In the News
February 14, 2019
When business is booming, it’s easy to reflect on what’s working right. However, it’s also easy to let preparation for potential problems fall by the wayside when companies are more focused on maintaining their good business. Take the construction industry, for example, where several sectors saw stable or increased spending growth in 2018. Engineering and construction (E&C) spending is expected to continue riding a positive wave in 2019, but contractors might not have been prepared for the government shutdown and its impact on government-funded projects. An important takeaway from this occurrence is contractors take this time to prepare for the unexpected.
According to an outlook for 2019 U.S. construction completed by FMI, a management consulting and investment banking firm, E&C spending for residential and nonresidential projects exceeded original predictions by 5% in 2018. Furthermore, growth is expected to continue at a 3% annual rate in residential, nonresidential buildings and nonresidential structures. Although predictions are positive, that doesn’t mean contractors won’t encounter hurdles along the way. This was evident in an analysis of the Purchasing Managers’ Index (PMI) by NACM Economist Chris Kuehl, Ph.D.
Kuehl said the service sector, particularly construction, saw a poor performance in connection to the government shutdown because some companies will “get nothing at all [in backpay] and will simply be out the income they had expected to earn.” The government is scheduled to stay open until Feb. 15, but it could shut down once again if a deal on border security is not reached between President Donald Trump, the House of Representatives and the Senate.
E&C spending in 2018 may have been good, said Kuehl, yet the possibility of a government shutdown is something contractors need to keep on their radar for 2019.
“Contractors who have traditionally avoided government contracts must be mindful of payment delays and certain invoicing demand,” added Chris Ring, of NACM’s Secured Transaction Services. “Contractors need to associate themselves with experts in financial planning and legal matters that pertain to their profession.”
What is also troubling is the economic slowdown in the U.S., which raises concerns from economists who predict a recession is possible in the foreseeable future. Concerns over a recession were raised in China’s GDP report as well as discussions at the World Economic Forum, CNBC reported. Moody’s Chief Economist Mark Zandi is among those who are anticipating a recession, telling CNBC in January that although a recession may not occur in 2019, “the odds are high that we’ll have one in the next few years.”
“I think we'll navigate through,” Zandi told CNBC. “As the economy weakens, political pressures will intensify and the policymakers will respond sufficiently to keep the train on the tracks.”
In an effort to stay ahead of potential roadblocks, FMI suggests contractors take a few additional steps, such as securing a business strategy, staying ahead of seasonal work and expanding their business’ reach. FMI’s 2019 overview described some contractors’ approaches to problems as “firefighting,” meaning they are putting out problems, or fires, as they come.
“Work on the new, envisioned future and set the strategy for post-recession success,” the report states. This plan may include securing contractors’ assets, such as tools and equipment, to avoid damage and theft, Ring said.
—Andrew Michaels, editorial associate
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Extending credit internationally becomes a greater challenge when political and economic unrest sweep through a variety of regions, overtaking a stable market with pangs of uncertainty. In a recent webinar by Dun & Bradstreet (D&B) titled “Global Economic Outlook,” the organization broke down the world economy by region, beginning with a fall in country ratings. D&B said 25 countries saw rating changes, with most seeing downgrades.
Much of the global unrest can be attributed to a rise in populism globally, according to the webinar. Populism slowly rose in the new millennium, but the sharper shift to more radical and less central governments began with the Brexit vote in the U.K. during the summer of 2016. Following the resignation of Prime Minister (PM) David Cameron and appointment of PM Theresa May, soon after came the election of Donald Trump in the U.S., the yellow vest protest groups in France, Brazil and Venezuela’s controversial leaders—political uncertainty across the world led to the current uncertainty in the global market.
“There are several problems that stem from these political trends. The implementation of tariffs and other obstacles through national trade has an adverse effect on the wealth of nations,” one webinar presenter said. “In other words, if populist governments are protecting certain parts of society, overall welfare in a country will be falling because of the implementation of these offsets.”
The rise in populism has adversely affected trade tensions globally, with far-right leaders in most populist nations. A shift in trade agreements between China, North America, Japan, the EU and other regions has weakened the global economy, particularly with the leaders on the right preaching closed borders and less global cooperation. Extending credit to new companies in regions across the globe then becomes risky should the countries’ leaders alter trade deals and sanctions. Combined with the far right’s negative effects on inflation, volatility and country risk, tensions remain high globally.
“Trade tensions are elevated. This is playing through into countries increasingly adopting restrictive trade measures, i.e., building barriers to imports,” another webinar presenter said. “Most trade agreements also include provisions to assist cross-border investments.”
Given the political and economic environment, D&B offered recommendations for how to best deal with a fickle market.
One of the most important skills a credit manager can have during a weak global market is paying attention to the news. Closely following trade talks between nations and political unrest in other countries will help a creditor better understand what to expect from global customers. Even just understanding that there is an issue in one country gives the creditor an advantage.
Tightening payment terms can also be a strategic move. When extending credit to a new customer in a country with an unhealthy political structure and economic environment, keeping terms short will help ensure payments get made despite whatever twist the government may impose on businesses in the future.
Lastly, creditors should not try to predict the future. While it’s imperative to stay current with the news and understand the global crises, having the ability to know what will happen next in most countries is nearly impossible. Instead, creditors should remain flexible and prepare for whatever the global economy gives them.
—Christie Citranglo, editorial associate
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A no-deal British exit (Brexit) from the EU is still an option, but the unknowns are what is haunting British and Irish businesses, particularly small- and medium-sized enterprises (SMEs).
“As the deadline [of March 29] for an exit from the European Union looms, the U.K. and the EU are facing unpleasant options,” said NACM Economist Chris Kuehl, Ph.D. “In truth, there is no desire on the part of either the British or Europeans to see the U.K. stumble out of the EU with no agreement at all. This would devastate the British economy, but it would hurt the Europeans as well.”
In Ireland and Northern Ireland, many SMEs are already feeling the impact of Brexit despite the U.K. still being part of the bloc. “The reality for most SMEs on both sides of the border is that Brexit is more of a future threat than a current reality with the lack of visibility, and concern about future business impact and the potential for wider economic impact weighing heavily on sentiment,” said Brian Gillan, head of business and corporate banking at First Trust Bank, a subsidiary of Allied Irish Banks (AIB), in AIB’s recently released Q4 Brexit Sentiment Index.
However, SMEs in Ireland and Northern Ireland are still reporting a large negative impact on current and future business—a jump of 7% from Q3 for current impacts in Ireland. Northern Irish SMEs were the only group to register an increase in positive sentiment for future business with a 3% hike. Over a third of SMEs in the two countries have either canceled or postponed investments due to Brexit. While many SMEs are reporting Brexit impacts, more than half in Ireland and Northern Ireland are not yet planning for the U.K.’s exit.
“Any Brexit will lead to additional supply chain disruption and costs to be borne by businesses,” said Catherine Moroney, head of business banking at AIB, in the index report. “However, a hard Brexit will add significant cost to most businesses irrespective of whether they trade with the U.K. or not.”
Meanwhile, firms are looking to ease the payment processes as the Brexit deadline approaches in six weeks. A partnership between Worldpay and Sage Pay was announced earlier this week to improve card payment solutions available to businesses. Card payments allow businesses to receive payments in a timely manner—nearly a fifth of SME invoices are paid late in the U.K. and Ireland, according to a joint press release.
“By increasing the opportunities for businesses to accept card payments, their customers can quickly pay by card (or other digital payment methods of their choice), which helps reduce the businesses’ admin burden and the time it takes to chase them up,” said Seamus Smith, executive vice president of payments and banking with Sage, in the release. It can take upward of 15 days to chase payments each year.—Michael Miller, managing editor
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The Illinois Supreme Court has overturned over 30 years of precedent in holding that property owners cannot sue subcontractors for implied warranty of habitability claims.
Courts have long held that owners receive implied warranties that accompany any construction work performed to their property, including an implied warranty of workmanship and an implied warranty of habitability for residential property. In the 1983 case Minton v. The Richard Group of Chicago (116 Ill. App. 3d 852), the Illinois Appellate Court held that if a homeowner has no recourse against a builder or general contractor (usually as a result of insolvency), a property owner may claim a breach of the implied warranty of habitability against the subcontractors performing any defective work.
In Sienna Court Condominium Association v. Champion Aluminum Corporation (2810 IL 122022), the Illinois Supreme Court was asked to review whether a right to recover against an insurance company or funds in escrow for construction defects is sufficient "recourse" to disallow a claim against the condominiums' subcontractors. The Supreme Court examined a more fundamental threshold question of whether a homeowner can bring a claim against a subcontractor under the implied warranty of habitability per the ruling in Minton and its progeny.
The court concluded on Dec. 28, 2018, that the implied warranty of habitability is a creature of contract, an implied term of a construction contract, imposed by law. The court reasoned that a party, without any privity of contract with a subcontractor, would require some form of negligence claim by the subcontractor to maintain an action against a party with whom the owner does not have a direct contract. However, in Illinois, as in most states, one cannot recover for a pure economic or commercial loss through a negligence action (known in Illinois as the Moorman Doctrine)—with some exceptions. Since the homeowner versus subcontractor negligence claim for economic loss did not fall within any of those exceptions in the Sienna Court case, the court noted that the only claim a homeowner can have against a subcontractor lies in contract, not in tort. In overruling Minton, the Illinois Supreme Court held that an implied warranty of habitability in construction is an implied term in the construction contract; and absent a direct contract with the subcontractor, an owner cannot bring a claim under the warranty against a subcontractor.
While the Sienna Court decision is a victory for Illinois subcontractors, the court did not address whether its ruling extends to any other implied construction warranties, such as the implied warranty of workmanship. The decision also did not address whether a general contractor would be subject to the implied warranty of habitability if the homeowner was not in contractual privity with the general contractor (for example, the homebuyer contracts with a developer entity that is not performing the construction). Further, the facts of Sienna Court did not fall within an exception to Illinois' Moorman Doctrine that precludes purely economic recovery for negligence claims. One exception to the doctrine, injury or damage resulting from a sudden or dangerous occurrence, is a possibility in construction defect cases. With those facts as an exception to Moorman, the court's reasoning on subcontractor liability in Sienna Court could have been swayed.
Reprinted with permission.
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