April 7, 2022

	I. War in Ukraine Expected to Stunt US Economic Growth
	II. Pay if Paid Clauses May Be Eliminated in Virginia

	III. How Adopting a Beginner’s Mindset Can Help Your Credit Game
	IV. eNews Metrics Series: How True DSO Fits into the Credit Department

The impact of the war between Russia and Ukraine is expected to slow global economic growth significantly in 2022 and beyond.

“Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation,” said JPMorgan CEO Jamie Dimon in an annual report to shareholders. “America must be ready for the possibility of an extended war in Ukraine with unpredictable outcomes. We should prepare for the worst and hope for the best.”

Countries around the world have started to revise their GDP projections downward for 2022 as a result of the war on top of lingering pandemic-related issues, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The two create quite a whammy.”

But the Russia-Ukraine conflict could be the tipping point for many businesses that so far have survived the challenges Covid initially created. Cutts predicts that roughly half a percentage point of global GDP will be lost due to the Russia-Ukraine conflict. “That comes from the fact that Russia and Ukraine supply vital commodities in certain parts of the world and certain sectors,” she said. “In a world where we only use the raw materials within our own borders, this would have no impact, but we are so globally connected.”

U.S. real GDP is now expected to grow 3% this year (down from a pre-war forecast of 3.4%), according to Economist Intelligence. The loss in growth is partly due to inflation, but the crisis also could further strain the U.S. semiconductor industry. The U.S. gets roughly 90% of its neon from Ukraine and 35% of palladium from Russia, both of which are used in semiconductor manufacturing. “If we curtail chip production, then we will see car and appliance production cut further, which will ultimately cut GDP on top of widespread inflation the conflict is creating,” Cutts said.

In addition, the role of the U.S. dollar could be diminished over time as a result of the war. The U.S. only produces about 16% of the world’s goods and services, but the U.S. dollar is involved in about half of all financial transactions and accounts for 60% of the world’s foreign reserves, according to Kellogg Insight. However, this could change as countries begin diversifying their reserves with alternative currencies to protect against potential future sanctions. “We might see an erosion of the role of the dollar in world affairs,” Sergio Rebelo, a professor of finance at the Kellogg School of Management, said in a recent article.

The combination of multiple negative spillover effects from the war also have increased the risk of a U.S. recession by as much as 35% in the next year—especially because the Federal Reserve was already struggling to tame record-high inflation prior to the conflict, according to Goldman Sachs. “Whether the Fed will be able to pull off a soft landing in such a challenging macro environment, or will instead end up triggering a recession, is a growing question,” reads a report from Goldman Sachs.

Pay-if-pay clauses may be eliminated soon in public and private construction contracts in Virginia. The Virginia General Assembly has approved a new law known as Senate Bill 550 that would make a general contractor individually liable for the entire amount owed to any subcontractor.

Payment by the owner shall not be a condition precedent to payment to any lower-tier subcontractor. A condition precedent pay-if-pay clause will be unenforceable. A general contractor can still back charge a subcontractor for noncompliance with the terms of the subcontract. However, the contractor must notify the subcontractor in writing of the intent to withhold and the reason for withholding payment.

This new law eliminating condition precedent pay-if-pay clauses will apply to “every agency of local government that acquires goods or services, or conducts any other type of contractual business with a nongovernmental, privately owned enterprise.” This seems to include not only public construction contracts, but also other types of public procurement.

This new law will certainly be welcomed by subcontractors in Virginia. However, this will add considerable risk and administrative expense to general contractors. All parties and especially general contractors will need to police payments more carefully. Virginia has historically been a “Freedom of Contract” state.

For years, most general contractors have passed much of the risk of owner insolvency down to subcontractors, while general contractors were still exposed to a substantial part of the risk. As you know, construction contracts can involve many millions of dollars. An owner insolvency on one major project can now put even a strong general contractor out of business.

It is not clear whether the proposed new law operates retroactively. The portion of the law stating that “Any contract awarded by any state agency, or any contract awarded by any agency of local government . . . shall include” a payment clause that obligates a contractor to be individually liable seems to operate only prospectively.

However, the portion stating that payment to the contractor shall not be a condition precedent to payment to any lower-tier subcontractor and that “any provision in a contract contrary to this section shall be unenforceable” sounds like it would apply to any now existing contract. Pay-if-pay provisions that are now in existing subcontracts may be unenforceable. It is also not clear whether this law applies to sub-subcontracts between first-tier subcontractors and lower-tier subcontractors.

The Virginia Public Procurement Act has contained prompt pay provisions for some time. Any contract awarded by any state agency must include a payment clause that obligates the general contractor to do one of two things within seven days after receipt of payment from the state agency:

1. Pay subcontractors for the proportionate share of the total payment received from the agency attributable to the work performed by the subcontractor under that contract; or
2. Notify the agency and subcontractor, in writing, of his intention to withhold all or a part of the subcontractor’s payment, with the reason for nonpayment.

Any contract awarded by any state agency must include an interest clause that obligates the general contractor to pay interest at the rate of one percent per month to subcontractors on all amounts that remain unpaid seven days after receipt of payment from the state agency, except for amounts legitimately withheld. A general contractor must include in each subcontract a provision requiring each subcontractor to include the same payment and interest requirements in all lower-tier subcontracts.

The proposed new law extends these prompts pay provisions to private construction contracts. In addition, unlike public contracts, a payment clause must be included in any private general contract that (i) requires the owner to pay the general contractor within 45 days of receipt of an invoice after satisfactory completion and (ii) requires a higher-tier contractor to pay a lower-tier subcontractor within 45 days of satisfactory completion of the work or within seven days after receipt of payment from the owner, whichever is earlier.

Similarly, private subcontracts “shall be deemed to include” provisions that make any higher-tier contractor individually liable to any lower-tier subcontractor for performance of the subcontract. Private subcontracts must require a higher-tier contractor to pay a lower-tier subcontractor within 45 days of receipt of an invoice after satisfactory completion or within seven days after receipt of payment from the owner, whichever is earlier. All of these provisions concerning private construction contracts more clearly apply to sub-subcontracts between first-tier subcontractors and lower-tier subcontractors.

The Governor of Virginia has until April 11, 2022 to sign or veto the new law. Check the status and see the legislative history at https://lis.virginia.gov/cgi-bin/legp604.exe?221+sum+SB550.

Readers are welcome to reprint or republish this article with the following attribution: © (2009, 2022) James D. Fullerton, Fullerton & Knowles, P.C. Clifton, VA (703) 818-2600, www.FullertonLaw.com; to learn more about Fullerton & Knowles, P.C.’s Construction Law Survival Manual, visit here.

Beginner’s luck. Maybe you’ve heard the phrase after hitting a homerun during your first-ever baseball game or even hitting the jackpot the first time you step into a casino. As it turns out, there may be some truth behind the phenomenon, and it has nothing to do with luck.

Being a beginner is generally seen as a negative trait, and adopting a beginner’s mindset may feel counterintuitive. But it actually comes with some major advantages: a clean slate, fearlessness and a willingness to learn. “Experienced business leaders let their worries hold them back, missing out on opportunities that their internalized fears told them were unsafe,” according to Forbes. “When you’re a beginner, though, you haven’t had the experience or time to build up unjustified fears.”

A beginner’s mindset might look different when applied to your credit department. For example, it could translate to valiantly reaching out to the CFO to score funding for new automation. Maybe it means taking a look at old collection strategies with fresh eyes. Or it could be finding a new approach to analyze risk that you have not done before.

“We define a beginner’s mindset as an inclination to periodically question and reassess deeply held theories, archetypes and conventions to devise new and fundamentally innovative solutions—either because reality has changed or because the current approach is based on flawed thinking, faulty premises, or a different consumer or technological landscape,” reads an article from Deloitte Insights.

And in the quickly changing world of business credit, being able to take a step back and adapt is of utmost importance. The beginner’s mind has not been conditioned to accept old teachings or preconceived ideas, but rather it relies on curiosity to come to its own conclusions.

“That capacity to reconsider our preconceptions and open our minds to new ways of thinking may be increasingly important in today’s rapidly changing world,” reads a BBC article. “Whether we are learning for pleasure or attempting to boost our professional skills, we could all do well to cultivate that ‘beginners’ mindset,’ where nothing is certain, and there is everything to learn.”

However, the beginner’s mindset is not just for beginners. Anyone can benefit from a reset. “Whether you are a new or experienced business leader, you can always adopt a beginner-like mind,” reads a Forbes article. “You'll be doing yourself a favor by thinking like a beginner, regardless of how experienced you are, because beginner-ship can help you achieve bigger and better results in less time.”

You can start to look at business credit with a beginner’s mind by asking yourself a few questions posed in the Deloitte Insights’ article:

• What if my assumptions are wrong, despite the best evidence at hand?
• What if what seem to be perfect solutions drawn from history are no longer relevant?
• What if I could wish for anything I wanted?
• What if my critics are right?

Despite all of its flaws, Standard DSO continues to be the primary DSO calculation credit departments use to evaluate their accounts receivable balance. Regardless, there are a number of ways to calculate DSO—which variation of the formula is used often depends on the business line of a company or the way it has historically calculated DSO.

True DSO is a lesser known or used calculation and is built on the Sales Weighted DSO method. It attempts to remove the sales bias associated with Standard DSO and produces an accurate view for all accounts receivable. The formula calculates the actual number of days credit sales are unpaid by tracking individual invoices to the month of sale. According to a recent eNews poll, only 14% of respondents acknowledge using it, compared with 75% who use Standard DSO.

True DSO is calculated for each invoice. It measures the number of days each invoice is open—from the invoice date to the date of measurement divided by the number of open invoices. One of its biggest drawbacks is that it is extremely cumbersome to calculate, and it only works for invoices that have been paid—“attempts to apply it to open invoices will give results that make no sense,” according to Andriy Sichka, in his LinkedIn article, TRUE DSO: The New Life of the Fine Old Friend. As a result, it is more commonly used for tracking payment performance for individual customers.

“It grows as a result of high levels of arrears, takes into account long-standing overdue rates and nearly disregards small or insignificant values,” Sichka wrote. “At the same time, it balances past-due payments and those paid earlier, thus giving an objective view on payment practice for each particular customer. Furthermore, if calculated for a long enough period, like one year, it could provide a sound background for a realistic estimation of future payment dates.”

Standard DSO differs from other DSO calculations such as True DSO, said Kenny Wine, CCE, director of credit for Joseph T. Ryerson & Son (Little Rock, AR). Industries that have flat sales patterns and payment terms can find use in Standard DSO, he added. However, “It can mislead when other factors must be considered. If you’re in an industry that is project based or you have split terms, multiple terms, 30-day customers, cash in advance customers or 60-day customers, then Standard DSO calculations get convoluted.”

Because his company uses a variety of terms, Wine shared that he currently uses a three-month blended DSO number derived from his company’s ending AR. It includes deductions, advertising, shortages and any other factors that contribute to the ending AR number. “Then we use our sales number, including any type of service charges, interest surcharges, fuel surcharges and whatever else the customer may owe us and apply that to a three-month average.”

Ultimately, how you calculate DSO depends on who the DSO is for, Wine said. “Is it for credit managers, shareholders or senior management? What are you trying to do? Are you trying to shed some light on the credit department’s progress or its trends?”

Other companies may calculate DSO by excluding deductions or some sort of advertising allowance, Wine continued. “So, what true sales might be for you and your company may be totally different than for me and my company. I look at DSO in a couple of different formats to try to see a snapshot in time. DSO is changing every single day. It is more important to establish what you’re looking for in that DSO number.”

Every organization should decide what DSO calculation it will use from day one, he continued. That way, they can establish a benchmark for analyzing trends from month to month or year to year using the same calculation.