Construction Picture Looks a Little Brighter
Two New State Prevailing Wage Policies Adopted
Eight Ways to Protect Your Construction Company
Are Your Vehicles Ready for Winter?
Washington’s economy is performing as expected, with slow growth and a weak labor market. The biggest threat to the Washington economy remains the European sovereign debt crisis. The key is whether the European policy authorities can be successful in preventing the sovereign debt crisis from turning into a full blown banking crisis. If not, the resulting credit crunch would drag the U.S. and Washington back into recession. A secondary risk to the recovery is the political gridlock in Washington D.C. that has fiscal policy sitting it out on the sidelines. This has led to a steady erosion of both consumer and business confidence. For the foreseeable future, Washington's economic fortunes will be determined by national and international events beyond our control.
Construction remains weak and has a disproportionately negative impact on revenue.
Contract data for new construction projects, which gives an indication of the level of activity roughly six months in the future, does appear to have stabilized. The total contract value for nonresidential construction projects is up 8.2% YTD compared to last year and residential contract values are up 1.4%. This growth, however, is off a historically depressed level and the total value under contract remains well below its previous peak. Construction employment edged up by 400.
- Washington State Economic and Revenue Update, December 12, 2011
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The state Dept. of Labor & Industries (L&I) Prevailing Wage section has issued two new policy memos, one dealing with a contractor “filing on behalf of “(FOBO) a subcontractor, and the other about providing employees’ social security numbers on certified payrolls.
Due to economic conditions, more subs are going out of business or disappearing than ever before. This has caused a problem for the general contractor getting retainage released because the sub failed to file an affidavit of wages paid. While L&I is constrained by some legal requirements, ABC has been working to make the FOBO process as good as it can be. A change to the policy was recently made that is somewhat better in that contractors no longer have to certify that the subs’ employees were paid properly – since there is no way of knowing that without access to payroll records. However, when filing a FOBO, the contractor still has to accept liability for unpaid wages for that project for a three-year period. To find the full policy statement and FOBO form, go to http://www.lni.wa.gov/TradesLicensing/PrevWage/files/Policies/FOBOPolicy.pdf.
Certified payrolls aren’t automatically required on state prevailing wage projects but contractors must keep payroll records for three years that include the social security (SS) number for each employee employed for that job. Certified payrolls, including the SS number for each employee, must be provided (to the awarding agency and L&I) if requested by L&I as part of a wage investigation or by an “interested party.” Interested parties include labor unions, Rebound and NW Fair Contracting Association, union-backed wage “monitors.” Once a certified payroll is received by L&I or the awarding agency, the interested party can access the payroll information under a public records request. The SS number is deleted from the payroll forms before being released to the interested party. ABC has long expressed its concern to L&I about the potential identity theft problem since the form includes a great deal of personal information. As added protection, L&I recently adopted a new policy that addresses our concern. If a certified payroll request comes from an interested party, the contractor will have to include only the last four digits of the SS number. L&I will then redact (remove) those numbers and other employee information before releasing the records under a public records request. However, if the record request comes from L&I as part of a wage investigation, the full SS number must be provided. For more information, go to http://www.lni.wa.gov/TradesLicensing/PrevWage/files/Policies/CertifiedPayrollSocialSecurityNumberPolicy.pdf.
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Make Sure Your Business Decisions Match Up with Proper Legal Compliance
By Paul Tonella and Benjamin Greenberg, Oles Morrison Rinker & Baker LLP
All contractors are facing difficult times. While minor mistakes can doom a bid in this economy of increased competition for scarcer work, the smart contractor will pay as much attention to his or her business practices as to bidding and construction methods. Following is a list of legal topics regarding the other aspect of construction — sound business legal strategy.
1. Choose the Right Entity
Limiting your personal liability is critical. All forms of business organizations have their strengths and weaknesses. A sole proprietorship is the least complex and least expensive, but it has the most risk of liability for the owner. For an owner also desirous of protecting personal assets, it can be a dangerous choice. For this reason we always recommend setting up a business in a limited liability form.
LLC’s and corporations are more complex and cost additional administrative time and fees. The single most important characteristic of these limited liability entities is their shield of liability for the owners. Provided an owner observes the formalities required by law, this shield should not be able to be breached, allowing the owner to safely accumulate wealth outside of the business. Regardless of the form — observing good corporate practices, regular meetings of directors or managers, keeping detailed minutes of meetings and otherwise — complying with the formalities will help keep your limited liability shield intact.
As companies grow and desire to expand their capacity for bidding and winning either larger jobs or jobs with specific technical issues, they will be faced with the choice of entering into joint ventures with other entities. Unless created as an LLC, a joint venture relationship will be treated as a partnership under state law. Partnerships are easy to form and maintain under Washington law (at least) and do not even require a written agreement; however, all partners are typically liable for the obligations incurred by the partnership. Therefore a careful understanding of the bid requirements, each party’s insurance and bonding coverage and capacity and balance sheet health is important in answering the question — should I be a partner in a partnership or a member of an LLC?
2. Separate Ownership of Operations
A company should consider forming separate business entities (using the guidance above for each entity) for operations, holding equipment and, if applicable, office ownership. An operational entity should, among other things, handle the business of entering into contracts with owners and the various subcontractors, suppliers and other third party vendors. A separate entity should buy most or all equipment and lease the equipment to the operational entity. Finally, any building or office space that is purchased should be owned by an entity separate from the previous agreements and leased to the operational entity. An important advantage of this practice occurs in the case of a judgment being rendered against the operational entity. In this circumstance, if properly organized and operated, the assets of the other entities cannot be touched.
3. Properly Document Infusions of Cash
Owners generally fund working capital needs of their companies through two ways — by making capital contributions or through lending. There are large advantages to using the latter. In case the company fails, the owner may have an interest in the company assets ahead of other creditors. However, in order for this to occur, any loan should be properly documented at the time it is made, and in order to obtain priority over the business’ other general unsecured creditors , it should be secured by company assets through a written security agreement and proper state filings and recordings.
4. Work Toward Consistency in Your Contracts
A company will enter into numerous agreements. A few examples are: construction contracts, loan agreements, employment agreements and vendor agreements. Consistency in clauses across these agreements will reduce your review time, your questions and the attorney’s fees you incur clarifying the meaning of the various standard clauses. A perfect example is a dispute resolution clause, as it will likely be included in each of these agreements. A company should strive for consistency and compatibility for these agreements so to ensure predictability and efficiency and to reduce the amount of legal fees incurred for decoding the legal impact of such clauses.
5. Cultivate and Protect Your Company Intellectual Property (IP)
Company trade secrets are protectable IP, and comprise information that: (i) is not publicly available; (ii) provides a commercial advantage; and (iii) subject to reasonable efforts to maintain secrecy. These can include client lists, production or construction methods, production formulas, marketing strategies, pricing strategies and other commercially sensitive materials. Protect you company’s IP with written confidentiality and intellectual property agreements and safe practices for ensuring such information is not accessible by non-essential personnel.
6. Comply with All Contractor Licensing Requirements
When performing work that requires licensing, ensure that your company obtains all proper licenses. Each state treats licensing infractions differently, but an unlicensed contractor is always at risk. For example, Washington and California are both very strict about licensing and limit recovery of claims by unlicensed contractors. A number of states also impose both civil monetary penalties and criminal sanctions for licensing violations. Additionally, some states declare any contracts with unlicensed contractors null and void and/or allow disgorgement of any previous payments to unlicensed contractors. Do not underestimate the consequences of improper licensing.
Similarly, contractors should also be cognizant of any special licensing requirements for performing work on tribal land. There has been a construction boom nationally with respect to casinos and other establishments for Indian tribes on Indian tribal land. Thus, licensing issues on tribal land have become a relevant concern. To commence construction, tribes often require special business and building permits, which are granted by the tribe.
7. Properly Classifying Workers as Either employees or Independent Contractors
The proper classification of a worker has implications in a number of areas including: wages and hours, unemployment and worker’s compensation and tax liability. To make matters worse, a worker may be considered an independent contractor for tax purposes, but an employee for unemployment purposes. Generally, independent contractors receive far fewer protections under state and federal law, and organizations have less obligations and liabilities toward them. However, the federal government and a number of states are beginning to give greater attention to misclassification of workers, which can result in fines, penalties, stop work orders and back taxes.
The determination of whether a worker is an independent contractor or an employee is very fact specific, and may vary depending on the agency and state. But, at the most basic level, a worker may be an independent contractor when he controls the means and methods by which the work is done. Courts also consider factors such as whether or not they are paid the same weekly wage and own their own tools. Moreover, the employer bears the burden of proving the existence of an independent contractor relationship. Given the increased scrutiny and penalties for misclassification of workers, it is important that organizations carefully analyze the employment status of each worker under applicable federal and state law.
8. Business Continuity Plans
An important consideration for any company is a well formulated business continuity plan. Many closely held companies are unprepared for business continuity after the founder or major shareholder retires, becomes disabled or is deceased. Thus, contractors should consider how to hold on to key employees and develop plans for operations in the event that something happens to the owner or a key person. With regard to keeping employees, contractors may want to consider various incentives, such Employee Stock Ownership Plans (ESOPs), or other mechanisms to give employees a stake in the business. A business continuity plan should also consider other risks and interruptions that can negatively affect business, such as IT failures, supplier default and economic slowdown. Preparation in event of unforeseen circumstances is important to ensuring that business can continue to run smoothly.
Conclusion
In this volatile market, it has become increasingly important that contractors exercise smart business legal judgment to help ensure continued success. Accordingly, this article sheds light on a number of topics that contractors should consider when making future business decisions. The foregoing is provided for informational purposes only and should not be construed as legal advice. Contractors are encouraged to consult with an attorney of their choice to discuss their own individual circumstances.
Paul Tonella is a partner at the law firm of Oles Morrison Rinker & Baker, which represents hundreds of closely held companies in their corporate management, succession planning, tax, real property and general business needs. Contact: Tonella@OLES.comor (206) 623-3427.
Firm Associate Benjamin Greenberg earned his law degree from Boston College Law School. During law school, he was a staff writer for Boston College Law Review and was co-president of the Criminal Justice La Project. Contact: Greenberg@OLES.comor (206) 623-3427.
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By Aaron Lindstrom, Enterprise Fleet Management
No matter how we may long for the warm days of summer, winter has arrived. Whether its snow, sleet, ice or rain, you don’t want to be caught unprepared when it comes to your vehicles. A little effort on your fleet now can save you a lot of time and money down the road. Even in areas where the climate does not fluctuate very much, it is still a good idea to take advantage of seasonal changes to keep the company fleet in good shape.
Business owners and fleet managers who make sure their vehicles are ready for winter can drive down costs while increasing the operating efficiency of their fleet. With routine maintenance, a company’s fleet can become one of the most controllable expenses, especially for companies with mid-size fleets that depend on every vehicle operating at peak capacity. According to the experienced mechanics and accredited Automotive Service Excellence (ASE) technicians at Enterprise Fleet Management, a good place to start is by following some simple maintenance tips:
- Winter Check. Inspect wiper blades and make sure windshield washers are working and washer fluid reservoirs are full. Check each vehicle’s battery for load capacity and the electrical/charging system for proper operation to avoid getting stranded. Also, check all belts and hoses for softness and wear.
- Oil Changes. Most people know that a vehicle’s oil should be changed at certain mileage intervals. Intervals for vehicles that idle for long periods of time, such as service or delivery vehicles, should also be measured using hours of running time. For vehicles that spend more time idling than driving, a general rule of thumb is change the oil every 200 hours of engine operation.
- Transmission Maintenance. Electronically controlled transmissions require more maintenance to continue operating at peak efficiency. A rule of thumb is to change the transmission filter and fluid every 30,000 miles or less for vehicles hauling heavy loads, pulling trailers, or doing mostly stop-and-go driving. Check the owner’s manual for specific intervals for your vehicles and always use the correct type of transmission fluid recommended by the manufacturer. Under certain conditions, such as a major internal component failure, it may be cost effective to replace the entire transmission with a unit remanufactured by the vehicle manufacturer. A remanufactured transmission generally offers better reliability and a longer warranty, and the vehicle can be taken to any appropriate dealer for the repairs, eliminating the trouble of seeking out a shop for future repairs.
- Warranty Repairs. Failing to adhere to specific use and preventive maintenance guidelines established by the manufacturer may jeopardize your warranty coverage. Check your vehicles owner’s manual to ensure you are keeping up with necessary preventive maintenance checks.
- Filter Changes. Replace the oil filter, air filter, fuel filter, automatic transmission filter and crankcase filter at regular intervals to prolong the service life of the vehicle and lower repair costs. Consult your owner’s manual or fleet services company for information on the correct intervals for specific vehicles.
- Tire Replacement. Match dimensions indicated on the tire information decal for new tires. This will help avoid inaccurate speedometer/odometer readings, ABS brake malfunctions and multiple engine and transmission errors. If a vehicle’s tires reach 3/32 of an inch or less in tread depth, it’s a sign to replace them. Some vehicles with all-wheel drive require replacement of all tires at the same time because of potential driveline problems. Consult your owner’s manual or fleet services company to determine if this is the case with your vehicles.
- Tire Maintenance. Use a quality air pressure gauge to check pressure at least once a week. Correct tire pressure helps extend tire tread life and gas mileage and contributes to good traction and handling. Incorrect tire pressure can lead to premature tire wear, lessened fuel economy or possible tire failure up to and including a blowout. Rotation of the tires, recommended every 10,000 miles, will also extend the tire life further. This is especially true for front wheel drive vehicles.
- Engine Oil. Always use equivalently rated API (Automotive Petroleum Institute) oil that is recommended by the vehicle manufacturer. This will ensure proper protection of vital engine components at all temperatures and running speeds, assist in starting on cold days and help you get the most from your vehicle.
- Gasoline Selection. The gas you choose can directly affect fleet cost and vehicle performance. When choosing a grade or octane of fuel for your company’s vehicle, consult your owner’s manual. Gasoline that is too low in octane can drastically affect vehicle performance, while gasoline that is too high in octane can drive up expenses unnecessarily.
Aaron Lindstrom, senior account executive for Enterprise Fleet Management in Washington can be reached at (206) 423-3958. Visit the company’s Website at www.efleets.com or call toll free 1-877-23-FLEET.
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