In the News

July 3, 2019

June CMI Disappoints After Small Positive Trend

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Solutions in the Credit Department: Automating the Credit Application Process

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Construction Credit Managers Ahead of Fraud, Despite Industry’s Minimal Concern

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The Lessor of Two Evils: Iowa Supreme Court Ruling on Mechanic’s Liens

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June CMI Disappoints After Small Positive Trend

The June Credit Managers’ Index (CMI) is not what credit professionals would have hoped for following two straight months of improvement; however, the report is not all bad despite the 0.7-point decline. June’s combined reading of 55 is still comfortably within expansion territory (score above 50), marking the first instance of consecutive months scoring at least 55 since August and September 2018.

“Last month we were grasping at straws and thought we might have the beginning of a trend, but that didn’t last long,” said NACM Economist Chris Kuehl, Ph.D. “This month, there was a substantial decline in the manufacturing sector and a minor one as far as service was concerned.”

Much of the slight drop is due to the combined favorable factors, with sales the biggest culprit. While remaining in the 60s, sales slid 5.5 points in June. New credit applications and amount of credit extended also slipped while remaining in the 60s. New to “Club 60” was dollar collections, crossing the threshold for the first time since November 2018—the last time all four favorables were in the 60s.

“The bad news is the two-month positive trend has ended, but the good news is there has not been the dramatic decline seen in some of the other indicators,” Kuehl said.

Combined unfavorables continued to climb into expansion territory at 50.7 in June, helped by gains in rejections of credit applications, accounts placed for collection, dollar amount of customer deductions and bankruptcies. Accounts placed for collection and dollar amount of customer deductions were back in expansion territory at exactly 50. Dollar amount beyond terms dipped back into the contraction zone at 49.8.

The manufacturing sector dropped modestly in June and fared slightly better than its service sector counterpart. Sales had the biggest impact with a nearly five-point drop to 58.5. New credit applications, dollar collections and amount of credit extended also declined in June, leading to much of the sector’s minor downfall. The unfavorable factors were the savior here—four of the six saw an upswing. Filings for bankruptcies was unchanged at 52; dollar amount beyond terms was the only factor to decline, yet it stayed in expansion territory. Accounts placed for collection burst back into the expansion zone at 53.5, a gain of 4.5 points.

This narrative continued into the service sector, dragged down by the favorables and lifted up by the unfavorables. “The test for the service sector will come this summer as many of the major categories are going into their peak seasons. Retail and entertainment as well as travel all wait for the summer months, and this is also a peak time for much of the construction sector,” Kuehl said.

Sales again pulled the overall service index down with a more than five-point drop. New credit applications and amount of credit extended also declined. The saving grace was the unfavorables, which inched upward to 50.2 for a second consecutive month in expansion territory. Dollar amount beyond terms fell back into contraction territory after reaching expansion in May’s index for the first time in several months. Overall, the service sector was worse off than manufacturing with a nearly one-point drop.

“Generally speaking, the data this month trends positive, albeit at a slower pace than was attained earlier. Given the CMI often predicts the behavior of the Purchasing Managers' Index (PMI), it will be interesting to see what happens in the months ahead. The news conveyed by the CMI has been a little mixed of late, but the nice recovery in the nonfavorable categories has been encouraging,” Kuehl said.

—Michael Miller, managing editor

Solutions in the Credit Department: Automating the Credit Application Process

Making the decision to automate the credit department comes with its caveats and considerations. Some of the top variables when making this adjustment include deciding what to automate, what programs work best for the company and how long the training process for the program will take. For some, the first step is to automate the credit application process, a theme explored during a session at NACM’s 123rd Credit Congress and Expo in Aurora, Colorado.

The session, “Technology Solutions to Credit Management Challenges,” touched on different ways creditors approach obstacles in their departments and the technological solutions embraced. Berenice Dominguez, of Horizon Personnel Services, automated her application process with the help of Dominic Biegel, of Bectran, which is one of the many companies that creditors can turn to when looking to automate.

Dominguez said her credit department consists of only two people, including herself, and the challenge to “do more with less” is a frequent hindrance. Horizon previously used a manual client-onboarding process, using several documents to approve an account—documents that would often be filled out incompletely or incorrectly.

“Most of the time, these [credit applications] were filled out randomly. They were illegible so you really couldn’t make out their handwriting, or numbers were missing, or they would conveniently leave out references,” Dominguez said. “And it was time consuming. … The competition is fierce out there, and they want us to fill these orders.”

The delay in the credit approval process sometimes reached five to seven days, Dominguez said, and for a small credit department, the pressure from sales and from customers motivated Dominguez to explore new options.

Biegel said the first step Bectran took was to move the credit application completely online. The sales team then became the initiators for the application, which cut out the credit department as the middle man for the process. However, the credit department still remained instrumental in the application process. 

Creditors at Horizon can now log into a dashboard where they can see the process of the credit application and the sales team’s track with the customer, allowing for more transparency and open communication between sales and credit during the decisioning process. The General Security Agreement for UCC filings is also part of the electronic credit application, streamlining the process to fewer documents and less physical papers to look through.

Bectran is but one of the many companies that supply these solutions to creditors. And while there is a transitional period, Dominguez said it was quicker than she expected, totaling about three weeks of training and learning. Despite the challenges, Dominguez reported a positive outcome for when Horizon decided to make the switch.

“I’ve received a lot of compliments not only from sales but also from prospects,” Dominguez said. “They love the convenience of having it all there. You send the credit app and you receive the alerts right away.”

—Christie Citranglo, editorial associate

Construction Credit Managers Ahead of Fraud, Despite Industry’s Minimal Concern

Many industries are learning to adapt to changes in business, whether it’s through customer interactions, payment methods or product/service deliveries. While different industries require different levels of security to protect their data during these changes, cybersecurity experts are finding the construction industry is showing little concern—an issue that could impact the industry’s credit managers.

Earlier this month, hundreds of employees in the construction industry attended the ENR FutureTech construction technology conference in California, where IT, cybersecurity and law experts shared the current state of cybersecurity in construction and some potential outcomes if industry leaders hesitate to secure their data. For example, according to Construction Dive, Philip Weaver, senior director of IT for Warfel Construction Co. and ENR FutureTech panelist, reported a 250% increase in phishing attacks in the industry in 2018 over the prior year. Phishing is a type of fraud that occurs when someone uses email to trick a company into revealing certain data or completing a transaction.

“The risk isn’t fully understood by people who should be in the know about this,” Weaver said in the article, which noted “50% of all attacks in the country are targeted at business with less than 1,000 employees.”

Richard Volack, partner and chair of data privacy and cybersecurity practices at law firm Peckar & Abramson, also spoke at the conference, Construction Dive stated, where he said many contractors don’t find their company’s information worth stealing.

Unlike some players in construction, credit managers in the industry do believe their companies information is worth protecting, so much so they and other parties have security measures in place. Carl Davidson, director of credit and collections at Blue Water Industries in Florida, said his company’s internal IT department is “solely responsible” for making sure its data is secure, while employees also take precautions. One form of fraud to look out for in construction involves former employees, Davidson said.

“Sometimes, you’ll have a foreman or a laborer, who was working for ABC company, decide to go off and start their own company,” he explained. “Then, they’ll ‘accidentally’ purchase on their old company’s account. We try to keep our ears to the ground when we know superintendents leave and employees leave, and we inform our dispatchers.”

If this fraudulent activity involves somebody who has been an authorized buyer in the past and their company did not notify Blue Water that they’re no longer an authorized buyer, Davidson said they require that company to file a police report. Once completed, Blue Water will take it off their customer’s account, and if not, that company is expected to pay for the purchase.

At Brown Strauss in Colorado, Corporate Credit Manager Yvonne Vigil said she’s experienced fraud in the form of check and credit card forgery. Customers have forged signatures on the back of joint checks, and others have forged Vigil’s signature on lien waivers. Brown Strauss does not do counter sales, she added, and sells cash sales on a limited basis at each branch, never face-to-face.

“We’ve had a construction company approach us and use a customer’s name from Washington to purchase some steel with a credit card. Then, the credit card went through, but two weeks later, it came back as fraud,” Vigil said. “I’ve talked to Visa, American Express and our credit card processor about what we could’ve done to avoid that and what they told us was unless you actually have the credit card in front of you with the chip, it’s going to happen. Now, we no longer sell to anybody that we do not know.”

Overall, Vigil said she’s noticed the construction industry is behind in technology adoption unlike at Brown Strauss, where many customers are beginning to send lien waivers via email rather than fax.

“I’m finally seeing that they’re no longer using fax numbers,” she said. “The number of customers that send ACH payments is also changing, but we still get a majority of checks.”

—Andrew Michaels, editorial associate

The Lessor of Two Evils: Iowa Supreme Court Ruling on Mechanic’s Liens

In the case of Winger Contr. Co. v. Cargill, Inc., No. 17-1169, 2019 BL 132092 (Iowa Apr. 12, 2019), the Defendant, Cargill, Inc., entered into a 50-year lease with HF Chlor-Alkali, LLC (“HFCA”) to permit HFCA to construct a chlor-alkali manufacturing facility on a property that Cargill owned in Eddyville, Iowa. HFCA then contracted with a pair of general contractors, who in turn hired several subcontractors, including the Plaintiffs. None of the general contractors or the Plaintiffs had any contracts with Cargill in connection with the construction of the chlor-alkali manufacturing facility. Eventually, the project unraveled and the Plaintiffs were not paid in full.

The Plaintiffs filed mechanic’s liens on Cargill’s property, and later sought to foreclose the liens, based on their work for HFCA to construct the facility. Cargill resisted the mechanic’s liens on the ground that amendments to the Iowa mechanic’s lien statutes in 2007 and 2012 established that a mechanic’s lien may only arise out of a contract with the property owner, not a contract with an agent of the owner.

Specifically, in 2007, the Iowa legislature removed contracts with “the owner’s agent” as a basis for permitting a mechanic’s lien to attach to the owner’s property. In 2012, the Iowa legislature further revised the mechanic’s lien statute to narrow the definition of “owner” to exclude persons “for whose use or benefit any … improvement is made.” According to Cargill, the Plaintiff’s mechanic’s liens attached only to a building, improvement, etc. specifically owned by HFCA, and not to the land owned by Cargill. The lower court agreed, and the Plaintiff’s appealed the decision.

On appeal, the Plaintiffs advanced a number of arguments to challenge Cargill’s and the lower court’s interpretation and application of the Iowa mechanic’s lien statute. Chief among them was that the 2007/2012 amendments were administrative in nature and did not substantively alter the law of mechanic’s liens to prevent the attachment of a mechanic’s lien on a lessor’s property where the lessee contracts for property improvements. The Plaintiffs cited two Iowa Supreme Court cases—Denniston & Partridge Co. v. Romp, 56 N.W.2d 601 (Iowa 1953) and Stroh Corp. v. K & S Development Corp., 247 N.W.2d 750 (Iowa 1976)—which held that mechanic’s liens could attach to a lessor’s property by virtue of a contract with a lessee if the lessee was a joint venture partner or agent of the lessor.

Like the lower court, the Iowa Supreme Court disagreed with Plaintiffs. According to the Iowa Supreme Court, “[a] mechanic’s lien is a creature of statute … [t]he amendments of 2007 and 2012 narrow the definition of owner and eliminate contracts with agents as a basis for a mechanic’s lien against an owner.” The Iowa Supreme Court also explicitly overruled Romp and Stroh, holding that under the court’s interpretation of the Iowa mechanic’s lien statute, neither case remained good law.

This case is a reminder that parties who intend to rely on state mechanic’s liens statutes to protect against the risk of nonpayment, must ensure they fully understand the nuances and complexities of the statute. If not, the parties risk forgoing their right to secure payment during project disputes.

Reprinted with permission.

R. Zachary Torres-Fowler, Esq., is an associate in the Construction Practice Group of Pepper Hamilton LLP. He concentrates his practice in construction-related disputes and has extensive experience in domestic and international arbitration matters arising from projects located around the world. He represents owners, EPC contractors and equipment manufacturers in disputes arising from a wide variety of construction projects, including power plants, airports, commercial buildings and other civil infrastructure works