The Contractor's Compass July 2017

THE

ASA’s

THE OFFICIAL EDUCATIONAL JOURNAL OF THE AMERICAN SUBCONTRACTORS ASSOCIATION

WWW.ASAONLINE.COM

Connecting the Dots: Utilizing Key Performance Indicators to Drive Organizational Performance

by Gregg Schoppman, FMI

The Future of Payments in

JULY 2017

Cash Management

Construction: Pay Me on the Blockchain!

by James L. Salmon, Esq., Benjamin, Yocum & Heather, LLC

Long Live the King! Why Your Company Needs Cash Flow Reporting

by Steve Antill, Foundation Software

Improving Your Cash Flow: The Art of Billings & Collections

by Stephane McShane, Maxim Consulting Group

Four Top Strategies to Retain and Motivate Key Employees

by Mark Steranka, Moss-Adams, LLP

How Your Client’s Creditworthiness and Ability to Pay Can Impact Your Bottom Line

by Scott Applegate, CapitalPlus Equity

Legally Speaking: Do We Have a

Deal? Avoiding Handshakes (and Litigation) in Contracting

by Lauren McLaughlin, Esq., Briglia McLaughlin, PLLC

TM

AMERICAN

SUBCONTRACTORS ASSOCIATION

SAVE THE DATE! February 28 – March 3, 2018

TEMPE MISSION PALMS HOTEL & CONFERENCE CENTER | TEMPE, AZ

THE

ASA’s

July 2017

TM

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.

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).

EDITORIAL STAFF Editor-in-Chief, Marc Ramsey 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.

ADVERTISING Interested in advertising? Contact Richard Bright at (703) 684-3450 or rbright@ASA-hq.com or advertising@ASA-hq.com.

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.

LAYOUT Angela M Roe angelamroe@gmail.com © 2017 Foundation of the American Subcontractors Association, Inc.

Features Connecting the Dots: Utilizing Key Performance.................................. 8 Indicators to Drive Organizational Performance

by Gregg Schoppman, FMI

The Future of Payments in....................................................................10 Construction: Pay Me Pay Me on the Blockchain!

by James L. Salmon, Esq., Benjamin, Yocum & Heather, LLC

Long Live the King! Why Your Company...............................................14 Needs Cash Flow Reporting

by Steve Antill, Foundation Software

Improving Your Cash Flow: The Art of Billings & Collections...............16

by Stephane McShane, Maxim Consulting Group

Four Top Strategies to Retain and Motivate Key Employees.................19

by Mark Steranka, Moss-Adams, LLP

How Your Client’s Creditworthiness and Ability to ............................. 21 Pay Can Impact Your Bottom Line

by Scott Applegate, CapitalPlus Equity

Departments CONTRACTOR COMMUNITY................................................................................... 4 LEGALLY SPEAKING.................................................................................................23 Do We Have a Deal? Avoiding Handshakes (and Litigation) in Contracting

by Lauren McLaughlin, Esq., Briglia McLaughlin, PLLC

Quick Reference ASA/FASA CALENDAR.............................................................................................25 COMING UP.................................................................................................................. 25

CONTRACTOR COMMUNITY

4

Civil Engineers Give Nation’s Infrastructure a D+

Death by Contract: Design Disclaimers

Although there has been some incremental progress toward restoring the nation’s infrastructure, it has not been enough, according to the American Society of Civil Engineers. As in 2013, the United States’ cumulative GPA for infrastructure is once again a D+. The 2017 grades range from a B for Rail to a D- for Transit, illustrating the clear impact of investment—or lack thereof—on the grades.

Three categories—Parks, Solid Waste, and Transit—received a decline in grade this year, while seven—Hazardous Waste, Inland Waterways, Levees, Ports, Rail, Schools, and Wastewater—saw slight improvements. Six categories’ grades remain unchanged from 2013— Aviation, Bridges, Dams, Drinking Water, Energy, and Roads.

ASCE has published its Infrastructure Report Card, which grades the current state of national infrastructure categories on a scale of A through F, since 1998. Since then, America’s infrastructure has earned persistent D averages, and the failure to close the investment gap with needed maintenance and improvements has continued. Even though the U.S. Congress and some states have recently made efforts to invest more in infrastructure, these efforts do not come close to what ASCE estimates is a $2 trillion need. ASCE estimates that to raise the overall infrastructure grade and maintain the country’s global competitiveness, Congress and the states must invest an additional $206 billion each year to prevent the economic consequences to families, business, and the economy.

A design disclaimer can come in many forms, but essentially, it is a statement in a contract that means “this part of the design might not be good enough.” When a contract or a subcontract contains a design disclaimer, it shifts the design risk to the contractor or subcontractor, whether or not a design-build warranty was supposed to be part of the deal.

From a financial standpoint, a design disclaimer amounts to the same thing as a design-build warranty, because both make the contractor or subcontractor responsible for increased costs should the design prove inadequate. For example, a Washington, D.C.-area contractor learned an expensive lesson about contractual design disclaimers when it spent twice its bid amount to complete a subway station.

After an inconsistency between the final bid package and the resulting requirements, the winning contractor discovered that the design was inadequate and sued to recover for the resulting extra costs. The owner disclaimed its warranty of the design in the contract, effectively putting the contractor in the position of warranting the design. However, a court decision found that the contactor “had a duty to inquire about the true meaning of the contract.” The court also found that: “By failing to inquire, the contractor assumed the risk that the owner would offer reasonable but conflicting interpretation.” This is an example of a design-bid-build, lump-sum contractor, not involved with the design, assuming responsibility for cost overruns caused by design changes.

J U L Y

2 0 1 7

T H E

To make its case, the contractor might have pointed to industry best practices described in the Guidelines for a Successful Construction Project, developed and published by ASA, the Associated General Contractors of America and the Associated Specialty Contractors. The “Guideline on Design Responsibility” provides: “Contractors and subcontractors must not be held responsible for the adequacy of the performance or design criteria indicated by the contract documents.”

Perhaps the best way to guard against design disclaimers is with a contract addendum that incorporates your bid proposal. For example, the ASA Subcontract Addendum provides: 2. Scope of Work. Subcontractor’s scope of work includes only the following: [Insert your scope and pricing information below. Many subcontractors may wish to substitute a different format.]

WORK CATEGORY(IES) AND SPECIFICATIONS TO WHICH THIS ADDENDUM APPLIES: EXCLUDING, HOWEVER:

Subcontractor’s obligation to examine documents, the project site, and materials and work furnished by others is limited to notification of Customer of any defects or deficiencies that a person in the trade of Subcontractor would discover by reasonable visual inspection. No testing beyond reasonable visual inspection shall be required.

Subcontractor is entitled to rely on the accuracy and completeness of plans, specifications and reports of site conditions provided to Subcontractor.

C O N T R A C T O R ’ S

C O M P A S S

Any design services provided by Subcontractor will be reviewed by Designer to assure acceptability when integrated with the entire work.

Customer is entitled to rely on the accuracy and completeness of design services or certifications provided by Subcontractor only to the extent that design responsibility is specifically delegated to Subcontractor by agreement in writing and all design and performance criteria are furnished to Subcontractor. A change in the price of an item of material of more than 5% between the date of subcontractor’s bid proposal and the date of installation shall warrant an equitable adjustment in the subcontract price.

Coupled with a bid proposal that specifically describes the work on which your bid is based, the ASA addendum shifts design risk back where it belongs, to the party who hired the design professionals. The ASA Subcontract Addendum is part of the ASA Subcontract Documents Suite, which is available at no cost to ASA members on the ASA Web site at www. asaonline.com.

Government List of Sureties Serves Many Purposes The federal government “screens” the surety bond companies that are permitted to provide bonds, or to reinsure bonds, for federal construction projects. This may seem like a piece of trivia to contractors that do not perform much construction for the federal government. However, specialty contractors can be required in a variety of contexts, inside and outside of the sphere of federal construction, to qualify for bonding by one of these “approved” sureties, and so should be aware of this select group of sureties and some of the circumstances under which they might need to meet the sureties’ exacting requirements.

T H E

C O N T R A C T O R ’ S

Specialty contractors that work as prime contractors on larger federal projects are already familiar with the U.S. Department of the Treasury’s list of approved sureties, since federal regulations require prime contractors on these projects to obtain a performance and payment bonds from a surety on the list. Federal law requires performance bonds on all prime contractors’ work on federal construction work valued at $150,000 or more.

Rather than judge the integrity of bonds on a case-by-case basis, the Bureau of the Fiscal Service of the Treasury Department compiles the Listing of Approved Sureties, a list of surety companies that it has examined and specifically judged to be financially sound for the purposes of insuring or re-insuring bonds. BFS continually monitors the financial status of companies approved for inclusion on the circular, and amends the circular as needed. BFS thus helps protect the federal government’s investment in construction by “screening” surety companies to ensure that they are capable of completing federal projects and/or paying subcontractors and suppliers should a bond be called.

Because only a surety on the list can bond federal construction, sureties seek to qualify for the list. After all, qualification means entry into a bond market covering billions of dollars’ worth of construction. A key point for contractors that do not perform much federal construction, or much public work at all, is that other entities use the list developed by BFS as a resource to protect their investments. Some state and local governments that desire the same level of security as the federal government, and even some private contractors, may ask for Treasuryapproved bonding capacity in their bonding requirements.

C O M P A S S

Some subcontractors encounter the Treasury list of sureties for the first time when a private owner or prime contractor on a relatively small project requires them to qualify for bonding by one of the Treasury-approved sureties. Specialty contractors should be aware that this requirement serves a dual purpose. First, it ensures the financial integrity of the bond and, by extension, the financial ability to perform the bonded subcontract work and to pay suppliers and laborers.

Second, owners or prime contractors may impose the requirement to pre-qualify subcontractors that can bid on the project. Because most subcontractors will undergo intense scrutiny of their finances and business operations in order to qualify for the bonds issued by this “select” group of surety companies, owners and prime contractors may impose the requirement to provide an extra layer of assurance that work will be performed according to contract requirements.

Could Arbitration Save You Time and Money?

Arbitration is a binding method to resolve claims among parties before a private arbitrator, rather than a judge or jury in the formal court process.

Because mandatory arbitration provisions are common in many construction contracts, a prudent businessperson needs to evaluate whether such an arbitration provision is advisable or not in a certain circumstance.

Generally, arbitration proceedings are conducted under the arbitration rules of the American Arbitration Association or JAMS. A party seeking arbitration of a dispute initiates this procedure by filing a simple Demand for Arbitration with AAA in the regional

J U L Y

2 0 1 7

5

office and enclosing a filing fee.

The fee charged by AAA is based, in part, upon the amount of each claim and the days of hearing. AAA then appoints an arbitrator or a panel of three arbitrators who are supposed to be knowledgeable in this type of dispute or industry to hear the dispute.

Arbitrators may be lawyers, but need not be. Once the dispute is heard, the arbitrator(s) make an award within 30 days.

According to Don Gregory, partner with the Columbus, Ohio, law firm of Kegler, Brown, Hill and Ritter, general counsel of ASA, “There is no sure answer as to whether mandatory arbitration is advantageous as each situation depends on the particular facts of that case.”

According to Gregory, there are several practical advantages to arbitration instead of litigation in the courts. One is that arbitrators generally are more knowledgeable in the construction industry than a judge or jury with little or no experience in that area. Second, the arbitration hearing generally is less formal with a more relaxed and informal atmosphere, with more lenient rules of evidence than a court of law. This can be an advantage for individuals who feel uncomfortable in a formal court setting. Third is overall cost and speed. One authority reports that arbitration saves 80 percent of the time and money involved in traditional litigation in the courts.

Gregory advises subcontractors to seriously consider the disadvantages to arbitration. First, the filing fee costs generally are much higher than those to initiate a lawsuit. Second, the fact that there may be no appeal could be a serious detriment to a party who is

6

J U L Y

2 0 1 7

unsatisfied with the outcome of an arbitration proceeding, particularly in a sizable dispute. Also, there is the serious practical problem that an arbitration award must be reduced to judgment by filing a lawsuit with the courts before collection efforts can be made to satisfy the judgment.

Therefore, the person or company that prevails in arbitration against an entity that refuses to voluntarily pay the arbitration award is faced with having to file a lawsuit anyway to collect the award, which is exactly what the arbitration procedure was supposed to avoid. There is a “privity of contract” problem that occurs with some regularity in complex disputes, in that one can usually only arbitrate with the party with which one contracted.

There is no assurance that all parties arguably responsible for the problem are brought into the same forum to avoid inconsistent results. Once again, the intent behind arbitration— to provide a swift, certain and less expensive procedures for dispute resolution—is defeated.

Gregory says, “As a general rule, arbitration can be helpful when dealing with disputes over relatively small amounts in controversy between parties that agree to be bound by the results. Yet arbitration is often counterproductive when dealing with disputes concerning multiple parties and very large amounts in controversy, particularly where there is no assurance that the parties will voluntarily agree to be bound by the result.”

T H E

Construction Will Feel Impact of ‘Buy American, Hire American’ Order On April 19, President Donald Trump signed an executive order initiating an aggressive policy “to buy American and hire American.” “Because the thrust of the E.O. is to direct federal departments and agencies to enforce existing laws and to study and report on the impact of those, it is difficult to predict its ultimate impact,” said ASA Chief Advocacy Officer E. Colette Nelson. The “buy American” policy is focused on federal contractors and subcontractors, including construction.

Specifically, the E.O. directs federal agencies to: • “[S]crupulously monitor, enforce, and comply with Buy American Laws, to the extent they apply, and minimize the use of waivers, consistent with applicable law.”

• Issue guidance to agencies about how to make the assessments and to develop the policies required by the E.O. • Assess the monitoring, enforcement, implementation and compliance with existing Buy American Laws.

• Assess the use of waivers by type and impact on domestic jobs and manufacturing.

• Develop and propose policies “to ensure that, to the extent permitted by law, Federal financial assistance awards and Federal procurements maximize the use of materials produced in the United States, including manufactured products; components of manufactured products; and materials such as steel, iron, aluminum, and cement.”

C O N T R A C T O R ’ S

C O M P A S S

CONTRACTOR COMMUNITY

With respect to “public interest waivers from Buy American Laws,” the E.O. states they should be construed “to ensure the maximum utilization of goods, products, and materials produced in the United States, and before granting such a waiver, an agency “must take appropriate account of whether a significant portion of the cost advantage of a foreign-sourced product is the result of the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods” and “integrate any findings into its waiver determination as appropriate.” Many federal construction contractors routinely request and obtain publicinterest waivers from Buy American requirements.

The construction industry also will be impacted by the E.O.’s “hire American” provisions. The E.O. states that the government’s policy is “to rigorously enforce and administer the laws governing entry into the United States of workers from abroad …”

It directs “the Secretary of State, the Attorney General, the Secretary of Labor, and the Secretary of Homeland Security, as soon as practicable, and consistent with applicable law, propose new rules and issue new guidance, to supersede or revise previous rules and guidance if appropriate, to protect the interests of United States workers in the administration of our immigration system, including through the prevention of fraud or abuse.”

In addition, it directs these officials to “as soon as practicable, suggest reforms to help ensure that H-1B visas are awarded to the most-skilled or highest-paid petition beneficiaries.”

H-1B visas allow U.S. employers to temporarily employ foreign workers in

T H E

C O N T R A C T O R ’ S

“specialty occupations,” which includes engineering and architecture.

The new E.O. does not address H-2B visas, which allow U.S. employers to bring in foreign workers to fill temporary non-agriculture jobs, such as construction. ASA will monitor and provide input to federal departments and agencies about the impact of the new E.O. and the resulting regulatory actions on the construction industry.

OSHA Silica Rule Compliance Date Is Sept. 23 Construction contractors with more than 10 employees have until Sept. 23 to comply with OSHA’s rule regulating employee exposure to respirable crystalline silica. Under a rule issued by OSHA on March 25, 2016, construction employers must comply with all requirements of the standard by Sept. 23, except requirements for laboratory evaluation of exposure samples, which begin on June 23, 2018. Earlier, OSHA delayed enforcement of its rule, which requires construction employers to limit worker exposure to silica and to take other steps to protect workers, from June until September.

Crystalline silica is a common mineral found in many naturally occurring materials and used at construction sites. Inhaling very small crystalline silica particles can cause multiple diseases, including silicosis, lung cancer, chronic obstructive pulmonary disease and kidney disease.

Respirable silica is generated by highenergy operations like cutting, sawing, grinding, drilling and crushing stone, rock, concrete, brick, block and mortar.

Activities such as abrasive blasting with sand; sawing brick or concrete;

C O M P A S S

sanding or drilling into concrete walls; grinding mortar; and cutting or crushing stone generate respirable dust.

Under the OSHA standard, construction employers can either use a control method, as laid out in Table 1 of the standard, or they can measure workers’ exposure to silica and independently decide which dust controls work best to limit exposures to the permissible exposure limit in their workplaces.

To learn more about OSHA’s silica rule, see the webinar prepared for the Construction Industry Safety Coalition. Access the webinar using the password, CSC4. A hard copy of the webinar slides is available on the ASA Web site. For more information, see the ASA Fact Sheet on OSHA’s Rule on Respirable Crystalline Silica, the ASA Frequently Asked Questions on the OSHA Standard on Respirable Crystalline Silica, and the free ASA video-on-demand, “OSHA Silica Rule— Applications for Subcontractors” (Item #8101), presented by Gary Visscher, Esq., Law Office of Adele L. Abrams, P.C. ASA, in collaboration with 22 other construction associations, has initiated a lawsuit to prevent OSHA from implementing its rule. In the meantime, ASA urges construction employers to take steps to be in compliance by the OSHA deadline.

J U L Y

2 0 1 7

7

Feature Connecting the Dots: Utilizing Key Performance Indicators to Drive Organizational Performance

by Gregg M. Schoppman, FMI

Hearing the words “data driven” causes a certain cringe factor. Whether it is the way internet-based companies always seem to know about that snazzy suit you had an eye on or even how they seem to know about the vacation you were seemingly going to book before you booked it, there are countless stories of firms capturing customer data, buying proclivities, likes, etc. From the transparent e-commerce site that matches your favorite authors with new authors you might like to the downright subversive businesses that capture your “clicks,” businesses are continuing to mine the treasure trove of data to help further their strategic aims. Now consider the mid-level construction organization—what are they measuring? Profitability, safety statistics, collections. Is that enough in today’s world? Do organizations need to up their game and follow their peers across the myriad of industries?

Many firms lament about connecting their vision or desired state which is usually some abstract, yet forward reaching, picture with how they are currently structured and operating. For instance, a firm might have a vision or mission such as: “We desire to be the leading specialty contractor in the New England marketplace.”

No one can argue that this hits all of the major bullets relating to text book visions/missions. However, visions/missions often die on the vine when they lack the right objectives or KPIs to drive them further. “Leading,” “superior contractor” or “best contractor” are outstanding adjectives and superlatives to define performance, but they do lack a certain specificity. Does leading define market share, productivity, profitability, customer service, strongest team, etc.?

All of them may be correct. In some cases, firms use their core values to supply stronger connective tissue to the

goals. However, without objectives or key performance indicators, firms will often languish like a team with a scoreboard. Ultimately, how does the team know if they are winning?

Defining the Vision Visions by their very nature may be nebulous or ambiguous. For instance, “To be the contractor of choice,” might be vague to allow the reader the interpretation of this choice as employer, general contractor, or service provider.

In the end, there has to be some series of metrics to help define success. This is not to say that a firm is locked into only one definition, but clarity around the vision establishes a series of bogeys for the firm to target. Below are several examples:

By providing a little clarity around the definition of “Contractor of Choice” or “Leading,” a firm can now implement processes, tools, etc., to drive these metrics. It is important to not get fixated on one metric or KPI. Think of it like a health panel screening—weight, cholesterol, body mass index (BMI), blood pressure, LDL, HDL, sugars, etc., are all health KPI’s that define a healthy lifestyle. You may have great blood pressure, but a BMI that is severely out of sync. A firm must look across several parameters to define success.

Connecting the Dots from Firm to Individual The next lynch pin for firms is translating this down to the individual associates of the firm to drive their behaviors.

A firm may have objectives and KPIs, but how do those cascade through business units (i.e. offices, markets, niches/ segments) and to the individual? The key word is alignment. For instance, it would be naïve to think that a firm that solely compensates its associates based on project profitability to live out

Fig 1

8 J UJ NU EL Y 2 02 10 71 7

O PM AP SA SS S T HT EH EC OC NO TN RT AR CA TC OT RO ’ RS ’ SC OC M

a vision that espouses customer service, integrity, and team orientation. While there are plenty of altruistic individuals that can do both, the vast majority will maximize personal gain at the expense of the organization leading to a misalignment. More importantly, the organization will struggle with credibility and image. How often have we seen a firm talk about the right things in the boardroom or only a fancy vision statement poster only to have individuals run amok like renegades on a pirate ship.

There must be connective tissue to link each piece of an organization. In Fig. 1, a matrix illustrates potential KPIs that would run through the goals of a firm’s strategic plan: To illustrate the flow, consider the “Operations Goal.” The firm is focused on overall efficiency. As a self-performing, labor-intensive contractor, this should be easy to measure. However, the firm is looking at the major heading of “Efficiency.” Within the business unit, they are focused on an element of efficiency, perhaps “Prefabrication for their Commercial HVAC Business Unit.” Lastly, the individual project manager or superintendent is tasked with measuring, tracking and adhering to the tenets of productivity through all direct labor on his/her project. All of this when rolled up would subscribe to this contractor achieving its moniker of “Leading contractor (for productivity in the commercial HVAC sector) in the Southern United States.”

Upstream/Downstream KPIs are also multi-dimensional. For instance, the main problem with measuring safety and profitability is that they

T H E

C O N T R A C T O R ’ S

are often snap shots in time or more importantly a “history lesson.” Last month, there were two lost time incidents and the project spent $30,000.

KPIs must measure the upstream and the downstream. The same principles apply in the previous health example.

Examine the illustration in Fig. 2:

Stepping on the scale every week is the equivalent of looking at the financial statements at the end of the month. It is very important to study a firm’s financials, but isn’t it more important to drive the behaviors that influence a project or firm’s performance? So rather than stepping on the scale, it is equally as important to measure one’s diet or exercise/ activities. The same could be said for the firm. Measure the processes that drive the vision. Fig. 3 illustrates several examples of upstream and downstream KPIs.

Behavioral Modification There was a famous management guru that once said, “To manage something, you must measure it.” Striving to become the “leading contractor” is an empty intangible target without something to make it tangible. One of the great vision statements from the last 30 to 40 years was Nike—“Crush Adidas.”

While there are not too many examples of contractors publicly trolling their

C O M P A S S

competition, this visualization was magnificent. It also worked well in light of the market (athletic shoes). Now consider your team—how do you motivate them to light up the scoreboard and achieve their individual and corporate goals? How often do they see the scoreboard? How often are the data updated—put another way, is the team seeing a stale version of the scorecard or live, up-to-the-minute results?

Ultimately, there needs to be a mechanism that will guide the team’s behavior and also demonstrate success. Consider broadcasting the score at corporate meetings, via corporate bulletins, or even with live feeds on televisions throughout an office. There is no single recipe that works for every firm. The only inalienable truths are transparency of the data, the frequency of the data and the relevancy of the data.

There has always been some mysticism about KPIs and what they mean to organizations. Some people worry that being a data-driven organization will require countless new overhead resources focused less on building and more on bytes. No one wants “Brand X Construction” to look like Skynet, but smart organizations, or “leading” organization, use the data afforded to them to provide context and more importantly provide direction.

As a principal with FMI, Tampa, Fla., Gregg Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. 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 multifamily 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) 636-1259 or gschoppman@fminet.com.

Y JJ UU NL E

2 0 1 7

9

Feature The Future of Payments in Construction: Pay Me on the Blockchain!

by James L. Salmon, Esq., Benjamin, Yocum & Heather, LLC Would you rather get paid today or in six months?

Technology exists to enable payment of pay applications in construction within hours instead of months. If McDonald’s collects at the counter prior to delivery, why not allow trade contractors to collect upon delivery?

This article outlines a futuristic pay processes driven by blockchain technologies on the cloud. Just don’t be surprised if something very close to the process described herein emerges in the marketplace sooner rather than later. But first, a little background.

introduced the concept1. Ethereum introduced the world to blockchain 2.0 powered by code with Turing capacity, that is the ability to insert logic forks and loops and, ultimately, write self-executing smart contracts on the blockchain2. Today, as blockchain 3.0 unfolds, startups offer Blockchain as a Service, (Baas) Data as a Service (DaaS) on blockchain platforms, Digital Asset Arrays (DAAs) and Distributed Autonomous Applications as a Service (DAAaaS). In short, blockchain offers an innovative new platform for services on the web3.

What Is the Blockchain?

What Is a Smart Contract?

Everyone knows about the internet and the cloud, but what is a blockchain?

A blockchain is an immutable database—usually distributed and networked around the world, via the internet—of secured tamper-resistant digital transactions. Blocks of data on the blockchain contain timestamps and links to previous blocks. Users around the globe connect to the network to send and verify transactions, creating new blocks in the chain.

Self-executing transactions on the blockchain, verified independently by random participants around the globe, reduce the need for trust between parties and enable swift, value-based exchanges on a global scale.

Blockchain 1.0, marked by the rise of Bitcoin and similar digital currencies, began in 2009 when Satoshi Nakamoto published the Bitcoin blockchain code described in his 2008 whitepaper that

10

J U L Y

2 0 1 7

Smart contracts reside on the cloud as code and self-execute when a triggering event occurs. Online bill payment systems utilize smart contracts. The due date of a bill triggers automatic payment of the bill, electronically, by executing prior instructions. Smart contracts leverage software to increase efficiency and productivity by automating execution of the terms. The potential uses of smart contracts are legion, and limited only by the imagination of the drafters and, importantly, the appetite for risk of those entering into such agreements. Deploying smart contracts on a secure blockchain reduces those risks exponentially.

T H E

How Is the Blockchain Used Today?

Blockchains, resting on secure distributed ledgers, enable the intelligent secure use of smart contracts. Those transparent ledgers create immutable records of each transaction and as append-only databases they create the perfect audit trail, ensuring transparency and accountability and, over time, becoming more and more secure.

Bitcoin and other crypto currencies reside on such ledgers.

Intrigued by the value of the blockchain, businesses and governments are exploring the use of blockchain-style ledgers as secure, distributed platforms. Multiple sectors of the economy, many ripe for digital disruption, appear vulnerable to the exponential increases in efficiency, productivity, security and transparency that blockchains enable. These include sectors as diverse as finance, government, real estate, medicine and, of course, construction and the built industry generally.

Two big time players in this space are the R3 Consortium and the state of Delaware. Made up of 19 different members, all banks, the R3 Consortium controls a research lab that recently completed the origination, funding and payment of a Syndicated Loan on a private blockchain4. In 2016 Delaware launched the Delaware Blockchain Initiative, on Symbiont’s AssemblyTM platform. Delaware intends to record all government data on a state controlled blockchain, to issue, track and update UCC filings and, ultimately, issue, record and track stock ownership in Delaware Corporations5.

C O N T R A C T O R ’ S

C O M P A S S

What Is ‘State of the Art’ in Construction?

More and more, sophisticated consumers of planning, design and construction services insist that integrated teams of designers, constructors and suppliers virtually plan, design and construct facilities, infrastructure and residential assets (FIR Assets). Those integrated teams, made up of the owner, designers, constructors and key trades, often execute new generation legal instruments patterned after the ConsensuDocs 300 Multi-Party Integrated Project Delivery (IPD) Agreement and related documents, or instruments contained in the AIA Integrated Project Delivery (IPD) Family of documents published by the American Institute of Architects.

Virtually planning, designing and constructing FIR Assets together, as an integrated team, and signing an integrated agreement related to the delivery of such services, greatly increases efficiency and productivity and might be described as the “State of the Art” in construction. At a minimum these processes represent best practices in the industry.

Unfortunately, these best practices tend to replicate antiquated paper processes developed for use in “waste based” business models created to extract profits from the waste stream of a complex construction project. Historically, the built industry, operating under a design-bid-build procurement model, delivered planning, design and construction services out of a series of silos.

Procurement via design-bid-build encourages waste and inefficiency, and the built industry delivers both in spades. From 1950 until 2013, a span of almost 65 years, labor productivity rates remained flat while labor productivity in all other non-farm sectors of the economy improved by over 250 percent!6 While flat to declining labor productivity is one measure of failure in construction, there are others. In 2004 the U.S. construction industry wasted $15.8 billion due to a lack of interoperability among digital platforms used in capital facilities .

The value “added” by the construction

T H E

C O N T R A C T O R ’ S

sector in 2007 was, purportedly, $1.2 trillion; however, at least 50 percent of that “value” was waste. In other words, the industry wasted $600 billion dollars in 2007! Nor have these numbers improved in the past 10 years.

Waste manifests as labor inefficiencies at a rate of 30 percent, as material waste at 30 percent, re-work at 10 percent, while 5 percent arises from poor planning and management.

Together the foregoing account for $450 billion of the $600 billion wasted in 2007. Further, 72 percent of construction projects run over schedule, and 70 percent run over budget.

Not fully reflected above, additional failure manifests itself as injuries to workers, broken equipment, design defects, energy loss, inefficient operations and undue maintenance costs. These factors contribute billions more in red ink. Meanwhile, the industry embraces business models that extract profits from waste, while shunning those that earn profits by adding value.

How Can We Fix Our Broken Built Industry?

Forward-thinking firms in the built industry embraced building information modeling (BIM) in the late 1990s and early 2000s, and by 2005 the industry had begun to supplement those virtual planning and design tools with proven continuous improvement processes borrowed from manufacturing and agile project management concepts borrowed

C O M P A S S

from the IT industry. In 2010, the U.K. government mandated that all government projects in the U.K. worth more than £5.0 million be planned, designed and constructed virtually, and that the resulting digital asset be delivered to the U.K. government along with the completed physical asset.

Armed with the technologies described above, the built industry has the capacity to plan, design, construct, operate and maintain FIR Assets on a blockchain platform that combines virtual planning and design, lean construction processes and innovate financing options in a manner that enables automated payment of pay applications.

Leveraging Blockchain as a Service (BaaS) in Construction Imagine a complex construction project financed by a member of the R3 Consortium on behalf of an owner that intends to manage the digital assets related to the FIR Assets it procures on Symbiont’s AssemblyTM blockchain platform. Further imagine that owner sought to procure planning, design and construction services from an integrated BIM enabled team capable of operating on a blockchain platform upon which all stakeholders recorded and tracked everything related to the project including, ultimately, pay applications.

In that environment, where proceeds from the construction loan reside in an escrow on the blockchain and the owner expects the physical FIR Assets as delivered to match the virtual, as designed version of those FIR Assets, J U L Y

2 0 1 7

11

a trade contractor can complete a pay application on the blockchain and get paid immediately.

To process a pay application on a construction project three things must occur: The trade must properly complete a portion of its scope of work and request payment; the request for payment must be approved; and, a lien release related to that portion of the work must be executed. In a technologically empowered world, that entire process can be completed in a matter of seconds rather than months, resulting in a permanent, transparent record of the entire transaction being recorded on the blockchain.

Under our current cumbersome system, processing pay applications easily takes 45 or even 90 days and consumes thousands of hours of administrative time, depending on the size and complexity of the project.

If the virtual design reflected in the BIM accurately depicts what the owner contracted to receive, and the photo/video from the trade contractor accurately depicts what the trade contracted to deliver, then proof of completion exists. Technology exists to compare such photos/videos to the BIM, thus automating two elements— proof of work and approval—of the smart contract referenced above. Of course, a human might “approve” the work and then click an online link

to satisfy the approval element of the smart contract as well.

Next, a lien release must be executed.

Technology exists to create and execute lien releases digitally and to then store those releases on the blockchain. Or a PDF copy of a physically executed lien release could be stored on the blockchain. Either way, placing the release on the blockchain could be the last “if then” requirement prior to payment under the smart contract.

Processing pay applications on the blockchain, rather than via the existing byzantine red-tape riddled process used now, will save the built industry billions.

All providers, including trades, designers, suppliers and general contractors will get paid more quickly.

Owners will enjoy lower costs and access to a transparent and immutable record of all payments. That transparent and immutable record of payment will save lenders millions if not billions in administrative and regulatory compliance costs. Insurance companies and sureties will also benefit greatly from the increased precision and timeliness of information shared on projects. And as with all such technologies, numerous unknown benefits will likely accrue and trigger new opportunities to deploy new business models.

Trade contractors need to embrace the new knowledge economy and

1

Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto, October 31, 2008, accessed June 2, 2017 http:// nakamotoinstitute.org/bitcoin/

7

2

History of Ethereum, Accessed June 2, 2017 http://ethdocs. org/en/latest/introduction/history-of-ethereum.html

8

Blockchain explained in under a minute, accessed June 2, 2017 https://youtu.be/xrurxBEftMs

9

3

Financial Institutions Move Closer to Realizing a Blockchain Solution for Syndicated Loans, Ipreo, March 30, 2017, accessed May 1, 2017 http://www.prnewswire.com/news-releases/financial-institutions-move-closer-to-realizing-a-blockchain-solutionfor-syndicated-loans-300431763.html 4

Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance, Tinianow, Andrea and Long, Caitlin, March 16, 2017, accessed May 1, 2017 https:// corpgov.law.harvard.edu/2017/03/16/delaware-blockchain-initiative-transforming-the-foundational-infrastructure-of-corporate-finance/ 5

think carefully about how emerging technologies, like the blockchain, will impact their businesses going forward.

After all, wouldn’t you rather get paid today instead six months from now?

James L. Salmon joined Benjamin, Yocum & Heather as a BIM and IPD consultant in 2010. As president of Collaborative Construction, Salmon advocates the use of virtual planning, design and construction tools and integrated project delivery. Salmon also serves as an adjunct instructor of a master’s-level BIM strategy course offered by Middlesex University in London. Salmon is also a special advisor to the buildingSMARTalliance’s Thought Leadership Committee.

Salmon advocates the use of integrated project delivery (IPD) and the use of virtual planning, design and construction software tools. He relishes the challenge of replacing the built industry’s broken culture with a smart procurement culture. Salmon works with clients to modify existing legal frameworks to ensure support for the vision, skills, incentives, resources and actions required to achieve the changes necessary to adopt, adapt to and deploy a smart procurement culture throughout the built industry.

He can be reached at (513) 721-5672 or jameslsalmon@gmail.com.

Cost Analysis of Inadequate Interoperability in the U.S. Capital Facilities Industry, Gallaher, M. P.; O'Connor, A. C.; Dettbarn, J. L., Jr.; Gilday, L. T. NIST GCR 04-867; 194 p. August 2004.

Rex Miller, Dean Strombom, Mark Iammarino, and Bill Black, “The Commercial Real Estate Revolutions,” John Wiley & Sons, Inc. 2009 at pg. 3.

Martin Fischer, Howard Ashcraft, Dean Reed and Atul Khanzode, “Transitioning to Integrated Project Delivery: The Owner's Experience” Wiley & Sons, Inc. 2017 Rex Miller, Dean Strombom, Mark Iammarino, and Bill Black, “The Commercial Real Estate Revolutions,” John Wiley & Sons, Inc. 2009 at pg. 3.

10

11

Id.

The Built Industry’s Backwards Bicycle, Blog Post on the Collaborative Construction Blog, accessed 4-4-2017, http://collaborativeconstruction.blogspot.com/2015/08/the-built-industrys-backwards-bicycle.html 12

The UK government set up a BIM Task Force to ensure compliance with the BIM mandate. Accessed June 2, 2017 http://www.bimtaskgroup.org/ 13

AECbytes Viewpoint #67 (March 14, 2013) Labor-Productivity Declines in the Construction Industry: Causes and Remedies, Paul Teicholz, Professor Emeritus, Dept. of Civil and Env. Eng. Stanford University 6

T H E

C O N T R A C T O R ’ S

C O M P A S S

J U L Y

2 0 1 7

13

Feature Long Live the King! Why Your Company Needs Cash-Flow Reporting

by Steve Antill, Foundation Software Why do we say cash is king? It’s one of the most powerful assets in your company, because it sets the reality for your business every day of your project cycle—not just at year-end when your financials tie out. That’s why it’s always critical for subcontractors to go beyond high-level financial statements and look at the different angles offered by company-wide and job-level cash-flow reporting.

The Heart of a King: Why Cash Is Different From Assets or Income Let’s look at a different metaphor— one with a little more body. Cash is the lifeblood of construction projects.

In a medical exam, there are numerous tests your doctor will want to run.

Some are routine; some are based on specific risk factors. All of them can be important. But none of them count for much if the heart isn’t working properly and carrying life throughout the body.

14

J U L Y

2 0 1 7

The Balance Sheet. One of those basic, essential health checks for any business is the balance sheet.

The balance sheet looks at a specified moment in your fiscal year.

It represents the balance of your resources that have value (assets) and your resources owed (liabilities) plus owner or shareholder resources (equity). In other words, it’s a statement of the things a company has (assets) and how it pays for them— either money owed (liabilities) or invested in the business (equity).

The simple logic of a balance sheet looks like this: Assets = Liabilities + Equity What does a balance sheet look at with regard to cash? Basically, it just takes it into account. In the balance sheet, your cash accounts are numbered among several other asset accounts that show your company’s big-picture worth in a moment-intime snapshot. So, you can see how

T H E

much is in your cash accounts and how much of your current value that accounts for, but that’s about it.

The Income Statement. Another key health check is the income statement, or P&L statement, which reports your profitability over a period of time. It does this with a very simple formula, which can have additional layers to it: Income – Expenses = Net Profit (Loss) A P&L can also be divided out, for example, to show separate income sources, as well as expenses incurred directly versus indirectly from jobs. Obviously, if revenues exceed expenses, it shows a profit, and if expenses exceed income it reports a loss. What’s not obvious is what this tells you about your cash. Hint: not as much as you might think.

The main reason is that P&Ls recognize revenue when it’s billed by accounts receivable—not when it’s collected. If you’ve invoiced your

C O N T R A C T O R ’ S

C O M P A S S

client $150,000 and they’ve haven’t made a payment, your P&L still counts that as income. That can make you look more profitable than your checking account would indicate. Just as important, your accounts payable are reported as expenses even before you’ve paid them from cash.

As a result, if you’re looking just at your income statement, a run of A/R invoices can lead you to think your cash flows are healthy, even though you won’t see that money for another 30 days. Thus, a P&L will suggest whether you’re profitable overall, but if you ask, “Will we have enough cash for payroll in September?” it’s pretty silent.

Cash Flows. While the balance sheet and income statement can tell you a lot about your company’s health, construction projects don’t run on “assets” or “income”—they operate on cash. No amount of X-rays or lab work will tell you how well your heart is pumping and whether the blood is getting where it needs to be. That’s where two vital types of reports come in: statement of cash flows and cash flow by job.

The Heart of the Matter: How to Track Cash To see how readily cash is being made available to the projects that need it, contractors should view and understand cash flow from two perspectives: across the entire company’s financial picture and at the level of each job.

Statement of Cash Flows. Like the balance sheet and P&L, the statement of cash flows is a general ledger financial statement; however, it’s structured specifically to separate out the non-cash assets (like receivables and inventory) and non-cash liabilities (like accruals) the balance sheet reports.

T H E

C O N T R A C T O R ’ S

So why not just look at your G/L cash account balances? There are two reasons: First, your statement of cash flows provides an additional check of your books; your net change in cash should always tie out to the changes in your balance sheet accounts.

Second, it shows you where cash is being made available and where it’s going—whether that’s from operating activities, investing activities or financing activities.

With assistance from a financial professional like a construction CPA, you can use this in projecting future cash flows, as well as gauging some of your overall business health. In general, consistent, strong cash flow suggests the ability to reduce debt and invest in growth. But is all well just because your cash from operating activities is pumping away strong?

Cash flow by job. If you have integrated job costing through your accounting software, you can and should also look at your cash flows on a contract level. Every project of course needs a healthy movement of billings and purchasing—but more importantly, they need cash receipts; otherwise, your projects are drawing on your cash accounts. If too many of your jobs are borrowing on company cash, you can easily find yourself needing to take on additional debt or grinding to a halt in the field.

The benefit of contract cash-flow reporting is that it shows you where each project stands in its cash cycle and how each project is affecting cash activity for the company. Struggling projects can hide on a cash flows statement—but not here. At its most basic, these reports lay out your estimated gross profit (contract amount – estimated costs), cash received to date (billings – open A/R invoices) and cash paid to date (costs + labor – open A/P invoices). This enables you to see your net cash flow at a glance

C O M P A S S

and even project future cash flow as your projects move forward.

Received job dollars to date – Cash paid to date = Net cash flow A job-level cash flow report can also offer an additional perspective on your job progress by calculating the proportion of your net cash flow to (a) your contract amount and (b) your gross profit estimate, each as a percentage. To get even more from it, you can also look at the “cash flow to gross profit” figure alongside the percent contract billed, the job progress by cost, etc., to get comparison job progress metrics. Cash flow by job reporting opens up a whole new world for your project financial data.

When it comes to important financial reporting, your income statement and balance sheet will never be dethroned—but cash is king, and the reason is that it carries life to the projects that keep you profitable. A cash flows statement tells you how well the heart of your business is pumping. Job-level cash reports then show you how well that flow is working in your active jobs. Together, they help complete the picture of your business health so you can keep conquering the industry.

Steve Antill is the director of sales for Foundation Software, where he builds partnerships and relationships across the construction industry with contractors, CPA firms, associations and technology vendors. Over 18-plus years, he’s led more than 1,000 software selections and implementations.

Foundation Software delivers job cost accounting, project management and mobile applications, along with education and bookkeeping services, to help contractors run the business side of construction. Antill can be reached at (800) 246-0800 or santill@foundationsoft.com.

J U L Y

2 0 1 7

15

Feature Improving Your Cash Flow: The Art of Billings & Collections

by Stephane McShane, Maxim Consulting Group Contractors take on tremendous risk when they perform work. However, more contractors go out of business due to poor cash flow than for lack of profitability. Why? Is there as much emphasis on billing and collections as there is on daily construction operations? While management executives typically have a firm grasp on the cycle of cash through their organizations, what does the financial acumen of your remaining staff look like? More importantly, how educated are your PMs, project administrators, and A/R clerks in the art of billing and collections? Are your company’s systems and processes standardized in these critical areas? A contractor’s cash flow is driven by one thing: the cash flow of its individual projects.

This article will discuss the key indicators that are necessary to give early warning to cash flow issues, the importance of a properly crafted schedule of values, how to implement a structured billing process, and how to define the internal escalation process for collections.

Key Indicators When a project’s cash flow goes south, it is not usually a surprise. Your team can spot the early warning signs if it has the right tools and knows how to use them. There should be standard reports both at the corporate and project levels that allow for cash flow visibility. While monitoring cash flow at the corporate level is important, the solutions to cash flow are derived at the project level.

Corporate Level It is critical to monitor key financial indicators at the corporate level so that upper-level managers can detect a cashflow issue early. There are many items to review regularly that can serve as early warning signals. At the enterprise

U E L Y 2 2 0 0 1 1 7 7

16 16 J UJ N

level, monitoring current ratio and quick ratio give a snapshot in time of the asset to liabilities calculation as a rollup. Establishing minimums for these ratios and building red flags into your reporting structure is key to identifying issues quickly. Analysis of working capital by dollars, percentage, and yearly turnover are also important indicators of the company’s financial health. From the corporate perspective, a roll-up of project overbillings and the cash position are also essential to review. Lastly, looking at debt-to-equity ratios and establishing a maximum threshold for this is also an important data point to monitor. All of these are key indicators that would compel you to dig deeper once a problem was identified. (You can also use such tools as CFMA’s Financial Benchmarker to compare this data. Visit www.financialbenchmarker.com.)

Many companies create a balance sheet and income statement either monthly or quarterly. Interestingly, fewer publish a statement of cash flows.

Best-in-Class companies also publish a forward-looking cash projection, which could be crafted as a 12-week look-ahead based upon the projects on the WIP and the PMs’ understanding of their project schedules and work planned. This cash projection gives the company time to react to an oncoming shortfall more effectively.

Project Level There are relevant indicators that can be created at the project management level. Within your company’s job status report, there should be two very clear indicators of cash position of the project: overbillings/underbillings and net cash position. During the monthly project review, these two key data points should be reviewed and expectations for the PMs to uphold should be set; the PM is the singular point of responsibility over a project.

There is a distinct difference between a “project witness” and a “project manager.” If expectations are clearly set around overbillings, such as a net overbilled position of 20 percent or greater, this can be measured and the PM can be held accountable. There is a quantifiable data point to measure the PMs’ effectiveness in this area. This measurable can be incentivized, drive the desired positive behavior, and turn those who might be simply witnessing a job’s cash position into those who want to drive it and ensure that they hit their targets.

The very same can be said for the net cash position. Cash position simply states how much has been paid out vs. what has been collected. While this may seem remedial to some, driving this level of knowledge to the project level is key. A true PM wants to manage all of the direct job costs, the billing, and the collections process. (Billing and collections strategies will be discussed later on in this article.)

Schedule of Values Creating a schedule of values includes the mechanics of how the budget cost data is procured and organized, what format to use to ensure that the correct costs fall into the correct categories, a review of the schedule of the project to clarify which activities will occur early in the project, and correct assignment of the general conditions and start-up costs (e.g., mobilization, design, detailing, submittals, material procurement, and prefabrication). If a schedule of values is done poorly, then maintaining a positive cash position is virtually impossible.

A controversial piece to define is whether or not to front-end load the schedule of values and, if so, by how much. This is an enterprise-level decision that should be driven by the type of vertical markets your company

T E H EC O C N O T N RT A R C A TC OT R O ’R S’ S C O C M O P M AP SA SS S T H

serves, the normal payment terms of your client base, and your company’s position on the topic. (Refer to the Construction Financial Management Association article, “Taking Risks with Numbers: How Far Can You Go?”

by Susan L. McGreevy & Kathryn I. Landrum, in the September/October 2014 issue of Building Profits for more on this topic.)

Should front-end loading become a company standard, the minimum percent frontload should be a calculation on the schedule of values tool, to be reviewed for compliance and used as a metric for a PM’s performance. The goal of an effective schedule of values is to get paid for overhead and profit as quickly as possible, and is the single greatest impact a PM can have on his/ her project cash flow.

Billing Strategies Your company’s internal billing process should be well defined, communicated, reviewed, and measured. Let’s take a look at a sample billing process: Repeat steps 1-4 for each line item on the billing: 1. Review the existing cost to date for labor, material, and other direct job costs 2. Identify additional costs of each direct job cost projected through the end of the month 3. Evaluate the percent complete 4. Mark up the billing item with the percent complete Quality check: 1. Verify the total billing amount for all line items 2. Verify this total billing amount meets or exceeds the minimum established billing amount 3. Call or visit the client, review the bill, and get “pencil approval” prior to submission To clarify this example, let’s discuss the minimum established billing amount. While some contractors take a “bill as much as you can” approach, this is not a measurable target. When discussing a minimum billing amount, targets should drive the positive revenue recognition that is the goal of a billing process.

For example, the minimum billing amount could be set at percent complete of the project plus 20 percent of cost. This approach verifies how effective the schedule of values is at driving

positive cash flow. The reason that 20 percent of project cost to date is added is due to the cost of capital we encounter by having retainage withheld, and payment cycles that typically hover between 45 and 60 days. Establishing the minimum billing amount and method should be standardized, and billing amount approval should occur before sending to the client.

Too often, we see billings that are submitted and then kicked back for revision. Sometimes the owner or GC does not agree with the billing amount, causing tremendous rework inside of the accounting group to revise the amounts. We have also seen billings that were submitted 60 or 90 days prior get kicked back, causing all of the subsequent billings to be recalculated and reissued. Depending on your company’s accounting software, this can cause both a time delay to process and tremendous labor expenditure to accomplish.

This also has a devastating effect on cash flow since it is much later in the payment cycle to even be approved, much less the waiting time to receive a check. One solution is to get billings “preapproved” prior to submission: Walk the owner or GC through the billing, and have him or her sign off on your preliminary copy. This is critical in helping to avoid the billing adjustment scenario, thus keeping you in the correct payment cycle and driving a shorter wait to actually receive payment.

When a billing is withheld, the cause is often something that the PM forgot to do (e.g., waivers not submitted, certified payrolls not included, etc.). To prevent these types of delays, the billing process should include a job-specific checklist so that all required documentation is included each time a billing is submitted. We cannot always control what the other party does with our billing, but we can control our ability to meet the contractual requirements in a timely manner.

There also seems to be a tremendous challenge at the end of projects to get final billings approved. So, the amount placed on final billings should be held to a minimum. Here are some strategies to consider: • Ensure that the last regular progress billing is as large as possible, keeping the final billing amount small. Progress bills are much easier to get approved than a final billing.

O PM AP SA SS S T HT EH EC OC NO TN RT AR CA TC OT RO ’ RS ’ SC OC M

• Delay submitting a final billing if

substantial progress is made and collection has been difficult. Instead, submit an additional progress billing.

• Set up a separate contract or purchase order for small, last minute change orders. Don’t hold up a $200,000 retainage for an additional month or two for a $1,200 change order that contains $400 in margin.

• Ask for preliminary approval of the final billing in advance, similar to the preapproval of the progress billings previously discussed.

• Use the waiver of your lien rights as leverage to get final billings approved.

Collections While the PM may not be the person performing each of these tasks, he or she must ensure that items are accomplished in a timely manner in order to release payments quickly. The PM has the relationship with the client, and must be on the collections team.

Defining levels of ownership of the collections process is a method by which a person is assigned responsibility over a project’s receivables for a specific period during the aging. As the receivable gets older, it becomes the responsibility of a higher classification of employee, thus escalating the level of personnel handling it until the collection has occurred. Most companies are great at publishing an aging report. Assign a job title to each aging period to establish who owns the account at that moment. Fig. 1 illustrates an example: Aging in Calendar Days

Responsible Party

0–30

Project Coordinator or Billing Clerk

31–40

PM

41–55

A/R Representative

56+

Division Manager or Vice President

The collections process should document the actions taken at each level of aging and explain how documentation is to occur. The project coordinator should pursue the contact weekly, recording each step of the way. Once the aging has reached 31 days, it becomes the PM’s responsibility to contact the recipient and document

J UJ LU YL Y2 02 10 71 7

17 17

this information on the same project collection log. This continues until the bill reaches the 41st and 56th day, each time transferring ownership up the company chain so that they may reach out to their peers at the client office in order to resolve the issue. This affords the opportunity to consistently communicate non-payment and secure a customer’s commitment to pay. As with any process, the days sales outstanding (DSO) of a project is measured and rolled up by the PM, A/R representative, and division manager as another very effective performance metric Monitoring key indicators can enable early warnings of a cash flow issue. The development, implementation, and monitoring of effective schedule of value practices, billing strategies, and collections processes increase the chances of collecting the full revenue due, help drive down the timeline between submission of billing and receipt of payment, and place your company in a positive cash position earlier, thus reducing the cost of capital to perform work. In addition, these processes establish levels of ownership and the ability to both measure

and incentivize the right behaviors to keep cash flow positive for each project and the company as a whole.

Stephane McShane is a director at Maxim Consulting Group and is responsible for the evaluation and implementation processes with Maxim clients. McShane works with construction-related firms of all sizes to evaluate business practices and assist with management challenges. With a large depth of experience working in the construction industry, McShane is keenly aware of the business and, most specifically, operational challenges firms’ face.

Her areas of expertise include leadership development, organizational assessments, strategic planning, project execution, business development, productivity improvement, and training programs. McShane is an internationally recognized speaker, mentor, author, and teacher. Her ability to motivate, inspire, and create confidence among your work groups is extremely rare and very effective. McShane can be reached at stephane.mcshane@maximconsulting.com.

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.

What Happens If You Don’t Get Paid?

So, what happens when you don’t get paid? You have a number of options, including leveraging your lien rights or filing on the payment bond. Be sure, however, that you thoroughly understand the notifications requirements for either of these options to be effective. Bring in your bonding agent and have an educational session with your project staff on the essentials of filing a bond claim. This could prevent the all-toocommon late filing and loss of rights.

If you have disputed work, claims, or outstanding change orders, then negotiate a settlement if at all possible.

If you are forced to go into arbitration or litigation, the chances of collecting the full amount of what you are owed diminishes greatly, and the amount of time your project staff will spend preparing documentation for the case may diminish their capacity to manage profitable work.

TM

“Prompt Payment and How/When to Suspend Work”

(Item # 8103)

In this on-demand video, presenter Jason Ebe, Esq., Snell & Wilmer, LLP, Phoenix, Ariz., discusses best practices for ensuring prompt payment of invoices and shares tips for how subcontractors can mitigate their own damages by suspending work without breaching their subcontract and getting fired, replaced and sued.

$65 for ASA members $95 for nonmembers.

ORDER ONLINE AT www.contractorsknowledgedepot.com

Feature Four Top Strategies to Retain and Motivate Key Employees

by Mark Steranka, Moss Adams, LLP In today’s robust construction marketplace, subcontractors and construction firms face a significant challenge to their business: retaining an effective employee base. In addition, employee engagement in the United States has hovered around 33 percent since 2000, according to annual surveys conducted by the Gallup organization. This dismal level of employee engagement is complicated by the fact that as baby boomers retire, there simply aren’t enough Generation Xers to replace them. This alarming trifecta of a strong construction market, low employee engagement, and a shortage of human capital threatens the ability for construction firms to retain and motivate their most valued employees.

These challenges can impact performance and affect your company’s bottom line. As reported in the 2017 Gallup State of the American Workplace survey, behaviors of highly motivated employees resulted in 21 percent greater profitability, and business units with highly motivated workers experienced a 20 percent increase in sales. So how can you engage your employees in ways that encourage them to stay and thrive, while also enabling your company to reach its full potential?

Here are four top strategies to retain key employees, foster engagement, and ultimately enhance performance: • Create a clear strategic plan.

• Define and monitor performance.

• Cultivate and compensate employees based on performance.

• Commit to clear communication.

Create a Clear Plan The first strategy is to create a strategic plan that defines a roadmap for reaching its goals. All subcontractors should have a long-term vision that guides your strategic decisions, reflects a thorough understanding of how your organization reached its current state, and defines a clear path of practical actions to achieve your desired future state. Core elements of a comprehensive strategic plan include: • Mission, vision, and core values to guide decisions.

• Goals and objectives to quantify your expected outcomes.

• Strategies and tactics to achieve your goals and objectives.

• Action plan to identify responsibilities, costs, and timelines for strategies and tactics.

It’s important to understand that the planning process is just as important as the plan itself. Involving your management and staff throughout the process is critical to success. By asking for input from your employees, you will develop a more informed plan, strengthen buy-in, increase the likelihood of implementation success, and ultimately increase employee engagement.

Define and Monitor Performance Key performance indicators play an integral role in monitoring performance. The second strategy is to develop KPIs for each facet of your business, and to tie them back to your strategic goals and objectives. Think of performance at three different levels: company, business unit or department (team), and individual. Focusing

T HT EH EC OC NO TN RT AR CA TC OT RO ’ RS ’ SC OC M O PM AP SA SS S

on performance at each of these levels is important to your organization’s success. For instance, subcontractors need all employees to perform in a manner that is in the best interest of the organization in order to achieve company goals; work together as teams to achieve departmental/team objectives; and conduct themselves in accordance with core values to achieve individual expectations.

Cultivate and Compensate Employees Based on Performance The third strategy is to determine how your organization will attract, retain, develop, and motivate your key employees to meet your goals at every level—and in every facet— of the company. For instance, subcontractors need to clearly define and articulate what core competencies their employees are expected to possess to successfully perform each role at each level of the organization, and how the company will support development of those competencies.

Similarly, organizations need to craft performance-based compensation programs that are aligned with the demonstration of core competencies and achievement of multi-level performance expectations. Annual performance reviews should reinforce this alignment.

Employee cultivation and compensation programs should include the following key components in order to be as effective as possible: • Well-defined recruiting needs for entry-level and experienced personnel.

• Career paths that enable managerial and technical personnel to progress.

J UJ L U YN E2 02 10 71 7

19

• Compensation programs that incentivize employees to accomplish goals.

• Training programs designed to help employees reach their potential.

Ultimately, the goal should be to motivate employees to strive for strong company, team, and individual performance. The most effective employees are those with a clear understanding of how their performance contributes to company success, how to navigate their career, and how they benefit from performance-based compensation.

glue that aligns and binds these strategies together, helping employees understand how they individually and collectively contribute to your company’s success. As a result, subcontractors need to focus on making communication crisp, clear, structured, and regular. For example, subcontractors can engage employees through quarterly communications on their company’s progress toward implementing the strategic plan, and explaining how that progress impacts performance and, in turn, performance-based compensation payouts.

Commit to Clear Communication

When Employees Thrive, Companies Succeed

Although the first three strategies form the cornerstones of performance, engagement, and retention, they can’t be fully effective without clear and consistent employee communication. Communication is the

These four strategies lay the groundwork to develop key management staff into future leaders, help reach your company’s full potential, and sustain your business over the long term. The key is to take an honest and transparent approach with

your key employees by treating them like essential members of the team, and making it clear that each person plays a valuable role in achieving the company’s mission. Employees need to understand your strategic goals, the expectations for achieving those goals, the competencies required to meet those performance expectations, and how compensation is tied to performance in order to perform at their best. When they do, your organization will have incentivized key employees, strong retention, and high employee engagement.

Mark Steranka is a partner with Moss Adams, LLP. He has more than 30 years of experience helping organizations to improve performance through strategic planning, succession planning, performance assessments, and executive compensation planning. Learn more at www.mossadams.com.

2017 ASA BEST PRACTICES AWARDS 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. 3, 2017. The application fee is $495. Each prime-contractor applicant must supply three sealed businesspractices 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 2018, Feb. 28-March 3, 2018, in Tempe, Arizona.

APPLICATION DEADLINE: NOVEMBER 3, 2017

Helpful Links: • Watch the National Construction Best Practices Awards video.

• Prime contractors: Download the 2017 National Construction Best Practices Award application form.

• Specialty trade contractors: Download the 2017 National Construction Best Practices Award “Form for Evaluating the Applicant’s Business Practices.

Feature How Your Client’s Creditworthiness and Ability to Pay Can Impact Your Bottom Line

by Scott Applegate, CapitalPlus Equity Have you ever considered how the creditworthiness of your customers can impact your bottom line? How about how their cash flow can impact your bottom line? When you consider that according to a survey by RocketLawer, 43 percent of small businesses have customers who are more than 90 days late on a payment, it might be something you should give a second thought to.

For subcontractors who are looking to take on new jobs to maintain and grow their businesses, assessing the risk associated with the project should be considered every bit as much as estimating the job costs. As a subcontractor you are already aware of the risks associated with estimating and pricing the cost of a job, so what other risks are associated with the project that aren’t cost related? How about the creditworthiness of the GC and the owner? How long is it going to take them to pay you? Are you going to need to hire other subcontractors?

Does their creditworthiness matter?

How can I better assess these risks to protect my business?

Creditworthiness of GC and Owner The fact that your clients’ creditworthiness directly impacts their ability to pay you may be obvious, but many subcontractors and construction companies often overlook it. When you bid on a project do you look, or even know where to look, to see if the GC has any liens or judgments? Do you know if they have any tax liens? Do you know how long the GC is taking to pay their other subs (called days beyond terms)?

Does the owner already have financing in place? All this information has an impact on when you get paid, and when you get paid has everything to

T H E

C O N T R A C T O R ’ S

do with your cash flow. You can get this information in a credit report, which gives you information on the business’s trading, credit, and financial histories. It also provides a credit rating and suggested credit limit. All of this can prove to be invaluable information when assessing if you want to work with the client and what payment terms you want to extend. Unless you are getting paid in advance, you are offering terms once you pay for your labor and material and send the GC or owner an invoice. The “term” is how long it takes them to pay you for those materials and services.

So where can you get these reports and are they easily interpreted? You can’t just log online and pull credit reports on people or companies. You will need the help of your bank or financial partner or a financial services company, such as a factoring company, that works with constructions companies. There are all types of reporting agencies that offer all types of information. The basic information that you want to look for is: how long has the company been in business, are there any liens or judgments, and the most important thing you want to know is how long it takes them to pay their bills (that’s you). Remember, it’s important to pull a report on the owner as well as the GC because it’s the owner that has to pay the GC before you get paid.

Another way that the creditworthiness of your client can impact your bottom line is if you use your A/R as collateral for a line of credit or if you work with a factoring company as your source for working capital. The reason for this can be summed up in one word: risk. The more creditworthy a company is the less risk for someone to advance you money on the

C O M P A S S

expectation of getting paid. The same philosophy is used in business as with individuals wanting to buy a car or house. If you have good credit the lower your interest rate.

How Long They Take to Pay How long your clients take to pay you impacts your bottom line because it impacts your cash flow. Since there are many expenses, such as materials and payroll, which subcontractors and construction companies have to cover in advance of being paid by your clients, you must manage your cash flow closely. So when your clients stretch out the payment terms and don’t pay for 45, 60, 90 or more days, you are stuck having to cover those expenses and stress your cash flow. It’s important to determine if the owner has financing or the cash in order to complete the project. Also, understanding the process in order for you to get paid is important. If the owner has bank financing the bank will typically do an inspection before issuing a draw to the GC. Every additional step in the process tends to delay you getting paid, so understand the process it takes to get paid.

Once you have determined the length of time it takes you to be paid, you then need to determine the cost of that length of time. Do you have a bank line of credit to cover the costs?

If so, the cost of interest should be included in the project cost. If you do not have a bank line of credit you will need to be able to either, fund the upfront costs on your own and carry those costs until such time as you are paid or there is another option of working with a financial services company that provides factoring services for commercial construction companies. When using a factoring company,

J U L Y

2 0 1 7

21

you typically sell your invoice to the factor and he or she will advance a percentage of the invoice amount for you to use for payroll or materials. The amount of the discount will depend on the amount of time it takes the GC to pay the invoice.

There is also a common misconception that the bigger the company the better their credit rating and the better they pay. I’m not going to make a global statement that all large companies pay slow—that’s not the case. I can tell you that there are a lot of large GCs that use their size to extend payment terms as long as they possible can. The longer they extend payment, the more it costs you to carry the expense of the invoice and the more it impacts your bottom line. If at all possible negotiate payment terms in advance and put them in your subcontract agreement.

Does Creditworthiness of Your Subcontractors Matter?

As long as we are discussing creditworthiness, let’s talk about your

subcontractors. If you hire subs you also need to determine their creditworthiness. If you have two subs bidding on a job for you and they appear to be very similar except one bid is 10 percent cheaper you probably go with that sub. But what if you could look at the creditworthiness of the two subs and you could see that the cheaper sub has numerous judgments and tax liens? This may be because they do not complete projects they start. Would it be worth it to know this before you are midway through a project? That extra 10 percent for the other sub might look like a bargain, especially if the credit report would have shown you in advance they did not have any financial difficulties.

How to Protect Your Business One option to protect your business and arm you with the information you need to determine what clients and potential clients are creditworthy and to get paid more quickly is to partner with a financial services company that

specializes in commercial construction. When you partner with a financial services company, such as a factoring company, they work with you to determine risks associated and the continued due diligence needed on an ongoing basis. They do this by conducting credit checks that can provide the information you need to make the best decision about which clients you want to work with. They will also work with you to provide immediate access to the funds from your unpaid invoices, allowing you to more easily manage your cash flow.

Scott Applegate is the chief operating officer for CapitalPlus Equity, LLC, a financial services company providing factoring and other back-office support services in assisting construction companies with their cash-flow needs.

For more information, visit CapitalPlus Equity at www.capitalplus.com or call (865) 670-2345.

4 TIPS TO SOLVE YOUR FINANCIAL CHALLENGES

1.

Get your financial books in order with accurate and up-to-date entries.

3.

Understand your lien rights and stay compliant.

2.

Understand your financial risks before you provide a proposal or enter a contract.

4.

Improve your cash flow.

Take the next step today to ensure your businesses financial success by partnering with CapitalPlus for all your bookkeeping, back office and financial needs.

Get more information today at (865) 670-2345 or www.capitalplusfinancial.com/capitalplus.

Legally Speaking Do We Have a Deal? Avoiding Handshakes (and Litigation) in Contracting

by Lauren P. McLaughlin, Esq., BrigliaMcLaughlin, PLLC Bid day deals are often fraught with risk for all parties in the privity chain.

One example of this plays out when a general contractor submits a proposal for a project, wins the award of a prime contract, and then later discovers that one of the subcontractors upon whom the GC relied—reneges on its bid price and refuses to enter into a subcontract.

In some states, contractors are able to prevail against the subcontractor who backed out, even though no contract existed between the two. Consider the recent case of Weitz Co., LLC v. Hands, Inc., where the Supreme Court of Nebraska held that a general contractor can hold a subcontractor to its bid price under a theory of promissory estoppel.

Under this doctrine, the general contractor is allowed to sue the subcontractor based on a “promise” (i.e., the bid) if the general contractor relied on the promise to its legal detriment.

The disputes in that case arose when Evangelical Lutheran Good Samaritan Society invited four prequalified general contractors to bid on the construction of a nursing facility. One of those prequalified contractors was Weitz Company, LLC. Fifteen minutes before bids were due, Weitz received bids for the mechanical scope of work from the defendant, Hands, Inc. d/b/a/ H&S Plumbing and Heating, for $2,430,600, with alternate duct and radiant heating work, at $39,108 and $52,500, respectively. Weitz used H&S’s numbers for the HVAC scope and was awarded the project for $9.2 million. After the award, H&S conveyed that its bid contained mistakes in the magnitude of $430,000.

Ultimately, the parties were unable to come to an agreement for increased compensation, and Weitz completed

T H E

C O N T R A C T O R ’ S

the project using different subcontractors costing almost $300,000 more than H&S’s bid with options. Weitz then sued H&S for breach of contract and promissory estoppel, seeking to recover that amount. After a bench trial, the court concluded that although no contract was formed, Weitz was entitled to enforce the bid and recover the $300,000 in damages under its claim for promissory estoppel.

On appeal, the Nebraska Supreme Court affirmed. Reciting the elements of a claim of promissory estoppel, the court held that a plaintiff is entitled to damages if it can show: (1) a promise that the promisor should have reasonably expected to induce the plaintiff’s action or forbearance; (2) the promise did in fact induce the plaintiff’s conduct; and (3) injustice can only be avoided by enforcing the promise. The court began its legal analysis by addressing whether H&S’s bid was a promise upon which reliance was foreseeable. In other words, should H&S have known that Weitz was going to use its bid price?

The answer was undoubtedly yes.

The court determined that in the construction industry, most subcontractors know and understand that by submitting a price, contractors are going to rely on those numbers and submit them to owners in the hopes of getting an award. Moreover, H&S’s submission of its bid 15 minutes prior to the bid deadline meant that the H&S should have known that Weitz had little time to review or otherwise “kick the tires” on the numbers. Having satisfied itself that Weitz’s reliance on the promise was foreseeable, the court next considered whether Weitz’s reliance was also reasonable.

C O M P A S S

The court was persuaded by the business relationship and commercial history Weitz and H&S had together. Weitz had worked with H&S 10 or 15 times before without incident and without H&S retracting its bid. The court noted, “[h]ow could competitive bidding function at all if general contractors did not rely on subcontractors’ bids?”

H&S made four primary arguments in an attempt to show Weitz’s reliance was not reasonable. First, it argued that the bidding documents themselves precluded reliance, since the owner had a right to veto subcontractors. In addition, H&S argued that Weitz did not require subcontractors to “keep their bids open” for a specified period of time. The court correctly noted that contractors are not required to affirmatively state, notify, or remind those submitting bids that their bids cannot be revoked. Third, H&S asserted that because Weitz could have withdrawn its own bid at any time with no consequences, its reliance on H&S’s mistaken bid was not reasonable.

Even though the IFB did not require the contractor to post a bid bond, or otherwise subject it to real penalties, the court was persuaded that if Weitz withdrew its own bid, its business reputation would have suffered greatly with its clients and prospective clients. The court concluded that Weitz should not have to back out of a deal “because of a squabble with its HVAC contractor.”

Lastly, H&S argued that Weitz’s reliance was not reasonable because H&S had submitted an exceptionally low bid, fraught with mistakes. Weitz, however, presented evidence that its own internal HVAC estimate was lower that what H&S proposed. Because there was

J U L Y

2 0 1 7

23

testimony that the market was weak and subcontractors were submitting very aggressive bids, the court deemed Weitz’s reliance reasonable.

What is noteworthy was how the court interpreted what was “fair.” H&S argued that it was not fair to enforce a bid with mistakes in it, and that was especially true where it alleged Weitz “engaged in … bid shopping.” But the court determined there was no evidence of bid shopping and that: “As between the subcontractor who made the bid and the general contractor who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it.”

Nebraska is not alone in holding that subcontractors can be held liable for backing out of bids. Courts in Georgia, Louisiana, Nevada, Minnesota and Pennsylvania have also had occasion to address the issue in favor of general contractors. As a general rule and take away, a subcontractor can be held to its bid to a general contractor if the bid is unequivocal and reasonably relied-upon.

But proving promissory estoppel is very fact intensive, and very difficult to prove. Two states, Virginia and North Carolina have rejected promissory estoppel as a basis to enforce a subcontractor’s bid. There are times when a subcontractor is not held liable for backing out of its bid. Consider another recent case which highlights the “classic trilogy” of a general contractor and subcontractor relationship gone wrong: a bid, ensuing negotiations, and disengagement.

In CG Schmidt Inc. v. Permasteelisa North America, the general contractor filed a breach of contract and promissory estoppel suit against an international conglomerate of subcontractors participating in design-build projects for unitized curtainwalls.

The parties were going after a $52 million award of a mixed-use, 18-story office building in Milwaukee, Wisc. The curtainwall was slated to be the largest subcontract for the development.

In 2013, PNA submitted a $12 million bid to furnish, fabricate and install a

24

J U L Y

2 0 1 7

custom curtainwall. CGS had not yet entered into the prime contract and GMP amendment with the owner, and as such, did not yet enter into a formal subcontract with PNA. CGS and PNA began value engineering negotiations to reduce the cost of PNA’s proposal. Although the parties began reviewing and exchanging a draft subcontract, they held off on formalizing while the prime contract continued negotiations. The parties continued to exchange draft subcontracts through 2013 and into 2014. In May 2014, CGS issued a signed letter of intent to PNA for approximately $7.7 million (the result of the parties’ VE solutions). CGS then entered into the GMP Amendment with the owner. PNA emailed sample glass options to CGS and provided an Updated Bid Proposal of $8.4 million.

When PNA received a copy of the prime contract, they had serious reservations regarding the open-ended nature of the liquidated damages and delay damages. Now eager to get a contract executed, CGS sent two proposed subcontracts for PNA to sign in June 2014. PNA then advised CGS it was “disengaging” from the curtainwall project due to civil unrest in Thailand limiting production availability. The parties had not signed a contract. CGS was forced to hire another curtainwall contractor and directed acceleration. CGS sued PNA in federal court alleging both promissory estoppel and breach of contract.

PNA argued that the parties intended to sign a subcontract and that, unless and until a subcontract was signed, neither party owed a binding obligation to the other. On the other hand, CGS argued that a binding contract could be formed, even in the absence of a signed, written agreement. CGS alleged that over the course of their 14-month interaction, four different “contracts” could be enforced based on the terms of: (1) the PNA bid; (2) the LOI; (3) PNA’s Updated Bid Proposal; and (4) the proposed subcontracts.

The court ruled in favor of PNA and concluded that the parties never manifested an intent to be bound to any

T H E

of the bids, LOIs, or proposed subcontracts that the parties exchanged from April 2013 through June 2014. Instead, the documents all pointed to the unmistakable conclusion that CGS and PNA fully intended to be bound by a subcontract, which was never executed.

The case underscores that general contractors are experienced actors (i.e. “big boys”) in the commercial construction industry and will be viewed as such. As the court noted, here “… the ‘losses are best left where they have fallen.’” To that end, sophisticated parties are not likely to succeed where they rely on a series of transactions that failed to yield a satisfactory agreement.

Lauren McLaughlin is a founding partner of BrigliaMcLaughlin, PLLC, a law firm devoted exclusively to construction industry and surety clients. For the past 16 years, she has represented owners, developers, contractors, subcontractors, sureties and design professionals in all aspects of public and private construction projects. With that perspective, she counsels clients on project risk management and litigation avoidance.

Having represented all parties in the privity chain, McLaughlin is intimately familiar with the unique leverage perspectives of the owner, contractor, and subcontractor. She understands the business aspects confronting construction companies from employment and compliance issues to bid day deals, from change order negotiation to electronic project management systems.

She has worked extensively with performance bond sureties, mechanical contracting firms, glass and glazing contractors, and in support of excavation contractors. McLaughlin’s construction clients routinely involve her at all phases of the project, from conception and value engineering through final completion. She can be reached at (703) 506-1990 or lmclaughlin@briglialaw.com.

C O N T R A C T O R ’ S

C O M P A S S

Coming Up

ASA/FASA Calendar November 2017

11 – Webinar: “School of Risk Control Excellence: Employment Practices Liability” (Complimentary) presented by Laura Lapidus, Esq., CNA

14 — “Employment Law Mistakes Most Commonly Made by Subcontractors” presented by Philip J. Siegel, Hendrick, Phillips, Salzman & Flatt

24 – Webinar: “ASA Briefing on Federal and State Advocacy Activities” (Complimentary) presented by E. Colette Nelson, ASA August 2017 8 — “The Devil’s Triangle: Understanding the Overlap Between the FMLA, ADA and Workers’ Compensation Laws” presented by Philip J. Siegel, Hendrick, Phillips, Salzman & Flatt 22 — “Self-Funded Healthcare for Subcontractors” presented by Andrea Aker, Redirect Health September 2017 12 — “Lean Construction” presented

by Ashley Colburn, Hoar Construction 22–24 — ASA Executive Committee and Board of Directors Meeting, Baltimore, Md. 26 — “How to Have a Multi-Million Dollar Impact by Asking ‘One More Question’” presented by Eric Anderton, Professional Leadership Coach and Trainer October 2017 10 — “Technology and Transparency— Part 2” presented by Stephane McShane, Maxim Consulting Group 20–21 — ASA Legal & Advocacy Meetings, Santa Ana Pueblo, N.M. 24 — “Using Drones: What Subcontractors Need to Know” presented by Brian Esler and Seth Row, Miller Nash Graham & Dunn LLP

December 2017 12 — “Ownership Succession Planning” presented by Stephen Bonebrake, Maxim Consulting Group January 2018 9 — “Indemnity and Hold Harmless” presented by Lee B. Brumitt, Dysart Taylor Cotter McMonigle & Montemore, P.C. 23 — “How the Difference Between Extra Work and Additional Work Can Impact Claims for Payment” presented

by Stephen Moore and James Morris, Galloway Johnson Tompkins Burr & Smith February 2018 13 — “Getting Better Subcontracts” presented by Eric Travers, Kegler, Brown, Hill and Ritter 28–March 3 — SUBExcel 2018, Tempe Mission Palms Hotel, Tempe, Ariz.

THE

July 2017

in the August 2017 Issue of ASA’s

Theme: Sales & Marketing • Sales

& Marketing

• Business

Development

• Champion

Salespeople

• Selling

Effectively—The Buyer Blending System

• Switched-On

Selling— Balance Your Brain for Sales Success

• Legally

Speaking: Complying with the New Paid Sick Leave Requirements

April 2018 10 — “Lien & Bond Claims” presented

by Timothy Woolford, Woolford Law, P.C. May 2018 8 — “Change Orders” presented by Joe Katz, Huddles Jones Sorteberg & Dachille, P.C. June 2018

Look for your issue in August.

PAST ISSUES: Access online at www.contractors knowledgedepot.com

12 — “Cash Management” presented

by James L. Salmon, Benjamin, Yocum & Heather, LLC

TM

T H E

C O N T R A C T O R ’ S

C O M P A S S

J U N E

2 0 1 7

25

Cloud-Based

Project Management Software for Subcontractors Complexity.

That’s the biggest obstacle to implementing a new technology. The more complex it is, the less your people will use it.

That’s what sets us apart.

Our software was created for subcontractors by subcontractors. It speaks your language. It mirrors the way you work.

And it strips away all the confusing bells and whistles that make other systems so complex.

With Project DocControl, it’s never been easier to stay connected to all your projects from the field. Or to access project information from your mobile devices.

Discover why so many ASA members have implemented Project DocControl.

For more information, or for a no-obligation online demo, call 813.903.9446 or visit ProjectDocControl.com.

“The flow and consistency of the documentation in Project DocControl was exactly what we had been looking for. We needed a tool that would allow employees to generate documents easily and consistently.”

—Stephen Rohrbach, CPC President F.A. Rohrbach, Inc. Past ASA National President

50!

Congratulations to ASA on your 50th anniversary!

Project DocControl is proud of its decade-long ASA national sponsorship.

JUNE 5TH , 11:08 A .M .

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

C A LV IN B ERGER SAW THE VA LU E O F IN - C A B B EH AV I O R TR A ININ G FRO M CN A

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.

When you’re looking for risk control programs that keep workers dialed in to relevant industry trends … ® we can show you more.

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, places or situations is unintentional and purely 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 service mark registered by CNA Financial Corporation with the United States Patent and Trademark Office. Certain CNA Financial Corporation subsidiaries use the “CNA” service mark in connection with insurance underwriting and claims activities.

Copyright © 2017 CNA. All rights reserved.