In the News

October 17, 2019

 

In the 1972 film Cabaret, Liza Minnelli and Joel Grey’s characters said it best when they sang “money makes the world go ‘round.” What they probably didn’t know was just how accurate the lyric was to the construction industry, in particular, the flow of money down the chain of command from project owner to general contractor (GC) to subcontractors (subs) and sub-subcontractors and, finally, material suppliers.

GCs not only recognize the importance of prompt payment but also actively seek projects with prompt-paying project owners. Separating those from late payers is a challenge in itself, but industry experts offered a few tips on how to spot a paying project owner in the Construction Dive article, “How contractors ensure the project owner can pay.”

It’s common knowledge that lower-tier parties, such as GCs and subs, need to prove their worth to the owner when throwing their name in the ring for a project. What are their credit references? How have their projects panned out in the past? As a licensed certified GC for a quarter of a century, the article’s author, Kim Slowey, wrote additional information may also be requested from the owner including bank and other financial data.

“What some contractors might not realize, though, is that their contracts, including one of the most commonly used forms, might give them the right to ask for proof that the owner has enough financing in place to pay its bills,” Slowey wrote, referring to the American Institute of Architects’ A201-2017 General Conditions of the Contract for Construction.

For example, before the GC begins any work on the project, they can submit a written request to the owner for “reasonable evidence” showing the owner has the necessary finances, according to Section 2.2 of A201, i.e., a commitment letter from a lender, financial statements, bank statements or a bond commitment. Should the owner fail or decline to share this information, the GC is allowed to delay any work on the project until the information is received.

A201 also allows GCs to obtain owner’s financial information when work on the project is already underway; however, there are limited circumstances upon which this can be done:

1. The owner’s payments are late and do not meet the terms of the contract.
2. There is “reasonable concern” regarding the owner’s ability to pay.
3. There are changes to the contract amount due to more or less work on behalf of the contractor.

“If the owner doesn’t provide the contractor with the requested information within 14 days under this scenario, the contractor could stop work and bill the owner for demobilization and remobilization costs plus interest,” Slowey wrote. “In the case of significant changes, contractors must proceed with the portion of their work that is unaffected by the change.”

Fortunately, according to an October 2019 study from Dodge Data & Analytics and Sevan Multi-Site Solutions, relationships between owners and contractors are thriving. A recent finding states “over 70% of owners and contractors agree that better communication and coordination across complex projects can significantly improve project outcomes.”

Attorney J. Gregory Cahill of Dickinson Wright in Phoenix, Arizona, noted in the Construction Dive article that subs must generally rely on the GC to request financial information from the owner.

After further negotiations, the U.S. and China reached a “cease-fire” Oct. 11, according to the Associated Press. Representatives from both nations met and reached an agreement to cancel the Oct. 15 tariffs, provided China purchases $40-50 billion in U.S. farm products. If no true agreement is reached, the U.S. has threatened to move forward with more tariffs in December, which will be 15% on $160 billion worth of Chinese goods. The trade war and tariff deals have shaken the world economy for more than a year, tossing creditors across different industries—from metals to agriculture—into precarious situations.

The Trump administration calls the deal made Oct. 11 a “Phase 1” agreement that will take several weeks to draft and sign by November, according to The New York Times. The Oct. 15 tariffs would have increased from 25% to 30% on $250 billion worth of Chinese imports, leaving creditors and customers in a further struggle in terms of over-buying, pricing, paying back creditors, etc.

“Nobody seems to be getting too excited over the latest ‘deal’ between the U.S. and China, although there is some sense both countries are walking away from the edge of the cliff,” said NACM Economist Chris Kuehl, Ph.D. “The White House has reminded China that these more punitive tariffs will return to the table in December if a real agreement is not struck, while China has made it clear it wants everything in writing before it goes another step.”

The metal industry has been particularly impacted by the Chinese tariffs, causing companies to call into question whether to import, where to import from and how to deal with pricing. Kenny Wine, CCE, director of credit-South/East at Joseph T Ryerson & Son, Inc., said in late 2018, when the tariffs were coming into play, his company gained new customers who were previously purchasing from foreign sources. 

“The higher tariffs are forcing those companies to look at cheap alternatives, which typically means source material from domestic steel mills,” Wine said. “In the credit department we are getting a bunch of new credit applications.”

Deciding how to best mitigate risk in the space of tariffs has altered the way companies handle their customer bases. Matt Marthinson, VP of Supply Chain at JB Poindexter & Co., Inc., a manufacturing company based out of Houston, Texas, said his company increased the prices of their metals to combat the repercussions of the Chinese tariffs. During his interview on the MetalMiner Podcast, Marthinson said customers were not happy about the price increases, but after JB Poindexter explained the company’s decisions and gave its customers warning, customers were more understanding.

“Domestic suppliers were raising their prices to match or to be right underneath those tariffed materials,” Marthinson said. “We passed through price increases: metal went up in 2018, we passed in price increases to our customers, and at that point, we started looking to other opportunities.” 

The other opportunities Marthinson’s company looked toward were finding alternative elements and creating new alloys to sell, incorporating elements free from tariff exploitation and yet still the right compound to sell to its customers—which the company explained to customers before they purchased materials.

But even with risk mitigation tactics, the unpredictability of the market still keeps creditors in an anxious space.

“The fact remains that none of the major issues [around the trade war] have been addressed, and there is no sign these will be dealt with anytime soon,” Kuehl said. “The Chinese have simply agreed to do what they had already been doing—buying more farm output from the U.S.”

The Australian government is reviewing insolvency practices. Announced earlier this month, Small Business and Family Enterprise Ombudsman (ASBFEO) will investigate the current system in place. “This inquiry will shine a light on the insolvency system and uncover if it encourages practitioners, in the first instance, to restructure the small or family business to turn it around,” said Ombudsman Kate Carnell in a release.

According to the announcement, restructuring in Australia is not a very successful venture for small businesses. “Few small businesses that enter formal insolvency administration are able to navigate their way through the process to reach a restructuring agreement,” continued Carnell.

More than 8,000 businesses took the external administration route in 2018-19, and small rural and regional Australia businesses were among those hit the hardest. The new insolvency practice investigation will review the current system; transparency, processes and costs; insolvencies relation to owner bankruptcy; and the framework and fees of insolvency practitioners.

“It is most important that small businesses and farmers who find themselves in financial difficulty are treated with respect and fairness. … This inquiry is essential to see if any systemic improvements can be made,” said reference group chair and former New South Wales Senator John Williams. An interim report on findings will be released in December with a final report due out in February 2020.

A prior Small Business Loans Inquiry by ASBFEO found transparency a major issue for small business owners. Among the results were “less than ideal outcomes for the owner, the lender and creditors of the business,” states the agency, and there was a “lack of transparency for the small business owner when a creditor commenced debt recovery action,” Carnell continued.

Despite the struggle of small businesses in Australia, the economy continues to thrive, according to the International Monetary Fund (IMF). “Our economic plan will see the Australian economy continue to grow,” said Treasurer Josh Frydenberg. Among the reasons he mentioned were lower taxes, the workforce getting skills they need and new free trade agreements. He added Australia is entering its 29th straight year of economic growth.

Overall, the IMF’s October World Economic Outlook is not positive as the global economy was downgraded to its slowest growth since the global financial crisis. Global growth is expected to hit 3.4% in 2020, which is a downward revision from six months ago. Much of this 180-degree turn is due to trade tensions, Brexit and other country-specific factors.

“For sustainable growth, it is important that countries undertake structural reforms to boost productivity, improve resilience and lower inequality. … The global outlook remains precarious with a synchronized slowdown and uncertain recovery,” states the IMF.

With the recent proliferation of pipeline construction projects in Pennsylvania including Mariner East, Mariner East II and Atlantic Sunrise to name a few, contractors have been faced with the dilemma of securing payment for work performed on these projects. Within the past year, at least one major pipeline contractor has filed for bankruptcy and the Mariner East II Project was stalled by citizens’ lawsuits. As a result, contractors, subcontractors and suppliers (collectively, “contractors”) on these projects have been forced to find alternate means to secure payment. Can these contractors receive the benefit of Pennsylvania’s Mechanics’ Lien Law to preserve their right to payment when the property to be liened is not a traditional building, but rather a natural gas transmission pipeline that traverses multiple Pennsylvania properties and counties? We believe the answer to be “yes,” but it can be tricky and costly.

The first hurdle is to establish that the pipeline owner has an interest to which a lien can attach. For a lien to be effective, the pipeline must be an “improvement” on “property” as defined in the Pennsylvania Mechanics’ Lien Law of 1963, 49 P.S. § 1201, et seq. (“Lien Law”). Traditionally, mechanic’s liens are filed against the owner’s fee or leasehold interest in a building or structure. The structure is normally found at one location and in only one county. A pipeline, however, by its very nature, traverses many individual properties and counties. Often, the pipeline owner’s interests are a mix of easements, rights-of-way, leases and fee interests that span thousands of unrelated real property parcels.

In view of the pipeline owner’s complicated ownership pattern, can contractors and subcontractors find protection in the Lien Law? The most common property interest held by pipeline owners is that of an easement. Contrary to common perception, no caselaw or statutory support was found that would limit the Lien Law to fee or leasehold interests in brick-and-mortar structures. The Lien Law simply provides lien rights for work performed on “every improvement and the estate or title of the owner in the property. …” (49 P.S. § 1301(a)). An “improvement” is defined as “any building, structure or other improvement of whatsoever kind or character erected or constructed on land, together with the fixtures and other personal property used in fitting up and equipping the same for the purpose for which it is intended.” (49 P.S. § 1201(1)).

The term “property” includes the improvement (i.e., the pipeline) “belonging to the same legal or equitable owner … forming a part of a single business or residential plant.” (49 P.S. § 1201(2)). The key phrase in the definition of property which allows the filing of a single lien is the phrase, “forming a part of a single business … plant.” If that language were not in the Lien Law, contractors would be forced to file separate liens against each and every parcel on which they performed work. Since a pipeline can meet the criteria of being an improvement on property that can be liened, the next hurdle is determining whether and how the other requirements of the Lien Law can be met.

The second hurdle is to confirm that a single lien is appropriate. Before making the decision to file a lien against a pipeline, a contractor or its counsel must determine whether the apportionment rules apply. Under the Lien Law, when a contractor performs work under one contract on several different improvements which “do not form all or part of a single business or residential plant,” the contractor must file a separate lien claim against each parcel and apportion the lien among those parcels for the total amount owed. (49 P.S. § 1306(b)). A pipeline can traverse more than 500 parcels in one county alone. Practically speaking, if the apportionment rules were to apply to such liens, the cost and logistical issues would be prohibitive. While courts have found that the apportionment rules apply to the construction of an attached row of townhouses, pipelines and the ownership interests involved are distinguishable.

A pipeline has only one function—i.e., to transport gas to its ultimate destination for processing and distribution in the furtherance of the owner’s business interests. A pipeline, therefore, is an “improvement” that is part of a single business plant. With the unique nature of pipelines, practitioners could mistakenly believe that a lien would need to be filed on every property the pipeline crosses, which would be completely infeasible. Fortunately, the apportionment rule is less complicated than it looks. It is imperative, however, that the lien claim expressly state that the pipeline forms all or part of a single business plant.

NACM will publish Part II of this article in next week’s eNews, Thursday, Oct. 24.

Reprinted with permission from the August 20, 2019 issue of the Legal Intelligencer, © 2019 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Peggy Underwood and Rachel E. Jeanes are attorneys with Horn Williamson assisting clients at all stages of the construction and litigation process, representing general contractors, subcontractors, owners, developers and suppliers involved in both public and private construction projects throughout the Mid-Atlantic region. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it. or at 215-987-3800.