eNews August 29, 2019

In the News

August 29, 2019

Confirming Funding on Public Projects: P3s and the Little Miller Act

US, UK Lending Practices Divided

Atradius: Corporate Insolvencies Increase

Oregon Court of Appeals Clarifies Timing Rule for Construction Liens

Confirming Funding on Public Projects: P3s and the Little Miller Act

When working in construction credit, confirming the source of funding on public projects helps to ensure creditors can take appropriate action when payments become past. Ambiguity can arise when working on large government projects—such as highway construction—as the projects could be funded by a private investor, which likely makes the project a public-private partnership (P3). 

The federal government has not yet stepped in to create requirements on posting bonds for P3 projects. Each project’s bond requirements fall under the state’s legislation.

“People aren’t always prepared to ask the right questions, and they just assume it’s a public project and that it should be bonded,” said Chris Ring of NACM’s Secured Transaction Services. “And the good news is more and more state statutes are requiring that even if it’s a P3 project, the job be bonded. But, unfortunately, not all are.”

If the project does turn out to be a P3, the Federal Miller Act does not require the general contractor to post the payment bond. While the general contractor may not be required to post the bond—this will depend on statutory laws—there may still be a bond in place. In order to determine if there is a bond in place, the creditor will need to ask the general contractor.

The Federal Miller Act statutes may not apply in all circumstances, Ring said. For instance, if a payment bond is in place on a project, the Federal Miller Act statute for when and what a creditor must do to claim against a bond does not apply. Assessing the requirements for the bond involves obtaining a copy of the bond and understanding the language of the bond itself.

When working on local government or Little Miller Act projects, Ring advises to first determine if the local state has adopted any P3 legislation. If the state does have P3 legislation, the Little Miller Act statute will outline how creditors can enforce their rights as claimants and where to determine if the job is bonded. Should there be a payment bond, the Little Miller Act statute for what a creditor must do and when to claim against a bond does not apply.

If the state does not have P3 legislation, the job may not be bonded.

—Christie Citranglo, editorial associate

Credit Congress Call for Proposals

Call for Proposals—Submit Yours Now

The National Association of Credit Management will hold its 124th Credit Congress & Exposition in Las Vegas, Nevada, from June 14-17, 2020. Please visit creditcongress.nacm.org to fill out the form to submit abstracts, proposed sessions and communications pertaining to participating in the program. Submissions must be made using this form.

Please submit ideas by October 1, 2019. Any proposals that are incomplete or are received after this date will not be considered.

US, UK Lending Practices Divided

In recent years, lending practices in the United States and the United Kingdom have remained relatively similar as both countries found success in small- and medium-size business (SMB) finance. Only recently have the U.S. and U.K. parted ways in such common successes, the latter carving a more concerning path in the wake of a geopolitical rift.

The will-they-won’t-they of Brexit has rocked the U.K. since 2016. Officials continually push the deadline for the still nonexistent exit plan—now set for Oct. 31, 2019—with incumbent Prime Minister Boris Johnson who took up the reins of former Prime Minister Theresa May in late July. According to small business lending platform Funding Circle, macroeconomic factors, such as the uncertainty of Brexit, are affecting small business finance and lending in the U.K. and, therefore, lowering loan demand.

“This has been driven by a deterioration in the consumer credit environment since 2016, which affects smaller and younger companies,” the firm stated in a Morningstar article on Aug. 8. “We continue to monitor the macroeconomic environment, proactively making adjustments where appropriate.”

While the article states business investment has slowed in the U.K. just in the past month, FCIB saw a decline in credit extended six months prior in March 2019. The latest International Credit and Collections survey reported 2% of respondents were not extending credit to the U.K. compared to the 100% who said they were extending credit in the April 2018 survey.

A quarter of respondents also said payment delays increased by 16% between the two surveys. The most common reasons for delayed payments included billing disputes, cash flow issues, customer payment policy and unwillingness to pay. In another survey in July 2017, one respondent said Brexit was hurting small businesses—an issue that continues today. Respondents agreed credit managers must be diligent as more Brexit-related challenges arise in the near future.

“Because of Brexit, [you should] know your customer, get financials [and] visit them,” another respondent said.

Unlike those in the U.K., small businesses in the U.S. are optimistic about funding opportunities. Over the next six months, Dun & Bradstreet recently reported, 34% of businesses plan to get new funds. Furthermore, a July Biz2Credit report states big banks approved nearly 28% of SMB loan applications, a record high since the recession.

FCIB’s latest U.S. survey reiterates the minimal risk of selling into the country. In the November 2017, June 2018 and April 2019 surveys, 100% of respondents said they extend credit in the U.S., where more credit managers in the latest survey said they are extending credit to new customers. Payment delays reportedly decreased between the 2017 and 2019 surveys, the latter showing billing disputes as the main culprit.

“Credit is tightening somewhat in the U.S., so companies are relying more on trade credit and asking for extended payment terms more often.,” a respondent said. “Negotiate credit terms up front and make sure they are adhered to.”

“Many U.S. companies are currently carrying an unprecedented amount of debt,” another respondent noted. “As a result, new customers should be reviewed closely to determine their risk of bankruptcy, and credit limits should be set that are compliant with your company’s level of risk tolerance.”

—Andrew Michaels, editorial associate

FCIB Summit
Connect With Someone Who Could Impact Your Career

FCIB’s International Credit & Risk Management Summit in Hamburg, Germany, provides an opportunity to learn and grow with like-minded people and industry peers. Be a part of it and hear from the presenters about new techniques and technology while also taking advantage of the many opportunities to ask questions and build on discussions. In the expo, learn about products and services that support your profession by speaking with exhibitors and asking questions about industry trends and today’s business climate.

Strengthen your career and your company by attending this year’s International Credit & Risk Management Summit in Hamburg.

Learn more and register at www.fcibglobal.com/summit-home.html.

Atradius: Corporate Insolvencies Increase

Corporate insolvencies are on the rise, and they will not stop anytime soon. According to credit insurer Atradius, corporate insolvencies are predicted to increase across the globe in 2019 for the first time in 10 years. While the 2019 increase (2.8%) is more drastic than the one expected in 2020 at 1.2%, trade tensions, most notably between the U.S. and China, among other factors are forcing businesses to struggle financially.

“The global economy is losing momentum, feeding into the first annual upturn in corporate insolvencies across advanced markets since the global financial crisis in 2008 and 2009,” states the Atradius report. “Trade policy uncertainty is a main reason for lower business sentiment and investment growth, increasing financial risks. … The upward revision [in global insolvencies from last quarter] comes primarily through worse-than-expected insolvency developments in North America, which is now expected to surpass Western Europe in the rate of insolvency growth.”

Much of the negative outlook is due to North American insolvencies from trade policies and slower economic growth. Atradius forecasts a 3.2% increase in insolvencies this year and a slightly lower increase in 2020 at 1.7%. Business failures in the U.S. are predicted to jump 3% higher than in 2018, continuing into next year as a result of the China trade war and financial vulnerabilities.

Meanwhile, commercial Chapter 11 bankruptcy filings increased 1% in July 2019 compared to July 2018, according to the latest release from the American Bankruptcy Institute. Total bankruptcy filings in the U.S. increased 3% year-over-year. Bankruptcy filings jumped even more in July compared to June, up 5% for total filings and 6% for commercial filings—2% for commercial Chapter 11 filings. “Amid increasing debt loads and growing global challenges, bankruptcy provides financial shelter for distressed consumers and businesses,” said ABI Executive Director Samuel J. Gerdano in the release.

Insolvencies in the eurozone are also expected to increase, states Atradius, albeit at a slower pace than in the U.S. Some of the increase can be attributed to tighter credit standards for business loans, impacting smaller businesses. According to Euler Hermes, roughly 70% of bank loans are for small- and medium-sized enterprises (SMEs). “The banks’ interest in extending or granting loans to SMEs with rather poor creditworthiness is likely to decline with the new EU directives on banking regulation,” said Rob van het Hof, CEO of Euler Hermes in Germany, Austria and Switzerland, in a release. Euler Hermes states SMEs will need to find alternative financing as banks start to pull back.

The U.K. is expected to be hit the hardest—mainly due to Brexit—with an increase of 10% this year and 5% in 2020. The U.K.’s exit from the EU will harm others as well, including Ireland. Insolvencies in the U.K. are nearly 9% higher than in 2018, and the risks of a no-deal exit are weighing on the economy and businesses.

—Michael Miller, managing editor

Fall Conferences

Network and Learn With Credit Professionals in Your Region

NACM's fall conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.

Central Credit Conference
September 11-12, 2019
Orlando's Banquet & Event Center
Maryland Heights, MO
Hosted by: NACM Connect - Gateway Region

All South Credit Conference
September 22-24, 2019
Hyatt Regency San Antonio Riverwalk
San Antonio, TX
Hosted by: NACM Southwest

Western Credit Conference and CFDD National Conference
October 23-25, 2019
Sheraton Portland Airport Hotel
Portland, OR
Hosted by: NACM Commercial Services in partnership with CFDD National

For more information and to register, contact the local Affiliate or visit nacm.org/regional-conferences.

Oregon Court of Appeals Clarifies Timing Rule for Construction Liens

Under Oregon law, a contractor or subcontractor must file a construction lien within 75 days “after the person has ceased to provide labor, rent equipment or furnish materials or 75 days after completion of construction, whichever is earlier.” ORS 87.035(1). But when does the 75-day period run when a subcontractor fully completes its work on a project, but is called back months later for additional work?

In a recent case, Bethlehem Construction, Inc. v Portland General Electric Company, the Oregon Court of Appeals determined that the 75-day period ran from completion of the additional work. 298 Or App 348, ___ P3d ___ (2019). The court primarily based its conclusion on the fact that the subcontractor performed the additional work under a change order that specifically referenced the original contract.

Accordingly, contractors and subcontractors who are called back to a job to perform additional work and who have not already filed a construction lien should request a change order referring back to the original contract. Likewise, owners should recognize that even if a contractor or subcontractor fails to file a construction lien within 75 days of completion of the original work, the contractor or subcontractor’s lien rights can be revived if the contractor or subcontractor is called back to perform additional work under a change order that refers back to the original contract.

The Case

In Bethlehem Construction, PGE hired a general contractor, Abeinsa, for the construction of a power plant. Abeinsa, in turn, subcontracted with Bethlehem Construction. Under the subcontract, Bethlehem agreed to manufacture concrete panels for Abeinsa.

Bethlehem completed its work and issued a final invoice, but did not file a lien within the ensuing 75 days. Around eight months later, Abeinsa requested that Bethlehem return to the project to evaluate damage to the panels caused by a different subcontractor.

Bethlehem and Abeinsa signed a “Change Order Request” listing the original contract number and name in the “reference” field and describing a “scope of change” to the original contract. Bethlehem completed the work and, within 75 days of doing so, recorded a lien covering both the original and change order work.

The Oregon Court of Appeals concluded that Bethlehem’s lien was timely because all of the evidence (specifically, the language in the Change Order Request referring to the original contract) demonstrated that the parties intended the original and subsequent work to be “two parts of one single contract.”

The court also concluded that the later work was not “trivial or trifling”—which was significant because the 75-day deadline to record a lien is not extended by the contractor or subcontractor returning to the project to perform “some trifling work or a few odds and ends after apparently completing the job and removing its equipment.” Here, the later work was not trivial or trifling because the Change Order Request specifically required the work, and the work was “significant to the project.”

Key Takeaways

  1. A construction lien must be recorded within the earlier of 75 days of the contractor or subcontractor stopping its work on the project or completion of construction.
  2. If a contractor or subcontractor completes its work on a project but later is called back to do additional, related work, and it performs that work under a change order that specifically refers back to the original contract, the 75-day period will likely run from the date the later work is completed.
  3. If the later work is not required by the original contract or a change order, or is not significant to the project, the 75-day period will likely run from the date the original work was completed.

Reprinted with permission.

Blake J. Robinson, Esq., is a construction and real estate litigation attorney. He is counsel at Davis Wright Tremaine LLP in Portland, Oregon. For more information, please visit: https://www.dwt.com/people/r/robinson-blake.

mechanics lien, bond services, mechanics's liens
Believing Everything You Hear Can Cost You

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