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The Nuts + Bolts of Construction Financial Management


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"The Nuts + Bolts of Construction Financial Management" was presented by Stephanie P. Union and Peter Berg on September 23, 2015, at the office of Kegler Brown.

The morning briefing covered the nuts and bolts of construction financial management, including, but not limited to, the steps and best practices for prompt collection.

Published in: Law
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The Nuts + Bolts of Construction Financial Management

  1. 1. z
  2. 2. z Steps for Prompt Collection + Keep Close Eye on Receivables + Easier to Collect when “Younger” + Demand Letters + From you + From an attorney + Act on them if no response
  3. 3. z Improving Your Position at the Start
  4. 4. z Get as much info as you can Verify the information using public information or trustworthy documents from client Get personal guaranties if able Credit Applications
  5. 5. z Security Agreements + Think outside of the box in taking security: real property, vehicles, IP, A/R, etc. + Make sure to file a financing statement in proper place or notate on title + Make sure to note date to refile financing statement to keep it current
  6. 6. z Collection via Litigation
  7. 7. z Small Claims Court Can pursue without counsel Municipal Court Must have counsel if corporation Common Pleas Must have counsel if corporation
  8. 8. z No Response? Obtain a Default Judgment
  9. 9. z Legal Process + Construction Claims Jumping Off the Deep End
  10. 10. z Legal Process to Defend a Claim + 18-24 months from the time a lawsuit is filed to when a trial or arbitration hearing is conducted + Diversion from your core business – will feel like you are playing short-handed
  11. 11. z Legal Cost Thermometer + Generally, legal costs are not recoverable + Notable exception is if permitted by contract HOT - $1 million+ MEDIUM - $500k+ MILD - $250k+
  12. 12. z LITIGATION + Courthouse setting + Decided by judge or jury + Extensive discovery + Appeal process + Extends the time for resolution ARBITRATION + Conference room setting + Decided by panel of industry experts/attorneys + Semi-extensive discovery + No appeal process + Less formal than litigation v.
  13. 13. z Various project agreements should be consistent as to whether disputes are resolved by arbitration or litigation Architect CM/GC Subcontractor Owner
  14. 14. z Discovery Project Viewed Under A Microscope + Project schedule + Bid + Job cost report + E-mails - including internal e-mails + WIP reports + Correspondence with surety + Daily reports + Meeting minutes + Tickets
  15. 15. z Figure Out 80% of the Case with 20% of the Legal Costs 80/20 Rule
  16. 16. z What Happens in Mediation Stays in Mediation + May be contractually required + Any resolution/settlement is voluntary + Use an experienced construction attorney + Both parties need to be ready to make significant concessions while recognizing the benefits of avoiding future legal costs and diversion of resources
  17. 17. z Collecting the Judgment + Via wage garnishments + Via bank account garnishments + Via attachment of assets + Can take Judgment Debtor Examination + Can certify judgment and attach to real property
  18. 18. z Mechanic’s Liens
  19. 19. z Mechanic’s Liens + Allow Contractors, Subs, Laborers and Material men to put liens on properties where they work + Time of the essence in filing them + Determine whether project is “public” or private” + Public= 120 days from last day of work to file + Private (commercial)= 75 days from last day of work + Private (residential)= 60 days from last day of work
  20. 20. z Notice of Commencement (NOC) + Recorded by owner + If filed, suppliers need to serve Notice of Furnishing (NOF) on owner or designee + original contractor + Serve before beginning work + Sometimes within first 21 days after work or materials delivered + Preserves the right to file lien if not paid
  21. 21. z + Notice of intention to claim, hold lien + amount thereof + Amount is due and owing to the claimant for labor performed or for skill, material, or machinery furnished + to what improvement the same was done or supplied + Amount due is over and above all legal setoffs and before name and addresses of claimant and person to or for whom work was performed or the material was furnished + Date when 1st material or 1st laborer was furnished/performed If not paid timely, need to include in Mechanic’s Lien:
  22. 22. z + Date when last material or labor was performed + Description of premises to be charged again described with reasonable certainty (Use legal description) + Name of owner(s) at the time of making such affidavit + Post office address of the claimant + Name of original or prime contractor + Interest of owner, lessee or vendee upon which lien is claimed If not paid timely, need to include in Mechanic’s Lien:
  23. 23. z Rights + Once have lien, can file a foreclosure on property where work done + Need to name other lienholders, including mortgage holders + Liens paid in order of their priority, but all mechanic’s liens share pro rata
  24. 24. z Bankruptcy of Client + Intended to give debtors a fresh start + Sets up priority system for different claims + creditors + Creditors can influence case + You should receive notice of filing
  25. 25. z Automatic Stay
  26. 26. z Creditors cannot take action against the debtor or against the property of the estate, or exert control over property of the estate + Make collection calls/send demand letters + File a lawsuit or enforce a judgment + Repossess collateral or setoff debt + Allow prior actions to proceed
  27. 27. z However, you CAN preserve your lien rights by filing a mechanic’s lien
  28. 28. z Penalties for Violating 1. Compensatory damages for any violation Lack of actual notice is not a defense 2. Punitive damages for willful violation 3. Courts are very hard on creditors who received notice of bankruptcy, even if creditor didn’t have actual notice (i.e., if creditor’s system didn’t catch the notice) + Very broad interpretation of the stay + Obtain relief from stay to pursue foreclosure
  29. 29. z DISCHARGE
  30. 30. z Fresh Start + Debtors allowed to strip away debt that arose prior to petition in bankruptcy being filed + Individual debtors allowed to exempt some basic property in order to facilitate fresh start
  31. 31. z Exceptions 1. Not an individual 2. Lies during bankruptcy or conceals assets 3. Received discharge filed in past 8 years 4. Fails to cooperate with bankruptcy laws + orders
  32. 32. z Non-Dischargeability + Money/services obtained by false pretenses, false representations or actual fraud + Embezzlement, larceny, or defalcation + Debts for willful or malicious injury by debtor to another entity or to property of another entity + Failure of the debtor to name creditor in bankruptcy, unless creditor had notice or actual knowledge of case
  33. 33. z Preferences: 5 Elements Transfer of property of debtor To or for benefit of creditor On account of antecedent debt Made while debtor was insolvent Presumption of insolvency in 90 days prior to bankruptcy (1 year for insider) Enabling creditor to receive more than it would have received in Chapter 7 case if transfer hadn’t been made 1 2 3 4 5
  34. 34. z Most Common Defenses 1. Contemporaneous exchange for new value 2. Ordinary course of business (of debtor or creditor) 3. Amounts at issue + if individual + primarily consumer debt, limit is $600 + if not primarily consumer debt, aggregate value of transfer has to be over $6,225
  35. 35. z Thank You! Stephanie P. Union Director, Kegler Brown Hill + Ritter 614-462-5487
  36. 36. z
  37. 37. z What is a “Claim”?
  38. 38. z Avoiding Claims Preparing For Claims Submitting Claims Preserving Claims Keys to Successful Claims
  39. 39. z Avoiding Claims
  40. 40. z See the future Dispute Avoidance Begins at Bid Time Do the Impossible
  41. 41. z Responsible Estimation Always a Gamble, Price the Risk
  42. 42. z Ask Questions!
  43. 43. z Throw the “Red Flag” on Bad or Insufficient Details Submit RFI’s + Force Architect to Tell You What He/She Wants “We’ll Build It As Drawn, But Don’t Blame Us if It Leaks”
  44. 44. z Scrutinize SUBS
  45. 45. z Importance of Low Price How Low is it Really?
  46. 46. z Know Your Teammates + Responsible? + Trustworthy? + Sufficient Capital?
  47. 47. z Avoid Your Zombie Subcontractors Recently Gone Out of Business + is Now Working Under a New Name Back from the Dead
  48. 48. z Avoid Owners that Treat Design + Construction Like Commodities A sophisticated owner understands the value that comes with good design documents and is willing to pay + wait for them There is more to design + construction than shopping for the cheapest price
  49. 49. z Avoiding Disputes After Contracting
  50. 50. z Collaborative Project Administration + Teamwork + Cooperation + Coordination + Partnering
  51. 51. z Tie Up Loose Ends + Partial Lien Waivers + Partial Releases
  52. 52. z Smart Financing Should You Finance Your Sub?
  53. 53. z Document Your Work + Correspondence + Meeting Minutes + Daily Reports + Job Cost Report + Photographs
  54. 54. z Daily Reports Daily reports are helpful to support a claim when they consistently include the following information: Workforce (Example – 6 carpenters, 3 laborers) Equipment (both rental and company owned) Description of the events of the day Areas where crews are being delayed
  55. 55. z No Delays or Problems Are Identified Nothing Listed For Equipment Daily Reports: Common Problems
  56. 56. z » Create a check-the-box daily report and follow through » Delays Encountered » Waiting on other Trades » Waiting on RFI Response » Inefficiencies Encountered » Loss of power » Lack of building enclosure » Stacking of Trades » Have Your Superintendent/Foreman Take Pictures That Can Be Later Identified By Date Writing Daily Reports Takes Time Away From Running the Work Possible Solutions
  57. 57. z Pictures Are Great When . . . Date + Area Easily Identified Persuasive + Efficient Proof
  58. 58. z
  59. 59. z
  60. 60. z Compare Milestones
  61. 61. z 4/29/10 Original Temporary Enclosure Milestone = 4/30/10 With What Actually Happened
  62. 62. z Progress Meeting Minutes Often Times Progress Meeting Minutes Do Not Reflect The Discussions That Took Place Two Pages of Progress Meeting Minutes
  63. 63. z Provide Written Notice that Minutes are Not Accurate Silence = Acceptance
  64. 64. z Job Cost Reports
  65. 65. z Aligning Your Bid with the Job Cost Report Job Cost Report Budget Entries Framing • Material $50k • Labor $100k Drywall • Material $75k • Labor $50k Ceilings • Material $75k • Labor $100k 1100 Framing • Material $50k • Labor $100k 1200 Drywall • Material $75k • Labor $50k 1300 Ceilings • Material $75k • Labor $100k Change Orders 1100 Framing • $10k • $5k 1200 Drywall • $5k • $10k 1300 Ceilings • $15k • $20k Update With Change Orders Your bid + job cost report are discoverable and often must be provided if there is a claim Bid Entries
  66. 66. z Claim Management Your claim is better the earlier you provide: + Written notice your work is being delayed/affected + State your damages + Back it up with project documentation Value of the claim decreases the longer you wait to provide notice + quantify the claim.
  67. 67. z Avoid Sticker SHOCK
  68. 68. z Occurrence of event for possible claim • Missed Milestone • Revised schedule • RFI response • Rejected change order pricing 10 Days - submit written Notice 30 Days- Submit Certified Claim 120 Days- Obtain Final Administrative Decision or Exhaust Jobsite Dispute Resolution Process 2 Years – File Suit or State Will Argue Claim Is Waived Free To File Suit 14 Days – Must Appeal CM or A/E Decision or Recommendation Current as of 2015 Step 1 Step 2 Step 3 Graphic Timeline for Notice + Claim Submission under State’s Article 8 Process
  69. 69. z Article 8 “Road to Nowhere”
  70. 70. z Key Elements for Successful Claims Goal: Convince claim reviewer of validity of CO request and need for adequate compensation. + Understandable + Factual + Contract-complaint + Realistic + Compelling
  71. 71. z Components of Well-Prepared Claim Document Remove Roadblocks for Settlement
  72. 72. z Preserving Claims
  73. 73. z Proceeding Without a Change Order or Written Direction is Risky
  74. 74. z Unless you indicate otherwise, we will proceed with the additional work as we were directed in the progress meeting earlier today, and this e-mail shall serve as continued notice of our intention to receive additional compensation for this change. Protect Your Company
  75. 75. z If You Sign a Change Order Be Sure Everyone Understands – This is Your One “Bite at the Apple”
  76. 76. z Typical Change Order Includes All Costs Associated with that Change
  77. 77. z LETTER We have only priced the direct costs, so Change Order Number ___ is returned to you as executed with one exception and deletion. We have deleted and initialed the portion of the change order that would waive claims for any delays, inefficiencies, disruption or suspension, extended overhead, acceleration, and the cumulative impact of this and other change orders issued to this date. Please return an executed and initialed copy to us. No additional time or costs are sought as of this date based upon what is reasonably foreseeable now; however, we are not waiving claims for additional time or costs should circumstances change. When There are Concerns a Change Order Will Not Provide Sufficient Compensation for Delays + Other Indirect Costs
  78. 78. z Broader + More Aggressive Language (All Cost and Time Impacts To This Point In Time)
  79. 79. z Be Careful When Signing Waivers for Progress Payments
  80. 80. z Same Applies with Schedule Acceptance
  81. 81. z With its signature, Contractor does not verify the accuracy of the schedule nor does it waive any claim with respect to additional costs it will incur as a result of changes to previous schedules, additional costs for unresolved issues it has previously provided notice of, additional costs if the work does not proceed in accordance with this schedule because of others, or costs related to other matters beyond Contractor’s control. Insert This Language
  82. 82. z Be Mindful of Statute of Limitations Starting in October of 2012 8 Years From When The “Cause of Action Accrued.” Reduced From 15 Years Breach of Contract Claims
  83. 83. z Thank You! Peter Berg Associate, Kegler Brown Hill + Ritter 614-462-5494