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THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION
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Building Bridges to Your Banker
AUGUST 2015
Banking & Credit
Establishing Bank Lines of Credit from an Underwriter’s Perspective How to Increase Bonding Capacity Construction Credit for Subcontractors The Payback of P-Card Acceptance Wage and Hour FAQs Legally Speaking: Suspending Work for Non-Payment Save the Date!
March 3-5, 2016 Miami, FL • See page 6
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August 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.
Building Bridges to Your Banker: How Contractors Can Construct and Maintain Solid Relationships with Their Banks................................................................................. 8 by Dev Strischek
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).
Establishing Bank Lines of Credit from an Underwriter’s Perspective ........................................................ 10 by Walter F. Norris, Jr.
EDITORIAL STAFF Editor-in-Chief, Marc Ramsey
How to Increase Bonding Capacity .......................................... 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.
by Sue McKinney
Construction Credit for Subcontractors...................................... 14 by Scott Wolfe Jr.
The Payback of P-Card Acceptance— Are Purchasing Cards Right for Your Business?....................... 17 by Kimberly Coley
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.
Wage and Hour FAQs...................................................................... 19 by SESCO Management Consulting
Departments
ADVERTISING Interested in advertising? Contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com.
CONTRACTOR COMMUNITY............................................................ 4
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.
LEGALLY SPEAKING.......................................................................... 22 Suspending Work for Non-Payment May be a Legally Protected Right Where the Subcontractor Can Obtain Interest, Time and Save Unnecessary Costs by Karen A. Palecek and James J. Palecek
Quick Reference
LAYOUT Angela M Roe angelamroe@gmail.com
ASA/FASA CALENDAR..................................................................... 24 COMING UP....................................................................................... 24
© 2015 Foundation of the American Subcontractors Association, Inc.
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Contractor Community ASA Calls for Increased Public Participation on Proposed Fair Pay/Safe Work Place Rules In response to a request from ASA, the U.S. Department of Labor and the Federal Acquisition Regulatory Council agreed on July 14 to extend to Aug. 11 the time allowed for public participation in the agency’s development of a final rule on fair pay and safe work places. On May 28, DOL and the FAR Council issued proposed guidance and a proposed regulation, respectively, implementing President Obama’s 2014 Executive Order on Fair Pay and Safe Work Places. The Executive Order requires prospective federal contractors to disclose labor law violations and gives agencies more guidance on how to consider labor violations when awarding federal contracts. DOL’s proposed guidance is intended to assist contracting agencies and the contracting community in applying the Order’s requirements, including evaluating the severity of labor violations. The FAR Council’s proposed regulation will integrate the Order’s requirements and the provisions of the Labor Department’s guidance into the existing procurement rules. Together, the proposed guidance and regulation are intended to make sure that agencies have the information they need to determine which contractors are providing their workers with protections to which they are legally entitled. They also create a process for agencies to help contractors come into compliance with labor laws. Most federal contractors will only have to attest
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that they comply with laws providing work place protections. For those contractors that report violations, designated Labor Compliance Advisors will coordinate with the relevant enforcement agency experts to help them come into compliance. ASA had called on the agencies to extend from 60 to at least 120 days the time allowed for public comment. For more information on the DOL proposed guidance and the FAR Council’s proposed rule, see ASA’s Frequently Asked Questions. Interested parties may submit comments and additional materials electronically at http:// www.regulations.gov, the Federal eRulemaking Portal, until Aug. 11.
Construction Coalition Calls for Quick Action on Procurement Reform ASA and the other 14 associations in the Construction Industry Procurement Coalition called on the Senate conferees to H.R. 1735, the National Defense Authorization Act of 2016, to support the inclusion of important construction reforms. Specifically, the Coalition called on the conferees to support provisions that would curb the fraudulent use of individual surety bonds and prohibit federal agencies from using reverse auctions to procure design and construction services. Currently, under the Federal Acquisition Regulation, unlicensed persons, commonly known as “individual sureties,” can provide the bonds required by the Miller Act. These individual sureties are subject to neither the same vetting process as corporate sureties nor are they required to relinquish custody and
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control of the assets that they pledge to secure the surety bonds. As a result, such assets may be illusory, inadequate, or not readily convertible to cash so that subcontractors can be paid for work performed. H.R. 1735, as passed by the House, would require federal agencies to use an existing standard in the Miller Act to make sure that performance and payment bonds issued by an individual surety are backed by assets that are real, adequate, and readily available. In addition, the Housepassed version of H.R. 1735 would prohibit federal agencies from using reverse auctions for awarding most contracts for federal construction and design services. A reverse auction essentially is an online, real-time dynamic auction between a buying entity (e.g., owner, contractor) and pre-qualified vendors who compete against each other to win a contract. These vendors compete by bidding against other, usually over the Internet, by submitting successively lower-priced bids during a specified bid period, usually about one hour. The coalition told the Senate conferees that the provisions “provide a framework for growth in the construction industry and for more efficient government procurement through simple, no-cost solutions.”
Senate Committee Acts to Block OSHA Silica Rule The Senate Appropriations Committee, on June 25, voted to direct the Occupational Safety and Health Administration to restart the clock on consideration of its proposed rule aimed at curbing worker exposure to crystalline silica, issued in September 2013. The Committee approved, by voice vote,
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an amendment offered by Sen. John Hoeven (R-ND) that would require OSHA to assemble a new small business advocacy review panel under the Small Business Regulatory Enforcement Fairness Act. ASA told the committee that both the economy and the construction industry have changed dramatically since 2003 when OSHA convened the SBAR on its proposed silica rule. The Hoeven Amendment also would require the National Academy of Sciences to conduct a study to address several key issues concerning the technological feasibility of OSHA’s proposed rule. For example, the Construction Industry Safety Coalition, of which ASA is a member, told the Appropriations Committee that it “remains concerned that laboratories do not have the ability to measure exposures below OSHA’s current exposure limits. Independent studies, and even OSHA’s own testing, have shown that the laboratories that would be conducting the exposure testing are only able to determine within a margin of error of ± 50 percent what level of silica is present in the samples at the significantly lower exposure levels.” Crystalline silica is a natural occurring component of soil, sand, granite and other minerals. According to OSHA, about 1.85 million construction workers are exposed to respirable crystalline silica annually. ASA has filed multiple sets of comments with OSHA both individually, and in conjunction with CISC, on OSHA’s proposed rule.
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Advertise in Book Commemorating 50th Anniversary to Celebrate Milestone with ASA ASA will commemorate its 50th anniversary during SUBExcel 2016, March 3-5, 2016, in Miami, Fla. In addition to hosting several special activities, ASA will publish a commemorative book documenting the many accomplishments and milestones that ASA has achieved over the past 50 years. ASA members, sponsors, ASAdvantage program participants, and others are invited to advertise in this book, which will be unveiled and distributed during SUBExcel 2016. Full-page, half-page, and “Friend of ASA” listings are available. Please see the advertising flier and insertion order for details. ASA will also offer several event sponsorship opportunities that may interest your firm. Please save the dates March 3-5, 2016, in Miami and watch for online registration announcements this fall.
SBA Proposes New Rule on Women-Owned Businesses On May 1, the U.S. Small Business Administration proposed a rule to implement sole-source authority to eligible Women-Owned Small Businesses and Economically Disadvantaged Women Owned Businesses. The new sole-source authority was authorized by the National Defense Authorization Act for Fiscal Year 2015, which was enacted in December 2014. Under the new statutory authority, if a contracting officer conducts market
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research in an industry where a WOSB or EDWOSB set-aside is authorized, and the contracting officer cannot identify two or more WOSBs or EDWOSBs that can perform at a fair and reasonable price, but identifies one WOSB or EDWOSB that can perform at a fair and reasonable price, the contracting officer can award the contract on a sole source basis, if the value of the contract, including options, does not exceed $4 million for a construction contract. The proposed rule also amends SBA rules concerning contracting opportunities at or below the simplified acquisition threshold and protest procedures for sole source contracts. The objectives of the proposed rule are to put the WOSB Program on a level playing field with other SBA government contracting programs with sole source authority, and to provide an additional tool for agencies to meet the statutorilymandated 5 percent prime contracting goal for WOSBs. In addition, under the new law, SBA must conduct a study to determine the industries in which WOSBs are represented within three years of enactment.
OSHA Issues Temporary Enforcement Policy for Confined Spaces The Occupational Safety and Health Administration announced a 60-day temporary enforcement policy of its Confined Spaces in Construction standard, which becomes effective Aug. 3. The agency is postponing full enforcement of the new standard to Oct. 2 in response to requests from stakeholders, including ASA, for additional time to train and acquire the equipment necessary to
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March 3-5, 2016 Hyatt Regency Miami, Florida
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comply with the new standard. During this 60-day temporary enforcement period, OSHA will not issue citations to employers who make good faith efforts to comply with the new standard. Employers must be in compliance with either the training requirements of the new standard or the previous standard. Employers who fail to train their employees consistent with either of these two standards will be cited. Factors that indicate employers are making good faith efforts to comply include: scheduling training for employees as required by the new standard; ordering the equipment necessary to comply with the new standard; and taking alternative measures to educate and protect employees from confined space hazards. OSHA issued the Confined Spaces in Construction final rule on May 4. The rule provides construction workers with protections similar to those manufacturing and general industry workers have, with some differences tailored to the construction industry. These include requirements to ensure that multiple employers share vital safety information and to continuously monitor hazards, a safety option made possible by technological advances after the manufacturing and general industry standards were created.
OSHA Unveils New ‘It’s the Law’ Poster OSHA has unveiled a new version of its “Job Safety and Health — It’s The Law!” poster. The poster informs workers of their rights, and employers of their responsibilities. “This poster emphasizes a very important principle when it comes to prevention — that every worker has a voice,” said Assistant Secretary of Labor for Occupational Safety and
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Health David Michaels. “Workers need to know their rights and be able to use their rights, without fear of retaliation, when they believe that their safety or health is at risk.” The newly-designed poster informs workers of their rights to request an OSHA inspection of their workplaces, receive information and training on job hazards, report a work-related injury or illness, and raise safety and health concerns with their employer or OSHA without being retaliated against. The poster also informs employers of their legal obligation to provide a safe workplace. In addition, the poster has been updated to include the reporting obligations for employers, who must now report every fatality and every hospitalization, amputation and loss of an eye. OSHA’s “It’s the Law” poster is free and can be downloaded online. Employers must display the poster in a conspicuous place where workers can see it. Previous versions of the poster do not need to be replaced.
Call for Entries: Best Practices Awards Recognize Best Primes That Subs Want to Work For ASA is looking for prime contractors that construction subcontractors say are the best to work for — those who are committed to best business practices like safety management, prompt payment, prompt processing of change requests and claims, and effective project scheduling and coordination. Such prime contractors are encouraged to apply for ASA’s National Construction Best Practices Awards. These awards, which were first offered in 2011, have been out of reach for many contractors. The program’s rigorous criteria include
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the use of a standard subcontract whose provisions substantially reflect the best practices incorporated into the ASA-endorsed ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor, as well as highly favorable evaluations from three specialty trade contractors, based on 20 project management factors. “These awards commend those specialty trade contractors and general contractors that exemplify the values of subcontractors, treat subcontractors fairly through use of level-playing-field contract terms, and consider subcontractors part of their core project teams,” said ASA Task Force on Ethics in the Construction Industry Chair Shannon MacArthur, MEMCO, Spring, Texas. “The task force has set a very high bar.” Any firm — including a specialty trade contractor — that has signed within the past year a contract directly with a construction owner under which it performs construction services is eligible to apply. Each applicant must supply three sealed business-practices recommendations from specialty trade contractors that have worked for it in the past year along with a copy of its standard subcontract with its application. A construction attorney will evaluate the standard subcontract, and the ASA Task Force on Ethics in the Construction Industry will evaluate the recommendations from specialty trade contractors. Prime construction contractors that use the ASA-endorsed ConsensusDocs 750 contract form as their standard subcontract automatically pass the subcontract evaluation. The application deadline is Nov. 13, 2015, and the application fee is $495. Awards will be presented during ASA’s annual convention, SUBExcel 2016, which will take place March 3-5, 2016, in Miami, Fla.
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Feature Building Bridges to Your Banker: How Contractors Can Construct and Maintain Solid Relationships with Their Banks by Dev Strischek The last scene of Casablanca closes with Rick telling Captain Renault, “Louie, I think this is the beginning of a beautiful relationship.” However, movies aren’t the real world, and your company needs real partners to succeed — good employees, reliable suppliers, and a supportive bank. The good news is that you don’t need a good script and great actors to produce a solid relationship with a bank. As with any relationship, both partners must build trust with the other, and trust begins with open communication and information exchange. If you want your banker to be there when you need a loan, then you need to give the banker what he needs to ensure that you can repay the loan in full, on time, and as agreed. Bankers routinely ask borrowers for financial information because they have to figure out if borrowers can repay the loans requested. They analyze financials to evaluate borrowers’ financial condition and performance, and calculate some key financial ratios to help identify potentially bankable borrowers, so if a contractor wants to build a relationship with a bank, the best way to start construction is with plenty of information. Expect your prospective banker to build a file on you, and that file will probably include credit agency reports, e.g., Dun & Bradstreet report, on your company, as well as Internet information about your firm and you personally. The banker is hoping that you will provide financials and a business plan, so what comprises a complete set of information? The ability to produce regularly and consistently a complete, detailed set of financial documents tells the banker that your accounting house is
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in order. One reason loans go bad is that the borrower’s financial records break down or were inaccurate from the start; the borrower is unaware that the borrower’s operations are losing money or creditors are not being paid; or internal fraud is occurring. First, the financial information ought to include the following items: • Most recent fiscal year end (FYE) financial statements and previous year’s FYE including balance sheet, income statement, cash flow statement, financial statement footnotes. • Interim financial statements — balance sheet, income statement, receivables aging, payables aging. • Most recent two years of federal income tax returns on your company, you, and any other owners or guarantors. • Current personal financial statement (PFS) from you, any other owners or guarantors. It is a plus for you if the FYE financial statements are audited or at least prepared by an outside accountant. Interims are typically company-prepared; the banker will be expecting quarterly financials, but monthly financials are even better. The banker usually prefers that individuals fill out the bank’s standard personal financial statement form because the attestation statement typically above the signature line gives the banker the right to order consumer credit reports on the signers. The standard PFS form also usually identifies joint owners of assets, e.g., John and Mary Smith jointly own their personal residence, so that the banker can develop a clearer picture of individual assets and debts. Second, the business plan should be a kind of resume for your business
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and explain what you do, how you are organized and staffed to do it, and what you plan to do in the next several years. There are hundreds of Internet sites with outlines, formats, and advice on how to write a business plan, but the essentials usually include: Purpose of the plan • To attract investors and qualify for bank and trade credit. • To describe and explain the feasibility of your business. Company’s products and services • Give a brief history of your company — how long in business, how long you have been in the business, what you have done to make the company succeed. • Identify the needs your company will satisfy. • Describe the products and services you will offer to satisfy those needs. Market analysis • Characteristics of your target market — demographic, geographic, etc. • Size of your target market. Marketing and sales strategy • Keys to success in your competitive market. • Your price and non-price strategies to be competitive. References: • Suppliers, insurers, sureties, and other creditors willing to speak positively about their credit experience with you and your firm. • Customers who have been satisfied by your work. Organization • Organization chart. • Key managers and principals.
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Finance • Funds required and their purpose. • Historic financial information. • Projections. Keep the business plan short and concise, and one way to do that is simply keep it in outline form. The banker will compare the business plan’s data with any information he or she might have in his or her own files to confirm facts and validate information.
First Constructive Step in Building the Relationship Opening depository accounts with the banker is often the first step toward building a relationship. Generally, the banker likes to see your money in the bank before he or she extends credit to you later, to see how you handle your cash. Frequent overdrafts and requests to waive OD fees do not build trust or a record of reliability; after all, if a customer cannot keep depository accounts in balance, a banker is unlikely to consider the extension of credit. Sometimes, a borrower is disappointed with the service of his or her current bank and approaches another banker looking for better service, a more reasonable loan deal, etc. The new bank will expect the potential borrower to move over his or her depository accounts as both a measure of good faith and also as a practical tool for advancing funds to the borrower. If the bank offers payroll services, the banker will probably expect you to let the bank handle your payroll, too. The more bank services you engage, the stronger the relationship with the bank.
Credit Request The more specific your loan request, the better the banker will be able to accommodate it. Specificity infers that you have thought through your credit needs and have planned for the use of the proceeds. Key components of the credit request include: Amount: • You have a cash flow projection that shows you may need up to $500,000 sometime over the T H E
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summer to cover cash flow timing differences, i.e., you have to pay for materials at the beginning of the month, but your progress billings are not due until the end of the month. Purpose: • To cover cash flow timing differences. Type of facility and term: • A line of credit is usually the appropriate type of financing for month-to-month operations and usually matures every 12 months. • A term loan is typically how equipment or real estate is financed, and the term is likely to be limited to the useful life of the asset, e.g., five years for a truck, 10 to 15 years for a building. Collateral: • The use of the funds usually determines what the collateral will be, so your company’s progress billings typically serve as collateral. If your loan is to acquire equipment or real estate or some other asset, the asset acquired will become the security for the loan. Guarantees: • If you want the bank to lend to your business, be prepared to stand behind your firm and guarantee the credit. Banks generally expect the owners to guarantee their company’s obligations. You save your banker considerable time in decisioning your credit request if you have what you want spelled out in some detail. At the same time, the banker should give you some sense of when the banker can give you an answer, who must approve it, when and where the loan can be closed and the loan proceeds can be funded. There are other banks and non-banks competing for business, so be prepared to search for an alternate bank if the response time is too long, say, more than 10 business days. However, build yourself some protection against delay by initiating the credit process early enough to have some slack time. Folk singer Joan Baez once admitted, “The easiest kind of relationship for me is with ten thousand people. The hardest is with one.” Contractors are often working with dozens of C O M P A S S
customers, trade suppliers, and other creditors, but if there is one relationship that stands above the others, it is the banker. The banker provides the credit that can help you pay your suppliers on time and cover your payroll at the end of the week. Be prepared — give the banker the information needed to support your credit request. Offer a business plan that describes and explains your business. Show a projection that estimates how much credit you need and when you can repay it. Negotiate the terms of your credit request, and expect to guarantee and collateralize the credit requested. You should also get a straight answer on when you can expect the credit decision. A relationship requires both parties to interact, so if you give the banker the right information, the banker ought to be able to give you the right decision. Dev Strischek is senior vice president and senior credit policy officer, SunTrust Banks, Atlanta, Ga. He is the author of the Risk Management Association’s (RMA’s) Analyzing Construction Contractors and instructor for RMA’s Analyzing Construction Contractors course. He can be reached at dev.strischek@ suntrust.com.
LEARN HOW TO RECOVER YOUR OVERHEAD COSTS Get a handle on your company’s bottom line with the Foundation of ASA videoon-demand, “Recovering Your Overhead Costs” (Item #8051). Presenter Perry C. Barnett, CPA, Rushton & Company, LLC, Gainesville, Ga., explains how to make more money by improving your accounting of costs like equipment maintenance, rent, and salaries. He also helps you choose the right method of tracking overhead costs, so you can recover those costs. “Recovering Your Overhead Costs” (Item #8051) $65 ASA members $95 nonmembers Order online
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Feature Establishing Bank Lines of Credit from an Underwriter’s Perspective by Walter F. Norris, Jr. In the construction business, financial partners are a lifeline that can sustain firms during both good and bad times. The most well-devised business plans, both operational and financial, can be ruined by unforeseen problems that often demand immediate access to cash. Furthermore, the cyclical nature of construction often requires that firms have a financial cushion for slower periods, as well as during the peak season. Surety underwriters place a high value on firms having an established bank line of credit. With the help of banks and sureties, subcontractors are able to procure contracts, fund working capital, pay employees, and grow their business. Although defaults and
bankruptcy filings in construction will continue to occur, organizations that wisely manage their finances with the assistance of financial partners will have the greatest opportunity for long-term success.
over a competitor in terms of being selected by the owner or general contractor for an award.
Management Sophistication
IN THIS ARTICLE . . .
Prequalification and Work Procurement
A cash crunch can occur at any time during the construction cycle. During slower months, it could be due to overdue receivables. During peak season, it could be driven by substantial payroll costs and project mobilization costs. In any case, should the subcontractor’s cash balances dwindle, the bank line of credit provides a liquidity cushion until receipts catch up to expenditures. One of the key cash flow problems in construction is the relationship of receivables to payables. Receivables are generally low volume, high dollar value items. Conversely, payables are quite often high volume, lower dollar amount items. The difference here creates an unstable cash flow. For example, a subcontractor’s employees may need to be paid every seven days or every 14 days, while payment due from an owner or general contractor may not arrive for 30 to 60 days, if not longer. This can lead to liquidity stress, which can be alleviated by temporarily accessing the credit facility. When subcontractors utilize part or all of the line of credit, surety underwriters will look closely at the subcontractor’s ability to repay the bank debt. When the debt is repaid in a timely fashion, it’s an indicator that the firm is focused on billing procedures, receivable collections, and cash management. On the other hand, an overreliance on the bank facility may signal to the underwriter that the subcontractor
• Surety underwriters place a high value on firms having an established bank line of credit. • Having an established bank line of credit is an indication you are creditworthy. • An underwriter may assess your financial “loss absorbing” capabilities.
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When it’s confirmed that a subcontractor has an established bank line of credit, the underwriter has evidence that the firm’s management team has provided the financial institution with a number of items: (1) business plan; (2) historical financial statements; and (3) credit references. There may be other submission materials, but the formalized bank line shows that the firm’s leaders are sophisticated, organized, and have demonstrated a strong business acumen. Essentially, they have convinced the lender that they are indeed creditworthy.
Project owners, general contractors, and suppliers will be highly interested in whether or not the subcontractor has a bank line in place. Again, it’s an indication that a lender has vetted the firm’s financials and agreed to provide funding either on a secured or unsecured basis. It’s a testament to the credibility of the firm’s business plan. All things being equal, a firm with a credit facility in place has an advantage
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is struggling to manage cash flow. More sophisticated subcontractors will perform a cash flow forecast to try and predict when, throughout the year, they will need to utilize their line of credit and when it will be repaid. The underwriter gains a great deal of confidence in the firm when cash flow is proactively managed in this way and the debt repaid within a scheduled time period.
Mitigating Contractual Risk In the traditional linkage of contractual obligations, ownercontractor-subcontractor, the contractor is first in line and closer to the source of funds. In addition, the subcontractor eventually gets paid by a contractor that is, traditionally, less financially sound than the owner. The specific terms of a subcontract include significant financial implications. While a firm may have lien rights on private projects, those lien rights will not typically provide relief during a short-term cash crisis. Unfavorable payment terms can be detrimental to cash flow, as is the retainage held by the general or project owner. Retainage provisions have a severe effect on subcontractors’ operating cash flow. And if those specific payment terms include a “pay-if-paid” clause, the subcontractor takes on the risk of nonpayment by the owner because of insolvency or for other reasons. Consequential damages might also flow down to the subcontractor. These various elements of contractual risk (and there are many others) create the need for a liquidity cushion, which is where the bank line of credit plays a key role.
Project Funding, Delays and Disputes One or several problematic jobs can create financial havoc for a subcontractor. The problems may come in the form of delays, disputes, or even legal actions. Project financing on private construction can be delayed or may cease entirely. All
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of these situations have cash flow implications. The surety underwriter often will assess the subcontractor’s financial “loss absorbing” capabilities. The balance sheet is the primary focus in these assessments, but the credit facility is also critical as a second line of defense. The underwriter typically will see less risk in projects losing money when there are ample cash and/or credit resources to maintain fiscal stability.
Growing the Business In certain construction market segments, depending on the region and economic factors, businesses that do not grow will often not endure multiple construction cycles. Competition often forces a need for business expansion. And in most cases, it is proven that “growth eats cash.” To support sales growth, a firm must continuously reinvest in the business. Increased overhead expenses, increased payrolls, larger inventories, and capital equipment purchases will require more liquidity. This strategy requires cash flow and profitability, but having an established line of credit will be of great benefit when the construction cycle limits cash flow.
Terms of the Bank Line of Credit Some firm owners or CFOs may hesitate to engage with a bank due to concerns over their requirements. The banking agreement will go into detail regarding many areas, often including: guarantees and/ or collateral, financial covenants, borrowing base calculations, interest rates, fees, UCC filing, repayment terms, default, restrictions on distributions, required financial reporting, etc. Initially, the subcontractor may see these terms as restrictive and may feel a loss of control over the firm’s financial dealings. Business owners are not interested in third parties dictating how they should run their operations, how much they should spend on equipment, or how much profit
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should be distributed to shareholders. However, there are three key points to consider: (1) subcontractors are negotiating a deal with the bank; (2) the bank wants the company to succeed; and (3) future bank agreement terms (conditions) can often be renegotiated during the next renewal. Within limits, and depending upon the financial institution’s guidelines, the credit representative will be open to some negotiation on certain terms and conditions. And once the facility is in effect, the bank will be vested in the success of the firm in terms of the ability to repay the loan, as well as maintaining an ongoing business relationship (i.e. future revenues for the bank). Upon demonstration of the firm’s success and ability to manage finances, the subcontractor may be able to convince the banker to revise the parameters of the bank line, which provides more flexibility. The surety underwriter considers the credit facility a valuable financial asset, which may be a prerequisite for a surety program. Establishing a bank line of credit indicates the subcontractor’s management team is taking a proactive approach to cash flow management. It’s also important to keep in mind that, like the surety underwriter, a banking representative can be a valued source of market information. When seeking out a bank lending partner, look for an institution that lends to similar businesses and cultivate a relationship with the commercial banker. Neglecting to establish a bank line of credit will most likely have both short- and long-term ramifications, from an operations standpoint and also in terms of engaging a surety partner to support the subcontractor’s business plan. Walter Norris is an underwriting manager with Liberty Mutual Surety. He has over 18 years of combined field and home office experience, with a focus on contract surety. He can be reached in Liberty Mutual’s Plymouth Meeting, Pa., home office at (610) 832-4585 or walter.norris@ libertymutual.com.
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Feature How to Increase Bonding Capacity by Sue McKinney In today’s competitive construction environment, contractors that have the ability to increase their surety programs are in an advantageous position compared to competitors unable to bond. The ability to provide a bid bond or “letter of bondability” makes the difference between being able to submit a proposal or not be involved. If your business plan is focused on growth, there are several steps that can be taken to help increase bonding capacity.
Surround Yourself with Professionals Partner with a surety agent. In every marketplace there are a few, knowledgeable surety agents/ producers. Find out who they are and who you want to work with. An experienced surety agent will match your company with a surety company/underwriting team best suited to support your type and size of construction. Hire a certified public accountant with expertise in construction. Surety companies have more confidence in contractors able to produce timely, accurate financial statements. Your CPA and internal cost systems have to meet that need. If you’re asking your surety to stretch with an increased bond program — first provide them quality financial statements. Work with a proactive banker, one that understands construction, your business plan and is willing to step up when you need expansion in your operating line of credit and fixed asset purchases. Be prepared with an attorney that is knowledgeable about construction. The industry continues to move in one direction, with more and more risk transfer taking place. Stay on top of this with proper legal guidance before signing contracts and bonds. A
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construction-knowledgeable attorney can help you manage and assess contractual risk and thereby protect your company over the long haul.
Build a Relationship with Your Surety Take time to build a relationship with your surety underwriting team. Do everything possible to warrant their confidence in the integrity of your organization. Surety underwriters judge a contractor’s character in a variety of ways — primarily they want to see an honest business, producing quality workmanship, consistently completing jobs on time and in budget. Providing this confidence assists directly in their willingness to step up with larger bond credit. Share your business plan. This should include the short- and longterm vision for your company, as well as the steps you intend to take to achieve these goals. Help the underwriter understand how you run your business, how you lead your organization. The objective is for them to appreciate and support your plans for growth. Meet with the surety regularly. It is advisable to meet annually for an overall review of operations, and as needed, to discuss large or unusual bond requests. Invite them to tour a project and meet key field personnel. Your surety needs to know you have the expertise, personnel, and the resources to successfully complete the projects you take on.
Financial Information Is the Contractor’s Score Card It’s simple: surety companies value liquidity (defined as adjusted current assets minus adjusted
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current liabilities). Maximize cash on hand. Growth for a construction company means increased pressure on cash. Surety companies know more contractors fail during times of economic recovery than in a recession due to inadequate cash flow. A shortfall in cash is the most common reason contractors fail. In the eyes of the surety, higher liquidity reduces risk and thereby leads to more bond capacity. If you are seeking a stretched bond program, include a cash flow forecast and demonstrate you have a plan to manage cash demand. If liquidity will do all that, what are some ways to increase it? Run operations to maximize receivable turnover. Establish a structured collection program — timely collection increases cash flow and aids in increasing bond capacity. Push to collect receivables within terms. Slow turning assets such as aged receivables, loans to related entities/shareholders/employees, and non-project specific inventory are typically discounted from current assets and reduce liquidity. Balance the desire for low fixed asset debt with the need to maintain adequate liquidity. Improve the “quality” of your liquidity with field and home office coordinating their efforts to bill projects to the extent possible. While overbillings are a liability on a balance sheet, they are preferred by surety companies as compared to underbillings. Overbillings improve cash flow by utilizing the owner’s money to fund a project. Underbillings deplete cash, weaken cash flow and increase the likelihood of bank debt usage. The further along the job is, the more concerns underbillings raise in the eyes of the
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MANAGING THE LIFE BLOOD OF CONTRACTING—CASH FLOW (ITEM #8079) One of the most important issues for contractors today is cash flow. More companies go bankrupt due to cash flow issues than profitability. “Having survived the downturn, companies are faced with starting new projects, hiring staff and investing in assets to support the business,” Stephane McShane, Maxim Consulting Group, Denver, Colo., explains in “Managing the Life Blood of Contracting — Cash Flow,” a video-on-demand from the Foundation of ASA. In the video, McShane examines cash management practices and techniques, including the following (i) contractual negotiation strategies, (ii) pricing and bidding practices, (iii) development of cost and resource-loaded schedules that tie to billing activities in the schedule of values, (iv) use of 12-week cash flow forecasts, (v) project closeout procedures, and (vi) managing the billings and collection cycle. $65 ASA members; $95 nonmembers ORDER ONLINE
COLLECTION STRATEGIES FOR SUBCONTRACTORS (ITEM #8064) One of the most difficult decisions a subcontractor faces is when to send a customer to collection. On the one hand, the subcontractor needs to get paid for work performed or services provided. On the other, keeping a customer happy to ensure repeat business is critical. Robert Andreu, Hunter Warfield, Tampa, Fla., answers this difficult question in “Collection Strategies for Subcontractors” (Item #8064), video-on-demand from the Foundation of ASA. In this video, Andreu explains how to design an in-house debt collection process and three steps to accelerating the collection of past due debts. He provides tricks of the trade guaranteed to decrease outstanding receivable aging by as much as 50 percent, and examines technology’s impact on debt collecting. $65 ASA members; $95 nonmembers ORDER ONLINE
surety. It cannot be over emphasized: “quality liquidity” is a critical element in the pursuit of increased bond capacity. Finally, be profitable and stay profitable. Show that your company can generate a profit regardless of market conditions. Sympathy for contractors unable to generate a
profit is past. The recession is behind us. It’s time to focus on how to grow in the recovery. Keep a portion of overhead “flexible” so you can quickly adjust overhead, as revenue and margins start to come back. How do you increase bonding capacity? Follow these basic guidelines — surround yourself with
New On-demand Video from FASA When it comes to managing your business, the Foundation of ASA is your partner in education. View and listen to FASA’s on-demand videos at an individual workstation or in a conference room for group training. Your order includes access to the on‑demand video any time, and as many times as you’d like! This is just one of the on-demand videos available through the FASA Contractors’ Knowledge Depot to meet your business management training needs.
professionals, maximize quality liquidity, and generate profitable operations. Sue McKinney is a regional underwriting officer, Construction Services, for Travelers Bond & Specialty Insurance. She can be reached at (253) 943-5777 or simckinn@travelers.com.
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Contractors’ Knowledge Network
“How to Properly Manage and Terminate Employees Without Breaking the Law” (Item #8080) A Labor Department study shows that 50 percent of new hires last only six months in their new job. In “How to Properly Manage and Terminate Employees Without Breaking the Law” (Item #8080), a video-on-demand from the Foundation of ASA, presenter Jamie M. Hasty, vice president, SESCO Management Consultants, Richmond, Va., provides participants with the tools to properly coach, counsel and discipline employees with proper techniques and ensure adequate documentation to best protect the employer from liability. $65 Members; $95 Nonmembers
Order online at www.contractorsknowledgedepot.com or call 1-888-374-3133
Feature Construction Credit for Subcontractors by Scott Wolfe Jr.
Everyone in the world knows the term “credit,” but it has many different meanings. In the consumer context, people think about credit cards, credit reports, and credit scores. In the business-to-business context, credit can refer to lines of credit or “trade credit” with suppliers and vendors, and it can refer to a company’s credit score or creditworthiness. When it comes to “credit,” subcontractors sit at a very interesting intersection. On the one hand, subcontractors seek trade credit from its vendors to buy supplies or rent equipment. On the other hand, subcontractors must evaluate the “credit worthiness” of those who will ultimately pay them. Unlike many corporations that deal with credit questions and evaluations daily, subcontractors typically do not have a credit department or much “credit and collections” experience. Even those subcontractor groups that do have the experience are required to navigate a unique landscape.
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Introducing Businessto-Business Credit In one way or another, everyone is familiar with the concept of “credit.” In everyday life, people will encounter their own creditworthiness when looking to buy a house, a car, or when applying for a new credit card. Credit bureaus keep profiles and reports on every person’s credit history and assign a score to each person based on that history. When a person’s history is good, the credit score will be high and lenders are willing to issue more and more “credit.” When history is bad, the credit score is low and lenders are more guarded. The same concept is true in the business context. Just like a person, every business has a credit history, and based on that history, lenders will give more or less “credit” or “financing” to the business. Business credit does have a pretty big problem, however. Business credit records are usually much more empty than an individual’s credit record.
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This is particularly true for small and medium businesses that rarely have a complete enough credit history to mean anything. There are a few reasons why this is the case: 1. Consumer credit reporting is very, very common. Businessto-business transactions are frequently between one small business and another, and reporting those transactions to credit agencies is not very common. Accordingly, the transaction is “invisible” to a company’s transactional history. 2. Since business credit histories are largely empty, companies require personal guarantees and information about the business owner(s)’ personal credit, which is a vicious cycle making personal credit more relevant and complete and business credit less relevant and complete. 3. Many small businesses are fairly new (less than 6 or 7 years old), and thus it’s impossible to have much of a credit history at all.
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4. While a person cannot run away from their personal credit history, a business entity can just shut down and open up another entity, which could make personal credit history more relevant than a company’s history. Business-to-Business credit, therefore, is a tricky concept that is difficult to master. This is especially true in the construction context, because so many construction companies are small to medium businesses, and because the dollar value of many construction projects is frequently out of proportion with a SMB’s credit worthiness on paper.
The Relevancy of ‘Credit’ in the Construction Industry Credit is relevant in almost every industry, but like everything else, the construction industry puts a twist on the mechanic’s of how credit works and how credit is managed. Subcontractors, in particular, have to manage both ends of “credit,” meaning that they have to seek credit from vendors, and they have to evaluate credit from those who owe them money. This presents a lot of interesting issues.
Subcontractors Get Trade Credit from Vendors and Financers It’s no secret that subcontractors face substantial working capital challenges. They are expected to furnish materials and labor to benefit a project before getting paid, which means they must float all of those costs. On top of this, 5 percent to 10 percent of the contract price is withheld until the end of a job through retainage practices. Most subcontractors need credit and financing to pull off this cash management magic. Subcontractors seek lines of credit and loans from traditional lenders to make payroll while dealing with the ebbs and flows of their cash flow. They also seek trade credit terms from material suppliers and equipment rental companies, which
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enables them to furnish equipment and materials before putting out cash. Traditional loans and lines of credit rely very heavily on credit scores and a company’s balance sheet to justify the risk. Subcontractors large and small, therefore, must be conscious of their company’s available assets, collateral, and credit history, and then must develop strong relationships with bankers to get access to these working capital aids. Getting trade credit from vendors is a bit more peculiar. Unlike anyone else in the construction industry — such as general contractors, developers, lenders, sureties, and subcontractors — material suppliers and equipment rental companies have large “credit and collection” teams who focus on evaluating the risk of doing business with subcontractors, and who extend and manage trade credit to the subcontractors. These credit and collection teams use a variety of tools and philosophies to manage this process. 1. Credit Reporting Tools—Just like almost any other businesses, these companies rely on credit reporting tools like Experian or Equifax. These tools produce reports on the credit history of a business. As mentioned above, however, this rarely gives a full enough picture for the vendors to justify issuing tens of thousands, or hundreds of thousands, in trade credit to a subcontractor. 2. Risk Mitigation Tools—Since a subcontractor’s credit history is rarely full enough to justify the trade credit needed, these groups use other tools to mitigate their risk: • Personal Guarantees: For some companies, credit and collection teams will want to get past the corporate shell and have the debt guarantee by a person with a strong credit history. • Joint Check Agreements: Credit teams can justify issuing credit to a subcontractor when they know that a project is sound and worthy, and so they will agree to issue credit if the general contractor or owner agrees to make all payments to the subcontractor through a “joint check,” naming the vendor on the check.
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• Mechanic’s Lien Rights: Suppliers
and equipment rental companies can take collateral from the project through their mechanic’s lien rights, which enables the vendor to issue trade credit on the project with much less risk. 3. Collection and Credit Management Tools—Finally, while subcontractors must navigate through “pay-whenpaid” provisions, retainage delays, and other payment problems, most vendors will not accept such nuances. Their terms are strictly counted in a flat number of days. After 30, 60, or 90 days, it’s time for them to collect, and they use different credit and collection management software to keep up with this and to make sure that things are collected on time. Subcontractors should keep these tools in mind when seeking trade credit for a vendor. Understanding how the vendor must evaluate the subcontracting business and the risk on the account will enable the subcontractor to have a stronger relationship with the vendor, and to sometimes find ways to bridge the risk gap and get more credit.
Subcontractors Must Evaluate Credit from Those Paying Them While every subcontractor encounters their own credit getting evaluated by banks, financers, and vendors, it is very common for subcontractors to forget that they frequently sit at the other side of the table. Subcontractors, in other words, must do a healthy amount of credit evaluations themselves. Everything that a subcontractor does is done on “credit.” A subcontractor furnishes labor and materials to a project, and then, only after the labor and materials are provided, the subcontractor will send a bill. The subcontractor has just provided labor and materials to a third party on “credit.” The furnishing was provided based on a promise to pay. Now, what evaluations did the subcontractor do to make sure that the party promising to pay has the creditworthiness to fulfill that promise?
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Did the subcontractor run credit checks on the business and the business owners? Did they get a personal guarantee or a joint check agreement? Did they preserve their collateral by sending a preliminary notice and protecting their mechanic’s lien rights? It’s unfortunate that subcontractor rarely have “credit departments” or “credit professionals” in house, and they rarely evaluate their credit risk on a project. For the most part, subcontractors will rely on “relationships,” or worse, rely on nothing on at all. This can become a very expensive bet. Subcontractors can mitigate against this risk, and it works the same way as it does for vendors, banks, and lenders. Subcontractors can use the same tools and philosophies to manage their own credit risks, with particular importance placed on the subcontractor’s mechanic’s lien rights. Those who position themselves to use mechanic’s lien rights will insulate themselves against the risk of nonpayment, and since the lien rights are preserved, the subcontractor is more likely to avoid a non-payment situation to begin with. That’s because
general contractors, owners, and lenders, place great emphasis on mitigating their exposure to lien claims, and those subcontractors who send preliminary notices to protect their lien rights are bookmarked by these paying parties, and are given stronger priority when it’s time to make payment decisions.
What Subcontractors Need to Know About Construction Credit Subcontractors encounter construction credit issues all the time, whether or not they are conscious about it. Great subcontractor organizations, however, are very conscious about how credit works for and against them in the construction industry, and they use that understanding to their advantage to get more trade credit from vendors and banks, and to take less risk with those who will ultimately pay them. Subcontractors must know how credit and collection teams work within material supply and equipment rental companies. Rather than fighting against all the credit mitigation tools that these
vendors use, subcontractors should understand and embrace them, as they can be used to make these vendors more and more comfortable with issuing better and better terms. Subcontractors must also understand that they are issuing trade credit on every project, just like their vendors. If they ignore the credit risks, they are just waiting for the ticking time bomb to explode. Instead, subcontractors should employ credit risk mitigation strategies, such as the use of mechanic’s lien protection, to decrease their nonpayment risks. Scott Wolfe is CEO of zlien in New Orleans, La., a platform that reduces credit risk and default receivables for contractors and suppliers by giving them control over mechanic’s lien and bond claim compliance. Wolfe is a licensed attorney in six states with extensive experience in corporate credit management and collections law, including the use of mechanic’s liens, UCC filings and other security instruments to protect and manage receivables. He can be reached at (866) 720-5436, Ext. 700, scott@zlien. com, or @scottwolfejr on Twitter.
ASA NATIONAL CONSTRUCTION BEST PRACTICES AWARDS 2015 ASA offers national recognition to prime contractors that are committed to superior business practices like prompt payment. ASA’s annual National Construction Best Practices Awards, developed by the Task Force on Ethics in the Construction Industry, recognize elite prime contractors that uphold best practices and refuse to do business according to the “lowest common denominator.” The deadline for prime contractors to submit applications is Nov. 13, 2015. The application fee is $495. Each prime-contractor applicant must supply three sealed business-practices recommendations from specialty trade contractors that have worked for it in the past year, along with a copy of its standard subcontract, with its application. ASA will honor recipients during an awards ceremony at the ASA annual convention, SUBExcel 2016, March 3-5, 2016, in Miami, Florida.
HELPFUL LINKS Watch the National Construction Best Practices Award Video Prime contractors: Download the 2015 National Construction Best Practices Award Application Form Specialty trade contractors: Download the 2015 National Construction Best Practices Award Form for Evaluating the Applicant’s Business Practices ASA Chapters: Download the ASA Chapter Guideline for Processing the 2015 National Construction Best Practices Award and other materials under “Industry Relations” in the ASA Chapter Toolbox.
APPLICATION DEADLINE:
NOVEMBER 13, 2015
Feature The Payback of P-Card Acceptance—Are Purchasing Cards Right for Your Business? by Kimberly Coley A purchasing card (P‑Card) is a type of commercial credit card that allows organizations — corporate, education, and government — to take advantage of the credit card industry’s existing infrastructure to facilitate electronic payments for goods and services. In simple terms, a P-Card is a charge card (physical or virtual) that must be paid in full each month.
An Appetite for P-Cards Purchasing card spending continues to grow regardless of the economic environment. According to the Summary of 2014 Purchasing Card Benchmark Survey by RPMG Research Corporation, purchasing card spending in North America grew from $196 billion to $245 billion from 2011 to 2013. Looking ahead, P-Card spending growth is expected to average 10.8 percent per year over the 2014-18 timeframe, increasing from $245 billion in 2013 to $377 billion. When you consider the benefits to end-user organizations, it’s easy to see why P-Cards continue to gain momentum. The manually intensive purchase-to-pay process — requisition, purchase order, invoice, and check payment — is costly and inefficient, with cycle times averaging 15 to 30 days (and often more) and cost estimates ranging from $50 to $200 per purchase, regardless of the dollar amount of the purchase itself. Truth is, for low-cost goods, the costs associated with purchasing the item may very well add up to more than the value of the item itself! The benefits go beyond time, cost, and labor savings. With P-Cards, accounts payable can make one monthly payment to the card issuer instead of hundreds of payments to many different suppliers. A key attribute of commercial card use is the availability of rich transaction data
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generated by card payments that help businesses gain valuable insights that help drive savings and results.
Beyond the Rate: Benefits of P-Card Acceptance When it comes to calculating the costs of accepting P-Cards, it’s important for companies to look beyond the “swipe rate,” and instead consider the total cost of payment acceptance. The benefits realized often dwarf the costs related to card acceptance, and include: • Improved cash flow, with payments received in one to three days. • Elimination of manual processes like invoice creation, postage and handling, and past due/collections. • Lower bad debt write-offs and collection fees. • Reduced costs of check deposit and processing fees. • Improved customer satisfaction. By accepting purchasing cards, you make it easy for companies to do business with you. Gone is the onerous vendor setup process barrier to boarding new suppliers, which is often experienced by end users, especially for small-ticket purchases. Plus, P-Cards allow you to put the savings to work and improve customer loyalty. Apply some of the cost savings to the creation of purchase incentives for your customers. You’ll give them a reason to continue to buy from you versus a competitor. C O M P A S S
Level 3: The Next Level of Savings The ability to process customized line-item detail, known as Level 3 data, drives significant value for your customers and results in significant savings for your business. Level 3 line-item detail is equivalent to the information found on an itemized invoice: invoice number, order number, product codes, product descriptions, postal codes, tax rates, freight charges, etc. The ability for your business to capture and send this information can help transactions qualify for the lowest available interchange rates.
IN THIS ARTICLE . . . • The appetite for purchasing cards continues to grow throughout North America. • P-Cards are replacing the manually intensive, and costly, purchase-to-pay process. • P-Cards offer rich transaction data that provide insights that help drive savings and results.
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Just how much savings are we talking about? Here’s an example based on the MasterCard interchange schedule: • Commercial standard interchange is 2.95 percent plus 10 cents. • The Level 3 rate is 1.90 percent plus 10 cents if the transaction is less than approximately $8,000 and 1.35 percent plus $40 if over approximately $8,000. • The delta represents the specific amount in dollars that a business might realize, and those savings add significant value to the bottom line. Big-ticket items result in big-time savings. With Level 3, a purchase of $5,000 costs about $50 less per transaction than a standard purchase, $10,000 saves $120, and $50,000 saves more than $700. Just think of the ways that those savings can be reinvested into your business!
Finding a P-Card Processing Partner Accepting P-Cards and passing along Level 3 data adds significant value to your business and your bottom line. When evaluating B2B processing partners, it’s important to look beyond the basics and consider providers that can supplement P-Card acceptance with value-add solutions. Here are a few things to consider: • Commerce happens everywhere. Make sure that you are aligned with an acquirer that has solutions
to process payments in person, online, and on the go. Point of sale, e-commerce, and mobile solutions ensure that you and your customers realize the benefits of P-Card acceptance no matter the channel used. • P-Cards aren’t just physical credit cards. Make sure that your acquirer can process single-use virtual credit card numbers (VCN), department-specific Electronic Accounts Payable (EAP) “ghost cards,” declining balance cards, and prepaid cards, to name a few. • Security is key. Tokenization allows for card-on-file processing for loyal, repeat customers by replacing actual card numbers with secure tokens that are useless if compromised by fraudsters. Plus, you get the added benefit of reduced PCI scope, resulting in a simplified PCI compliance validation process. • Build customers loyalty. Recurring transactions build customer loyalty by making it easy to set up an efficient and secure process for repeat purchases. • Keep up to date. Account Updater Service ensures that expiration dates and other information associated with cards on file are current. P-Cards streamline the procureto-pay process for end users and suppliers, resulting in efficiencies that drive savings in time, labor and fees.
When you say hello to P-Cards, you open the door to increased sales, reduced costs, and more efficient processes. Take the time to learn more. Talk to leading B2B payment processors and turn those savings into growth opportunities. Kimberly Coley is vice president, National Accounts, for Merchant e-Solutions, Mount Pleasant, S.C., where she is responsible for partnering with e-commerce and retail companies of all sizes to consultatively bring meaningful payment solutions that integrate with their business and complement their future growth plans. Coley has over 15 years of payment experience bringing merchants tangible value by strategically reviewing their operations and understanding their plans for global reach. Her payment expertise includes payment analysis, cash flow management, global processing and identifying cost efficiencies and revenue opportunities. MeS helps merchants accept payments anywhere and easily manage all on one platform. MeS provides a global network and enables merchants to securely do business in multiple channels including online, mobile, and in-person. Its industry-leading technology platform, flexible and customized reporting, and worldclass service provide customers, banks, partners, and developers with the most comprehensive payment services in the market. Coley can be reached at (843) 830-6704 or kcoley@ merchante-solutions.com.
LEARN HOW TO PROTECT YOUR LIEN AND BOND CLAIMS RIGHTS The right to secure payment with a mechanic’s lien or payment bond claim is ordinarily the most valuable right the subcontractor has to ensure payment. The laws regulating subcontractor mechanic’s lien and payment bond claims, however, are complicated and frequently change. Uncertainty about claims and notice requirements can be perilous for subcontractors. Learn how lien and bond claims offer lawful protection to subcontractors on private, state and local projects, and how ASA’s Lien & Bond Claims in the 50 States manual can help you understand these valuable rights with the Foundation of ASA video-on-demand, “Liens and Bonds: Keeping Up with the Changes to Protect Your Rights to Collect Your Money” (Item #8063), presented by Eric Travers, Esq., Kegler, Brown, Hill & Ritter, Columbus, Ohio.
“Liens and Bonds: Keeping Up with the Changes to Protect Your Rights to Collect Your Money” (Item #8063) $65 ASA members; $95 nonmembers
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Feature Wage and Hour Frequently Asked Questions by SESCO Management Consulting Overtime violations and non-compliance with the Fair Labor Standards Act (Wage and Hour) continues to be the No. 1 financial liability for employers, according to SESCO Management Consulting. While many of the overtime violations are due to non-compliant employment practices utilized by employers, most Wage and Hour violations occur with specific job titles wherein the position has been classified as exempt by the employer and, in fact, is nonexempt as determined by the Wage-Hour Division, thus due overtime for hours worked in excess of 40 hours per week. DOES AN EMPLOYER HAVE TO GIVE AN EMPLOYEE REST BREAKS AND MEAL PERIODS? The federal regulations do not require rest or meal breaks. However, many states have adopted rest and meal break laws and as such, you need to check your state.
I AM AN HOURLY EMPLOYEE AND I AM PAID EVERY TWO WEEKS. DOES MY EMPLOYER FIGURE MY OVERTIME PAY AFTER 80 HOURS? No. Overtime is based on each individual workweek (a workweek is a seven-day consecutive period as defined by the employer).
IS THERE A RESTRICTION ON HOW MANY HOURS AN EMPLOYER CAN WORK AN ADULT EMPLOYEE? No. The federal law allows an employer to work the employee as long as they want. The employer only has to make sure that the employee is paid at least minimum wage (or the promised wages) and overtime.
DOES A PART-TIME EMPLOYEE HAVE TO BE PAID OVERTIME? Yes. Any employee who works over 40 is due overtime.
CAN AN EMPLOYER PAY SOMEONE A SALARY AND NOT HAVE TO WORRY ABOUT OVERTIME PAY? No. If an employee is exempt from the overtime regulations, then the answer is yes. However, just putting an employee on a salary does not necessarily mean that employee/position is not due overtime pay.
Can my employer require that I work overtime? Yes. The employer can require that you work overtime even if it was not scheduled. CAN I GIVE COMP TIME TO MY EMPLOYEES INSTEAD OF PAYING THEM TIME AND ONE-HALF (150 PERCENT) OVERTIME PAY? No. A business in the private sector cannot give comp time in lieu of overtime. However, in the public sector this practice is allowed.
DO THE HOURS THAT I AM PAID WHILE I’M OUT ON A HOLIDAY OR VACATION HAVE TO BE COUNTED WHEN MY EMPLOYER FIGURES OVERTIME PAY? No. Only actual hours worked are counted when figuring total hours for overtime purposes. Thus, an employee can work 40 hours plus one eight-hour holiday and be paid 48 hours at straight time. DOES MY EMPLOYER HAVE TO PAY ME TIME AND ONE-HALF (150 PERCENT) IF I WORK ON A HOLIDAY OR ON THE WEEKEND? No, from a federal law standpoint. However, some states require premium pay for holidays and weekends. WHAT ARE THE LEGAL HOLIDAYS THAT MY EMPLOYER HAS TO OBSERVE? None. There is no such thing as required legal holidays that employers have to observe.
CHASING PAYMENTS? LEARN HOW TO GET PAID ON TIME Getting paid on time and in full is part science and part art. Learn strategies for preventing payment delays and non-payment with the Foundation of ASA video-on-demand, “The Art and Science of Getting Paid” (Item #8054). In this video, presenter Michael Pappas, Esq., Miles & Stockbridge, Baltimore, Md., discusses how to develop and implement a corporate strategy using the law, your contract, and your company personnel to prevent payment delays and effectively apply pressure, when it is needed, for proper payments. Pappas reviews the key elements of such a strategy and how it enables you to better manage projects and reduce uncollectible receivables. “First and foremost, you need to know your customer, as well as your projects and the risks involved in them,” Pappas says.
“The Art and Science of Getting Paid” (Item #8054) $65 ASA members; $95 nonmembers
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1100 Via Callejon, Suite A, San Clemente, CA 92673
surety@southcoastsurety.com www.southcoastsurety.com (949) 361-1692 Fax (949) 361-9926
The Bond Only Agency
(800) 361-1720 DOI Lic# 0B57612
CAN AN EMPLOYER PAY ITS EMPLOYEES BY DIRECT DEPOSIT AND MAKE THIS A CONDITION OF EMPLOYMENT? Yes, on a federal basis. However, check your state as state laws vary. WHEN I SEPARATE FROM A JOB DOES MY EMPLOYER HAVE TO PAY ME WITHIN 24 HOURS? No, from a federal standpoint. However, check your state laws as states vary regarding final paychecks. DOES AN EMPLOYER HAVE TO GIVE ITS EMPLOYEES VACATION TIME OFF WITH PAY? No. Vacation is a wage benefit, which is provided at the discretion of the employer. I AM AN HOURLY-PAID EMPLOYEE. DOES MY EMPLOYER HAVE TO PAY ME FOR JURY DUTY? No, from a federal Wage and Hour standpoint. Check your state laws as state laws vary regarding jury duty pay.
CAN MY EMPLOYER REQUIRE ME TO TAKE A DRUG TEST? Yes. An employer can require that an applicant or an employee submit to a drug test as a condition of hiring or of continued employment within established policy. There is a significant amount of misunderstanding and misconceptions within federal Wage and Hour guidelines regarding pay, overtime, and fringe benefits. Education and training of managers and employees alike will help reduce internal questions/morale issues as well as potential complaints to a federal or state Department of Labor office. This article originally appeared in the June/July 2015 edition of The SESCO Report and is reprinted with permission from SESCO Management Consulting. SESCO Management Consulting, Bristol, Tenn., has been providing professional human resource consulting services to small and medium-size clients throughout the country since 1945. Services include development of employee handbooks and policy
manuals, compensation administration, management and leadership training and development, organizational development, federal and state employment law compliance including representing clients before the Department of Labor-Wage and Hour Division and the Equal Employment Opportunity Commission/OFCCP. ASA members receive complimentary human resources services provided by SESCO Management Consultants, including free telephone/email consultation, free handbook review, a management/employee satisfaction survey program, and the monthly newsletter, The SESCO Report. SESCO consultants can be reached at (423) 7644127 or sesco@sescomgt.com.
Legally Speaking
Suspending Work for Non-Payment May be a Legally Protected Right Where the Subcontractor Can Obtain Interest, Time and Save Unnecessary Costs by Karen A. Palecek and James J. Palecek
What do you do when you are on a project and the monthly progress payment is late? In many states and under certain contracts, there is a temporary remedy that may be available to a subcontractor that cannot only expedite payment, but reduce costs and compensate a subcontractor when a contractor does not pay the progress payment, even though they have been paid. It is important to know the contractual rights and what state law may apply in a situation where there has been a delayed monthly progress payments. Every situation is not necessarily a material breach that would allow termination, so it is important for the subcontractor to immediately evaluate what the possible remedies are and how it may impact the action options that may be available. A suspension may be more appropriate if the reasons for the non-payment can be cured following a suspension payment and resumption of work that could ultimately mutually benefit all parties. The suspension could include several aspects, whether it involved just reducing the crew size or a complete demobilization depending on the seriousness of the nonpayment and the particular provisions of the subcontract agreement and state laws that may apply.
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It is very important before suspending work or even threatening to suspend work, to obtain the advice of experienced construction counsel to evaluate the benefits and risks of suspension.
Be Aware of the State Statutory Law Involving Prompt Payment Many states have enacted prompt payment laws for public and private construction projects. It is important for subcontractors to familiarize themselves with the applicable laws where they are performing the work and depending on whether it is public or private, the suspension possibilities may be different. For example, in Arizona on private construction projects, Arizona has adopted Arizona’s Prompt Payment Act and under A.R.S.§32-1129.04 provides that a contractor may suspend performance if the owner fails to pay the contractor and a subcontractor may suspend performance if the owner fails to pay the contractor and the contractor fails to pay the subcontractor. In addition, if the owner pays the contractor for the subcontractor’s work, but the contractor fails to pay, the subcontractor has a remedy as well. In addition, the statute addresses situations when the pay application
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is submitted, there may be a proper basis to withhold the fund and, thus, this must be evaluated by the subcontractor. Arizona’s statute specifically provides that the subcontractor will not be in breach of contract for suspending performance pursuant to the statute and that once the suspension occurs, they are not required to resume work until the amount that has been certified and approved is paid, along with the costs incurred for remobilization resulting from the suspension. Other states’ laws definitely vary in terms of the specifics with regard to the ability to suspend work.
Check the Specific Subcontract Language for Any Rights to Suspend Work Some subcontract agreements contain a provision that gives a subcontractor the right to suspend work for non-payment. Specifically, the ConsensusDocs Form 200 Agreement and General Conditions Between Owner and Contractor (Lump Sum) (Copyright 2011, revised 2014) specifically provides that if there is no fault of the constructor that the constructor that has not received a progress payment from
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the owner within seven days after the payment is due, upon giving a sevenday written notice to an owner, and without prejudice to or in addition to any legal remedies, may stop work until payment of the full amount owing the constructor has been received. It provides for interest for late payment. In addition, it discusses the contract price and contract time, which should be equitably adjusted by change order for reasonable cost and delay resulting from the shutdown. See section 9.5. The ConsensusDocs Form 750 Standard Agreement Between Constructor and Subcontractor also identifies that if a constructor has not received payment from the owner and does not make payment to the subcontractor for any reason not the fault of the subcontractor, or if the constructor has failed to pay the subcontractor within a reasonable time, the subcontractor may, after giving seven days written notice, stop work until payment of the full amount owing the subcontractor has been made. See Section 8.2.6. The ConsensusDocs Form 750 also provides for the subcontractor costs related to the suspension. See 8.2.6. It is important to verify the contract language and statutory language because if the construction subcontract agreement does not have a suspension of work provision and the state does not have such a statute, a suspension of work would be considered a material breach by the subcontractor.
Documenting and Communicating the Delays in Payment Are a Must If the subcontract agreement and the state law have remedies allowing for suspension for non-payment, it is still very, very important to investigate the reasons for non-payment, send timely communications stating that
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payment has not yet been received, what is the basis for the nonpayment, e-mails should also be sent as a supplemental. Writing to the appropriate contractor representative and identifying the specific billing or monthly payment that has not been paid is critical for documentation to support the suspension. In addition, if the procedures are followed in terms of communication and then a suspension does occur, it will be very important for the subcontractor to document the costs associated with the suspension and the timing of the suspension so interest and remobilization costs can be recovered.
Seek Legal Advice Regarding Any Suspension for Non-Payment Given the risks associated with the suspension and the necessary evaluation process, the subcontractor should seek advice from competent, knowledgeable construction counsel before undertaking the suspension. In addition, if the subcontractor wants counsel to just review the facts and the letter prepared for the suspension, it needs to provide counsel with all of the facts. Counsel should then be able to evaluate and advise as to the most prudent course of action. Karen A. Palecek is a co-managing member of Palecek & Palecek PLLC where she has more than 26 years of experience in the areas of construction law and litigation. Her clientele includes specialty trade contractors, suppliers, general contractors, and
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owners. Her practice and experience is focused on every aspect of the construction industry including but not limited to contract review and negotiation, mechanic’s liens, bond claims, arbitration, mediation, bench trials, jury trials, payment and performance issues, claim evaluations, litigation from complaint through to collection on judgments and appeals. James J. Palecek is a co-managing member of Palecek & Palecek, PLLC. He has advised construction and other corporate clients for over 18 years. His clientele includes suppliers, subcontractors, general contractors, developers, and consultants in both the commercial and residential construction arenas and in both the public and private sector. In addition to a focus in construction law, he has also led the firm’s corporate transactional and real estate practice areas for the last 10 years. They can be reached at (602) 522-2454 or info@paleceklaw.com.
IN THIS ARTICLE . . . • Understand the contractual rights and what state law may apply. • Obtain the advice of experienced construction counsel before suspending work. • Documenting and communicating delays in payment are a must!
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ASA/FASA Calendar September
February 2016
15 – Webinar: The Subcontractor’s Guide to a Fair Lien Waiver Process
9 – Webinar: Negotiating Retainage
Coming Up in the September 2015 Issue of ASA’s
March 2016
13 – Webinar: Cash Management for Subcontractors 16-18 – 2015 ASA Legal & Advocacy Meetings Austin, Texas
3-5 – SUBExcel 2016 Miami, Fla. THE
October
April 2016 12 – Webinar: The Payment Dance in the Construction Industry
November 10 – Webinar: Implementing Technology for the Jobsite: Turning Refusers into Adopters December 8 – Webinar: Employment Law Changes and How They Affect Screening and Hiring Practices January 2016 12 – Webinar: The War for Talent Drives Construction Pay Higher: Pay Trends in the Construction Industry
THEME: The P3 Issue
May 2016 10 – Webinar: Websites, Email, Social Media and Your Domain Name
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Public Private Partnerships: Payment Security Concerns
•
Construction Industry Internship Programs
•
The Ten Commandments of Mediation
•
Legally Speaking
June 2016 14 – Webinar: Damages For Lost Labor Productivity Contact information for all ASA and FASA events/programs: www.asaonline.com education@asa-hq.com
Win. Win. THE
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That’s a win-win situation. To advertise in The Contractor’s Compass, contact Tony Kozak at (716) 844-8174 or advertising@asa-hq.com
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