Boots on the Ground

Subcontractors, The Heartbeat of Construction

Category: Subcontractors

Leasehold Liens – A Coming Crisis to Subcontractors?

In North Carolina, in a tenant situation, common law limits the lien rights to the value of the leasehold, unless a connection to the landowner can be established. The NC Land Title Association (NCLTA) has proposed legislation in the current General Assembly short session to codify the common law. That, in itself, is not a bad thing. It’s the language in the changes that can cause the problem.

In effect, if you work for a tenant, you only have rights to lien the leasehold, that is the lease itself and the property of the tenant. In an ongoing business, there is value there. But, most commercial leases in NC have a clause that if the landlord cancels the lease for cause, such as non-payment of rent, all of the improvements become the property of the landlord. Some leases even contain a clause that a lien filed on the leasehold can trigger cancellation. In those cases there is no value remaining on the leasehold to collect against.

I attended a stakeholders meeting this past week at the Legislative Office Building in Raleigh. What I perceived is a lack of understanding as to the extent of leaseholds in commercial construction. The conversation would inevitably revert back to an extreme example of someone’s mother’s rental property where the tenant build a swimming pool and the contractor put a lien on his mother’s house. This is not the issue that subcontractors face. today.

When the facilitator posed the question, “How big a problem is this, really?” I spoke up and said that from the subcontractors’ point of view, this as a tremendous risk. I estimated that up to 90% of the work we do in commercial contracting involves a leasehold of some description. This can be as small as a retail tenant in a strip center to a multi-story office building being built by a developer for a single tenant. There are hidden owners like pension funds and real estate investment trusts that work through management companies. I argued for transparency up front so that the subcontractor can assess the risk before accepting the contract.

There were a couple of minor positives that came from the meeting. The study committee agreed to suggest to the legislative subcommittee that, in regards to leasehold liens, they add wording to separate commercial construction from single and two-family residential construction and to insert wording in the tenant code to make it against public policy and unenforceable for a landlord to cancel a lease because of a lien being filed.

Because a consensus of the stakeholders could not be reached, most of the NCLTA’s proposed changes were tabled until next year’s session to enable them to come up with a better way to explain the issue. I agree with the NCSA chapter attorney, Edward “Ned” McNaughton that we need to get ready and have our own legislative proposal prepared to present to next year’s session as an alternative to the NCLTA proposal.

There are even scarier things in the NCLTA’s proposed legislation, including the subcontractor’s right to a lien on real estate being subrogated (cut-off) by the general contractor’s lien waiver. As Ned has said on numerous occasions, “The title company gets paid to take risks, the subcontractor takes risks to get paid.” Much of what is contained in the proposed lien law revisions creates impediments to the subcontractors’ right to payment. It’s time for subcontractors to get involved.

Construction Trends – Green Globes and Net Zero

At a recent NC Subcontractors Alliance meet and greet, Bill Lorenzo, pre-construction manager with Balfour Beatty Construction’s Carolina Division, presented things that are trending in North Carolina. The most important is energy sustainability. He showed a chart showing that over the lifetime of a building, only 11% of the cost is related to construction and 85% is the cost of energy to power the building and its systems. It is becoming more accepted that an investment in sustainability saves money over the long run. More and more building owners and developers are requesting their new buildings be energy sustainable. But, they want to do it without all the rules and paperwork involved in the LEED program.

The big trend, now, is the movement away from LEED and toward a program called Green Globes. Green Globes is a web based program that began in Canada. The Green Building Initiative acquired the US rights to the program and administers it in the US. A building is awarded points for various attributes, the largest attribute being energy consumption. Upon verification by a third party, the building is awarded 1 to 4 globes. The use of Green Globes substantially reduces the administrative cost of obtaining a certified energy sustainable building.

The next thing to come will be Net Zero Sustainable. This is becoming common in California and Balfour Beatty is working on designs for the first one in Charlotte. In Net Zero, the building must produce as much renewable energy over the course of a year as it consumes. The building is connected to the grid and sells surplus energy to the grid on sunny days and buys energy from the grid on cloudy days, with the goal of achieving a net zero energy consumption. This is more challenging on the east coast because there are more cloudy days in the Carolinas than in California. We will have to wait and see how that works out.
Lunch n Learn at Balfor Beatty
The bottom line is that subcontractors need to be more aware of sustainability. It is not just a government mandate now, it is a trend coming from building owners and developers.

Reverse Auctions…. The Only Way to Win the Game is to Not Play

In 2013, the Department of the Interior and Army Corps of Engineers announced they were considering expanding the reverse auction method to eastern North Carolina for jobs that small businesses can perform. This is a method whereby the Owner posts a price online and registered bidders will bid the price down until time expires and a low bidder is declared.

I had some experience with reverse auctions about 20 years ago when Target Stores decided they were going to start using reverse auctions for their construction projects. Needless to say, we didn’t get much work with Target until they stopped the practice. We only got one in Lawton Oklahoma where we were the only bidder. A sophisticated company, even in the worst of times, will not price below the cost of labor and materials, plus taxes and overhead, and the cost of working capital. They may price at cost hoping to buy it down, but they will never knowingly go into a job at a loss. An unsophisticated company, hungry for work, can be tempted to take work too cheaply. Work they may not be able to afford the interest on for the duration of the project until they can collect final payment and retainage.

In other words, reverse auctions deprive contractors of a fair profit. I am in favor of reducing government waste, but not at the cost of unfair business practices.

Rep. Richard Hanna (R-NY), has introduced a bill, HR-2751, to ban these practices. The Associated General Contractors has testified before Congress in favor of this bill and recommends everyone ask their Congressman to co-sponsor or support this bill. It is scheduled for a committee vote in March, 2014. Subcontractors should support this bill as well.

http://newsmanager.commpartners.com/agcleg/issues/2014-02-20.html#0

The Case of the Hidden Owner

If you are a Contractor or Subcontractor, at some time or other you will be doing business with a tenant, or a Contractor working for a tenant. If something happens and you do not get paid, don’t think the NC Lien Laws are going to help you.

The idea of a mechanics lien is written into the Constitution of the State of North Carolina. The Constitution provides that state law provide adequate protection to suppliers of labor and materials. When Thomas Jefferson first envisioned the mechanics lien and wrote it into the Virginia Constitution, things were pretty simple. If a carpenter did work on a man’s house and did not get paid, he could claim a lien against the house to enforce payment. Things are more complicated now. Owners can be pretty nebulous. The owner may be a REIT or an insurance company or a pension fund. You may be dealing with an Agent or a Management Company and you may only know the Owner by an entity formed solely for a single project, something like ABC123, LP.

Under current NC Lien Law, as adjudicated in Pete Wall Plumbing Co. v Sandra Anderson Builders, Inc. (2011), the mechanics lien can only be enforced against the lease. Under the standard lease agreement used in North Carolina, if a tenant defaults on a lease or the owner terminates a lease for cause, all improvements and fixtures become the property of the owner. At that point, there is absolutely no value to the mechanics lien.

In his opinion in the Pete Wall case, judge Steelman wrote: 

“I am concerned that the present state of our law does not provide adequate protection to suppliers of labor and materials as envisioned by Article X, section 3 of the North Carolina Constitution. In addition, the increasingly complex real estate arrangements now being used make it virtually impossible for a supplier of labor or materials to protect themselves under our lien laws.”

The legislature re-wrote the statutes to protect the Title companies against “hidden liens.” Now is the time for the legislature to correct the problem that affects the very people lien laws are supposed to protect.

The North Carolina Subcontractors Alliance has produced a position paper that will be presented to the legislative study committee that will meet on March 3, 2014. Hopefully, the law can be corrected and brought into compliance with the NC Constitution. The position paper can be read or downloaded from the NCSA’s website, http://ncsubcontractors.com/wp-content/uploads/2014/02/NCSA-Position-Paper-Leasehold-Liens-2-19-14.pdf

Safety is a Team Sport

DSCN0659The annual joint meeting between the NC Subcontractors Alliance (formerly the ASAC-Charlotte Chapter) and the Charlotte Chapter of the National Association of Women in Construction (NAWIC) was held November 19th at the Carolinas Aviation Museum. The Air Museum is the final resting place of US Airways Flight 1549, the “Miracle on the Hudson.” This flight was the first time a commercial airliner was able to make a successful crash landing on water without the loss of a single life.

The keynote speaker at the meeting of 95 attendees was Cherie Berry, Commissioner of Labor for the State of North Carolina. Ms. Berry used Flight 1549 as an example of how teamwork and training on the job can save lives. It took the teamwork and training of the Captain and First Officer, the flight attendants, the passengers, the rescue boats, the tower and the NY Emergency Services to accomplish this amazing feat. It also took the designers, engineers and builders of the airplane to produce an airplane durable enough to survive the landing without breaking apart.

Ms. Berry likened this to safety in the workplace. It takes teamwork and training to provide a safe workplace. Businesses need to have a safety plan. The plan needs to be communicated to the workers and the workers must be trained to work safely and avoid hazards.

Ms. Berry also announced that the Injury rate in North Carolina for 2012 had dropped to 2.9 cases per 100 workers, down from 3.1 for the three previous years. She also announced that the fatalities in NC through October were 23. That is a historic low for the same period in prior years, but she stated that the only acceptable number is zero.DSCN0637

Another thing she urged is for businesses to partner with the NC Department of Labor to assure safe workplaces. She stated that the Department of Labor offers, in fact encourages, businesses to request courtesy safety inspections. There are no penalties assessed during a courtesy inspection. The only expectation is that all the hazards found need to be abated. She stated the department would rather the money that might have been spent on fines be spent on abating the hazards and providing a safe workplace. She is proud that North Carolina’s injury rates are well below the national average and partly attributes that to the teamwork between the Department of Labor and business owners.

Cherie Berry has been the NC Commissioner of Labor since 2000. Prior to that she served in the NC House of Representatives focusing on issues relating to small businesses. Before her public service career, she and her husband owned a small business that during its history produced over a million miles of spark plug wires. She has the second most recognizable name in the state. Her picture and signature are on the operating certificate of every elevator in the State of North Carolina.

 

Construction Manager at Risk vs. Healthcare.gov

In my early career, we started to see state projects being handled as Construction Manager Projects. There was a general contractor, but he was effectively just a job superintendent, a quarterback. He managed the jobsite and handled the paperwork, but the power remained at the state. The Contracting Officer was in control, the subcontractor signed a contract directly with the state and the subcontractor’s check came directly from the Department of Revenue. Projects were always late. There was endless confusion with change orders since they had to come from the state. Payments were inconsistent, contracting officers had no incentive to process payments quickly and payments were issued in due course and tended to be held up at the end of the fiscal year when the state was running out of cash and had other priorities.

Enter the Construction Manager at Risk. Now the general contractor is the one who has to deal with the state. The state still approves the subcontractors and makes the rules, but for the subcontractor it is mostly like a normal general contractor agreement. You sign the GC’s contract, you submit the GC’s pay application (along with a lot of government forms) and you receive you check from the GC. You have one boss on the job, the GC. The GC is responsible for getting the job done on time and on spec. There are incentives for the GC to finish on time and penalties if he does not. Having one entity in charge of the project pulls it all together and the Construction Manager at Risk form of contracting has proven successful.

The fact is that on a large and complicated project, there has to be one person or company that is in control and takes responsibility to the successful completion of the project.

A prime example of this is the HealthCare.gov website. In Congressional hearings, it has been revealed that there were as many as nine contractors working on various modules of this website and with subcontractors, as many as 55 different companies writing code. The nine contractors worked for different contracting officers at the Treasury Department and the Department of Health and Human Services (HHS).  They were writing in different code styles. There was a last minute change order to require people to register and enter their personal data before being able to see their potential subsidy. There was no testing of the entire system until a couple weeks before implementation and when they did test, it crashed with just 200 users. The site was introduced with great fanfare, then total collapse. No one claims responsibility. No one has been held accountable. No one has been fired. They are bringing in “the pros from Dover,” Google, Amazon and Red Hat. But who is in charge? Who is accountable?

Another example was the Salt Lake City Olympics. It was millions of dollars over budget and running late. It seemed like there was no way the Olympics would go off on time and it would be a horrible black eye for the United States. They called on Mitt Romney to take over. He did. He reorganized the effort, brought in strong leaders and got the Olympics off on time and with a budget surplus. 

Politics aside, you need strong leadership to pull off a major project. On Healthcare.gov, we haven’t seen it yet.

What Gets Checked, Gets Done!

Inspector with magnifying glassAnother one of Gary Olnowicz’s “Lessons Learned” from his July 2013 presentation was “What Gets Checked, Gets Done.” What he means by this, is that even the best of your employees need to be checked. Without supervision, there is too much temptation to cut corners or work down to the lowest common denominator. Further, labor productivity is critical to the profit margin and the cash flow on the project and needs to be tracked. If there is a problem on the job, the earlier you know about it, the more time you have to create a solution. If you can’t solve the problem, you can at least adjust the markup on your billing so you don’t go negative at the end of the job.

Once again, the Mercedes Benz Truck Assembly Plant in Hampton VA that I mentioned in my previous post provides a personal example. We were about a week into the job of installing the strip windows in the job. The Glazing Superintendent came in to the office and started calling Miami Wall Systems and ordering window components. When I quizzed him about it, he said the window mullions were not lining up with the columns as they were supposed to and he was going to have to make up additional small window units to compensate.

I accompanied the Glazing Superintendent back to the job and started checking the drawings against the installation. These were self-mulling windows; meaning that the vertical jambs had male/female components so that one window jamb was inserted into the jamb of the next one. I observed that the drawings provided by the manufacturer showed a 1/8” gap for expansion between each window, but the windows had been installed tight together. When quizzed as to why he had not followed the drawings, the lead installer (who was also the shop steward) snapped back that he knew how to install windows and that they were supposed to be tight together.

Long story short, the first week’s work had to come out and be re-installed. From then on, everything worked perfectly. At the end of the job we had one item on a 53 page punch list. We had a labor overrun from the part of the job that had to be re-done that cost me $1,200 out of my commission. But, I still had my biggest commission check ever.

From that day forward, as long as I was a commissioned salesman, I made it a practice to visit the jobsite on the first day and last day of work of each job. On the first day, I would show up in the early afternoon to see if the installation was going as expected and diagnose any problems and address solutions. On the last day, I would punch out the job as if I was the customer, including the operation of each door and the door hardware. I also carried a bag of thumbturns and Push/Pull stickers in my car. These were required on all jobs in the City of Virginia Beach and were often overlooked in the fabrication shop and their absence could cause an emergency service call when a Certificate of Occupancy was being held up. I had to look after my personal cash flow as well, you know.

Reach for the Stars if you Want to Get Ahead

MB TruckIn his presentation to the NC Subcontractors Alliance at their July 2013 meeting, Gary Olnowicz, president of The Linda Construction Company, said “Sometimes, you have to bite off more than you can chew.” The meaning behind this is that to grow in business, sometimes you have to reach beyond your comfort zone.

My moment came in 1978 when I was a young contract salesman for Binswanger Glass in Norfolk, VA. I was in my second year in sales. In those days, I was strictly commission, earning 15% of the gross profit of the sale. To get a jump start, I had been concentrating on small jobs that could be turned around quickly so that I could get into position to cover my draw. My commission was paid quarterly, after deducting for my draw and expenses. Luckily, I was successful in landing a very busy metal building dealer who furnished me a couple nice jobs each month and a builder who was building nine Roy Rogers Chicken restaurants in the area. We did not use project managers at the time, so each salesman was totally responsible for his jobs until they were handed off to the Glazing Superintendent to get them installed. It was taking a lot of time to stay ahead on small jobs, so I realized I needed a bigger job carry me along.

One day, I was alone in the contract office when the call came. It was a call from The Haskell Company in Jacksonville, Florida. They were going to design/build at truck assembly plant for Mercedes Benz in Hampton, Virginia and wanted Binswanger to price it for them. I wasn’t going to give it up. I had them send me the plans. The job was big, but fairly simple. It consisted of 1,000 running feet of 4 ft. tall fixed and operating self-mulling strip window units and a 100 foot x 27 foot tall curtain wall assembly. I got all my quotes, put the labor on it and went to my manager to get approval to bid it. We put the price on it and I rolled the dice.

A few weeks later, I got a call from my contact at Haskell. He wanted me to fly down to Jacksonville the following Monday to meet with the design team. I told him I would get back to him. Both the contract manager and branch manager tried to discourage me from going. They both suggested that Haskell was just using me and that I would be making a mistake to go. I said I had a feeling on this one and had developed a feeling of trust with my contact. He told me to go ahead, but he made sure I understood that all the expenses of the trip would be charged against my commission.  1978 was before airline deregulation and the cost of a same day trip from Norfolk to Jacksonville and back was $678. Yes, I still remember that amount. It was a significant amount when your monthly draw was $1,000. That was a sleepless night.

The next morning, I called Haskell and told them I would be there Monday. Sunday was another sleepless night. Up early on Monday to drive out to the Norfolk Regional Airport. The flight, including a stop in Atlanta took about four hours. A taxi ride to Haskell’s office and I was there with about 20 minutes to spare. The advantage of a design/build team is that everything is done in house. I was before the estimating team, the project manager, the architect and the engineer. I made my presentation, then we got to the meat of the meeting. The architect had specified Kawneer windows and Kawneer 1600 curtain walls. Binswanger was not a Kawneer dealer so I had come to the table with Miami Wall Systems windows and Amarlite curtain walls.

But, in an unexpected development, the project manager spoke up and said he did not object to Miami Wall, they had been used on several of their Florida projects. Someone else said, “I understand Amarlite’s curtain wall has a 2” wide mullion and Kawneer is 2.5” wide.” Before I could answer that I had figured on Amarlite’s heavy system, the architect spoke up “I don’t object to a 2” mullion as long as it windloads. A quick call to Jerry Wright at Amarlite got me the windload values and everything worked. I realized they wanted to do the deal as much as I did. They assured me a contract would be going out to me the next day. We shook hands and they had one of their assistants take me back to the airport.

There I was. A twenty-nine year old kid who had landed his first big job. I was walking on air. I don’t remember a single thing about the flight home. The moral of the story is you have to take a risk if you want to score the big one.

In Business, Relationships Rock!

Swim with the sharksFirst Posted September 8, 2013

In 1988, a man named Harvey Mackay wrote a book that set the business world on fire. It was called “Swim With the Sharks Without Being Eaten Alive.” It is an entertaining and enlightening handbook to be successful in your career and personal life. It is a networking bible. It established Harvey Mackay as a respected author and columnist.

The book chronicles Mackay’s career from a recent college graduate trying to find a job, becoming successful selling envelopes, to buying a failing envelope company and turning it into a huge success. The book has been re-printed and needs to be in every businessman’s arsenal.

As a construction Subcontractor, we are losing the personal relationships we have with our customers, the General Contractors. Invitations to bid are sent out electronically. To view plans, we go onto a contractor’s FTP site or to a service like iSqFt. We download and print plans or order the prints from a third party printing service. We send our bids by fax or email. General Contractors now have a “pre-construction” department that puts the bids together before handing them off to the project manager, sometimes with a purchasing department in between. Unless you have a relationship with a contractor, or a really low price, your lines of communication with the contractor are limited.

Getting to know the people in the company you want to do business with are more important than having the lowest price. Contractors are looking for the lowest responsible bid, and when the contractor knows you, you get a seat at the table when the job is bought out. What Harvey Mackay wrote in 1988 is relevant today, except that part about a Roladex. If you use Mackay’s principles, including the “Mackay 66,” the things you should know about your client, your business relationships will be greatly improved. For you youngsters, it is even available as an e-book.

How’s Your Project’s Cash Flow?

TenaciousFirst Posted September 2, 2013

In an uncertain economy, a positive cash flow is imperative. Your goal should be to exit the recession with the same amount of cash you entered with. If you don’t have cash, you won’t be able to fund the materials and labor necessary to take on additional work when the economy recovers. Your accountant furnishes you with a periodic cash flow statement at the end of the period, but very few subcontractors do a cash flow statement on their individual projects. A project cash flow statement will let you know how each job is affecting your overall cash flow.

You can download an Excel template for a simple cash flow statement at http://office.microsoft.com/en-us/templates/statement-of-cash-flows-TC001046101.aspx?AxInstalled=1&c=0 . You should have your project manager furnish a monthly cash flow statement on each project. You only need to do the top section, Cash Flows from Operational Activities. It is only 7 lines long and you are only concerned with the top three lines, cash received, cash paid for materials and cash paid for wages, benefits and other operating expense. The template will calculate your cash flow for the project.

Why do a project cash flow statement? The project manager has the most influence on cash flow and contractors fail when they run out of cash.

Tips for improving your project cash flow:

  1. Front load the Schedule of Values. This is critical to maintain a positive cash flow on the job.
  2. Get the billing in on time and done correctly. Re-work on the billing is deadly to cash flow.
  3. Negotiate for payment of stored materials.
  4. Negotiate lower retention terms. Make sure the contractor passes through any reductions he gets from the owner.
  5. Email your invoices. Even if you are still required to mail an original, the contractor will still be able to include your billing for the month if the mail is delayed or lost.
  6. Utilize ACH payments. The money is sent directly from their bank to your bank.
  7. Get a check scanner from your bank and immediately scan any checks received.
  8. Have one person dedicated to collections. Must be tenacious.