Who couldn’t use more cash during the holiday season?  No matter the season, however, construction companies rely heavily on cash flow to fund their operations.  Cash flow depends on so many variables, but there are a few that you can control.

Written Contract.  As a preliminary matter, make sure that you get a written contract when starting a new project and make sure that both parties sign the agreement.  Too many times I have represented parties who either "did the deal on a handshake" or "never signed the contract."  Disputes over payment will ultimately arise and the contract will dictate how the parties are to address payment (and ultimately cash flow) issues.  Although courts treat oral agreement differently in each state, a written agreement will be easier to enforce.

Contract Provisions.  A recent article by friend Tracy Thomas at Kraft CPAs correctly suggests that the best place to start for creating a healthy cash flow is the construction contract. First, pay attention to payment terms, including whether payment is based upon work in place or equal installments.  Also, consider eliminating any retainage provisions, if possible, or including a phased-out retainage so that your entire gross profit is not left until the project is completed. When drafting subcontracts, consider using a "pay when paid" or "pay if paid" clause so that payment is tied to when you receive payment from the owner.  

Project Management Tips.  Cash flow issues can be addressed in the contract, but Tracy also recommends better project management as a way to improve cash flow.  These include:

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    Assess the financial strength and creditworthiness of the owner as well as other contractors, suppliers and vendors.

  • Prepare cash flow forecasts and make any necessary adjustments during the course of a job.

  • Monitor work-in-progress reports, cash flow reports and other documents to spot cash flow issues while there’s still time to do something about them.

  • Make sure your project management team submits paperwork and issues invoices on a timely basis.

  • Develop working relationships with customers’ accounts payable personnel, staying in touch to ensure payments are on schedule rather than waiting until a payment is past due to contact them.

  • Establish clear change order procedures for your personnel to identify changes in the scope of work and to promptly prepare and document change orders in accordance with contract terms.

  • Don’t make payments to subcontractors, suppliers or vendors any earlier than required unless you’re entitled to a discount for doing so.

  • Tie bonuses or other incentives to effective cash flow management.

  • Use sweep accounts or zero-balance accounts to maximize investment returns on your funds.

Question:  Are there other project management tips that you have to help create a healthy cash flow?

Over my legal career, I have handled a significant amount of workers’ compensation disputes, representing injured employees, defending employers and insurance carriers, and even a few years working for an appellate judge that addressed workers’ compensation appeals. Recently I was discussing the process for determining an employers’ experience rating, and I was surprised to learn about some dramatic cost increases that will likely occur in 2013.

The National Council on Compensation Insurance, Inc. is a group that performs national insurance ratings based upon data collection, particularly in the area of worker’s compensation. NCCI has been operating as not-for-profit since 1922, performing the following:

  • engaging studies on workplace injuries and other national and state factors impacting workers compensation
  • provide analysis of industry trends
  • prepare workers compensation insurance rate and loss costs recommendations
  • determine the cost of proposed legislation, and
  • provide a variety of data products to over 900 insurance companies and nearly 40 state governments.

What is the increase? According to a fact sheet from NCCI, the experience rating split point will increase to $10,000 on January 1, 2013.  While I have a basic understanding of the rating methodology, I am not an expert.  You will really benefit by reading the fact sheet and talking with your insurance agent.

Why the increase?  The last split point update occurred two decades ago and the average cost of a worker’s compensation claim has tripled since that time.  The result is that the rating plan is given less weight to each employer’s actual experience.  With the new proposal, the split point will be increased to $10,000 in 2013; to $13,500 in 2014; and to $15,000 in 2015.

How will the point change affect employers?  It will depend on how many claims the employer has that exceed $5,000. If no claims exceed this amount, then the employer will see a decrease in their experience rating modification.  However, in an industry like construction, where more significant type of injuries tend to occur, it is likely the number of claims exceeding $5,000 will increase the experience rating modification.  Additionally, the change also requires re-scoring for 2009-2011, which means that the increased penalty could also result in a readjustment of past assessments. 

What to do with this information?  As an employer, you need to understand that this is going to be a significant change over how the rating system has been handled for the past 30 years.  You and your risk department need to be more diligent in the workers’ compensation claim process and you should have a return-to-work program.  As you work closely with your insurance agent, you need to understand the difference between medical only claims versus indemnity claims.  You could be assessed a huge penalty if a claim is turned into an indemnity status because the claimant has not returned to work after a certain time period, depending upon your state.

 

Hat tip to Chris Smith and Gary Sanders of Brown & Brown of Tennessee for some of this information.

A contractor’s recovery from an owner for damages suffered by its subcontractor is limited in certain circumstances. The Severin doctrine provides that a general contractor cannot sue an owner on behalf of one of its subcontractors to recover monies due to the subcontractor unless the general contractor is itself liable to the subcontractor.

The Background. In Severin v. United States, the plaintiff-contractor agreed with the defendant-federal government to build a post office in which plaster column models and ornamental work were to be supplied by the government.  The contractor filed suit to recover delay damages resulting from the late delivery of owner-supplied materials.  The claims were made by the contractor on its own behalf, as well as on the behalf of its subcontractor.  Finding that most of the loss was suffered by the plaintiffs’ subcontractor, the court held that plaintiffs could recover for their damages but were precluded for recovering for their subcontractor’s damage because assignments of such claims were forbidden by a federal statute.

A Transportation Example.  The Severin doctrine has been applied in the highway and transportation industry.  For example, in Aetna Bridge v. Rhode Island DOT, the contractor on a bridge project had failed to include a material supplier in its list of vendors to the DOT.  The subcontractor prepared an additional 70 shop drawings for total of 1,650 additional hours for which it sought additional compensation.  The claim was presented by the contractor to the DOT.  Although the claim went through arbitration, ultimately the Supreme Court of Rhode Island remanded the case to the superior court to determine whether the claim was simply a "pass-through" claim or a claim involving other liability between the contractor and the subcontractor.

Pass-Through-Plus.  There is a reason why I call the Severin doctrine a pass-through-plus claim.  In presenting a claim to an owner for damages allegedly suffered by a subcontractor, a contractor must be careful that the claim is not solely a pass-through claim. The contractor must have some remaining liability to the subcontractor for the damages in order to properly present the claim to the owner for payment. A well drafted liquidation agreement will generally accomplish this purpose. Otherwise, the claim may be denied pursuant to the Severin doctrine.

Image: Sangudo

After nearly five years of deliberations, the Federal Trade Commission has released its revised "Green Guides," which are aimed at environmental marketing claims.

The guidelines were first introduced in 1992 and updated in 1996 and 1998. (For more history and context for the Green Guides, we invite you to read the FTC’s 314-page statement of basis and purpose.) A draft of the revised guidelines was published for public comment almost two years ago. Newly updated and added sections include the use of carbon offsets, environmental certifications and seals, and renewable energy and renewable materials claims.

The Green Guides are not agency rules or regulations. Instead, they describe the types of environmental claims the FTC may or may not find deceptive under Section 5 of the FTC Act. Under Section 5, the agency can take enforcement action against deceptive claims, which ultimately can lead to Commission orders prohibiting deceptive advertising and marketing and fines if those orders are later violated.

Last week, ENR’s Digital Wire highlighted an article in the Pittsburg Post-Gazette by Jon Schmitz about Pennsylvania’s new law to boost private investment in public projects through PPPs. According to the article, there are numerous major projects in the pipeline that will garner interest from private investors, including highways, bridges and other transportation facilities. 

Under the new law, PPP proposals would go before a panel made up of seven transportation and budget members appointed by the governor and legislative leaders.  "The Legislature would have the ability to override the panel’s decisions but would have to act within 20 days."  According to Schmitz, 33 other states have similar laws.

What are some of the most important legal aspects when looking at a public private partnership?  Here are a few:

  • Understand the PPP enabling legislation in your state.  As evidenced by the new Pennsylvania law, each state will have to explore whether use of PPPs for roads, bridges and other infrastructure projects can be successful.  If so, then the enabling legislation must provide the mechanism to achieve the right contracting goals.
  • Understand that PPPs don’t create new money.  Instead, the arrangement relies on the private sector and other resources to help develop the infrastructure. Public funds will eventually be a part of the equation to pay back the private investment.
  • Understand the different risks involved with PPPs. If you are going to participate in a project involving alternative financing, you need to understand the new risks and opportunities that you will encounter.  For example, the AGC of American published a White Paper on Public Private Partnerships (pdf), which gives a good overview of the history of PPPs, the legislative hurdles encountered by states, and the legal issues to consider by contractors.

Image: eschipul

Call it Civil Integrated Management. Call it Building Information Modeling for horizontal construction. Call it 4D modeling for infrastructure projects.  Call it "BIM Leaves the Building and Hits the Road."  Whatever you want to call it, you will want to see this Autodesk video about Mortenson Construction that highlights the advantages of BIM for road construction and other infrastructure projects. 

In the video, Rich Khan, Director of Integrated Construction, and Roberta Oldenburg, Integrated Construction Coordinator, both of Mortensen Construction, share their company’s experience over the last 12 years using BIM and how to use those lesson’s learned for new industries, including renewable energy and infrastructure projects.

What are some of the best practices and benefits that can be applied to highway construction and infrastructure projects?  According to Khan and Oldenburg, these include:

  • Reduction in budgets
  • Fast-track schedules
  • Increased collaboration through the 3-D environment
  • Disruption avoidance
  • Early identification of utility conflicts
  • Improve efficiency and reduce waste

For Mortenson, use of BIM is a "value-add to the customer" because it provides benefit not only to the design side, but also to the construction side.  "And now the 3-D model allows us to greatly improve the decision-making process," says Khan. 

The video highlights some of the same themes from from a presentation that I gave last week at the ARTBA National Convention in Memphis called Civil Integrated Management: New Technologies and Legal Risks, which you can download here.

On September 6, 2012, the U.S. Department of Transportation issued a Notice of Proposed Rulemaking (NPRM) that proposes three categories of changes to DOT’s disadvantaged business enterprise (DBE) rule. Comments to the proposed rule must be received by November 5, 2012.  The proposed improvements include:

  1. The NPRM proposes revisions to personal net worth, application, and reporting forms.
  2. The NPRM proposes modifications to certification-related provisions of the rule.
  3. The NPRM would modify several other provisions of the rule, concerning such subjects as good faith efforts, transit vehicle manufacturers and counting of trucking companies.

History.  In January 2011, the DOT published a final rule that made a number of important policy changes to its DBE program.  Some of those original changes included: (a) greater accountability for recipients with respect to meeting overall goals; (b) adjusting for inflation the personal net worth cap applicable to owners of DBE firms to $1.32 million; (c) requiring greater monitoring of contracts by recipients; (d) adding a small business element to recipients’ DBE programs; and (e) facilitating interstate certification.

Reason for New Rule.  In order not to delay the above policy initiatives in January 2011, the rulemaking did not include some of the more technical, program improvements. The improvements covered by the September 6, 2012 NPRM involve modifications to the business forms of the program, changes to certification-related provisions in response to eligibility concerns that have come to DOT’s  attention, and modifications to a variety of other program provisions.

MAP-21 Applicability.  If you are following the transportation industry, then you know that on July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21) was enacted.  Funding surface transportation programs at over $105 billion for fiscal years 2013 and 2014, MAP-21 is the first long-term highway authorization enacted since 2005.  According to the NPRM, the DOT believes that MAP-21’s reauthorization is intended to maintain the status quo of the DBE program and does not include any significant substantive changes to the program.

What do with this information?  If you have time, then you will want to print out a copy of the NPRM and read the 75-page proposed rule.  Then, if you want to send me some comments to consider, or if you have any questions about the DBE program and the proposed rule change, please send me an email.  Over the next few weeks, I will be digesting the full impact of the rule and will outline my comments as part of my DBE presentation at ARTBA’s 4th Annual Transportation Construction and Regulatory Forum on October 24-25, 2012 in Washington, DC. (You can register online if you want to go.)

As a construction attorney, I have been on both the sending side and receiving side of a request for a time extension.  Whether the deadline involves discovery responses, a witness interview or a trial brief, most requests are granted.  In the construction world of competitive bidding, however, the request for an extension is not so clear.

Most bids on construction projects must be accepted within a certain time period; otherwise, they are no longer binding. Of course, the same provisions permit an extension of the time period by consent of the bidder or both of the parties. What happens if there is no formal agreement to extend the bid acceptance period? A good example of this scenario is found in the case of Prime Contractors, Inc. v. City of Girard, where a disappointed low bidder contested an award to the second bidder.

In this case, the City sought bids for repavement of a road.  The bid documents included the City’s right to determine if the bidder had the ability to perform the work at the bid price, as well as a provision requiring bidders to attach materials showing they had complied with the state’s Equal Employment Opportunity Commission (EEOC) requirements.

When the bids were opened, the City learned the low bidder had failed to comply with the EEOC requirements because its Certificate of Compliance had expired two days before the bid’s submission.
Thus, the City decided to award the contract to the second bidder.  The low bidder challenged the decision and sought an injunction against the award to the second bidder.  The trial court ruled in favor of the second bidder.

On appeal, the low bidder relied on a state statute that required the award and execution of a contract to be done within 60 days. Under the statute, the failure to award and execute a written contract within that time frame invalidates the entire bid proceedings and all bids submitted, unless the time for awarding and executing the contract is extended by mutual consent of the owner and bidder.

Mutual consent.  The court found the 60-day limit could be extended by "mutual consent." As to this point, the court emphasized that the parties to the proposed contract need not "agree" to extend the 60-day period. Instead, mutual consent could be reasonably inferred by conduct. Under this interpretation, the court concluded the bid does not automatically become invalid at the end of 60 days: It continues to be valid until one party indicates to the other that it is withdrawing its consent.

Implied extension.  In this case, the court found no evidence that either the City nor the second bidder had revoked their consent to extending the 60-day period. In fact, the evidence showed that the second bidder had already begun to perform the work on the project even though a written contract had not been executed. On that basis, the court refused to grant the injunction sought by the low bidder. 

Lesson learned.  In most cases, public owners specifically request extensions of the bid-acceptance period when some problem holds up an award. Suppose a public owner did not seek an extension and the low bidder did not revoke its bid. Could the public owner require the bidder to perform by a notice of award several months later?  Obviously, the answer to that question depends on the wording of the statute or bid proposal. Interestingly, the court in the Prime Contractors case found a consent to extend that did not require a formal agreement.

Image: ToniVC

I recently spoke to a group of highway contractors about disadvantaged business enterprise (DBE) laws and regulations and some of the different policies among the state departments of transportation.  Did you know that in FYI 2010, special agents with USDOT’s Office of Inspector General (DOT-OIG) were responsible for 92 indictments, 72 convictions and over $18 million in financial recoveries?

 

The DOT-OIG special agents are called upon to investigate criminal activity for violators of Federal transportation laws, including safety violations, Department policies, and fraud cases.  Timothy Barry, Assistant Inspector General, identified his department’s mission as follows:

We focus on those matters that have the greatest direct impact on Department programs and operations and particularly those matters where regulatory enforcement action has been or would be ineffective. Our four investigative imperatives are transportation safety, grant and procurement fraud, employee integrity, and consumer and workforce fraud.

Since one of the DOT-OIG’s top target investigation areas involves workforce fraud, it is important to understand some of the basis rules. DBE fraud can involve a broad range of schemes, but the most misunderstood issue deals with identifying whether the DBE expenditures count toward the DBE goal.  In other words, a contractor can meet certain DBE participation goals on a project by contracting and using properly classified DBE firms. Here’s the key: the DBE must be performing a "commercially useful function."

What is a commercially useful function?  The DBE must carry out its contract responsibilities by actually performing, managing and supervising the work involved, and for negotiating, determining quality and quantity, ordering, installing and payment for material.

DBE Management.  Management worked performed by a DBE may be counted toward the contract goal when the DBE:

  • Schedules the work operations
  • Receives quotes and orders equipment and materials
  • Prepares and submits certified payrolls
  • Hires and fires employees
  • Makes all operational and managerial decisions
  • Supervises daily operations, either personally or with a full time, skilled, and knowledgeable superintendent who is under the DBE owner’s direct supervision

The Red Flags. You may have seen this list before, but it is worth reviewing again.  Following is a lost of selected "red flag" indicators of DBE fraud:

  1. DBE owner lacking the background, expertise or equipment to perform the subcontract work
  2. Employees shuttling back and forth between prime contractor and DBE-owned business payrolls
  3. Business names on equipment and vehicles covered with paint or magnetic signs
  4. Orders and payment for necessary supplies made by individuals not employed by DBE-owned business
  5. Prime contractor facilitated purchase of DBE-owned business
  6. DBE owner never present at job site
  7. Prime contractor always uses the same DBE
  8. Financial agreements between prime and DBE contractors
  9. Joint bank accounts with prime and DBE contractor
  10. Absence of any written contracts…everything done on a hand shake

Each state DOT has rules on these issues, whether you are talking about use of joint checks, renting equipment loaning employees, selling materials, advancing funds, or holding retainage. In a new post on Friday, I will review some of the differences among the states’ laws.  

The real lessons learned are to make sure you are staying clear of the red flags and, if a question does arise, that you check whether you are properly complying with the regulations in your state.

Image: derkeskey

While I generally limit my guest posts to my fellow law partners, I simply could not resist sharing with you today’s post from my friend and construction attorney, Scott Wolfe, Jr.  He is the founder of Zlien.com, a national mechanics lien filing and compliance management service. Scott writes the Construction Lien Blog, which analyzes construction lien laws and regulations across the nation.

Now the disclaimer part: I have not used or test-driven any of the services offered by Zlien.com and this post here is not an endorsement of the product.  I can say, however, that Scott is one bright guy and has a lot of good information about lien filings throughout the states.  I hope you enjoy.

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Through the years of consulting with folks in the construction industry about mechanics lien and bond claims, I’ve unearthed a set of principles to help navigate the very complicated world of liens. These principles form a set of “best practices” for the company interested in preserving its lien rights on every construction, and ultimately therefore, avoiding bad debt.
 

Understand What Type of “Lien” Is Available.  The term “mechanics lien” is overused in the construction industry, with companies presuming they can file a mechanics lien on any type of project. That’s part true, and part untrue.

The truth in this statement is that there is a lien-like remedy available on every construction project. The untrue part of the statement is that it’s not always a “mechanics lien” per se, it could be, for example, a state bond claim or a miller act claim.

This can get confusing to the contractor or supplier who considers them all one in the same. The other day, for example, I had an equipment rental company ask me whether they could file a mechanics lien on a state project in Florida. I referred them to some Florida attorneys who answered the question, but those attorneys got hung up on the terminology and not the goal of the client.

Rather than answering the equipment rental company by saying “yes, you can encumber the project” by filing a bond claim, they emphatically told the company that they couldn’t file a mechanics lien claim. They barely even mentioned that they could file a bond claim, and that this is commonly even referred to as a lien.

The long and short of this discussion is that the industry uses the term “lien” pretty loosely. But, if you’re on a state project, you’re likely filing a bond claim; on a federal project you’re filing a miller act claim; and on a private project you’re filing a traditional mechanics lien. They work differently, there are different rules, but they are all fundamentally the same.

The first best practice is to understand what lien remedy is available to you, because it will help you get that type of lien document filed when the time comes.

Know All Relevant Project Information.  If you’re furnishing labor or materials to a construction project, you should know all the critical data about that project. This includes:

● The address where your furnishing
● The name of the property owner
● The name of the general contractor
● The name of the bonding company (if any)
● The name of the lender (if any)

You’d be surprised how often I’m approached to help someone file a lien claim without this basic project information. This information is critical to not only filing an accurate mechanics lien claim, but also to sending out the required preliminary notices. If you don’t have this information, figure out a way to get it.

Most of the time you can politely request the data, and get it without much effort. Other times, you may need to send in a formal request. On state and federal projects, the identity of the bonding company and the general contractor is public information, and you can typically request this directly from the contracting department.

If you’re in Tennessee, a great place to start is with Matthew DeVries’ checklist, originally published on this Best Practices Construction Law Blog: Information Needed To Prepare A Lien.

The second best practice is to have good information about your construction projects.

Understand Preliminary Notice Requirements and Lien Deadlines.  In most states, filing a mechanics lien or bond claim is a discipline, and not something you can do impulsively. That’s because many states require you take actions right at the beginning of furnishing to preserve your right to file a mechanics lien or bond claim. It’s very important that you understand these requirements.

If you furnish in one state only, it should be fairly simple for you to get educated about that state’s notice requirements. Take the time to learn this information and follow it diligently. If you furnish to multiple states, organizing and understanding the information may be a bit more complex, and you may need to consult with a mechanics lien service or attorney to help you comply with the varying notice requirements. Remember, these mechanics lien laws and nuances will vary not only between states, but also between projects.

The third best practice, therefore, is to understand the requirements applicable to your project to preserve your lien claim rights, and then to follow those requirements.

Conclusion.  While most companies don’t want to file lien claims lightly, it is a very effective way to get paid on a construction project, and therefore, a remedy you always want available. If your customer doesn’t pay its debt, if money gets misappropriated on a job, or if your customer files for bankruptcy, you’re going to wish that you had preserved and enforced your lien or bond claim rights.

It’s very difficult to comply with lien and bond claim requirements on every project, because there are so many layers of complexity. However, these best practices will help your company wade through those requirements and set itself up to successfully protect its lien rights…and, hopefully, always get paid.