eNews February 7, 2019
In the News
February 7, 2019
The 86th Texas Legislature has been in session for roughly one month (Jan. 8), and there are several items of interest within a new proposed bill. House Bill 589 (HB 589), filed Dec. 21, 2018, relates to changes in the state’s law governing mechanic’s liens among other construction entities.
“In essence, this bill, like similar derivations in previous years, attempts to convert Texas from a notice after nonpayment to a notice to owner/prelien state—a ‘notice of furnishing’ in this case,” said Kurt Sorensen, CCE, corporate credit manager with H&E Equipment Services Inc.
The notice of furnishing, set forth under the proposed amendment to Section 53, states those contracted with a person other than the owner must give the owner or reputed owner this notice for a lien to be valid, and a person not an original contractor must give the notice to the owner or reputed owner and the original contractor to have a valid lien. According to the bill, among the items the notice of furnishing must include is (“in bold type”):
“THIS IS NOT A LIEN OR A CLAIM FOR A LIEN. THIS IS ONLY A NOTICE TO THE OWNER THAT A SUBCONTRACTOR IS FURNISHING OR INTENDS TO FURNISH LABOR OR MATERIAL TO THE PROJECT. THIS NOTICE IS REQUIRED TO PRESERVE THE SUBCONTRACTOR'S LIEN RIGHTS UNDER CHAPTER 53, PROPERTY CODE."
HB 589 also plans to establish a lien website where an owner can file a notice of commencement. “An owner who elects to file a notice of commencement [with the county clerk of the county in which the real property is located] must post the notice on the lien website,” according to the bill. This addition benefits the owner, said Sorensen, reducing the notice of furnishing filing timeframe from 60 days to 30 days.
“The bill anticipates the sending of a notice at either 30 or 60 days after material or labor is supplied,” added Sorensen. “The typical pay cycle of an invoice in construction is at least 60 days; by the time the invoice gets to the subcontractor, they send it to the general contractor, wait to get paid and flip the money back. Usually, we don’t even know we have a payment problem until 75 days after invoice.”
When payment is not received, the new law would allow for a notice of nonpayment, which can be given by a subcontractor to an owner or reputed owner; however, strict timeframes are listed. If this notice is given by a subcontractor, a copy must be given to the original contractor, and “if the subcontractor did not contract for the subcontractor's work with the original contractor, the person to whom the subcontractor furnished the subcontractor's work.”
“Proponents of the bill contend that these changes are necessary in order to modernize and simplify Texas construction lien laws,” states an article from law firm Porter Hedges LLP. “Opponents of the bill contend that these changes will overcomplicate a system that is already working and the early notice requirements may actually make it more difficult for subcontractors and suppliers to protect their rights.”—Michael Miller, managing editor
Credit Congress: Session Highlight
28094. Advanced Collection Techniques in the Construction Industry
Speaker: Christopher Ng, Esq., Gibbs Giden Locher Turner Senet & Wittbrodt, LLP
This session addresses the more complex collection techniques applicable to the construction industry, such as evaluating available statutory remedies (mechanic's lien rights, bond claims, and stop payment notices/claims on construction funds) on private and public projects. Christopher will also discuss the Piloting Miller Act bond claims for federal projects, how to avoid getting caught in fraudulent schemes when selling MBEs/WBEs/DVBEs and enforcing claims against contractors’ license bonds. He will further present how to enhance prelawsuit collection efforts (including strategies for impactful demand letters and exploring claims against third parties), how to navigate Bankruptcy Court when your customer, the general contractor, or the owner files bankruptcy as well as handling the contractor’s purchase order and avoiding the “Battle of the Forms.”
Please visit creditcongress.nacm.org for more information and to register.
Early Bird Rate is in effect — Register now and save!
Team discounts (5 or more) are also available for larger member companies.
Credit managers today embrace trade credit insurance to protect their businesses from the financial hardships that may accompany troubling collections. Similar to a general insurance policy, trade credit insurance equips businesses with a safety net but is geared toward risks of default, insolvency or bankruptcy. Trade credit insurance goes beyond other forms of insurance as credit insurers also provide mounds of data to better guide creditors in their decision-making processes.
Now in the early months of 2019, credit insurers, such as Euler Hermes and Atradius, are eagerly anticipating whether their economic predictions will come to fruition, some of which indicate businesses should consider a trade credit insurance policy. Global insolvencies appeared most concerning, according to Euler Hermes’ Global Insolvency Outlook 2019. Business insolvencies increased 10% in 2018 over the prior year but are expected to decrease to 6% this year. Atradius’ findings differed slightly, predicting a 1.7% decrease in global insolvencies in 2019.
Impacts from insolvencies are felt worldwide, including Australia where insurance brokers National Credit Insurance (NCI) stated trade credit insurance came to the rescue. On Jan. 25, Insurance News magazine reported a 41% gain in credit insurance claims in December 2018 over the prior year. Insurers reportedly covered $64 million in claims, nearly a quarter more than 2017.
“The conditions for international trade may not appear inviting, but no business can afford to stand still, and ‘wait and see’ may be too late for the bottom line,” Stuart Ramsden, head of commercial at credit insurer Atradius, wrote in Global Banking & Finance Review magazine. “Opportunity for trade is there and your business could benefit hugely, but the message is to know your customer.”
Regional Manager Bill Houck, of the U.S. Small Business Administration’s Office of International Trade for the Mid-Atlantic region, said credit managers should view insurance as a viable option, describing it as “an integral part of their job when reviewing buyers.” Houck, who is based out of the Northern Virginia Export Assistance Center in Arlington, noted insurance—whether for domestic or international business purposes—reduces credit risk for a low cost and helps alleviate pressure from sales to lock down a potential customer.
For example, he said, it’s common for creditors to have relationships with customers based on cash-in-advance terms; however, it’s possible, over time, to lose those customers when they express interest in getting credit terms. This is why credit managers need to know about trade credit insurance. In addition to protecting a company’s balance sheet, credit insurance allows credit managers to consider offering credit terms to customers they previously considered risky.
“In most cases, credit managers should have the credit insurance option available to them so the company doesn’t lose a sale,” Houck said. “Anything can happen, meaning a customer may have a concentration of risk with some creditors and they decide to divert payments to that creditor. Credit insurance prevents against nonpayment and, in many cases, a company can get as much as 90% on the dollar back from the credit insurer (a deductible may apply) if there is a default. It essentially secures an open account transaction.”
Credit insurance is not new. Companies in the European Union have used credit insurance for over 50 years, and it’s a common business practice. The U.S., on the other hand, remains a novice user of credit insurance. Selling the concept of credit insurance within a company begins with establishing communication between the credit department, the company’s chief financial officer and the treasury department. Credit managers, through the use of a credit insurance broker (often required to purchase a policy), can show the company credit insurance can protect accounts receivable, boost sales and give the company greater access to working capital. The bottom line: Credit insurance should be part of a credit manager’s tool box.
Houck also noted that “once a company beefs up their use of open account terms by using credit insurance, they may find they’re going to need some type of working capital.”
“Credit insurance makes receivables much more attractive to a bank for financing,” he said. “The more you extend credit, the more likely it is going to affect your cash flow. By using credit insurance, the company can consistently use open account terms and not affect cash flow. They will use those secured receivables for short-term working capital provided by their bank.”—Andrew Michaels, editorial associate
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A new survey released during The World Economic Forum in Davos, Switzerland, revealed many corporate companies—especially in the G20—are not equipped to prevent market risks. If credit managers become aware of the risks facing many corporations, better care can be taken when extending credit to customers, and credit managers can more efficiently handle any risks involved with a company before the risks become detrimental.
FTI Consulting announced the survey results to the company’s inaugural Resilience Barometer report, which analyzed the health of G20 companies in this digital age and the challenges to come throughout 2019. The G20 countries scored a 40 out of a possible 100 on the resilience barometer, which measured geopolitical disruption, adaption to change in the markets, leadership and fraud, and protecting against threats in a digital world.
The score of 40 spells out “a major cause for concern in an environment that is growing more and more challenging,” according to the report. The biggest risk revolved around cyberattacks, with 30% of firms surveyed being victims of the attacks. Less than 50% of companies said they were partaking in preventative measures for cyberattacks, something credit managers need to be aware of when sharing information with another company by digital means. With a shift toward more technology, rather they should be more prepared for pitfalls while working with technology.
“Building resilience in a digital economy isn’t just about managing risk,” said Caroline Das-Monfrais, senior managing director for FTI Consulting, in the report. “It’s also about preparedness, business model innovation, culture and leadership—as well as how to use your data to create competitive advantage.”
When working with customers, credit managers who take a few extra steps to mitigate digital fraud and secure their company’s information will likely be much safer than those who do not. Even just the possibility of a weakness in a company’s system can spiral into a breech or other risks to the company.
Combined with these survey results, 2019 is predicted to be less robust than 2018 in general, according to International Monetary Fund (IMF) data also presented at The World Economic Forum. Several factors contributed to the IMF’s analysis, but with the knowledge that 2019 may be a riskier year, credit managers can take precautions early to avoid bigger problems in the future.
“There is a sense that several factors will combine to make 2019 a lot less robust than 2018, and the IMF has been quick to point out that many of these are self-inflicted wounds,” said NACM Economist Chris Kuehl, Ph.D. “This is not like the downturn that gripped the economy in 2008-09 when it was economic factors and failures in the financial system that combined to send the world into a crisis.”—Christie Citranglo, editorial associate
We Understand Construction Credit
Construction Credit is complicated and time consuming. Don't underestimate the time, effort and information required. While some people give away the state timeframes for free, there are no shortcuts, and it's easy to miss a step or a deadline.
Don't let that happen to you.
Managed by construction credit professionals, NACM’s Secured Transaction Services (STS) helps you reclaim your valuable time and resources for your own projects! We take pride in handling your projects, and we triple check all work for accuracy.
The STS Lien Navigator digs deeper to provide the answers that will help guide you through the entire process. It's that depth and attention to the details you may not know about that makes the difference. The STS answer line is also available with your Navigator subscription.
We have you covered with:
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For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.
Public projects are often bid competitively and subject to complex procurement laws and regulations intended to prevent corruption as well as to promote larger public policy goals. Protection for small and minority businesses and mandating a fair wage are common requirements on many public projects. Some public procurement laws require the use of multiple prime contractors, and others restrict switching subcontractors after bids are submitted to encourage subcontractor participation in the bidding process, and to protect the subcontractors who do participate. Absent a requirement in the law, public-private partnership (P3) projects need not comply with well-established public procurement laws, putting the public and the construction participants in peril of seeing private companies evade public policies and procurement safeguards that protect public funds from private plunder.
Most states have laws for public as well as private projects that obligate owners to make prompt payment for work completed and to otherwise enhance payment rights on construction projects, but the protections on public projects are more common and more meaningful. Illinois has a State Prompt Payment Act, a Local Government Prompt Payment Act, and for private projects, a Contractor Prompt Payment Act. The State and Local acts afford better protection to contractors and subcontractors than does the Contractor Prompt Payment Act, but none automatically apply on a P3 project without a clear P3-enabling law to specify which laws apply for the hybrid projects. Thus, to level the playing field for contractors and subcontractors on P3 projects, enabling law should specify which payment protection laws apply.
Finally, a contractor and a developer might understand the rights and responsibilities of the owner and contractor on a unique P3 project, but a subcontractor likely will not. The allocation of risks between owner, developer, designer and other participants in a P3 project vary greatly from one project to another. For a subcontractor, the sometimes onerous provisions in a subcontract would be even more unpredictable in a P3 project. For example, a pay-if-paid provision in a subcontract would take on a much different meaning if the contractor had agreed to await payment until the asset had been in use for several years. Further, standard flow-down provisions imposing duties on an unknowing subcontractor comparable to the unique undertakings by a contractor on a P3 project would be wholly unpredictable. By describing the permissible uses and expectations for P3 projects, the legislature would not only protect subcontractors but, in addition, encourage responsible subcontractors to bid on P3 projects.
P3s offer a promising solution to fund state and local government’s capital programs when those governments would otherwise not have the funds available to repair crumbling infrastructure and build new schools and other structures. If P3s are properly established with enabling laws that consider the rights of all potential parties in the process, the projects are more likely to be successful. By establishing a fair and open process for the use of P3s, the ultimate goal of advancing the public interest will more likely be served.
Reprinted with permission. Part I of this article appeared in last week’s eNews on Thursday, Jan. 31.
James T. Rohlfing's practice is focused in the areas of construction law and business litigation. He’s a partner with Saul Ewing Arnstein & Lehr LLP, a firm based out of Chicago.
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