The Contractor's Compass April 2015

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ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

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Chasing the Prize — Building Your Backlog Regardless of Market Conditions

APRIL 2015

Building Backlog

Not All Strategy is Good Strategy — Fatal Flaws to Avoid Benchmarking: A Road Map to Growth Backlog — A Contractor’s Best Friend or Worst Enemy?

Disarming A Dozen Dangerous Subcontract Clauses — Part 2 Legally Speaking: The Art of Documenting Your Project in Today’s Technological World

Save the Date!

March 3-5, 2016 Miami, FL • See page 18

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April 2015

Features

EDITORIAL PURPOSE The Contractor’s Compass is the monthly educational journal of the Foundation of the American Subcontractors Association, Inc. (FASA) and part of FASA’s Contractors’ Knowledge Network. The journal is designed to equip construction subcontractors with the ideas, tools and tactics they need to thrive.

Chasing the Prize — Building Your Backlog Regardless of Market Conditions.................................................... 6

by Gregg Schoppman

The views expressed by contributors to The Contractor’s Compass do not necessarily represent the opinions of FASA or the American Subcontractors Association, Inc. (ASA).

Not All Strategy Is Good Strategy — Fatal Flaws to Avoid........................................................................ 10

by Gregg Schoppman

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey

Benchmarking: A Road Map to Growth..................................... 12

MISSION FASA was established in 1987 as a 501(c)(3) taxexempt entity to support research, education and public awareness. Through its Contractors’ Knowledge Network, FASA is committed to forging and exploring the critical issues shaping subcontractors and specialty trade contractors in the construction industry. FASA provides subcontractors and specialty trade contractors with the tools, techniques, practices, attitude and confidence they need to thrive and excel in the construction industry.

FASA BOARD OF DIRECTORS Richard Wanner, President Letitia Haley Barker, Secretary-Treasurer Brian Johnson Robert Abney Anne Bigane Wilson, PE, CPC SUBSCRIPTIONS The Contractor’s Compass is a free monthly publication for ASA members and nonmembers. Subscribe online at www.contractorsknowledgedepot.com.

by Hiromi Young, CPA, CCIFP, and Duwayne Sibley

Backlog — A Contractor’s Best Friend or Worst Enemy?...................................................................... 14

by Kevin M. Waldron

Disarming A Dozen Dangerous Subcontract Clauses — Part 2................................................. 16

by Dan McLennon

Departments CONTRACTOR COMMUNITY............................................................ 4

ADVERTISING Interested in advertising? Contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com.

LEGALLY SPEAKING.......................................................................... 20

EDITORIAL SUBMISSIONS Contributing authors are encouraged to submit a brief abstract of their article idea before providing a fulllength feature article. Feature articles should be no longer than 1,500 words and comply with The Associated Press style guidelines. Article submissions become the property of ASA and FASA. The editor reserves the right to edit all accepted editorial submissions for length, style, clarity, spelling and punctuation. Send abstracts and submissions for The Contractor’s Compass to communications@asa-hq.com.

ABOUT ASA ASA is a nonprofit trade association of union and non-union subcontractors and suppliers. Through a nationwide network of local and state ASA associations, members receive information and education on relevant business issues and work together to protect their rights as an integral part of the construction team. For more information about becoming an ASA member, contact ASA at 1004 Duke St., Alexandria, VA 22314-3588, (703) 684-3450, membership@asa-hq.com, or visit the ASA Web site, www.asaonline.com.

The Art of Documenting Your Project in Today’s Technological World

by Jim Sienicki and Cindy Schmidt

Quick Reference ASA/FASA CALENDAR..................................................................... 22 COMING UP....................................................................................... 22

LAYOUT Angela M Roe angelamroe@gmail.com © 2015 Foundation of the American Subcontractors Association, Inc.

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Contractor Community GAO Says Bid Shopping Not Apparent on Federal Construction The U.S. Government Accountability Office said it was “not able to determine if bid shopping occurs or does not occur when prime contractors select subcontractors on federal construction projects” in a January report on subcontractor selection on federal construction projects. Bid shopping occurs when a contractor, after its bid is accepted by the government or private owner, induces a subcontractor to perform at a lower price than that used to calculate the bid.

GAO asserts in its report that “the selection process could lead to subcontractors’ perceptions of bid shopping.” In preparing its report, GAO reviewed selected agency contract files and interviewed contractors and subcontractors, as well as their association representatives. GAO reported that the federal agency officials it interviewed stated that they were not aware of bid shopping occurring on their contracts. The agency also reported that many of the construction contractors that it interviewed said that bid shopping occurs, but could not “furnish evidence of specific instances” of bid shopping. GAO concluded that negotiation procedures between prime contractors and subcontractors may create the impression of bid shopping among subcontractors that submit bids.

The agency said, “Specifically, prime contractors explained that they receive multiple bids for each trade (e.g., electrical, plumbing) up to minutes before their proposal is submitted to the government; and they typically do not use a specific subcontractor’s price in their

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proposal, but a price informed by the subcontractors’ bids. After award, the prime contractor negotiates and selects a subcontractor for each trade during the ‘buyout process.’”

ASA supports federal legislation that would require bid listing on federal construction. Bid listing requires prime contractors to list in their bids the subcontractors they plan to use for each part of a construction contract.

President Obama Proposes Increasing Investment in Infrastructure President Obama announced efforts across government including new executive actions and a new tax proposal to encourage increased investment in U.S. roads, ports and drinking water systems. The executive actions include: • A Presidential Memorandum directing the Departments of Commerce, Transportation, Homeland Security, Housing and Urban Development and Agriculture to improve the early phases of infrastructure project planning and design by aligning federal funding for planning and predevelopment. These agencies and others will be working closely with state and local governments and other stakeholders over the coming months to ensure that the federal government is doing all it can to support critical predevelopment activities.

• Establishment of a new interagency center within the Environmental Protection Agency to increase innovative financing support for water systems across the country. The new center is charged with bringing innovative financial tools, such as publicprivate partnerships, to the water sector.

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• Establishment of a Rural

Opportunity Investment Initiative within the Department of Agriculture to connect projects to investors and improve access to USDA credit opportunities in order to catalyze rural investment opportunities for the public and private sectors.

• Promotion of global investment in the U.S. infrastructure market through the SelectUSA Investment Summit, an event held in March 2015 to connect leading international investors with the U.S. business market.

In addition, the Administration announced that in its forthcoming budget it will propose the establishment of a new municipal bond, Qualified Public Infrastructure Bond. QPIBs will extend the benefits of municipal bonds to P3 financing for airports, ports, mass transit, solid waste disposal, sewer and water, as well as for more surface transportation projects.

U.S. Labor Department Updates Definition of Spouse for FMLA Purposes Employers covered by the Family and Medical Leave Act soon must provide family-leave rights to workers in legal, same-sex marriages, regardless of where they live. The U.S. Department of Labor, in a new rule, changed the existing “state of residence” rule to a “place of celebration” rule for the definition of spouse under the FMLA regulations.

That is, the new rule changes the regulatory definition of spouse to the law of the place in which the marriage was entered into, as opposed to the law in which the employee resides.

DOL issued the rule change in order to comply with the U.S. Supreme Court ruling in United States v.

Windsor. That ruling struck down

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the federal Defense of Marriage Act provision that interpreted “marriage” and “spouse” to be limited to opposite-sex marriage for the purposes of the federal law. The FMLA entitles eligible employees of covered employers to take unpaid, jobprotected leave for specified family and medical reasons.

A covered-private sector employer is one with 50 or more employees in 20 or more workweeks in the current or preceding calendar year. Eligible employees may take up to 12 workweeks of FMLA leave in a 12-month period. The definition change means that eligible employees, regardless of where they live, will be able to: • Take FMLA leave to care for their lawfully married same-sex spouse with a serious health condition.

• Take qualifying exigency leave due to their lawfully married same-sex spouse’s covered military service.

• Take military caregiver leave for their lawfully married same-sex spouse.

This change entitles eligible employees to take FMLA leave to care for their stepchild (child of employee’s same-sex spouse) regardless of whether or not they provide day-today care or financial support for the child. This change also entitles eligible employees to take FMLA leave to care for a stepparent who is a samesex spouse of the employee’s parent, regardless of whether the stepparent ever stood in place of the parent to the employee.

The new rule took effect on March 27, 2015. For additional information on the FMLA revisions, including a fact sheet and frequently asked questions, see http://www.dol.gov/whd/fmla/ spouse/faq.htm.

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FAR Council Issues Contract Clause for Minimum Wage on Federal Contracts Starting this year, construction contractors and subcontractors with contracts covered by the Wage Rate Requirements (Construction) statute (formerly known as the Davis-Bacon Act) will be required to pay their employees no less than $10.10 per hour. On Dec. 15, 2014, the Federal Acquisition Regulatory Council published an Interim Final Rule and request for comments on a proposed rule to implement Executive Order 13658, which President Obama published on Feb. 12, 2014. The interim rule establishes a new minimum wage for covered service and construction contracts of $10.10 per hour, which will be adjusted annually, by the Department of Labor. The rule does not excuse a contractor’s noncompliance with any applicable federal or state prevailing law or any applicable law or municipal ordinance establishing a minimum wage higher than the minimum wage established by the E.O. The rule also: • Prohibits a contractor from discharging any part of the minimum wage obligation under the E.O. by furnishing fringe benefits.

• Prohibits a contractor from making deductions that reduce a worker’s wages below the E.O. minimum wage rate unless the deduction qualifies as a deduction required by federal, state or local law, such as federal or state withholding of income taxes.

• Establishes that wage payments to workers are to be made no later than one pay period following the end of the regular pay period

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in which the wages were earned, and that a pay period under the E.O. may not be longer than semimonthly.

• Requires the contractor to notify all workers performing work on, or in connection with a covered contract of the applicable minimum wage rate under the E.O. • Delineates the records that are to be kept by contractors.

• Prohibits any person from discriminating against any worker because the worker has filed a complaint, instituted or caused to be instituted a proceeding, or has testified or is about to testify in any proceeding intended to investigate or implement the rule.

• Provides that the contractor and any upper-tier subcontractor are responsible for the compliance of any subcontractor or lowertier subcontractor with the E.O. minimum wage requirements, whether or not the contract clause was included in the subcontract.

• Addresses enforcement of the E.O. requirements and details the process for filing complaints, investigating complaints and the remedies and sanctions for violations.

• Addresses the handling of disputes concerning contractor compliance and identifies the DOL procedures for adjudication.

Contracting officers will include a clause in covered contracts and, if requested by the contractor and if appropriate, will adjust contract prices for the annual adjustments in the E.O. minimum wage. Contractors shall consider any subcontractor request, including requests by small businesses subcontractors, for a subcontract price adjustment due to the annual adjustment.

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Feature Chasing the Prize — Building Your Backlog Regardless of Market Conditions

by Gregg M. Schoppman As market conditions steadily improve, firms are slowly feeling more confident in their backlogs. It was not but a short time ago that predicting backlog was almost like picking the winning Powerball numbers. Not only was it a risky bet to make assumptions on future work, it was also as random and haphazard. Even with the being tagged “low bidder,” there was no certainty that projects would move forward. With a more stable economy, there is greater probability that projects will receive the green light.

Does building backlog have to be so dependent on market conditions?

Should every contractor consult the oracle the same time they develop their annual budget? Interestingly enough, there were plenty of contractors during the recession that defied this conventional wisdom. They did not fall victim with having to keep pace with the economy. For every uptick, contractors become glutton with work. With every downturn, contractors become as thirsty as the lost person in the desert does. Why do some firms defy this trend?

in predicting the future, leaving that to the soothsayers. While the bestin-class firms probably do not have a shiny crystal ball, they do engage in examining data and making fact-based strategic decisions. Every day, the market or the “context” shifts. Whether it is something relating to net neutrality, immigration policies, stock valuations, new technology, employment rates, etc., the greatest leaders develop hypotheses on where to lay their chips. For instance, during the height of the “Green Movement,” firms scrambled to become LEED accredited professionals. While no one can argue the importance of being environmentally conscious, how many firms did this to follow the pack? What about the first firms that were engaged in green before green was the paradigm of the day? For every firm that is just getting on board with sustainability, there are other firms that are finding the new green. Is that purple? Is that magenta? Whatever the trend might be, leaders are not simply concerned with keeping up with their peers but using

Strategy Comes First One of the first characteristics that these firms have is a strong understanding of market conditions and more importantly which direction the wind is blowing. It is easy to follow the market leaders and simply fall in lockstep by doing the work that is vogue today.

The truly great firms “read the tea leaves” or more importantly do the research. Some people put little stock

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data to chart a new path, following the old adage “If you are not the lead dog, the view is always the same.”

Relationships Instead of Projects The second trait that best-of-class firms have when it comes to breaking away from the gravitational pull of the market is a focus more on strategic relationships than projects. It is easy to be sucked into the vortex associated with volume obsession. In fact, developing relationships is a much longer proposition. However, assuming a firm has done the requisite research on the right markets with the right opportunities, developing relationships becomes a much easier prospect.

For instance, this is the equivalent of hunting with a shotgun, blasting away at anything that moves in the woods. On the other hand, hunting with a specific target in mind, might take longer but by carefully sighting in and with a patient approach, the bounty is often worth the extra time. Additionally, firms that “blast away” at projects often become commoditized and valued solely on price. There is hardly differentiation in this type of setting. Firms that develop relationships have the ability to learn critical drivers, particularly buying trends associated with customers.

An electrical contractor that develops strategic relationships in the medical community quickly learns the keys are patient safety and infection control. Developing an appropriate value proposition around these tenets tend to illustrate a contractors longterm value rather than being the lowest number on bid day.

Figure 1 — Proactive and Reactive Business Development

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the firm’s value is further amplified.

Lastly, use the opportunity to get market intelligence. Whether it is on how the competition serves this customer’s needs or how they see the long-term viability of the market, never discount an opportunity to gain more data to support your firm’s strategy.

How Do You Measure Up?

Figure 2 — The Project Pipeline Simply put — as portrayed in Figure 1 — true business development leaders are proactive and leave the reactive project chasing to the people simply following the market.

Additionally, relationships shouldn’t be exclusive to the general contractors, construction managers or end users that make the final decisions.

Leveraging the key relationship of influencers is also important. This might include key members within a niche or marketplace such as designers, engineers, bankers, financiers, etc.

Think of this as fishing — one might fish off a boat, another might use a net, another might troll the flats. What if there were lines in all of these areas?

Furthermore, it is easy to be an industry friend when times are good, especially when everyone knows a particular influencer holds the keys to the city.

Deep relationship ties extend both when times are good to when times are bad. Keeping relationships fresh is challenging, but the best contractors fail to abandon someone simply because they might be down. If a market sector has promise and if an influencer has similar strategic aspirations, it might become the marriage made in heaven.

Why Should You Win — An Introspective Look How often do firms ask themselves, “Why should we be selected?” Taking an introspective examination of one’s firm and what they offer should be done on a routine basis. For instance, what does your firm do that Brand X does not? Conversely, what does Brand X do that you do not? This is not espousing corporate espionage but seemly forcing the firm to ask their customers, what they like and what they don’t like. One T H E

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Building backlog should not be limited to the dollar value associated with contract awards. It is easy to get lulled to sleep when that is the only “dashboard indicator light.” Firms should look at the “available lines in the water” as well as what has been hauled in the boat. For instance, how does the firm stack up in terms of potential opportunities? Figure 2 examines the business development process much like a civil contractor would look at stones passing through a sieve. Not every firm in the market will become a customer but are we tracking the potentials and applying some sort of metric. From the time a potential customer is identified, how long does it take to get an opportunity? What is the firm’s success rate? Rather than examine the usual metric of estimator “hit rate” here is an opportunity to gauge a firm’s “marriage rate.”

Best-of-class firms utilize some sort of CRM system to not only help define these relationships but also attach probabilities to help gauge the “health”

quick way to become a commodity is to simply not ask. Sometimes, firms take an “ignorance is bliss” perspective, mainly because they are afraid to confront the brutal feedback. We may not like the feedback but the moment the customer stops providing it, is also the moment that you no longer have a client. It is also important to remember that if you are not asking your customer what they like or don’t like about your performance, rest assured that your competitor is asking. Consider a process at the conclusion of projects that provides for constructive feedback: • What did we do the best on this project?

• What should we stop doing as a course of business or operations?

• What will make you a raving fan?

• What is your favorite thing that one of your vendors — other than us — does for you?

• How does your firm feel about the future in the market?

First, keep it simple. No one likes surveys and long and verbose ones scare people away. Make this a safe zone — avoid being defensive when the feedback is received.

Secondly, thank them for the feedback — it takes courage to give constructive criticism.

The natural inclination is to feel as if these comments require a defense. The best defense will be WHAT YOU DO WITH THE FEEDBACK! If you make no changes, the customer will feel as if it fell on deaf ears.

Figure 3 — The Zipper When they see transformation,

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of the backlog. For instance, a firm may have $2 million in backlog but with its burn rate it might churn through that backlog in three months. What is the prognosis based on the relationship indicators? While there is no certainty, a president or CEO can rest a little easier knowing that the 35 “live prospects” in the hopper have a 75 percent probability of yielding something within four to six months. No crystal balls or stargazing but simple mathematics to provide some predictive indices for the business leaders.

The Zipper In many firms, client management often resembles a coconut telegraph reminiscent of the days of Gilligan.

Crude, old fashioned and highly unreliable. Furthermore the relationships might also be somewhat siloed — like the telegraph, there is only one cable running at any one time.

For some firms, one estimator may know a procurement director and the relationship barely extends any further.

Yet, the procurement director is but one

person in an organization of thousands with multiple offices in a county, city or state. Consider the “Zipper.” How well do you know your customers? How deep are the relationships and ties?

Draw them out. If they are a firm’s best customer, why does only one person have a connection. The zipper is hardly connected to make anyone feel secure.

Figure 3 on page 7 illustrates the zipper.

The zipper may also have multiple forks or legs. For instance, if a firm has multiple offices, how should the firm penetrate multiple assets? How can the zipper be replicated with satellites? The stronger the relationships, the stronger the zipper, and more importantly, the true appreciation for a firm’s value to that customer.

The one inalienable truth to successful backlog building regardless of the market conditions is the fact that the best-of-class firms have people within them that always view themselves as “Customer Managers.”

Regardless of where they sit — whether it is the field, accounting, or project management — the market leaders

have instilled a business development mindset into everything they do. Simply put, everyone in the firm is responsible for sales, even if that simply means selling the firm through its associates’ actions every day.

As a principal with FMI, Tampa, Fla., Schoppman specializes in the areas of productivity and project management.

He also leads FMI’s project management consulting practice. Schoppman was a featured presenter at SUBExcel 2014 in New Orleans and at SUBExcel 2015 in Seattle. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 6361259 or gschoppman@fminet.com.

Feature Not All Strategy Is Good Strategy — Fatal Flaws to Avoid

by Gregg M. Schoppman Strategic planning often becomes the annual sojourn that firms take in an effort to define their future. While some strategy takes the form of annual business planning, other firms embark upon the dubious task of charting the next decade. Strategic planning can be exhausting, but most would agree it provides an excellent platform to take a 30,000-foot perspective on one’s business and also make important course corrections. However, not all strategy is good strategy. There are plenty of practices and pitfalls to avoid when crafting a firm’s overarching strategic plan.

IN THIS ARTICLE . . .

• Vision, mission and core values are the foundation for which firms should strive to become.

• A vision without an action plan is empty.

• Spreading activities among the firm aids in accountability and helps ensure buy-in.

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Vision, Mission and Values Are Guideposts — NOT Suggestions Firms will dedicate enormous amounts of time to interview their people, survey their customers, craft their strengths/weaknesses/ opportunities/threats and ultimately draft a vision, mission and core values that will serve as the guiding light for the firm, forevermore. And then Monday comes. Back to work to fight the fight and catch up on lost time, especially after a three-day retreat. The vision, mission and core values are the foundation for which the firm should be striving to become. So often, these glamorous words adorn the back of a business card or even adorn the walls of the conference room but rarely do they see the light of day. Put another way, live the vision, mission and core values and do not live a “parallel life.”

One quick test to ensure you have the right vision, mission and values — ask someone in your firm to recite them.

If it doesn’t roll off their tongue with fluidity or if they grimace when they cobble some words together, you aren’t living that vision, mission and set of core values.

Vision Requires Action Not Empty Platitudes One of the biggest falldowns associated with the strategic planning process is forgetting that in order to achieve the vision, there must be action! Fluffy words that lack substance only serve to undermine an organization. If a firm sets out to be “The premiere contractor in the Midwest,” what are they doing to achieve that vision? What action plans have been established within

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the firm to make that vision come alive?

Action planning can also be exhausting but this is where the rubber meets the road. A vision without an action plan is empty.

Urgent Versus Important It is easy to kick the tin can down the road when it comes to strategy. When pressed with urgent tasks and the inevitable firefighting that accompanies the business of construction, it is easy to get sidetracked. The tin can, however, can be kicked for only so long. Important tasks such as training, development, and succession planning require attention and by action planning the firm can at least identify critical timeframes where decisions or tactical items must be dealt with.

Divvy the Load So often, a sole proprietor or group of partners puts together a plan, but fails to get the critical traction the plan requires because other members of the firm were not involved. While the vision, mission and values could be left to the ownership team, the action items that stem from that plan should be divvied up to stakeholders within the firm. By not spreading the load, the ownership team only increases the probability that the plan will fail due to their own plate being overloaded. Spreading the activities among key member of the firm and assigning due dates to aid in accountability, the firm helps ensure buy-in and also helps future up-andcomers take “ownership” in helping work on the business rather than simply in the business.

Fact-Based Analysis Provides the Stable Foundation In this data-driven world, there are no shortages of resources that can help a firm make the right decisions.

While leading with one’s gut may have served the leader in starting the

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entrepreneurial enterprise, sustaining a business in this frenetic marketplace will require more than a hunch. Some of the considerations a firm should make during its planning process include: • Customers — What do they like?

How are they buying now? How will they buy in the future? What new markets are the current customers in? Who are new customers the we should be looking at?

• Competitors — Who are they? How are they structured? Why do our customers select them — what makes them special? What is their market share? What is our market share? How “healthy” are they?

• Climate — What regulations will influence our business? Is the current market likely to continue or is there a cliff? How will labor conditions affect my business?

• Company — What makes us special?

Why do people like (or not) working here? What is our succession plan (at all levels)? Do we have direction?

Keep Calm During the recession, many firms abandoned their strategic plan. It was as if the vision, mission and core values were only viable if the market conditions were positive. A vision, mission and values — as well as the subsequent action plan — should stand the test of the mightiest storm. The action plan simply gets adjusted. For instance, a firm should not have a vision that looks like this: “Brand X Construction — To Be the Leader in the Southeastern Concrete Market” * * Assumes perfect market conditions — in the event of a depression or recession we will simply be focused on being a bottom feeder focused only on low bid work with no appreciation of our customers

This is why the fact-based analysis is so important. Decision about the vision, mission and values shouldn’t be made hastily, off the cuff or viewed as “some grouping of cool adjectives that make us look cool but really have no substance.”

Know When to Pull the Rip Cord Course corrections — these are times where the firm wants to maintain the vision, mission and core values but

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fears they lose credibility by changing the action items. While the vision remains static and constant, the action plans are always dynamic and everchanging. So there were some action items that did not come to pass. That doesn’t mean the plan was a failure.

It simply means the firm must make course corrections. Even the best laid plans require adjustment. Consider Super Bowl winning teams, armies hitting a beach head or businesses that failed to capitalize on an idea. The best examples of each are those that stayed the course on their strategy but altered the tactics. They may have even been losing “the battle” but took the appropriate steps to achieve the win in the long term.

Many firms have a strategic plan but have no strategy. In an ever changing and, suffice it to say, volatile marketplace, it might be easy to discount a strategic plan by saying “Things change too much too plan.” But then again, how do you know if they are changing if there is no baseline to begin with? The best plans allow for fluidity and allow a certain level of flexibility.

However, firms without a vision are simply ships without a destination.

How would you recruit people to come aboard your ship without a true destination? Why would customers choose you if you don’t truly know who you are? The greatest strategy is the one that people can see exhibited through day-to-day operations and through the passion of its team.

As a principal with FMI, Tampa, Fla., Schoppman specializes in the areas of productivity and project management.

He also leads FMI’s project management consulting practice. Schoppman was a featured presenter at SUBExcel 2014 in New Orleans and at SUBExcel 2015 in Seattle. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 6361259 or gschoppman@fminet.com.

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Learn How to CHOOSE Your Best Customers Today’s subcontractors are turning the table and are choosing the best customers and projects on which to bid. Learn how with the FASA video-on-demand, “How to Choose the Right Customers (and Get Them to Select Your Bid)” (Item #8071).

Presenter Tim Moriarty, Textura Corp., Chicago, Ill., a member of Textura’s Product Management Team, explains the challenges general contractors have obtaining bid coverage on their projects and how subcontractors can make their firms a preferred partner by making the GC’s jobs easier.

“How to Choose the Right Customers (and Get Them to Select Your Bid)” (Item #8071) is $65 for ASA members and $95 for nonmembers. Order online.

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Feature Benchmarking: A Road Map to Growth

by Hiromi Young, CPA, CCIFP, and Duwayne Sibley These days a great deal of emphasis is placed on selling more work. There are workshops to teach sales skills, how to benefit from networking events, and creating a great marketing plan. Before subcontractors begin this process, however, they should ask themselves two questions: “Is my business ready to take on more work?” and “Am I financially balanced?”

The answer to these questions can be found with financial performance benchmarking, which is essentially the process of comparing a company’s current financial performance against its historical performance, industry standards, and top industry performers. It also can be done with top performers in other industries that share similar processes or operational characteristics. Benchmarking not only helps a company align its business goals with its operational and financial performance, but also provides a road map to uncovering continuous performance improvement opportunities.

Financial performance benchmarking isn’t a difficult task, so long as you’re able to consistently gather reliable comparable industry data and company data that demonstrates your company’s financial performance over a certain period of time. An important element of benchmarking is seeing the trends and improvements in your company’s financial ratios over time once the data is in a more visual format. Benchmarking can also provide insights to be used in forecasting future performance and capacity.

Financial benchmarks show both positive and negative trends, which allow you to detect and interpret underlying strengths and potential problem areas. For example, you can track the days of revenue in accounts receivable, which indicates the number of days it takes a company to collect

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outstanding invoices. A low number shows a relatively fast collection, thus greater liquidity. A higher number may indicate constrained cash flow and a need to borrow to pay obligations as they become due. If your billings are processed in a timely manner, you should expect this number to be close to what the payment terms specify.

A higher number may be indicative of a staff shortage, performance issues, inefficient billing processes, or communication issues between the billing department and operations. A diligent investigation of the system control and operational process related to the identified issue will offer solutions. By doing this type of analysis, your company may discover that it will require more money to finance growth if you have a relatively high number of days in accounts receivable.

In order to demonstrate utilization of the benchmarking process, assume you’re the owner of a $10 million mechanical subcontractor and your goal is to increase revenue to fully utilize current available resources or to increase revenue as you hire additional resources. The first step is to assess your resource capacity — employees, equipment, and finances — and compare your current performance to your ideal resource utilization. Secondly, what volume of work should your company have in backlog to maintain your planned operations or potential expanded operations? Here are some benchmarking ratios subcontractors may find useful:

given sales level. To measure efficiency in using working capital, you may use this ratio to compare to your own historical performance or against high performing companies in the same industry. A low ratio may indicate that assets aren’t being used effectively and a high ratio may indicate a need for additional working capital to support future revenue.

Revenue to Working Capital (Working Capital Turnover)

Revenue to Equity

This is the product of total revenue divided by working capital (the net of current assets minus current liabilities) and indicates how well a business is using its working capital to support a

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Return on Assets (ROA) The return on asset ratio shows the percentage of profit that a company earns in relation to its overall resources (total assets). ROA gives an idea as to how efficiently management is using its assets to generate earnings. This benchmark may use either pre-tax or after-tax profit so long as it’s calculated consistently.

Debt to Equity The debt to equity ratio presents the relationship of the owners’ investment in the company contrasted with the financing provided by outside creditors.

Bonding agents are particularly interested in this ratio along with working capital and gross profit. It is imperative to proactively manage this ratio if you’re planning to increase contract revenue or backlog, which requires additional bonding capacity.

With this ratio, it’s also important to evaluate the impact of any amounts due to owners that is classified as debt and adjust accordingly based on the nature of those debt agreements.

The revenue to equity ratio is another metric to measure net asset utilization and shows how well a company uses equity in operations. It is calculated by dividing revenue by owners’ equity.

Sureties recently said that a ratio of 10:1 or less is what they are looking for

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and a ratio of up to 15:1 is generally considered acceptable. A high ratio may indicate a highly leveraged position, whereas a low ratio may indicate a conservative approach to obtaining contract work while providing a lower than necessary return to their owners in the form of distributions. If you are planning to increase backlog and revenue, you will need to keep earnings in the company to demonstrate that you have enough equity for the additional future work.

Revenue to Net Fixed Assets and Depreciation Expense to Revenue These ratios may be used to identify underutilized fixed assets and lead you to more closely manage your balance sheet. A low ratio of revenue to net fixed assets and a higher ratio of depreciation to revenue may be indicative of underutilized equipment such that you may consider alternative uses or even selling certain excess equipment.

After examining the above ratios and other nonfinancial factors — such as the time a specific piece of equipment is actually used divided by the time it’s required and able to work (equipment utilization ratio), or the hours a project manager actually worked on projects divided by the hours a project manager is required and able to work (project manager utilization ratio) — you might conclude you have excess capacity and should look for ways to take on additional work with the resources you already have. After making this determination you should hold discussions with your bank and surety regarding your plan of expanded operations and look to see if your other ratios are in line with expansion opportunities or if such expansion will require more capital.

An effective road map to making wise decisions and realizing financial

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success requires continuous measurement and monitoring of your financial performance using industry benchmarks. As market conditions change, lenders and sureties shift their focus and increase scrutiny on your financial well-being and performance and may impose tougher financial covenants. Benchmarking enables you to adapt to new requirements much quicker than your competition, which most likely isn’t similarly monitoring their business. It also gives you the ability to negotiate attainable financial covenants with your lender or surety because you’ve prepared for the change or are performing within an upper tier of your industry segment.

While not an exclusive list, the following ratios, combined with those discussed above, often are used during benchmarking in the construction industry: • Liquidity ratios measure a company’s ability to repay its outstanding short-term obligations out of its short-term assets.

• Current ratio equals current assets divided by current liabilities. In the recent recessed economy, banks or sureties generally require a higher current ratio to provide a cushion to withstand unexpected conditions.

• Working capital is defined as the difference between current assets and total current liabilities and is a common measure of a company’s liquidity, efficiency, and overall financial health. Positive working capital generally indicates a company is able to pay off its shortterm liabilities with the use of the liquid assets on hand. This is a very important measure to manage cash flow, which is highly susceptible to becoming out of balance during a growth period.

• Leverage ratios measure a company’s ability to meet its longterm debt obligations.

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• Revenue to equity equals annual

revenue divided by total equity.

A low ratio may be indicative of a conservative approach to obtaining contract work. Generally, a ratio of 15 or lower is considered acceptable.

• Credit management • Days in accounts receivable is calculated by dividing average net accounts receivable, excluding retention receivable, by annual revenue and multiplying the result by 360 days.

• Line of credit available as a percentage of revenue is another metric to indicate if the company has a back-up plan to withstand fluctuations in cash balances as needed. The ratio is calculated by dividing the total line of credit (outstanding and available) by annual revenue.

Benchmarking is a powerful tool when consistently utilized and monitored over time to identify how your company is currently performing and compares to others, as well as its trajectory and potential areas of improvement. Real improvements can prepare your company for growth, but these improvements can only come after making thoughtful business decisions based on a careful analysis of the available data.

Hiromi Young is a senior manager with Moss Adams LLP and provides assurance and advisory services to closely held contractors and building material manufacturers/distributors in the Greater Bay Area. She can be reached at (707) 535-4154 or hiromi. young@mossadams.com. Duwayne Sibley is a senior manager with Moss Adams LLP and provides construction companies with tax consulting services ranging from gross receipts and compensating tax to incentives and credits, energy incentives, and property tax. He can be reached at (505) 878-7294 or duwayne.sibley@mossadams.com.

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Feature Backlog — A Contractor’s Best Friend or Worst Enemy?

by Kevin M. Waldron

Very few contractors have the ability or desire to double their awarded contracts, known as backlog, in less than two months or win a $6.1 billion contract that triples its revenue from the previous year. Perhaps the most astonishing thing about one contractor that actually did this in 2014 is that it didn’t stop there. This publicly traded company, which happened to be located outside the United States, followed that first huge deal with an even bigger one, a $40 billion project. Only months later, though, the company’s share prices dropped nearly 70 percent, the CEO resigned, and the board carried out a complete restructuring and cost-cutting.

What does a large contractor located outside the United States have to do with typical U.S. contractors? This contractor’s situation

IN THIS ARTICLE . . .

• Potentially destructive risk can be lurking in contractors’ backlogs.

• Surety bond underwriters are well aware of risks that can bring firms to the brink of ruin.

• What do underwriters look for when assessing a contractor’s ability to manage backlog risk?

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demonstrates how a lot of risk — potentially destructive risk — can be lurking in contractors’ backlogs. What can seem like incredible opportunity can bring even the biggest, most successful firms to the brink of financial ruin.

Surety bond underwriters are well aware of this potential risk. The health of a general contractor’s backlog should also be of concern to subcontractors who are counting on getting paid by the general contractor in a timely manner.

Backlog can often serve as a key predictor for how general contractors will perform over the short to medium term since it can be used to estimate revenues and profits for the next 12 to 18 months and identify potential cash flow and other operational problems.

Overall margin in backlog is even more important this year since 2015 appears to be a year of growth and opportunity. Dodge Data & Analytics has estimated that the 2015 total value of construction starts could be $612 billion, a 9 percent increase from 2014. The Associated Builders and Contractors’ numbers align with these, with the ABC calling for a 7.5 percent expansion in nonresidential construction alone.

What do surety underwriters look for when assessing a contractor’s ability to manage backlog risk?

WIP Schedules: During the annual, or perhaps even quarterly, underwriting process, surety underwriters will typically ask the contractor for a work in progress schedule.

This schedule provides a projection of backlog timing, size, margin and may include a cash flow

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analysis. As the contractor carries out the actual work, the underwriter can track its progress and see if margins are holding up.

Balance Sheet Forecasting: Underwriters can generally estimate a balance sheet for about the next 12 months, based on the contractor’s forecasted profits from their backlog and known tax and capital retention rates. Contractors often will have their own balance sheet forecasts, although these may turn out more optimistic than the underwriters’ estimate.

On-the-Ground Assessments: Surety underwriters may not know all of the intricacies how to build a particular construction project, but they can visit a worksite and tell if it’s productive, organized and well run.

Underwriters also talk with contractors and employers, at the worksite and in the office, and the consistency of what is heard during those conversations is helpful in assessing the quality of staff and how well the contractor is handling backlog.

Community Relationships: Underwriters often volunteer in their communities and participate in industry and professional associations. They know and work with professionals in related services, such as banking, accounting, and the law. By tapping into these networks, they can gain relevant information on contractors and the way they conduct their business.

Contractors may wish to consider implementing the following best practices in an effort to better manage their backlog risk.

Stick with your expertise: Many contractors specialize in a single discipline, such as heavy highway, HVAC, electrical, or another specialty,

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and will tend to stick with projects in their discipline, as well as within a particular geographical footprint.

This practice allows them to work with subcontractors and owners that they know and feel confident with.

Be cautious about expansion: Contractors exploring new disciplines should follow the crawl, walk and then run approach. Starting slowly and small and getting familiar with the new type of work and new participants can help contractors efficiently tackle the learning curve and any bumps along the way.

Work with reputable subs: One of the best practices a contractor can follow is to bring only trusted subcontractors onto a job — either those they’ve worked successfully with in the past or who come with sterling reputations. They should also consider implementing risk mitigation tools, like surety bonds, in connection with subcontractors.

Use data to your advantage. The contracting business is as sophisticated as any other business today when it comes to the collection and analysis of data. By extracting and managing

data from field operations on a weekly, daily or even a real time basis, it can help quickly identify and resolve any problems.

Understand your capacity: When it comes to the timing of adding new projects to their backlog, contractors should be knowledgeable about how their infrastructure will respond. From project management to accounting, tracking, field leadership, and other resources, how will each respond to the new work at any point in time?

Know your cash flow: Well-run contractors also know how their backlog will impact cash flow. Contractors should consider keeping a cash flow horizon — a critical-path view of what projects come on and when, with particular attention to where high points of cash demand will be. After all, a contractor may be able to digest a slightly larger than normal backlog over two years if spread out. But what if the projects start and peak all at once?

Prepare for adverse events: Construction is risky and contractors should build and maintain a financial structure that addresses such risk.

New On-Demand Video from FASA

Contractors should also build strong relationships with their financial partners. This relationship may be helpful if a contractor needs to set up a project-specific bank line or financing should their own resources be insufficient. General contractors will also want to build strong, transparent relationships with reputable, highly rated surety bond providers to offer an additional level of protection to owners and subcontractors.

Most contractors may never have to face the risk of taking on a substantial backlog, like the contractor mentioned at the beginning of this article, but all contractors can learn the lesson that even more modest levels of backlog require risk management.

Kevin M. Waldron, Vice President of Chubb & Son and Director for Chubb Surety, can be reached at kwaldron@ chubb.com.

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Feature Disarming A Dozen Dangerous Subcontract Clauses — Part 2

by Dan McLennon The following is the second of three articles examining how trade contractors may use conditional bids and proposals to set the stage for negotiations, legal arguments, industry standard ConsensusDocs and American Institute of Architects model subcontract forms, and fairness arguments to negotiate more favorable terms in subcontracts. Part 1 appeared in the March 2015 edition of The Contractor’s Compass.

This article discusses negotiation tips for clauses on consequential damages, warranties, builder’s risk insurance, pay-if-paid, retention, and schedule cooperation.

Limit Potentially Disastrous Consequential Damages First, watch out for conflicting liquidated damages and consequential damages clauses. These concepts are mutually exclusive, and GCs should provide for one or the other, but not both. They are mutually exclusive because LDs are included because consequential damages are difficult to determine and prove, and the LDs are intended to remove that difficulty and provide certainty. The LDs should replace consequential damages, not supplement them. Also, LDs may be preferred over consequential damages because a subcontractor’s liability exposure is limited to a known amount, whereas “the sky’s the limit” with consequential damages, such as when a hospital, hotel, or popular resort is shut down due to construction defects and profits are lost for an indefinite period.

The last sentence in AIA’s A201 2007 section 15.1.6 demonstrates that a waiver of consequential damages should be used when the contract provides for LDs — it carves LDs out of the waiver and allows recovery for them. However, better for GC and subcontractors alike would be for GCs and subcontractors to preclude LDs and enter mutual waivers of consequential damages in their entirety.

Negotiating these clauses starts with educating the GC that it is in GC’s best interest to enter mutual waivers with

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an owner, such as set forth in section 15.1.6: § 15.1.6 CLAIMS FOR CONSEQUENTIAL DAMAGES The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes [Specific, waived damages listed.]

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

The mutual waivers make sense, because all sides give up something substantial — for owners it is loss of use of the property and profits that might have been earned, carrying costs, etc., and for contractors it is office overhead expenses, financing, loss of profits on other jobs contractor might have had, etc. — and lengthy, costly disputes are avoided or minimized.

Note, however that courts do not always give the AIA waiver language full effect, and best practice is to modify the clause. Some courts have interpreted the clause to waive only consequential damages for breach of contract or consequential damages incurred following termination of the contract. Language should be inserted

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to clarify that the waiver applies to any claim or cause of action of any kind or nature, and it applies whether or not the contract is terminated.

The ConsensusDocs fixed-price contract, form 200, commends a similar waiver of consequential damages: 6.6 LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES Except for damages mutually agreed upon by the Parties as liquidated damages in section 6.5 and excluding losses covered by insurance required by the Contract documents, the Owner and the Constructor agree to waive all claims against each other for any consequential damages that may arise out of or relate to this agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below.

[Specific, waived damages listed.]

6.6.1 The Owner and the Constructor shall require similar waivers in contracts with Subcontractors and Others retained for the Project.

If the GC is unable to negotiate waivers with an owner, then the subcontractor will be expected to indemnify the GC for the GC’s exposure to the owner for consequential damages caused by the subcontractor. However, it would still make sense for the GC and subcontractor to include waivers of consequential damages each might claim against the other.

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Be Sure to Limit Warranty Periods

Beware of Hidden Bombs in Builder’s Risk Insurance

Contractors typically believe that they warrant their work only for one year, unless longer periods are specifically required and set forth.

However, the A201 2007 warranty, section 3.5, and accompanying oneyear correction period, section 12.2, do not limit warranty periods, and the warranty actually lasts for the duration of the statute of repose — 10 years in California. Note the absence of any specified time period here, in section 3.5: § 3.5 WARRANTY The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. …

Builder’s risk, or “course of construction” insurance is a good thing. Without it, a subcontractor risks building the same work twice — the second time at its own cost — if the work is destroyed by fire or other calamity. If the work is destroyed, the subcontractor is still contractually bound to complete the work for the contract price. The subcontractor needs to escape this risk or provide for it.

Typically, the GC requires the owner to provide BRI covering all of the work, materials on site, and contractors’ equipment, along with demo and soft costs. The GC and the subcontractors should have in their contracts clauses that release them from completing the work if the required insurance fails to cover the loss, for whatever reason. Also, some owners shift to the GC and subcontractors the obligation to pay premiums and deductibles.

These can be substantial, and the GC and subcontractors must be sure to obtain and consider these amounts in determining their bid amounts.

Unlimited warranties are not necessary and will increase the cost of the work due to GC’s and subcontractors’ need to set reserves for them. However, the owner does not receive corresponding value, because such long warranties are not needed since most warranty work occurs within the first year following completion and tort and statutory remedies are available after that time. The ConsensusDocs section 3.8 on warranty and 3.9 for correction of work recognize this lack of value and provide: “The Constructor’s liability for such warranties shall be limited to the one-year correction period as provided in the section below.”

Caution Required for Contractor’s Conditional Obligation to Pay

The subcontractor will want to ensure that the GC has limited its warranties, such as by adding at the beginning of A201 section 3.5 “For a period of one year following substantial completion or for such longer period as required by the specifications,” or add a limitation similar to that in the ConsensusDocs, above.

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Contractors often try to force subcontractors to rely on the owner’s ability to pay as the sole source of funding for subcontractors’ work, removing the GC’s obligation to pay if the owner fails to pay — “Pay-if-Paid.” Beware of language like this: “In the event Owner does not pay Contractor for work performed

by Subcontractor, Contractor shall not be obligated to pay Subcontractor.”

While such clauses are not enforceable in California and many other states, some states do enforce them, so

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the subcontractor must be aware of its own state’s law on this issue. In California, the GC is obligated to pay for work provided under contract by the subcontractor after the GC has had a reasonable time to seek payment from owner. This is fair, because the subcontractor’s contract is with the GC, not the owner, and the subcontractor does not have the ability like the GC to vet the owner’s ability to pay.

GCs often define “reasonable time” to include all potential court actions and appeals. The subcontractor should seek to limit the amount of time considered reasonable, such as to one year following substantial completion.

Also, the subcontractor should be compensated for loss of use of the unpaid funds, so the subcontractor should negotiate for interest to accrue as long as the subcontractor was not at fault for causing the owner to withhold payment from the GC.

IN THIS ARTICLE . . .

• Part 2 looks at clauses on consequential damages, warranties, and builder’s risk insurance.

• Part 2 also examines clause on pay-if-paid, retention, and schedule cooperation.

• Part 3 will examine clauses on dispute resolution, claims, right to cure, and waivers.

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March 3-5, 2016 Hyatt Regency Miami, Florida

www.SUBExcel.com

Remove Retention Requirements Retention practices are among the most hotly contested in the construction industry. Owners and GCs say they need to withhold until the end of the project 5 percent to 10 percent of subcontractors’ progress payments to ensure that subcontractors complete the work without defects, and to ensure that the owner and GC will have funds with which to complete or repair subcontractors’ work if subcontractors do not. Subcontractors see this argument as contrived, because retained amounts are not needed and serve only to force subcontractors to finance part of the construction — subcontractors buy materials and pay for labor on the project, often to recoup those amounts a year or more after the work is done, if ever. Indeed, many GCs negotiate over and refuse release of retention based on what subcontracts see as fabricated grounds.

Subcontractors may argue that retention is not needed, because by contract and often by statute the owner and GC have the right to withhold amounts needed, plus a cushion, to remedy specific problems identified during construction, whereas retention is not tied to any particular issue.

The U.S. government has determined that retention is not needed, and no amounts are withheld as retention on federal projects. Similarly, no retention is withheld on highway projects contracted by the California Department of Transportation. By statute, no more than 5 percent retention may be withheld on any California public works project, unless specific limited exceptions are met.

Both the A201 and the ConsensusDocs provide for retention, however, the ConsensusDocs 200 provides for limited withholding and early release of retention: 9.2.4.1 after the Work is fifty percent (50%) complete, the Owner shall withhold no additional retainage and shall pay the Constructor the full amount due on account of subsequent progress payments; 9.2.4.2 the Owner may, in its sole discretion, reduce the amount to be retained at any time;

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9.2.4.3 the Owner may release retainage on that portion of the Work a Subcontractor has completed in whole or in part, and which the Owner has accepted. In lieu of retainage, the Constructor may furnish a retention bond or other security interest acceptable to the Owner, to be held by the Owner.

In addition to the limits on retention discussed above, the subcontractor might argue also that no retention be withheld on materials purchased and delivered to the site, because ultimately the cost of materials is simply passed through to the owner anyway, and the owner has separate warranty rights against the supplier.

Schedule Cooperation To give its best price, the subcontractor assumes that it will have continuous, uninterrupted access to its work spaces and be able to perform the work in efficient sequence. On the other hand, GCs want control over when and where subcontractors work.

Often GCs include clauses like this: “Subcontractor will prosecute the Work diligently through completion and will adhere to the progress schedule and any modifications thereto established by Contractor. Work shall be performed in the sequence directed

by Contractor.” Such clauses, however, allow GC to destroy subcontractor’s efficiency, such as by stacking trades and moving subcontractors from location to location, thereby escalating subcontractor’s cost to perform the work — without the right to extra compensation. These clauses increase the cost of the work, since subcontractors cannot give their best price due to schedule insecurity.

Subcontractor might push to replace offensive language with AIA’s A401-2007 words from section 3.1.1: The Contractor shall cooperate with the Subcontractor in scheduling and performing the Contractor’s Work to avoid conflicts or interference in the Subcontractor’s Work . ...

Follow the sentence above with this language from ConsensusDocs 750, section 5.2: In consultation with the Subcontractor, the Contractor shall prepare the schedule for performance

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of the Work (“Progress Schedule”) and shall revise and update such schedule, as necessary, as the Work progresses. Both the Contractor and the Subcontractor shall be bound by the Progress Schedule. The Progress Schedule and all subsequent changes and additional details shall be submitted to the Subcontractor promptly and reasonably in advance of the required performance. The Contractor shall have the right to determine and, if necessary, make reasonable changes to the time, order, and priority in which the various portions of the Work shall be performed and all other matters relative to the Subcontract Work. To the extent such changes increase the Subcontractor’s time and costs, the Subcontract Amount and Subcontract Time shall be equitably adjusted.

Part 3 of this article will examine negotiation tips for clauses on dispute resolution, claims, right to cure, and waivers.

Dan McLennon, managing partner, McLennon Law Corporation, San Francisco, Calif., has been in private practice since 1986. His legal career has focused on cases litigated in the State and Federal Courts in California, representing defendants and plaintiffs, alike. He has resolved hundreds of cases through mediation, arbitration and trial, and he has been awarded Martindale-Hubbell’s “AV” rating, the highest rating in legal ability and ethics as established by confidential opinions of members of the Bar. McLennon represents public entities, general contractors, subcontractors, suppliers, premises owners, manufacturers, professionals, corporations, and individuals by prosecuting or defending cases in the follow subject areas: insurance subrogation and equitable contribution among carriers; licensure disciplinary proceedings; mechanic’s liens and stop notices; partnership disputes; payment issues under construction contracts, including acceleration and delay claims; bond claims; commercial landlord-tenant disputes; construction defect actions; contract disputes; indemnity among contractors; insurance bad faith; unfair business practices, and business torts.

He can be reached at (415) 394-6688 or dmclennon@mclennonlaw.com.

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Legally Speaking The Art of Documenting Your Project in Today’s Technological World

by Jim Sienicki and Cindy Schmidt While there is no magic bullet and even perfect documentation cannot avoid all controversies, complete and accurate documentation can help subcontractors protect their legal rights, fend off disputes and monitor their projects. Attorneys know that documentation both describes and provides important information regarding a subcontractor’s job, and will frequently ask their clients whether they have documentation relating to an issue. A client’s answer can mean the difference between a favorable or unfavorable outcome. In today’s technological world, mobile devices such as smartphones and tablets, along with emails, texts and social media sites, can help subcontractors stay in the “I need to be documenting” mindset and assist subcontractors in recording site conditions, responding to inquiries and correcting problems “on the go” and in real-time as they arise. While these technological advances frequently result in increased productivity, they also provide new challenges for employers.

Subcontractors will benefit from understanding the art of documenting their projects in today’s technological world.

One of the most traditional and yet crucial types of documents that a subcontractor must still understand is its subcontract. While subcontracts address a wide range of rights and responsibilities between parties, the most important provision is the signature line. This is because who a company subcontracts with influences how the entire subcontract proceeds; therefore, subcontractors must research their potential clients, confirm financing, check references and trust their instincts — the only thing worse than no client is a non-paying client! A subcontractor will want to ensure that it has copies of all documents referenced in the subcontract and the construction contract, which is usually incorporated by reference, including general and specific conditions, plans and

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specifications and insurance documents or related bonds. Subcontractors should review deliverable requirements to ensure completion, creation, and retention of all contractually required documents and review all contractual notice requirements and be prepared to comply with them (including changed conditions, delay claims and extra work).

A subcontractor will also want to become familiar with any plan and specification modeling to be used.

Some of the “key” subcontract clauses include (1) “pay-if-paid” or “pay-whenpaid” clauses; (2) indemnification clauses; (3) mediation or arbitration clauses; (4) insurance clauses; (5) responsibility for site conditions and unforeseen risks clauses; (6) liquidated damages clauses; and (7) scheduling clauses. An attorney can help a subcontractor understand these clauses and may be able to assist in negotiating terms that are more favorable to the subcontractor based on the unique needs of the subcontractor and the nature of the project. For example, an attorney can help a subcontractor understand how the indemnification and insurance clauses work in tandem, the risks associated with the subcontract and how to limit noninsured indemnification obligations. It may be necessary for a subcontractor to review the underlying insurance policies with its insurance agent to determine if the subcontractor’s coverage is sufficient, and a subcontractor may benefit from sending the insurance provisions of a prospective subcontract to its insurance agent to ensure the subcontractor’s policy covers against potential liability. An attorney can also assist a subcontractor in understanding which additional subcontract provisions would be helpful to draft into the agreement.

Beyond traditional subcontracts and sub-subcontracts, “documents” include any number of other “papers” (including electronic versions) such as daily site logs, meeting minutes, communications, lien notices and papers regarding

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changes, delays and extra work. A subcontractor should keep all material documents (including texts, emails and other material communications) in its project file, putting all project emails in one folder and all important texts, photographs, videos and other records in one location. Subcontractors should also have a home office set up to store billing and pay applications, lien notices, wage information, and immigration documents.

Importantly, subcontractors will want to create and keep an accurate daily site log. This can be done using traditional pen and paper or with a mobile device.

A subcontractor may choose to use a template for entering its daily logs which includes items such as the following: name of the subcontractor; date; job name and number; field notes; weather and temperature; personnel on site; changes, delays and extras (including authorizations, amounts and materials purchased) and rental equipment on site (including name of lessor and rental rate). During pre-construction, the subcontractor will want to note the site conditions, parties on site and the work planned. During construction, the subcontractor will particularly want to outline progress, disruptions, impacts, problems or delays. Photos or videos may also be used to supplement the daily logs.

Meeting notes are also important documents. Subcontractors should ensure that they are accurate and circulated in a timely manner. The notes should be specific, mention all issues discussed during the meeting and outline any decisions or resolutions.

Upon receiving minutes, a subcontractor should timely review them and correct any errors. Subcontractors will also want to note any issues with regard to attendance and schedules. Mobile devices may be used to document meetings (such as through the use of smartphone dictation and video recording apps), even if these are not the official minutes.

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Changes in the scope of the project should also be documented accurately and contemporaneously with the change.

If a change is requested, a subcontractor should always submit a written change order to all relevant parties and prepare all documentation required by the subcontract. While the change order can be based on an estimate, it needs to generally describe the work and costs. A subcontractor should make sure that change orders are signed by the relevant parties, if possible, and if they cannot be signed then alternatively find a way to document the consent of the owner and general contractor.

Subcontractors should not merely rely on course of conduct, industry practice, oral promises or witnesses and should not hesitate to document any additional issues, as needed. Subcontractors should always send an email, text or other communication as soon as possible to confirm oral directions or agreements and include all relevant parties.

Subcontractors should also stay apprised of deadlines for recording liens and serving bonds or stop notices, and keep diligent records of these matters. An attorney can assist subcontractors in understanding their state’s laws regarding liens, public bond claims, private bond claims and stop notices, as corresponding recordation, demand and service deadlines can vary.

Deadlines may be calculated from the date of the certificate of occupancy, the date the subcontractor ceased work on the project, the date after which services were provided to the project or something else. Subcontractors must also keep records of any contractual notice requirements, and while a subcontractor may, in certain circumstances, be able to recover after failure to comply with a contractual notice requirement, it will likely be more costly, and not cost-effective.

If issues begin to arise and a subcontractor suspects problems with a project, it can call an attorney to assist it through the process. In the event of a dispute, subcontractors should document all matters surrounding the dispute to the best of their ability.

An attorney may be able to assist a subcontractor in recovering under the terms of the subcontract itself or, alternatively, under a non-contractual remedy such as mistake, actual or constructive knowledge, cardinal change, waiver, or an “Act of God.” In the event of a dispute, technology, including mobile devices, can be particularly helpful in documenting things such as obstruction

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or delay, on-site progress, site conditions and substantial completion. Emails and text messages can also be useful documentation tools, especially because contemporaneous evidence is oftentimes the most convincing evidence. Because litigation disclosure obligations may include emails, texts and social media posts, subcontractors should be cognizant not to send an email or text message that they would not want a judge, jury or their mom to see. This includes jokes, comments or admissions regarding work on the project. Instead, subcontractors should limit the use of social media to promote the company, demonstrate its capabilities, show positive reviews of clients and employees, highlight its accomplishments, or showcase a new and interesting project.

Subcontractors should also develop and adopt a formal document retention and social media policy. This includes a comprehensive document retention policy addressing social media and other communications. Subcontractors should notify all of their employees of the social media policy and of their obligations under it, going over the policy with the employees one-on-one or during a company meeting. Subcontractors will need to make sure that the policy upholds all parties’ rights and liabilities (in other words, the same rules that apply elsewhere) and specifies the consequences for failure to follow the policy. The policy should be published to all employees on the subcontractor’s payroll and should be adaptable, as technology is ever-changing.

Complete and accurate documentation can help subcontractors effectively manage their projects. With policies and procedures in place to obtain, understand and retain documents, subcontractors will bolster their ability to successfully navigate the new technological age.

Jim Sienicki is a partner with Snell & Wilmer L.L.P., Phoenix, Ariz., and Cindy Schmidt is an associate with Snell & Wilmer L.L.P., Tucson, Ariz. Founded in 1938, Snell & Wilmer is a full-service business law firm with more than 400 attorneys practicing in nine locations throughout the western United States and in Mexico. The firm represents clients ranging from large, publicly traded corporations to small businesses, individuals and entrepreneurs.

Sienicki’s practice involves construction law representation and litigation, procurement law and bid protests,

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general commercial litigation, creditors’ rights and other litigation, alternative dispute resolution and appellate matters. He was the head of the firm’s construction practice group from 20002013. Sienicki can be reached at (602) 382-6351 or jsienicki@swlaw.com.

Schmidt’s practice is concentrated in commercial litigation and includes experience with general contract disputes, insurance defense, guaranty enforcement actions, receiverships, settlement negotiations and various real estate disputes involving leases, purchase and sale agreements, easements and unlawful possession.

She can be reached at (520) 882-1278 or cschmidt@swlaw.com.

Learn About Benefits of Technology & Performance Data Learn about the benefits of technology as it relates to your firm’s bottom line in the videoon-demand, “The Value of Technology and Data Management for Construction” from the Foundation of ASA. Presenter Michael Pink, founder and CEO, Construx Solutions, LLC, Atlanta, Ga., discusses the technological landscape of the construction industry and illustrates how subcontractors can minimize the risk of budget overruns and delay by studying performance data. Pink also explains which data can be most useful, how it should be obtained, and what to do with the data once it is captured.

Construx Solutions, LLC, is a software technology and consulting firm dedicated to assisting clients on improving performance, productivity, and profit margins within the construction industry.

“The Value of Technology and Data Management for Construction” (Item #8073) is $65 for ASA members and $95 for nonmembers.

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ASA/FASA Calendar April 2015

June 2015

14 — Webinar: Non-Negotiators’ Strategies for Negotiating Outstanding Results

9 — Webinar: Bidding from the Other Side: How GCs Use GradeBeam to Find Subcontractors

Coming Up . . . in the May 2015 Issue of ASA’s

May 2015 March 2016 3-5 — SUBExcel 2016 Miami, Fla.

Contact information for all ASA and FASA events/programs: www.asaonline.com education@asa-hq.com

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To advertise in The Contractor’s Compass, contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com

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12 — Webinar: Managing the Life Blood of Contracting - Cash Flow

Theme: Eliminating Retainage • How to Negotiate Retainage • The Retainage Conundrum—The Industry Needs a Paradigm Shift • Disarming a Dozen Dangerous Subcontract Clauses—Part 3 • The Complexity of Protecting Lien Rights on Retainage • Legally Speaking: Eliminate or Reduce Financial Impact of Retainage

Look for your issue in May. Past Issues: Access online at www.contractors knowledgedepot.com

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JUNE 5TH , 11:08 A .M .

A STAGGERING STATISTIC INSPIRES A LIFE-SAVING RULE IN AN INS TANT,

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When a recent safety webinar revealed that 280,000 drivers are involved in serious accidents every year, Calvin Berger of Calberg Contracting took CNA’s recommendation to heart, and posted placards restricting cell phone use in each of his company’s vehicles. Now Calberg Contracting is filing fewer claims, and Calvin’s enjoying a handsome bonus for worker safety and performance.

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To learn more about CNA’s coverages and programs for building contractors, contact your independent agent or visit www.cna.com/construction.

The examples provided in this material are for illustrative purposes only and any similarity to actual individuals, entities or places is coincidental. Please remember that only the relevant insurance policy can provide the actual terms, coverages, amounts, conditions and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice. CNA is a registered trademark of CNA Financial Corporation.

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