In the News

December 5, 2019

 

CMI Gives Hope to Credit Managers with November Increase

—Michael Miller, managing editor

The Credit Managers’ Index (CMI) is trending upward as 2019 comes to a close. NACM’s CMI improved for the second consecutive month in November, up nearly a full point from October. The combined reading now sits at 55.5 compared to 54.6 the previous month, while the manufacturing sector improved to its highest reading since August 2019. This is the CMI’s best showing since a 1.6-point jump in May 2019. “The CMI is the current ray of economic sunshine,” said NACM Economist Chris Kuehl, Ph.D. “This is important given the tendency for the CMI to predict the future a little more accurately than many other surveys.”

In the combined CMI, favorable factors led the way with a 1.5-point increase, despite a decent drop off in dollar collections. Sales and new credit applications moved back into the 60s, while amount of credit extended continued to climb to its third-highest score since November 2018. Meanwhile, the unfavorables were paced with growth in accounts placed for collection, disputes, dollar amount beyond terms, dollar amount of customer deductions and fillings for bankruptcies. “This month marks the first time that five of the six unfavorable readings have been in expansion territory in nearly three years,” said Kuehl. “The only category in contraction now is accounts placed for collection. It is unlikely this signals a new period of rapid growth for the economy, but it does reduce the potential for a serious recession.”

The manufacturing sector improved slightly, which is good news according to Kuehl. “By most accounts the sector has been struggling, and for a variety of reasons. The most pressing of late has been the impact of the trade war with China. The fact that the CMI is trending in a positive direction is a welcome surprise.” Sales and new credit applications improved in November, but dollar collections dipped modestly while amount of credit extended remained the same. While not all unfavorables were in expansion territory, the two with a score below 50 improved—disputes up nearly three points.

The service sector is being led by retail and the upcoming holiday season, noted Kuehl. “Retail sales have been up in general, although there has been somewhat less interest in the high-dollar items that drove holiday sales in past years. The CMI data on the service sector tends to be weighted toward the retail community as well as health care and construction. The data seems to be mirroring what the retailers are reporting.” All four favorable factors were back in the 60s for the first time since August 2019; however, dollar collections dropped significantly from 65.5 to 61.7.

Credit Congress

Last Chance for Special Savings!

Early bird rate ends tomorrow, Dec. 6. 

The National Association of Credit Management will hold its 124th Credit Congress & Exposition at Caesars Palace in Las Vegas, Nevada, from June 14-17, 2020. This is a one-of-a-kind opportunity for you and more than a thousand business credit and financial management professionals to gather and share experiences, learn from experts and one another and remember why what you do matters!

Please visit creditcongress.nacm.org for more information and to register. We will continue to update the site with additional information on sessions, speakers, exhibitors and much more.

Please visit creditcongress.nacm.org for more information and to register. We will continue to update the site with additional information on sessions, speakers, exhibitors and much more.

Team discounts (5 or more) are also available for larger member companies.

Material Suppliers Could See Domino Effect from AIA’s Construction Management Documentation Updates

—Andrew Michaels, editorial associate

Construction project documentation begins the moment an idea is born. Hundreds of pages of documentation between several parties, including owners, contractors, attorneys, architects and engineers, are in place to manage the project from start to finish by designating roles to those involved. As a leader in construction project documentation, the American Institute of Architects (AIA) is updating Construction Management documents to improve the preconstruction phase—a process that can potentially create a domino effect to benefit material suppliers.

In November, AIA announced its plan to release 13 new Construction Management (CM) documents, specifically, the Construction Manager as Constructor (CMc) and the Construction Manager as Adviser (CMa). Four CMc documents were released publicly Nov. 15, while nine CMa documents will be available on Feb. 6, 2020.

The AIA states its Documents Committee began compiling the CMc updates after gathering input from large CMc firm representatives. During preconstruction, CMcs not only collaborate and share input, but they also construct the project.

“Substantive changes that were made to the CMc documents include greater flexibility to establish the CMc’s preconstruction phase services,” AIA announced, “and a provision permitting the parties to agree on startup of some of the work before execution of the guaranteed maximum price (GMP) amendment.”

The CMa model differs from its counterpart in that the CMa participates in the preconstruction process but is not involved when construction begins. Instead, the AIA states, the CMa acts as the coordinator of contractors and other services. The new documentation is expected to broaden the CMa’s collaboration and management as well as review and analysis.

Both models will also see updates with new insurance, bond and sustainable project exhibits. Although material suppliers won’t see a direct impact from the AIA’s documentation changes, Chris Ring, of NACM’s Secured Transaction Services, said the updates may create a trickle-down effect as the “spirit of the changes” is to make projects more collaborative from the beginning, therefore, mitigating the risk of disputes between general contractors (GCs), subcontractors (subs) and property owners.

“By definition, if the GCs and subs have fewer disputes, it can mitigate disputes between subs and material suppliers,” Ring said. “[However, even though] the risk may be mitigated between the GC and sub, the standard nonpayment risks still exist between the subs and material suppliers. The most glaring one is, ‘I can’t pay because I haven’t been paid.’”

Additional risks include waiver disputes and change orders that may arise throughout the duration of the project, Ring said.

For more information regarding the AIA’s updates to Construction Management documents, go to their website at aia.org.

FCIB

Resolution for Success

Enroll now and become a global trade expert.
Course starts January 13.

The global marketplace is a volatile place, constantly affected by ongoing economic and political events. Are you really prepared to mitigate the risks of international trade in this rapidly changing environment? 

FCIB’s International Credit & Risk Management online course (ICRM) provides the tools and knowledge you or your credit staff needs to become experts in the complexities of global trade and risk management. 

Hurry and enroll! Early bird rate ends December 13! To learn more, please visit www.fcibglobal.com.

Hurry and enroll! Early bird rate ends December 13! To learn more, please visit www.fcibglobal.com.

AI Bias in the Credit Department

—Christie Citranglo, editorial associate

Artificial intelligence (AI) continues to find its way into the credit department, altering the more traditional ways of making credit decisions. The use of AI has led to quicker credit decisions and more efficiency overall in the credit department. But with the use of new technology in the office comes a learning curve, including understanding the exact process of how different types of AI work.

When companies implement new forms of AI, they may be unaware of the effects of AI bias, or machine learning bias. According to TechTarget, AI bias refers to “when an algorithm produces results that are systematically prejudiced due to erroneous assumptions in the machine learning process.” The AI used in credit departments is likely subject to AI bias, possibly skewing the decisions it makes. 

“More organizations are deploying AI as they recognize the technology as a critical success factor for competing in today’s business climate,” Ted Kwartler, vice president of Trusted AI at DataRobot, said in a press release. “Despite this fact, we’ve observed that AI maturity varies widely—with many organizations still using untrustworthy AI systems.”

The reasoning for this slant in AI decisions stems from the algorithm each AI software uses. A human being designs the algorithm for decision-making, which the AI then adapts and makes swifter, more streamlined decisions over time. 

But with the human-designed algorithm also comes the biases the human carries—biases the human is generally unaware of and therefore cannot prevent.

In a new survey released by DataRobot in late November, about 42% of the organizations surveyed said they felt “very to extremely” concerned about AI bias in their companies. This concern likely sees its roots in the fact that some companies are not aware of how their AI makes decisions. In DataRobot’s survey, 38% of companies said they used a “black box” machine learning, meaning the systems in use do not provide any information into how the AI makes its decisions.

While AI has its benefits in the credit department, failing to understand how AI works can be a creditor’s downfall. When implementing new technology in the office, it’s key to make everyone aware of how the system works and how to use it—and this extends beyond the IT department.

“If someone is trying to sell you a black box system … and you don’t know how it works or what data was used to train it, then I wouldn’t trust it,” DataRobot quotes Apple’s Senior Vice President of machine learning and AI strategy John Giannandrea in the report.

Honors and Awards

Nominate a Special Credit Professional

Do you know anyone working in the field of credit management whose professional life displays unquestioned integrity, outstanding and meritorious service in the field, and ongoing dedication to the highest standards of the profession? The National Association of Credit Management Honors and Awards have become an important mechanism by which we recognize our colleagues for their outstanding efforts and unwavering commitment. Nominate a colleague now!

NACM’s 2020 award recipients will be honored at the annual Credit Congress & Exposition. Credit Congress is taking place at Caesars Palace in Las Vegas June 14-17, 2020. The deadline for all nominations is February 7, 2020.

Visit www.nacm.org/honors-a-awards.html to learn more and to nominate your choice.

Visit www.nacm.org/honors-a-awards.html to learn more and to nominate your choice.

Recent Decisions Recognize Limits on Lien Amounts in Connecticut and Michigan

—Stephen W. Kiefer, Esq.

Subcontractor can only lien to the extent that there remain unpaid amounts by owner to general contractor. SHD Glenbrook Gardens, LLC v. D.S.O. Mechanical Corp., 2019 BL 342518. (Conn. Super. Ct. Aug. 15, 2019).

Project owner SHD Glenbrook Gardens, LLC filed an action to remove a mechanic’s lien filed by a subcontractor on its project, D.S.O. Mechanical Corporation (“DSO”). DSO liened SHD’s property for, among other amounts, the retainage that the general contractor was withholding from DSO. Connecticut’s mechanic’s lien statute places certain limitations on subcontractor liens, including that a subcontractor can only lien to the extent that there remain unpaid amounts by the owner to the general contractor. Thus, the “lienable fund” that a subcontractor can access is diminished by payments the owner made to its general contractor before receiving notice of the subcontractor’s lien.

Because SHD had paid its general contractor, the court found that DSO had no right under the Connecticut statute to enforce a lien for the amount the general contractor received, but withheld from DSO as retainage. Instead, the court found that DSO’s right to recover retainage could lie only in a breach of contract action against the general contractor.

Lost profits, not part of an unpaid contract balance, may be recoverable as consequential damages in a contract claim, but cannot be included in a lien. TSP Services Inc. v. National-Standard, LLC, 2019 BL 340267. (Mich. Ct. App. Sept. 10, 2019).

National-Standard, LLC (“National-Standard”) contracted TSP Services, Inc. (“TSP”) for asbestos abatement, demolition, restoration and disposal of scrap steel and other waste from work at National-Standard’s facility. TSP planned to sell the extracted steel after removing it. National-Standard was aware of TSP’s plans, though the contract made no mention of them or TSP’s potential profits from that activity.

The project encountered delays, and National-Standard suspended TSP’s work at a point when TSP had extracted only 9% of the steel. TSP commenced arbitration and filed a lien against the National-Standard’s property. It liened for the contract balance, plus the scrap value of the remaining steel that TSP was prevented from extracting and reselling. The arbitrator concluded that National-Standard’s suspension order had breached the contract and awarded TSP the contract balance plus its lost profits on the un-extracted scrap steel, and ruled that the TSP’s lien was valid in its full amount.

National-Standard moved to vacate the arbitrator’s award, arguing that TSP had no right to recover the scrap steel lost profits as consequential damages and that it could not validly include the lost profit amount in its construction lien. When the trial court denied its motion, it appealed to the Michigan Court of Appeals. Although the appellate court agreed that lost profits were foreseeable, recoverable consequential damages for breach of contract, it vacated that portion of the award that found TSP’s lien valid in its full amount.

The court found that Michigan’s construction lien act limits the amount of a lien to the value of the claimant’s contract minus any payments already made under the contract. Under that statutory language, the lien amount thus cannot exceed the remaining unpaid contract balance. TSP’s lost profits from its planned scrap sale to others were not part of National-Standard’s payment obligations under the contract and were separate from the amount constituting the unpaid contract balance. So, although TSP’s lost profits were recoverable as consequential damages in a claim for breach of contract, they were not a part of the unpaid contract balance, and TSP invalidly included those amounts in its lien.

Stephen W. Kiefer, Esq., is an associate with Pepper Hamilton LLP, resident in the Pittsburgh office. He concentrates his practice in commercial litigation matters, with an emphasis on construction-related claims. He has experience representing owners, EPC contractors, equipment manufacturers, general contractors, design professionals and building product suppliers in disputes arising from a wide array of construction projects, including power plants, water and wastewater treatment plants, pipelines, dams and commercial buildings. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Smile Amazon

Shop using your AmazonSmile account and support the NACM Scholarship Foundation.

Simply go to smile.amazon.com and select “NACM Scholarship Foundation” as your preferred charity. Amazon will donate 0.5% of the price of your purchase. Many millions of products are eligible for donations. Eligible products are marked “Eligible for AmazonSmile donation” on their product detail pages. Just use your same Amazon account. Same products, same prices, same service.

Simply go to smile.amazon.com and select “NACM Scholarship Foundation” as your preferred charity. Amazon will donate 0.5% of the price of your purchase. Many millions of products are eligible for donations. Eligible products are marked “Eligible for AmazonSmile donation” on their product detail pages. Just use your same Amazon account. Same products, same prices, same service.

Help the Foundation at no extra cost to you.