PUBLICATION OF ASSOCIATED BUILDERS AND CONTRACTORS OF MICHIGAN WINTER 2011
Brighter year in view for merit shop construction industry Also: Annual Report 2010 Michigan economic forecast for 2011
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Inside
Perspective 4 Executive Election strategy hits the mark. Annual Report/2010 Highlights 5 The 2010 Annual Report includes major
accomplishments, Chairman’s Report, Treasurer’s Report and President’s Report. ABC capped off 2010 by helping to elect a record number of pro-industry candidates in the Michigan House, Senate and governor’s races.
Outlook Commercial 9 Economic construction outlook has bright spots; however, weak demand for new projects in all six of the major market segments indicates there will be slow improvement in 2011. By Don Wilson, ABC of Michigan Economist
Business Development The 14 construction industry is more vulnerable to fraud than most other industries. It ranks in the top 10 for fraud cases and in the top five for potential loss when fraud occurs. By Mark Freed, Andrews, Hooper, Pavlik
19 Advertisers Index VOLUME IV, ISSUE. 4 The new year looks bright given the many legislative and political accomplishments of 2010.
Legislative Update 16
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ABCMI PAC backs winning candidates
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Costly PLAs rejected across Michigan
Winter 2011 3
ASSOCIATED BUILDERS and CONTRACTORS of MICHIGAN 2011 BOARD of DIRECTORS Jim Cripps – Chairman Cripps Fontaine Excavating – Western MI Chapter David Mollitor Jr. – Vice Chairman Consolidated Electrical – Central MI Chapter Rod Kloha – Past Chairman Circle “K” Service, Inc. – Saginaw Valley Chapter Dave Sheffield – Secretary/Treasurer Onslow-Sheffield, Inc. – Southeastern MI Chapter Chris Beckering Pioneer Construction – Western MI Chapter Bill Buyak Capital Steel – Central MI Chapter Brad Blasy Balsy Electric – Saginaw Valley Chapter
Election strategy hits the mark
Erick Forshee TIC, Inc. – Saginaw Valley Chapter Scott Gillespie The Gillespie Co. – Central MI Chapter Rick Jackson Jackson Associates – Southeastern MI Chapter Bill Molnar Wm. Molnar Roofing Co. – Southeastern MI Chapter Jack VandeGuchte Sobie Company, Inc. – Western MI Chapter Daniel Welch Welch Tile & Marble – Western MI Chapter Michigan Merit Contributors Publisher: Christopher Fisher Managing Editor: Mary Boardway, CAE Communications Coordinator: Kelly Dancsok ABCMI Economist: Don Wilson Publication management: Lezotte Miller Public Relations, Inc. Advertising: Arion Media Printing: Bradford Printing 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 120 N. Washington Sq, Suite 805, 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.
The dust has settled from the 2010 elections and ABC executed one of the best election strategies in its history by marking an impressive win rate with more than 90 percent of all PAC dollars spent going to successful candidates. While we’ve won the battle, the war is far from over. As your newly recruited army descends on the State Capitol, we will begin the biggest and most significant fight yet.
It is the job of ABC and our members across Michigan to ensure change takes place and elected officials keep their promises.
We have an opportunity to go on the offense and make significant strides on behalf of free enterprise and the Merit Shop, but we are not guaranteed change. It is the job of ABC and our members across Michigan to ensure change takes place and elected officials keep their promises. Our task will be to hold their feet to the fire and keep Merit Shop issues on top of lawmakers’ agendas. Only then may we see opportunity turn into reality. Yours for the Merit Shop,
Chris Fisher
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.”
4 Winter 2011
Michigan Merit
2010 Major Accomplishments
at a glance
n ABC of
Central Michigan Chapter members John Parish and Scott Gillespie discuss Merit Shop issues with Congressman Tim Walberg.
Michigan helped elect 93 percent of PAC supported candidates and 85 percent of endorsed candidates to office in November.
n ABC MI PAC raised and donated
more than $90,000 to candidates
n Formed Statewide PLA Task
Force committed to defeating PLAs wherever they are proposed.
2010 ANNUAL REPORT
Election success tops list of 2010 accomplishments The most successful political action efforts in recent history topped ABC of Michigan’s list of accomplishments in 2010 and resulted in the election of Republican Governor Rick Snyder and pro-construction industry candidates in the Michigan House and Senate. ABC of Michigan tallied one of its most successful election efforts over the year, helping to elect 93 percent of PAC supported candidates and 85 percent of endorsed candidates to office in November. ABC of Michigan helped Republicans take control of all three branches of state government and capture seats in the U.S. Congress. ABC-backed candidates won 26 seats in the 38-seat state Senate and regained majority control of the state House 63-47. Elected to the state www.abcmi.com
Supreme Court, Justice Bob Young and Judge Mary Beth Kelly gave conservatives a 4-3 advantage in the state’s Supreme Court. ABC also supported the election of state leaders, Attorney General Bill Schuette and Secretary of State Ruth Johnson. ABC of Michigan’s election efforts also helped lock in GOP control in the U.S. Congress, with a 9-6 advantage.
Efforts to defeat PLAs make headway Efforts to defeat project labor agreements (PLAs) and support open competition on publicly funded construction projects gained ground, as municipalities and private companies closed the door on PLAs in Lansing, Clinton Township and Ludington.
continued on page 7
n Launched statewide public
relations campaign to support efforts to defeat Project Labor Agreements and increase public and media awareness.
n Launched PLA Examiner
electronic newsletter & accountableconstruction.com website
n Added to ABC staff to better
serve member needs
n Created endowment at Ferris
State University with the MI Construction Hall of Fame
n Held a statewide Legislative
Day in April that featured presentations by several candidates for governor
n Produced and
improved the annual member directory with a green construction listing, safety listing, buyers’ guides and advertisements.
Associated Builders and Contractors of
Michigan
2010-2011 Directory
Winter 2011 5
2010 ANNUAL REPORT
C hairman ’ s
Our work in 2010 helped create change Thank you for the opportunity to serve ABC of Michigan and the Merit Shop construction industry as the association 2010 chairman of the board. Although our industry took a toll economically, ABC of Michigan tightened its belt and made great strides in promoting our issues in Michigan. Our leadership has worked throughout the year to make an impact on the legislative complexion of our state. With the biggest election in Michigan’s history now in the history books, we are moving into 2011 with Merit Shop friendly legislative majorities in the State House, Senate and governor’s office. ABC also formed a PLA taskforce to
R eport
educate and inform elected officials and the public about union-only project labor agreements while working to eradicate them in Michigan. The taskforce is proactively addressing the PLA issue at the local and county levels throughout Michigan. I would like to take the time to acknowledge the hard work and dedication of our staff. Starting with our newest member, Kelly Dancsok, who is a welcome addition. She hit the ground running and I believe she is a great asset to our association. Mary Boardway has tirelessly worked to keep the books in order and balanced. She also applied her skills to membership and business development. In this tough economy I am amazed at the association’s performance. Chris Fisher is tenacious, dedicated, hardworking and passionate. I can think of no better person to lead our association. In addition to working with a first class
P resident ’ s
Merit shop construction gains ground The last year brought mixed blessings for the construction industry. A weak economy hit the industry particularly hard, but the strength and clout of ABC of Michigan grew the benefit of our chapters and members across the state. ABC faired well in our efforts to defend the Merit Shop to the Legislature. The same can be said on the political front with our many successes to the ballot box. Moreover, ABC’s notoriety grew
ABC maintains strong financial position Financially, 2010 was not unlike 2009 for ABC of Michigan. Although regular sources of revenue decreased, ABC diversified revenue streams and decreased expenses to offset and overcome shortfalls that had arisen. In addition to increasing ABC’s financial stability, non-dues revenue helped to
6 Winter 2011
Rodney Kloha Circle K Service, Inc. 2010 ABC of MI Chairman of the Board
R eport
bringing crucial merit shop issues to the attention of the public and elected officials, such as ending union-only project labor agreements. During the year, ABC increased its staff to better serve members, launched new publications to keep the industry apprised of ongoing news and information, expanded its member benefit offerings and met the needs of our membership through the creation of new advocacy efforts such as the PLA taskforce and Accountable Construction campaign. The growth and enhanced member benefit offerings have been member driven and were implemented without raising membership dues or placing the association in debt.
T reasurer ’ s
staff, I also have a dedicated board of true believers in the Merit Shop philosophy. It takes special individuals to give so much to their industry, with little in direct return to themselves. They not only care about their businesses but also have a deep commitment to our state and country. I would be remiss if I did not recognize the hard work of the committees, and thank all who served. It is the commitment of members like you that make our association successful and enabled us to make the unprecedented changes in our state government in 2010. Each of us doing our part and pulling together will strengthen our industry and continue the success of ABC of Michigan. Thank you for your support throughout the year.
As 2011 unfolds, ABC of Michigan is stronger than it was a year ago and is poised to make major strides in its principled mission of representing the Michigan construction industry by advancing and defending the free enterprise philosophy of the Merit Shop. Thank you to all our members throughout the state who support their association, enabling ABC of Michigan to be a leading business organization as well as the premier construction trade association in Michigan.
Chris Fisher President & CEO ABC of Michigan
R eport
increase member benefits and strengthen the association’s value to members. The discount bulk fuel benefit and additional marketing efforts for other benefit programs helped stabilize revenues and added member benefits. With increased member participation in the workers’ compensation fund and the super fleet discount fuel program compensating for other shrinking revenue streams, along with cutting expenses, ABC of Michigan will end the year with a balanced budget once again. ABC of Michigan staff and leadership have already enacted changes and are preparing programs to assure 2011 is
financially sound for the association as well. Your Board of Directors sees the fiscal oversight of the association as an important responsibility and continues to work with the staff to maintain the financial health of the association through the coming year. Thank you for your support of ABC of Michigan and the Merit Shop Philosophy.
Sincerely, David J. Sheffield Onslow-Sheffield, Inc. 2010 ABC of MI Board Secretary/Treasurer
Michigan Merit
In Macomb County’s Clinton Township, a sewer project with a PLA attracted one bidder with a bid more than $30,000 above the project budget. Township officials re-bid the project and opened it to all contractors. In Ludington, PNC Bank reconsidered plans to allow only unionized firms to bid on a branch renovation. The decision change came after ABC leaders pointed out the discriminatory nature of the original policy. In Lansing, plans to greatly improve the downtown riverfront were jeopardized when Lansing City Council members tried to force the project’s private developer to accept a PLA on the multimillion-dollar project. ABC spoke out against the PLA effort, which was eventually stopped by a judge’s ruling in the developer’s favor.
Legislative efforts held prevailing wage in check ABC’s legislative and lobbying work during the year made significant gains for merit shop contractors in Michigan. n ABC
defeated legislation to expand Michigan’s Prevailing Wage Act, a detrimental bill that would have codified prevailing wage violations, making it even
www.abcmi.com
more difficult for contractors to comply with the law. n ABC
worked with the Senate in a successful, year-long battle against Gov. Granholm’s efforts to stack the boards of control at state universities with laboraffiliated trustees.
n ABC
defeated efforts to allow local units of government to amend building codes to mandate LEED green building requirements.
n ABC
partnered with coalitions of other business organizations to enact government reforms in order to balance the budget without any tax increases.
n ABC
killed legislation that would have allowed labor unions to file third-party complaints for independent contractor violations.
n ABC
defeated misclassification legislation stipulating that if a contractor dismisses an employee within three months of that employee filing a so-called misclassification complaint there is to be an automatic “rebuttable presumption” that the employer did so in retaliation for the complaint having been filed.
n ABC
successfully fought MIOSHA to prevent unnecessary construction sanitization and “portable toilet” mandates that exceed standards of all 50 states and the federal government.
New member benefits added ABC of Michigan added new benefits and expanded current benefits that increase return on investment for members and help enhance worker safety. The Self Insured Workers’ Compensation Fund averaged 35 percent annual return on member premiums by emphasizing worker safety. The Supplemental Unemployment Benefit (SUB) Plan helps saves members money on prevailing wage projects. Vehicle discounts are available for fleet purchases by ABC members from all of the “Big 3” automakers. ABC of Michigan added the following new membership benefits: n A
bulk fuel discount plan to save members money n Long-term care benefit for contractors n Long-term disability insurance benefit for members n Increased fuel savings through Super Fleet to five cents per gallon (10¢ for first 90 days) Winter 2011 7
2010 ANNUAL REPORT
ABC of Michigan members Dave Filipiak, Sky Electric; Dave Sheffield, Onslow-Sheffield, Inc.; and Ed and Joann Tanzini, The Tancor Corporation prepare to meet with state Legislators on the Merit Shop issue.
2010 ANNUAL REPORT
Michigan Merit Magazine earns statewide recognition
n Launching
a web-based campaign with social networking, website and advocacy tools n Implementing purchased billboard and web-based marketing of ABC’s message n Funding legal challenges to PLAs in Michigan
ABC’s quarterly magazine earned Gold Honorable Mention for Excellence in Publications from the Michigan Society of Association Executives Annual Diamond Awards Program.
State Supreme Court case was major victory
n ABC
added an economist feature in two issues each year, providing construction-focused economic reports. n The fall issue featured a highly requested Voters Guide prior to the general election to assist members in making informed voting decisions. n Other 2010 issues of Michigan Merit focused on safety and the impact of the prevailing wage law on contractors and the industry.
Governor Rick Snyder.
PLA Taskforce steps up fight against PLAs
Marketing efforts broaden to attract new members Membership marketing to both current and prospective members grew at a substantial rate, from year to year. ABC of Michigan launched online communication tools, publications, social media operations, member services flyers, annual reports, status updates, membership advantage print-outs, increased visits to chapters and group presentations around the state.
ABC of Michigan’s PLA Taskforce was formed in 2010 and is aggressively battling PLA efforts across the state on a number of fronts. The group meets monthly and is comprised of ABC members from each chapter, along with one liaison from the ABC board. The taskforce reports directly to the ABC of Michigan Executive Committee. Among the taskforce’s priorities: n Defeating
PLAs in three chapters across Michigan n Conducting an integrated campaign to educate the public and media through outreach and advocacy n Maintaining a full time taskforce led by ABC contractors from all areas of Michigan
ABC of Michigan champions legal endeavors in addition to legal challenges fought by local chapters. ABC filed an amicus curiae brief in the Michigan Supreme Court case, which denied an appeal involving the validity of Detroit’s living wage ordinance. The result confirmed the viability of a 1923 case invalidating all living wage and local minimum wage ordinances, and may also affect local prevailing wage ordinances. The Supreme Court ruling effectively leaves the unpublished appeals court and circuit court rulings intact and makes them into persuasive authority statewide. It has significant importance and may provide numerous opportunities for ABC over the next few years through spin-off cases and lawsuits. MM
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CONSTRUCTION & BUSINESS LAWYERS
8 Winter 2011
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JEFFREY S. THEUER 124 WEST ALLEGAN, SUITE 700 LANSING, MI 48933 (517) 482-2400 jstheuer@loomislaw.com
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Michigan Economic Indicators
Commercial construction outlook has bright spots
By Don Wilson, ABC MI Economist
Just as construction activity in other states began to be affected by the slowdown in the housing market in 2006 and 2007 with the drying up of funds available for mortgages and other financing, construction operations in Michigan were similarly affected, but more severely. In Michigan, the construction industry was additionally impacted by the loss of jobs and rising vacancy in the industrial, commercial and residential sectors accompanying the restructuring of the state’s manufacturing industries, mainly the motor vehicle sector and its impact in several peripheral industries and households. The effect on Michigan’s construction industry is portrayed in Graph 1, which on an index basis compares the value of all construction contract awards, non-residential building contract awards and
construction product put into place with construction trades payrolls. Investment to construct new nonresidential buildings or renovate existing space is basically determined by the change occurring in the volume of business, the type of layout and equipment required in business operations, the number of persons employed, the funds available to cover the cost of the space to be built or renovated (leased or owned) and the other expenses of carrying on a viable business. No annual data are regularly collected regarding business revenues or the size and diversity of the operational characteristics of the state’s several industries. However, growth and decline in employment can provide some insight into the changes in direction of non-residential building expenditures. Graph 2 compares the annual total value of statewide non-residential building
Graph 1
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Winter 2011 9
for every job lost among suppliers, four jobs disappeared in other industries.
Graph 2
Manufacturing up slightly Manufacturing activity, as tracked by the Michigan Manufacturing Barometer, improved to a level of 63 in 2010 (2001=100) from 60 in 2009 with the upturn in the North American market penetration of the Detroit automakers whose share of industry production volume, as tracked by Motor City Automotive Production Barometer, climbed to a level of 50 (2001=100) from 35 in 2009.
contract awards (measured on an index basis) with the change in private sector employment in the year earlier period. Demand weak for projects No data is tabulated and publicly available (without subscription) summarizing the value of nonresidential building contracts awarded for projects. However, the trend of change in employment (in the industries typically occupying the buildings) advanced one year displayed in Graph 3, provides some insight into the current weakness of demand for such investment in the six major market segments served by the non-residential contracting segment of the construction industry.
and other market segments has been the result of the restructuring at Detroit’s three automakers and the related downsizing that occurred among their suppliers and the many non-factory sectors dependent on their business volume and the rich earnings and fringe benefits of their workforce. According to the Ann Arbor-based Center for Automotive Research (CAR) for every job lost at Detroit’s automakers, nine jobs were eventually cut in other industries and
Housing inventory nearly triple the norm Wholesaling, transportation and utility operations strengthened with increased manufacturing, foreign trade and retailing activities. Construction continues to lag 2009 due to the large overhang of nonresidential space for lease, the visible and shadow inventory of unsold homes and the reluctance to invest by the business and household sectors. According to Corelogic, a California business research firm, Michigan’s inventory of distressed housing was the equivalent of 15.1 selling months supply at the end of August. Six months supply is considered normal.
Graph 3
Decline due to automotive restructuring Table 1 summarizes indicators of the level of activity in nonresidential markets in recent years and the changes that have occurred. The industrial market is dominated by manufacturers’ operations and to a lesser degree by wholesalers, transporters, contractors and utility operators. The most significant proportion of the decline in Michigan’s industrial 10 Winter 2011
Michigan Merit
Employment levels affect office building Activity in the office building market, as indicated by employment, as set forth in Table 1, declined to an average of about 973,000 jobs in 2010 from 982,000 in 2009 and higher levels in earlier years as many organizations realized they must lower their operating costs by adopting more productive work practices and outsourcing or off-shoring select business functions with the increased ease of communications offered by constantly improving technology. Retail sector improves as home sales surge Retail industry activity, as tracked by the Michigan Retail Sales Barometer, declined annually between 2004 through 2009 before turning slightly upward in 2010. Factors contributing to the decline included the slippage in household purchasing power
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accompanying job losses, the decrease in home equity values, increases in personal savings, the decline in construction and sale of homes and population emigration. Retail revenues in 2010 improved with the surge in home sales stimulated by the homeowner tax credit, a 2.5 percent rise in weekly earnings, satisfaction of pent-up demand for some products that had accumulated since early 2008, improved consumer attitudes, and fractionally lower joblessness.
assistance agencies, expanded 30 percent between 2000 and 2007 before declining in 2008 and leveling out in 2009 and 2010. By contrast, employment in the public sector has been in decline since 2003.
Healthcare expands, public sector declines Healthcare is the most viable market served by Michigan’s nonresidential construction industry. According to the Healthcare Services Barometer (listed in Table 1) the service activities of the industry’s providers in hospitals, out-patient ambulatory centers, nursing and residential care facilities and social
Little increased demand for construction expected Despite an upturn in activity in the industrial (dominated by manufacturing and automotive), retail and lodging market indicators in 2010 and a leveling out of healthcare market activity in 2009-10, there is no basis to expect anything but minor improvement in demands for construction of non-residential
Lodging sector improves slightly Room revenues, as measured by the Lodging Revenues Barometer (shown in Table 1), after stabilizing in 2005-07, is estimated to have turned up in 2010 for the first time since then.
Winter 2011 11
Graph 4 building projects during 2011 and 2012. The one exception is the automotive industry where US motor vehicle sales, forecast to rise to 12.7 million units in 2011 and 14.8 million in 2012 from 11.5 million in 2010, will see more alterations to existing structures in Michigan operated by Chrysler, Ford and General Motors and their suppliers, in addition to those projects already in process and others that have already been announced. Rental space inventory still high Job losses of about 550,000 in 2006 through 2010 have left millions of square feet of space vacant and available for lease across the state. Many of the 10 year leases signed between 2000 and 2005 will come due in the next few years with tenants seeking to reduce rental expenses and move to smaller and
less expensive space, further raising not drive the current downturn in vacancy levels and reducing landlord non-residential construction. The revenues. availability of inexpensive funds, Unlike the housing industry bubble rising rents and high occupancy that burst in 2006, overbuilding did rates attracted investor ardor to ABC RM 1_4 Michigan Merit.pdf 1 1/12/11 9:28 AM
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12 Winter 2011
Michigan Merit
Table 1 NON-RESIDENTIAL BUILDING MARKET ACTIVITY INDICATORS
2000
2004
2006
2008
2009
2010
Manufacturing Barometer (2001=100)
110.8
92.9
83.1
75.6
60.9
63.0
Motor City Automotive Production Barometer (2001=100)
114.8
96.3
84.4
59.2
35.1
50.0
Retail Sales Barometer (2001=100)
98.4
98.7
93.5
88.1
84.9
87.0
Healthcare Services Barometer(2001=100)
99.8
118.5
122.1
126.4
118.4
118.3
Lodging Revenue Barometer (2001=100)
104.3
88.6
89.6
83.2
79.0
82.0
Office Jobs (000)
1,159
1,110
1,103
1,064
982
973
Institutional Jobs (000)
709
723
713
700
699
692
diversify their portfolios after the stock market bust in 2000. The start of the recession in the final quarter of 2007 with its adverse effect on rents and occupancy and
the credit market turmoil in 2008’s third quarter significantly increased investor and landlord’s exposure and a withering of property prices. While the Commercial Property Price Index, calculated by Moody’s Investors Service and Real Capital things we can all agree Analytics, was you need, right now: 15.5 percent higher nationwide Maximized Workforce Productivity 1. in the 2010’s Reduced SUTA / Unemployment Costs 2. third quarter than one year earlier; Minimized Workers’ Comp Exposure 3. it was 30.1 Defense Against Rising Benefits Costs 4. percent below Reduced Hiring Costs and Hassles 5. its previous high Protection from Labor Legislation 6. in first quarter of 2007.
One
Employment may rise in 2011 According to the latest assessment and outlook for the Michigan economy, statewide employment was estimated to decline 20,200 in 2010 (fourth quarter over fourth quarter) with state and local public sector lay-offs, as well as the departure of the last workers conducting the 2010 Census. Employment is forecasted to rise by about 24,500 in 2011. Building contract awards may rise slightly in 2011 Based on the job losses in 2009 through 2010 resulting in the high building vacancy rates, the tightness of mortgage lending standards, the caution many companies exhibit about making investments considering the slow pace of economic recovery, the high level of joblessness and the damaged state of household finances, it is expected, as shown in Graph 4, the index of the value of non-residential building contract awards in all markets will likely improve only gradually to a level of 40 (2000=100) in 2011 from an estimated 37.5 in 2010 and the value of construction product put in place to a level of 40 in 2011 (2000=100) from an estimated 39 in 2010. MM Don Wilson is the economist for ABC of Michigan. He has researched economic data and trends for trade associations, banks, chambers of commerce and municipalities since 1982.
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Winter 2011 13
Prevention essential
Construction industry more vulnerable to fraud
By Mark Freed, Partner, Andrews Hooper Pavlik PLC
If business isn’t difficult enough for construction companies, the current challenging economy adds an additional threat – the increased risk of fraud. A recent study found that out of 221 industries surveyed, the construction industry ranks number eight in terms of the number of fraud cases – and number five in terms of the average size of loss. Every two years the Association of Certified Fraud Examiners (ACFE) issues a “Report to the Nation” on fraud schemes such as embezzlement, misappropriation of funds, phony expenses, bribes and kickbacks – schemes known as occupational or internal fraud. Its most recent report, based on 959 cases investigated over a two-year period ending in 2008, shows the construction industry is particularly vulnerable to such types of losses. The median fraud-related loss suffered by construction businesses in the ACFE study was $330,000 – twice the median loss for businesses of all types. Unfortunately, companies now face the greatest risk of fraud from within their own ranks. While management is distracted by the need to generate revenue and keep credit lines open, employees may be feeling financially strapped themselves, especially if a spouse has become unemployed or the household is facing other pressures such as excess debt or an “upside down” mortgage.
Fraud schemes permeate the industry Occupational fraud can take many forms, and construction companies are vulnerable to just about all of them. Common examples include: 14 Winter 2011
of materials – such as the project manager who arranged for more than $60,000 in building materials to be delivered to his home, which was getting a “free” remodeling, thanks to his employer’s lack of oversight.
n Theft
employees – such as the laid-off employee who was married to the company’s payroll clerk and continued receiving paychecks for almost a year after he was let go.
n Phantom
irregularities – such as the concrete contractor whose employees conspired with unscrupulous customers to falsify truck weight records and pocket the difference.
n Billing
rigging – such as the group of subcontractors who colluded on bids, leading the general contractor and owner to pay more for their services than they would have under a truly competitive bid.
n Bid
n Misappropriation
of equipment – such as the highway contractor whose employees were operating lucrative side businesses using his supposedly idle equipment.
Contractors especially vulnerable Unfortunately, such examples are all too common due to the nature of the construction industry. The majority of contractors are small businesses that cannot afford sophisticated internal audit functions. Many owners built their businesses from the ground up with little formal training in business or accounting practices. The work is nearly always performed at a remote site, removed from company headquarters, so Michigan Merit
management oversight is less consistent. Likewise, many of the raw materials used – such as lumber, concrete, copper pipe, wire and cable, or topsoil and fill – can be difficult to identify and track back to a specific job, making it easy to lose sizable amounts.
Internal controls essential The American Institute of Certified Public Accountants (AICPA) outlines a number of internal controls that are particularly desirable in the construction industry. Although even the best-managed companies probably don’t exercise all of the suggested controls, the AICPA’s audit guide provides a useful overview of industry best practices across the entire range of business operations. Here are some selected examples that construction company leaders should consider: n Estimating
and bidding – Management should independently review the completeness and reasonableness of all estimates. On large or complex contracts, it’s good practice to obtain at least two independent estimates. Review the materials and labor hours in all estimates and compare them to customer specifications, as well as to vendor price lists, price quotations, subcontractor bids or other supporting documents.
should include a detailed review of cost records, comparing actual costs with original estimates, as well as with the most recent estimate of the remaining costs to completion. The review should also include open purchase orders and commitments, change orders and other documents. n Job-site
accounting – Construction companies are particularly vulnerable to fraud losses at the job site. It’s good practice to require management authorization for all material purchases at job sites and to clearly specify the documentation required. Ensure there are adequate physical controls over equipment, materials and supplies to prevent unauthorized use, and conduct regular inventories of surplus materials. – The temporary nature of some construction employment can make adequate payroll controls difficult. Verify payroll records and related documents including W-2 forms. Have internal auditors or corporate administrative personnel disburse or observe payrolls at job sites periodically to guard against phantom employees.
n Payroll
revenues, costs and billing – Make sure that all customer billings match the terms of the original contract. Install n Project administration – Hold adequate controls to ensure that regularly scheduled meetings costs are properly assigned to with project managers and make each job, especially in the case of periodic visits to job sites. Visits cost-plus contracts, which offer numerous opportunities for fraud. (Regularly review the Technical Hot & Cold quantities Technical Hot & Cold and prices of ▪Heating & Cooling ▪Refrigeration ▪Plumbing▪ the materials ▪Heating & Cooling ▪Refrigeration ▪Custom Fabrication & Sheet ▪Plumbing▪ Metal ▪ charged, and ▪Custom Fabrication & Sheet Metal ▪Complete Building Services ▪ ▪ compare them ▪Complete Building Services▪ ▪ ▪ Mechanical Contractor to vendor ▪ Mechanical Contractor ▪ 37667 Cherry Hill invoices, 1-888-828-8317 37667 Cherry Hill Westland, MI 48186 purchase orders 1-888-828-8317 Westland, MI 48186 and receipts. www.technicalhotandcold.com www.technicalhotandcold.com Also ensure www.abcmi.com
n Contract
periodic agreement between the detailed contract cost records and the general ledger records.) n Construction
equipment – Maintain usage records for all major equipment, and ensure reporting procedures are in place to record and control the transfer of equipment between projects. Institute loss prevention practices for small equipment such as power hand tools.
Start with staff responsibility changes Ideally, controls would also include separate evaluations by internal auditors of all vulnerabilities. In reality, however, most contractors can’t afford to maintain a dedicated internal audit function. Nevertheless, there are a number of practical, costeffective steps to take. One of the most fundamental is also the simplest: segregation of duties. For example, the person who sets up vendor accounts should not be the same person who approves vendor payments. The payroll clerk should not be the same person who reconciles bank statements. The principle applies across all aspects of the business, and can be implemented immediately at virtually no cost. Begin by sitting down with an accountant or a security professional who specializes in loss prevention for a thorough evaluation of current risk. Reducing opportunities for fraud is always good business, but for construction companies in today’s economy, it’s downright essential.MM Mark Freed, CPA, partner-in-charge of construction services for Andrews Hooper Pavlik PLC (AHP), focuses on helping construction contractors throughout Michigan improve profitability. AHP is a member of ProfitCrew™, an association of accountants and business advisors dedicated to helping contractors build profitable businesses. For more information, contact Mark at mark.freed@ ahpplc.com or visit us on the Web at www.ahpplc.com.
Winter 2011 15
ABCMI PAC backs winning candidates one interested party — a The election results are in ABC of Michigan ABC of Michigan firm that bid $131,000, and ABC of Michigan is proud PAC Dollar Wins Endorsement Wins substantially higher than a to announce the success of $96,000 estimate presented ABCMI PAC in supporting 7 by township engineers. The winning candidates for 15 dearth of bidders prompted governor, attorney general, township officials to rebid secretary of state, Supreme the project and open it to all Court, Senate, House of contractors, regardless of Representatives and the labor affiliation. university boards. Michigan 85 93 Typically, its taxpayers was successful in electing who must pick up the PLA pro-business candidates who tab because PLAs are more are supporters of the Merit General Election 2010 often imposed on public Shop. Michigan now has a Wins Losses construction projects. The private Republican governor, a Republican sector, however, is not immune to supermajority in the Senate (26-12) Costly union-only PLAs. and a Republican majority in the construction contracts PNC Bank in mid-November House (63-47). rejected across Michigan reconsidered its original plans to ABCMI PAC endorsed 85 percent allow only unionized firms and of winning candidates and a total Open competition on publicly workers to bid on the planned of 93 percent of PAC dollars was funded construction projects is contributed to winning candidates. gaining ground, as municipalities and renovation of a branch in the Lake Michigan community of Ludington. ABCMI PAC is a principled PAC even private companies are opening The change of course came after that only donates to candidates who the door to Merit Shop workers, as Associated Builders and Contractors are supportive of Merit Shop issues. evidenced in three separate cases leaders pointed out to bank officials ABC of Michigan worked tirelessly across the state. the discriminatory nature and through out the weeks and months In recent months, projects in negative effects. leading up to election day in support Lansing, Clinton Township and In Lansing, plans to greatly of pro-merit shop candidates. Ludington that had each been improve the community’s downtown ABC chapters and members earmarked for union-only contractors riverfront were jeopardized last fall, across Michigan worked at the and workers were opened up to the placing hundreds of construction jobs grassroots level to encourage entire construction work force after in limbo, when city council members members to vote and to meet project decision makers changed tried to force the project’s private candidates in their home territories. course. developer, Pat Gillespie, to accept a ABCMI PAC would not have been “In each case, the exclusionary union-only PLA on the multimillionso successful without the support nature of forced union agreements, and commitment from the loyal often called project labor agreements dollar construction of the Market Place complex and redevelopment of members of ABC of Michigan. (PLAs), would have severely limited the Marshall Street Armory. Your contributions of time, money the competitive bidding process When Gillespie rebuffed the and support are making a difference and driven costs up,” explains Chris demands, saying the forced-union in Michigan. Fisher, Associated Builders and PLAs would make efforts to improve ABC of Michigan is already Contractors of Michigan president. the properties cost prohibitive and working to ensure that qualified, proFor example, in Macomb County’s deprive local workers of employment merit shop individuals are appointed Clinton Township, a sewer project opportunities, union backed by the incoming administration to that originally was open only to members of city council still refused posts affecting our industry. unionized bidders attracted just to approve previously agreed-upon 16 Winter 2011
Michigan Merit
economic incentives for the projects. Eventually, it was left to a judge to rule in Gillespie’s favor. Fisher says it shouldn’t have had to come to that. “Simply put, it’s not the government’s role to pick economic winners and losers, which it is essentially doing when it tries to foist PLAs on projects,” he says. “Citizens deserve better and should never be denied the accountability to which they are entitled by their government.”
Legislature OKs $383 million capital outlay for Michigan college and university projects The Michigan Legislature passed a final capital outlay bill in December, approving 23 infrastructure projects at universities and community colleges. The state will fund $383 million of the nearly $1 billion in projects at 11 universities and 12 community colleges, with no one project receiving more than $30 million. The $383 million in new debt will require $35 million a year from the state’s general fund to be used toward debt payments. Michigan currently has a $609 million debt cap available to finance projects, according to the State Building Authority.
The final bill passed the House with a 56-38 vote and passed the Senate with a 25-7 vote. The projects receiving approval and the state’s estimated outlay for the projects: n Oakland University engineering center, $30 million. n University of Michigan-Ann Arbor’s G.G. Brown Memorial Laboratories renovation, $30 million. n University of MichiganDearborn’s science and computer information building renovations, $30 million. n University of Michigan-Flint’s Murchie Science Laboratory Building renovations, $16.6 million. n Wayne State University’s Multidisciplinary Biomedical Research Building, $30 million. n Macomb Community College’s Health Science and Technology Building project, $7.25 million. n Henry Ford Community College’s science building improvements project, $7.5 million. n Central Michigan University’s biosciences building, $30 million. n Grand Valley State University’s classroom and office additions, $30 million. n Lake Superior State University’s School of Business building, $15 million. n Michigan State University’s plant science facilities and bioeconomy
additions and renovations, $30 million. n Northern Michigan University’s Jamrich Hall modernization, $25.4 million. n Alpena Community College’s electrical power technology and training center, $2.5 million. n Bay de Noc Community College’s nursing lab and lecture hall remodeling, $750,000. n Delta College’s health and wellness wing renovations, $9.9 million. n Gogebic Community College’s building renovations, $750,000. n Grand Rapids Community College’s Cook Academic Hall renovation, $5 million. n Jackson Community College’s student services and instructional classrooms, $9.75 million. n Lansing Community College’s Arts and Sciences building renovation, $9.9 million. n Mid-Michigan Community College’s Mount Pleasant campus unification — $8.8 million n North Central Michigan College’s Health Education and Science Center project — $5.2 million n Monroe County Community College’s technology center project — $8.5 million n Ferris State University’s College of Pharmacy — $6.6 million
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Winter 2011 17
ABC joins suit against city of Troy over excessive building permit fees ABC of Michigan has sued the City of Troy for charging more fees for building permits than allowed under law. The lawsuit, which was joined by Michigan Association of Home Builders and Michigan Plumbing and Mechanical Contractors Association, accuses Troy of violating the Headlee amendment and Michigan’s Stille-DeRossett-Hale Single State Construction Code Act by charging unauthorized taxes. According to the Headlee amendment, voters must approve any new local taxes. Since the fees were not voted on, they are essentially unauthorized taxes, the lawsuit contends. Since July 2010, Troy has been adding surcharges of 20 to 25 percent on fees builders have to pay for inspections and site reviews. The
change came when the city began contracting with a private company to operate its building department. The city’s contract allows the private company to retain 80 percent of fees collected and return 20 percent to the city. Troy deposits the 20 percent into the general fund, which helps fund other city departments and services. If fees collected in any fiscal year exceed $1 million, according to the contract, Troy’s percentage increases to 25 percent for general fund deposits. “Since by Troy’s own admission the fee is clearly not proportionate to the cost of providing the service and it’s being used for a revenueraising purpose as opposed to a regulatory one, the tax is unapproved and a violation of the Headlee amendment,” says Chris Fisher, ABC of Michigan president. The lawsuit requests Oakland County Circuit Court to enter a
preliminary injunction requiring Troy to place all funds it receives in violation of the act in a separate account and stipulate the funds not be used for any purpose other than permitted by the act. Ultimately, the lawsuit requests a permanent injunction barring Troy from charging excess fees and requiring that all fees collected be devoted exclusively to payment of the costs necessary to provide building department services. The lawsuit does not seek any injunctive relief against Troy’s use of a private company to operate its building department. Neither the request for preliminary or permanent injunction would prevent a private company from providing the services so long as the fees charged and services provided are compliant with the act and do not violate Michigan’s Headlee amendment.MM
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