eNews August 9, 2018
In the News
August 9, 2018
Construction Experts Foresee Increased Revenue but Little Economic Improvement
Cautiously optimistic is the best way to describe how the construction industry is feeling about the sector’s future amid rising material prices and the labor shortage. Over the past two months, analysts have surveyed construction industry leaders at the executive level to determine the outlook for the remainder of 2018 and the start of 2019. To the surprise of some experts, overall confidence declined only slightly among construction CEOs, particularly with respect to revenue and hiring.
During the second quarter of 2018, which began in April and ended June 30, nearly 1,500 CEOs of small- to medium-sized businesses (SMBs) in the sector participated in the Q2 2018 CEO Confidence Index Survey by peer-to-peer membership and executive coaching organization Vistage. The confidence index scored 104.1, falling below the first quarter’s 105.8, but above the 103 recorded in the third quarter of 2017—the lowest score in the past year. According to University of Michigan’s Dr. Richard Curtin’s analysis in the report, confidence was at its highest at the end of 2017 because of the tax reform’s passing.
“The minor decline in confidence in Q2 was due to slight falloff from the last quarter investment and hiring intentions as well as projected revenue and profit growth,” Curtin said in the survey. “Importantly, all of these factors were at least as favorable as a year ago. Of some concern is that CEOs anticipate slowing growth in the national economy during the year ahead.”
Only 31% of respondents said they expect improvements to the economy in the next year—1% less than the national average—while 57% expect economic conditions to stay the same. The majority of respondents (70%), who anticipate increasing their product or service pricing, also exceeded the national average by nearly 15%. The survey’s findings weren’t all doom and gloom, as 72% of respondents expect their firm’s sales revenues to increase, with 64% indicating plans to expand their workforce. More than half of respondents plan to hire more employees steadily throughout a 12-month period, 28% of respondents hoping to hire more employees in 2018’s third quarter.
Another survey on construction confidence in the year’s second quarter found that although the sector has grown in the past decade, there may be a slowdown on the horizon. About 15% of the 300 large construction and design firm executives who responded to the Engineering News-Record’s Construction Industry Confidence Index (CICI) survey said the market is headed for a decline in 12 to 18 months, whereas almost 30% believe there will be growth. However, when asked about market status in three years, more respondents (35%) said they expect a market decline and only 16% hold out for growth.
Labor shortage is nothing new to the construction industry either, said NACM Economist Chris Kuehl, Ph.D. Some may believe that a popular solution is to simply increase employee salary, but that doesn’t address the underlying problem: There are not enough qualified people to take the jobs offered.
“Of late, there has been a general hike in wages of around 2.9%,” Kuehl said. “The most rapid growth has been in the very sectors that have expressed the most distress—manufacturing, transportation, health care and construction. All have seen movement of at least 1.5%. Construction has been close to 3.7%, but the most rapid increase has been in financial services at 4.5%.”
Kuehl’s analysis concurred with the Vistage report, where Curtin said wages will “edge upward” in the next year in addition to commodities and interest costs. In the meantime, CEOs will work to lower costs and increase prices.
—Andrew Michaels, editorial associate
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Lien Rights of Contractors, Subcontractors and Suppliers of Materials Under Florida Law
Home renovations and repairs is big business in Florida, especially in densely populated south Florida where it seems that every available square foot of property is occupied by a residence or commercial building. That said, it is important to understand the lien rights of contractors, subcontractors and suppliers of materials under Florida law.
First, it is necessary to understand whether there is a difference between the lien rights of a company that has a contract with the owner of real property as opposed to a company that does not have such a contract. The prime example of the latter is a subcontractor or supplier of materials for the company that actually does have the contract with the homeowner. One who has a contract with an owner is said to be in privity with the owner, meaning the relationship between the two parties is recognized by law.
The short answer is that both those in privity and those not in privity with owners of real property have lien rights. Florida Statutes Sec. 713.01, in its definition of lienors, includes contractors, subcontractors and those who contract with contractors and subcontractors. However, the means of perfecting or protecting those lien rights is different.
As an example, let’s say a homeowner contracts with Company A to install a new roof on his or her property. The homeowner and Company A sign a clear, definite contract. Company A, in turn, contracts with Company B to supply it with all of the materials to install the roof. Company A and Company B have their own separate contracts, but there is no contract between the property owner and Company B.
Once the job is completed the owner refuses to pay the rather substantial balance that is due and owing to Company A. Company A, in turn, does not pay the balance that it owes to Company B. How do each of these respective companies perfect lien rights on the owner’s real property?
For Company A, the process is quite simple. Under Florida Statutes Sec. 713.08, it must record a document known as a claim of lien in the county where the real property is located within 90 days of the last date that it provided labor, services or materials. The statute sets forth, in detail, what must be contained in that claim of lien, and the actual form is provided in Florida Statutes Sec. 713.08. Amongst other things, the claim of lien must include the name and address of Company A; the labor, services and materials that were furnished and the contract price or the value of what was provided; the name of the owner of the real property; a description of that real property; when labor, services and materials were first and last furnished; and the amount unpaid.
Company B’s ability to perfect its lien rights is a bit more involved. Although it, too, must record a claim of lien and comply with the requirements of Florida Statutes Sec. 713.08, it has an additional step it must take to ensure that its lien rights are protected. Pursuant to Florida Statutes Sec. 713.06, prior to furnishing materials or within 45 days of first furnishing such materials, it must serve the owner with a document known as a notice to owner. Again, the statute sets forth the actual form—which is quite brief and straightforward—that must be provided, and that form will contain Company B’s name and address, the description of the real property and a description of the materials that were supplied or are being supplied.
Scott Topolski is a veteran litigator and a member in Cole Schotz PC’s Boca Raton office. He has been practicing for 30 years with a focus on litigation matters including probate disputes, breaches of fiduciary duties, contested guardianship hearings, business disputes involving contracts and unfair competition, construction disputes, shareholder and partnership disputes, as well as the defense of ADA lawsuits.
Copyright © 2018 Cole Schotz PC. All Rights Reserved.
Connect, Network, Learn and Share
Regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and networking with fellow credit professionals from their respective geographic regions.
Central Region Credit Conference
September 13, 2018
Hosted by: NACM North Central
Western Region Credit Conference
October 10-12, 2018
Salt Lake City, UT
Hosted by: NACM Business Credit Services, Utah & Arizona
All-South Credit Conference
October 21-23, 2018
Clearwater Beach, FL
Hosted by: NACM Tampa
For more information and to register, contact the local Affiliate.
Chinese Import Tariffs Confirmed: What Does This Mean for the Auto Industry?
On Aug. 7, President Donald Trump announced 25% tariffs on $16 billion in Chinese goods, set to begin Aug. 23. This comes after months of negotiations and threats, while now, the U.S. awaits China’s response to the tariffs.
Between May and June, the U.S. deficit in international trade rose $3.1 billion to $46.3 billion, according to a recent report by Wells Fargo. With the fear of tariffs, imports increased and exports decreased. More recently in July, Chinese exports increased even more than expected from June: June’s exports rose by 11.2% over last June and July’s rose by 12.2% from last July, according to Reuters. With the tariffs taking effect this month, Chinese exports may continue to increase as the U.S. waits out the impending charges on Chinese goods.
The trade wars have impacted several industries across the U.S., with the manufacturing industry remaining apprehensive about threats to imported Chinese steel. Underneath the umbrella of manufacturing industries, the auto industry remains one of the most vulnerable—especially with the trade deficit widening and the dependence on these metals.
“You really are going to be seeing some pretty substantial price increases [on cars] if any of these threats for tariffs go through,” NACM Economist Chris Kuehl, Ph.D., said. “The other thing that’s going to be affecting the car market is you still have a really under served used car market. That used to be the best way to go, getting a decent used car. But it’s gotten to the point that used cars are nearly as expensive as new ones.”
While reports claim the tariffs will likely be credit negative for manufacturers, many of the tariffs’ effects on the auto industry stem from how each auto supplier spreads out its operations, a report from Moody’s Investors Service said. Since many North American and European companies have extended relationships with foreign automakers, many of these customers can now be serviced locally. Moody’s also notes the tariffs still hold the power to derail the global economy, should they trigger a large reaction in the financial markets or if confidence is undermined.
North American parts suppliers may still struggle moving forward when exporting, especially from the U.S. to Mexico, given the ambiguity surrounding the fate of the North American Free Trade Agreement (NAFTA). It is still unclear whether all of North America will be affected by the tariffs under NAFTA or if the tariffs are exclusive to the U.S.
“While most auto parts suppliers have Mexican facilities in their manufacturing processes, the magnitude of the impact to profits for the auto parts manufacturers may be meaningfully affected by the degree to which a particular supplier operates in Mexico,” Moody Vice President Tim Harrod said in the report.
Inflation also remains a cause of concern across the auto market, with the tariffs estimated to drop the real GDP growth by about .25% in 2019. Inflation is also expected to rise throughout the rest of 2018 and into 2019—something expected even before the tariffs were officially announced.
—Christie Citranglo, editorial associate
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Are Public Payment Bond Rights Assignable Under North Carolina Law? Maybe.
Contractors, like other businesses, often find it advantageous to assign their accounts in exchange for some other form of consideration from the assignee. What is different about a contractor’s accounts, as compared to most other businesses, is that the amounts owed might be secured by payment bonds.
It should not be disputed that a contractor can assign its accounts to a third party so long as the proper procedures are followed. However, if the accounts relate to a project where the contractor would have a valid claim on a public payment bond, can this right be assigned along with the accounts?
Practically speaking, the ability of a third-party purchaser to make a bond claim would make the assignment of accounts more lucrative for the assignee and would provide some bargaining power for the contractor who wants to assign the accounts. However, once the accounts are assigned and the third-party assignee goes to make a claim on the bond and enforce that claim in court, will a court dismiss the action right off the bat for lack of standing of this new claimant? In North Carolina, maybe.
Under the plain terms of North Carolina’s Little Miller Act, claimants under payment bonds are discussed in terms of those “who have performed labor or furnished materials in the prosecution of work required by any contract” without any language expanding this to “or their assigns.” A plain reading of North Carolina’s Little Miller Act would support the argument that only those parties who actually worked on the project would have standing to bring an action on the payment bond.
But not so fast—it does not appear North Carolina courts have addressed the issue of assignability of public payment bond claims and the resulting standing of the assignee under the Little Miller Act. If faced with the question, North Carolina courts should look to federal law interpreting the federal Miller Act “on which our corresponding state act is modeled.”
See HSI NC, LLC v. Diversified Fire Protection of Wilmington, Inc., 169 N.C. App. 767, 771-72, 611 S.E.2d 224, 227 (2005); McClure Estimating Co. v. H.G. Reynolds Co., Inc., 136 N.C. App. 176, 181, 523 S.E.2d 144, 147 (1999).
And in doing so, the North Carolina courts should see that “assignees of the claims of persons furnishing labor or material come within the protection of the (federal Miller Act).”
See U.S. for Benefit and on Behalf of Sherman v. Carter, 53 U.S. 210, 219, 77 S.Ct. 793, 798 (1957) (rejecting surety’s argument that claimant had not furnished labor or materials to the project); also see U.S. ex rel. Constructors, Inc. v. Gulf Ins. Co., 313 F. Supp. 2d 593, 597 (E.D. Va. 2004) (approving of the decisions in Carter and recognizing the ability of a “valid assignee [to] properly claim payment under a Miller Act bond”).
Furthermore, allowing an assignee to make a claim on a payment bond advances the very purposes of North Carolina’s Little Miller Act. A payment bond is intended for the “protection of the persons furnishing materials or performing labor.” N.C.G.S. § 44A-26. Payment bonds “were designed for the protection of laborers and materialmen and are to be construed liberally for their benefit.” Symons Corp. v. Ins. Co. or N. Am., 94 N.C. App. 541, 544, 380 S.E.2d 550, 552 (1989).
Under this context, it is beneficial to allow assignability.
For example, without the ability to assign payment bond claims, a contractor in need of cash flow in order to stay on and finish a project is less likely to find funding through factoring agreements. By ensuring credit will be readily extendable to contractors, contractors may be less likely to walk off of public projects before substantial completion. This, in turn, enhances the public’s interest to prevent avoidable delays in a public construction project and the contractors’ private interests as well. This is just one way allowing assignability of payment bond claims may be in both the public’s interest and in contractors’ interests.
Therefore, while the question has not been conclusively decided in North Carolina, there are arguments supporting the ability of contractors to assign their payment bond claims along with their accounts. Understanding this can be an effective business tool for contractors.
Nexsen Pruet’s Construction Group is one of the leading construction practices in the Carolinas. Their attorneys have experience in all areas of the construction industry and have worked throughout North and South Carolina for many years.
 In Gulf Ins. Co., the court ultimately determined an actual assignment had not occurred and there was no viable claim because the subcontractors, who alleged assignee claimed it was subrogated to, were not owed any payments. 313 F. Supp. 2d at 598.
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Changes Coming to Construction Industry
“Progress is impossible without change …”
–George Bernard Shaw
This is where the construction industry is heading: progress, innovation and change. Consultancy firm FMI and the Associated General Contractors of America (AGC) recently published the report, Managing Risk in the Digital Age, which focused on four key findings and just as many themes.
Among the key innovation statistics was the evolution of the industry. Over half of the more than 100 responses believe there will be more change to how construction is put in place in the next five years than during the past 50. Other key stats were technology challenges, which included poor implementation and unclear needs. Education, commercial/office and health care will be the most disrupted sectors in the next five years.
The most important risk respondents are worried about is the limited supply of skilled craft workers, with nearly nine out of every 10 responses indicating the problem. According to a separate FMI survey, more than four-fifths of firms predict recruiting qualified workers will be difficult this year. Changes in contract language was the second-most named risk being encountered on an increasing basis at 75%. The worker shortage will only continue to worsen; FMI reports as many as 20% of higher-level employees will be lost over the next five years.
With the lack of workers and the possibility of workers leaving the industry over the next several years, firms are looking elsewhere to combat the issue and to “increase productivity, reduce costs, reduce risk and accelerate project schedules,” stated the AGC risk study. Roughly half of the current positions within the industry could be automated in the years ahead, and almost half of the tasks provided by paid labor could be automated with current technology.
“The bottom line is that technology is evolving at an exponential rate and industry innovators are learning and adopting new systems and processes for more effectively integrating design and construction,” according to the report.
When asked about certain risk costs over the next five years, all but one category (broker compensation) is expected to see an increase. About half of respondents said subcontractor surety and subcontractor default insurance (SDI) will increase, while insurance other than SDI was forecasted to increase by 80%.
“Today’s contractors are performing more work and staffing more projects with less of the skilled labor they have had in the past, and with fewer and less experienced field supervisors. Collectively, these factors are increasing the risks relating to labor productivity, quality, safety and working capital to unprecedented levels,” concluded the report.
—Michael Miller, managing editor
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