurance Group .................................................. 20

Moyle Concrete ................................................................13

Capital Steel & Builders Supply ....................................... 24

optare Services LLC ....................................................... 24

Century A & e ...................................................................10

Parrish excavating Incorporated......................................... 5

Chuckâ&#x20AC;&#x2122;s electrical Services Incorproated ......................... 25

Pinnacle Insurance........................................................... 26

Commonwealth Associates, Inc. ..................................... 25

Plante Moran ....................................................................13

Consolidated electrical Contractors ................................... 5

Power Door Systems, Dvn. Nabco entrances, Inc. ..........12

Cornish, Zack, Hill & Associates, Inc., WBe, DBe ............12

RCI electric ...................................................................... 20

Crowe Horwath LLP ........................................................ 26

Robinson electrical & Mechanical, Inc. .............................19

Curtis Glass Company ......................................................19

Ronald B. Rich & Associates............................................ 21

Davenport Brothers Construction Incorporated ............... 20

SecureCom, Inc. ...............................................................10

DJ Maltese Construction LLC ...........................................19

Shafer Redi-Mix Incorporated ............................................ 5

DJ McQuestion & Sons, Inc. ............................................13

Siding World....................................................................... 2

eGI Solutions ................................................................... 26

Summit Training ............................................................... 23

enterprise Fleet ................................................................16

Thermico, Inc. ...................................................................14

excel electric Incorporated ...............................................13

Timpson Transport, Inc......................................................15

Fisher Companies ............................................................ 22

Titan Interiors LLC ........................................................... 24

Garber Chevrolet ..............................................................14

Tradesmen International .................................................. 26

Grand equipment Company ............................................ 24

US Trackworks LLC .......................................................... 26

Great Lakes Industrial Supply Co., Inc. ............................ 24

Waterstone Insurance Agency Incorporated ....................16

Great Lakes Roofing & Insulation Systems Inc ................. 5

Welch Tile & Marble Company......................................... 22

HD Supply Waterworks ................................................... 26

Wm. Molnar Roofing, Inc. ................................................. 5

HNI Risk Services of Michigan ...................................12, 19

Young Detroit Builders/Youth Build Detroit .......................10

Independence Commercial Construction, Inc. ................ 26 WWW. A B C M I . C oM

S UMMER 2013

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