Don’t Make These Mistakes in a Recovering Economy.

An Improving Economy.  We are finally starting to see signs of improvement in the economy and more project opportunities are slowly appearing. An improving construction economy is good for everyone but there are risks for contractors coming out of this cycle as history has a way of repeating itself. This seems to be especially true in the construction industry. Ranked only behind the restaurant industry in terms of failure, the field of construction carriers a great deal of risk and reward.  It’s important to understand the common reasons why too much work can cause contractors fail coming out of a recession and why a surety bond underwriter might see this as a red flag.

This may be the most difficult for most contractors to understand and swallow. More work translates into more revenue and more profit right? Not necessarily. Believe it or not, more surety claims come during recovery than during a recession. There can be several reasons for this. First of all, many contractors have to cut employees and overhead. Once the work comes back, former employees have often found other work or left the industry completely. This can make it difficult to take on and manage the additional work. Along the same lines is equipment. Does the company still have adequate equipment to handle the additional work load? These things are important but the biggest reason contractors fail coming out of a recession is that their balance sheets have been depleted.

Reduced Working Capital.  For most contractors, the recession has significantly reduced their total contract volume and overall profit margins. This is turn causes losses and reduced working capital and equity. Consider that contractors typically have to internally finance their work. They perform their scope of work and may not get paid from an owner for 30 days or more. Add retention to that and you can see that each job has the potential to create a cash crunch that has to be financed by the contractor’s own funds or by an outside party such as a bank line of credit. The more work performed, the more financing you will need. Contractors typically fail when they run out of cash and underestimate their cash flow needs.

Steps to Take. So how can these risks are avoided? First of all, make sure your banker understands your growth plan and can support your needs. An adequate line of credit can be vital to taking on additional work. While you are talking to your banker, ask about taking outstanding short term debt and converting it into a long term note. This free up cash and ensures they will not call your line when if you get into a crunch.

Avoid the urge to purchase new equipment right away. New opportunity creates optimism and it becomes very easy to succumb to new purchases. However, it’s much easier to return a piece of rented equipment if needed verses selling one.

Finally, when loading up on new work, stick to what you know. It may be tempting to take work for unfamiliar general contractors, take work in new locations or venture in to new specialties. However, these are all items that add risk and this risk is magnified in a recovery period. Contract bonds, which are used broadly in the construction sector by universal contractors, are a pledge from a surety bond company to a job’s owner.

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Spot Risk and Stay Alive

Our friends at Fall Protection Blog have posted a nice article on how to spot risk and stay alive.  John Braun does a good job on outlining some of the major steps in risk detection.

How to Spot Risk and Stay Alive

A safety professional may read the title of this article and feel it’s child’s play. How could somebody notknow how to look for risk? That same safety professional may even be tempted to use a phrase that I cannot stand: common sense. I once heard a speaker explain that common sense is a learned phenomenon. We cull the experiences of our life and, from them, develop our so-called common sense. This is very true. If I spent my entire career reaching into a machine that wasn’t locked-out and nothing happened to me, I may believe that doing so was safe. This is the experience that develops my common sense.

Can You Rely on Common Sense?

That same scenario may seem like a lack of common sense to somebody who knows better, but we’re assuming that I have no other education or experience to help me come to a better conclusion. Of course, this example is extreme; it would also require that I had no experience or knowledge to let me know that rollers, gears, or blades were dangerous. The point of the matter is this: common sense is different for everybody, and therefore cannot be relied upon.

It’s important for safety professionals to realize that what seems like second-nature to us now, didn’t always. The fact that we can walk onto a construction site or a manufacturing floor and immediately begin pointing out unsafe conditions and practices stems from years of education and experience. When I first began in the industry, I could barely tell one piece of heavy equipment from another, let alone start pointing out problems. It took time to develop that particular skill set.

Walk a Mile in Their Shoes

To understand where a non-safety professional may be coming from, we need to put ourselves back in their shoes. Maybe you can’t remember what it was like before you knew safety so well, so instead, think of a time more recently when you had to visit a new facility or, worse yet, a new industry with which you were not used to dealing. Sure, there are things that carry over from facility to facility, from industry to industry, but most likely there were things there you had yet to understand – new machines, new procedures, new tasks. The first thing you needed to do was learn what those machines, procedures and tasks were. You needed to find out where the exposures were and how those exposures should be controlled.

The Importance of Risk Assessment

Yes, that’s right, you did a Job Hazard Analysis (JHA) or whatever preferred acronym you use for a risk assessment. Whether you stopped and did this on paper or you ran through it in your head, you went through a very methodical process. The problem is that you went through this process because it is a part of your training and background. Not so for your line employees, your laborers, or even members of management. Their inherent focus may be, “How do I properly operate this equipment?”, “What is the most efficient way to operate this?” or even “This is a piece of cake, so I guess I no longer need to pay attention,” not necessarily, “Where and why is this dangerous?”

Don’t Fish for Them, Teach a Them to Fish

It is important to instruct your employees that assessing risk is an important part of their job, not just something that is done for them . Train them on the proper way to perform a JHA. This should include running through some practice assessments and reviewing the existing assessments for your facility. When you see workers on the floor or jobsite, ask them what hazards are presented by their job and what they – or the company – have done to reduce their exposure. This is no time to be protective of your job and skills. You want everybody thinking like you do when you walk into a work area because you cannot be everywhere at once. If the employees can’t tell you what hazards their job presents and what controls are in place, then how can they possibly be aware if those controls or the precautions that they are supposed to be taking are effective?

What’s Wrong with This Picture?

Do you remember – as a child – doing those “What’s wrong with this picture?” puzzles? That’s how I approach every site or facility I enter. Consider the original picture – your frame of reference – to be the OSHA regulations, your company procedures, and your general knowledge of what is safe or unsafe. This original picture is how everything should be, in a perfect world. Next, you have the altered picture – the one with things missing, backwards, changed, whatever. This is reality. This is the facility or jobsite you’ve walked into. Having the first page in hand makes it easy to spot the problems, but what if you didn’t have that first page? What if you hadn’t known exactly how it should be, or had only gotten a quick glance? Now it becomes harder to see the problems. Our jobs must include giving our supervisors and workforce that first page – that frame of reference from which to work.

Do You Have the Right Picture?

To achieve this, they must understand the OSHA regulations that apply to their work, but just citing them chapter and verse helps only a little bit. They need to know how those regulations apply to what they do and be able to use them to help identify hazards. This is what the goal of a good OSHA 10 or 30 hour Outreach course should be – hazard identification. If you’re sitting through a class with an instructor that is just trying to cram as much of the CFR text down your throat as he or she can do in 10 or 30 hours, then your instructor has not been trained well and you have wasted your money. A good course teaches you the regulations and how to recognize if things are not right.

Now Do a Gut Check!

Finally, tell your people to trust their gut. No, common sense isn’t always good, but if something feels wrong to someone, most likely it is wrong, even if they’re not sure why. Tell them to take the time to find out why they feel this way or to get somebody with more experience or knowledge who can review it for them. In order for this to be successful, your company must be receptive to workers doing this. If every time a worker approaches a supervisor with a concern they hear “Just get back to work,” they will quickly stop trying to raise issues. Yet, if your company encourages this, eventually those same employees will begin to know why they feel something is wrong and, most likely, begin to be able to fix problems themselves, where possible.

Experience, knowledge, and good training, with good coaching along the way will help your employees get to a point where spotting risks is child’s play. It won’t happen overnight, but every day that passes is another day they’ve gotten better at it and another day they’ve stayed alive.

 

Thanks John.  We really appreciate the advice.

 

Gary Swiftbonds, Our short bio

Spot Risk and Stay Alive

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Is the Right to Repair Act in California dead?

Our friend Garret is back at it with another good post on the Right to Repair act and the case law surrounding actual versus economic damages.

And So it Begins . . . by Garret Murai

hourglass

This past year I wrote about a case that caused an uproar in the homebuilding industry - Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC, 219 Cal.App.4th 98 (August 28, 2013) – in which the California Court of Appeals for the Fourth District held or the first time that the Right to Repair Act, also known as “SB 800,” does notprovide the exclusive remedy for construction defects which involve “actual,” as opposed to mere “economic,” damages.

The outcry by the homebuilding industry, which contended that the Right to Repair Act was intended to be the sole remedy for construction defect claims involving newly constructed single family homes, was so great that a petition was filed to have the case reviewed by the California Supreme Court, which denied review three months later, in December 2013.

In short, the Brookfield case is now good law, and can be relied upon by the courts.  And the courts have already begun to.

Burch v. Superior Court

The first decision to be published in the post-Brookfield world is Burch v. Superior Court, Case No. B248830 (February 19, 2014).  In Burch, homeowner Cynthia Burch purchased a newly constructed single family home in Pacific Palisades from developer Premier Homes, LLC (“Premier Homes”).  The home was built by general contractor Custom Home Builders, Inc. (“Custom Home Builders”).  In December 2008, Burch filed suit against Premier Homes, Custom Home Builders and others alleging that the home suffered from numerous construction defects.

Burch’s complaint alleged claims for: (1) breach of  contract; (2) negligence; (3) breach of implied warranty; (4) unjust enrichment; and other claims.

Premier Homes and Custom Home Builders moved for summary adjudication against the negligence and breach of implied warranty claims.  Both Premier Homes and Custom Home Builders argued that the Right to Repair Act provided the exclusive remedy and Burch, therefore, could not sue Premier Homes or Custom Home Builders for negligence or breach of implied warranty.  Custom Home Builders also argued that, because it did not have any contractual relationship with Burch, it owed no duty to Burch and made no implied warranties to Burch such that it could be liable for negligence of breach of implied warranty.

The trial court agreed and Burch appealed.

The Court of Appeal Decision

On appeal, the California Court of Appeals for the Second District relying on Brookfield, held that the Right to Repair Act did not prevent Burch from pursuing her negligence and breach of implied warranty claims  because SB 800 only applies to construction defect claims arising out of newly constructed single family residences where there have been no actual damages:

[The Right to Repair Act] does not limit or preclude common law claims for damages for construction defects that have caused property damage.  Liberty Mutual examined the act and its legislative history and concluded that the act does not provide an exclusive remedy and does not limit or preclude common law claims of reconstruction defects that have caused property damage.  We agree.

It was all downhill from there for the developer and general contractor.

Finding that Burch was “a member of a class of prospective homebuyers” such that “in legal effect the construction may be considered to have been intended for her,” the Court of Appeals held that Premier Homes and Custom Home Builders owed a duty of care to Burch and that the trial court should not have found against Burch on her negligence claim.

As to Burch’s breach of implied warranty claim, the Court of Appeals held that while the general rule is that privity of contract is required in an action for breach of implied warranty, the trial court had not found that Burch was not an intended beneficiary of the work performed by Custom Home Builders so the trial court should also not have found against Burch on her breach of implied warranty claim.

Conclusion

The post-Brookfield world does not look promising for homebuilders.  The California Supreme Court has denied review, the case has not been depublished and can now be cited as precedent by other courts as the Burch court did, and absent legislative clarification that the Right to Repair Act provides the exclusive remedy for construction defect claims involving newly constructed single family residences this may mark the beginning of a rising tide in construction defect litigation involving newly constructed single family homes, which, oddly enough, was one of the very reasons why the Right to Repair Act was enacted to begin with.

Gary Swiftbonds, Our short bio

Is the Right to Repair Act in California dead?

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Bills, Bonds and other Business

On Wednesday, the House Small Business Committee went and approved several bills aimed at contracting reform.  This legislation included bills that would increase the agency’s goals of helping to direct work to small businesses.  The plan is to raise the goal from 23 to 25 percent of small businesses that contract and then to establish another goal of 40 percent for subcontractors that small businesses.

“Greater small business involvement in federal contracting benefits companies and taxpayers alike,” said panel Chairman Sam Graves, R-Mo., who sponsored the bill outlining the new contracting goals. “Small firms are innovative, and increased competition often leads to savings for the taxpayers.”

The bills that were approved are going to be felt within the construction industry.  Thus, we expect there to be a spike in contractor bond requests and other surety bond issuances. Another bill that was passed is aimed at helping small businesses by discouraging the bundling of contracts.  Given that large companies are able to more easily meet all the requirements of bundled contracts, small construction contractors are forced to either form a consortium or try only for a part of the business.  Further, Bills sponsored by Rep. Richard Hanna, R-N.Y., would restrict the government’s use of reverse auctions in awarding construction contracts.  Further, this bill is also structured so that it increases construction companies’ access to surety bonds, which is a necessity in federal procurement work.  Surety bond companies have got to love that.

Another interesting bill, sponsored by Rep. Mike Coffman, R-Colo., is designed to transfer the responsibility for verifying the status of disabled veteran-owned businesses from the Veterans Affairs Department to the Small Business Administration.   This is probably a great thing as the SBA is much better able to determine all that surrounds these businesses.

Two more bills are aimed at boosting the training and education services delivered by Small Business Development Centers as well as promote equality for women-owned small businesses, which would be done by creating a single standard in SBA’s procurement operations.

Unfortunately, not everybody is pleased with the legislation.  In particular, the bills aimed at directing work to smaller companies drew criticism from the Professional Services Council - a contractors group. Stan Soloway, the group’s President stated that “Prior to raising any of the contracting goals, it is important for federal agencies and policymakers to understand the total small business participation in federal contacting….To do so, clear and accurate data is needed of not just prime contracting dollars flowing to small businesses, but also federal dollars flowing to small businesses via subcontracts. However, such subcontracting data still does not exist in any meaningful or accurate form.”

We believe that the legislation will have both good and both effects on contractors and the corresponding bond market.  We see that more small contractors will be given work from these contracts.  However, given their smaller nature, the need for a contractor surety bond will also increase.  We also believe that there will be more construction bid bond requirements due to the increase in small firms that will be bidding.  Surety bond companies and going to be busy, for sure.

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Google's Floating Mystery Boxes

Garrett Murai has posted about the quite peculiar story that is the Google floating boxes outside of San Francisco, uh, I mean, Stockton.  What’s going on Google?

Here you go:

It was moored quietly in the Bay.

But when a four story structure made up of shipping containers was erected, questions began to be asked.

Elected officials said they didn’t know. The police said it wasn’t in their jurisdiction. And the Coast Guard was staying mum.

Some speculated that it was a floating data center. Others thought it was a R&D laboratory. And still others said it was housing the last remaining dinosaur.

When it was discovered that the owner of the barge was a company called By and Large, LLC, a take perhaps on the fictitious company Buy and Large from the movie Wall-E or a bastardization of the word “barge,” and that there were ties to an individual working at Google, speculation ran wild.

Google, however, remained silent. By building a (wink, wink) vessel not a building – plans, building permits, and planning commission approval – all of which are viewable by and open to the public, could be avoided.

But almost as soon as it began, construction suddenly stopped. Stopped in its tracks by that saboteur of even the best laid plans, Murphy’s Law, also known in this case as the San Francisco Bay Conservation and Development Commission (“BCDC”).

The BCDC, which is charged with protecting the resources of the San Francisco Bay, determined that it was necessary to obtain a permit from the BCDC before undertaking “most” work in the bay or within 100 feet of the shoreline including filling, dreading, shoreline development and “other” work.  The mystery barge was apparently “other” work which fell within the broad parameters of “most” work.

Google, who had by this time acknowledged owning the barge through By and Large, LLC, either had to get a permit, which would require the filing of publicly available documents, or move on. Google decided to move on and moved the barge this past week to Stockton, Calfornia where it was warmly greeted and even mentioned on the Stockton Visitors page (take that San Francisco!).

So, what’s on the barge? In a press release Google stated: “Google Barge … A floating data center? A wild party boat? A barge housing the last remaining dinosaur? Sadly, none of the above. Although it’s still early days and things may change, we’re exploring using the barge as an interactive space where people can learn about new technology.”

Google’s good. Really good. While many are saying that the mystery has been “unveiled” and that the barge will be used as a floating retail store, I say not so quick. I think Google has invented a new type of double-speak using humor as a distraction device. “Yeah, it’s been fun guys, but here’s the (pretty dull) reality, it’s just (possibly, maybe, we’ll see) going to be a [insert vague description that can be read a ton of different ways].” Has Google really revealed anything?

Here’s what we do know:

• The “mystery” barge is just one of a four vessel fleet (the second is currently in Portland, Maine and the other two have not yet been built) and will purportedly cost $35 million to build.


• The barges’ registrations are BAL 0001, BAL 0010 (Stockton), BAL 0011(Portland) and BAL 0100, which (un)coincidentally in binary computer code, are the numbers 1, 2, 3, and 4.


• The structures on the barges are being built by Turner Construction Company.


• The barges themselves were constructed by C & C Marine and Repair.


• The barges are 250 feet long, 72 feet wide, and 16 feet deep


• The structures on the barges (at least the first two) are constructed of 40-foot interchangeable shipping containers stacked into a single rectangular structure – four shipping containers long, four containers wide, and four containers high.


• The project is being overseen by Google founder Sergey Brin himself and members from the top-secret Google X team.

Other than that, as far as I’m concerned, it’s still a mystery.  Or maybe I just like to think they may contain the last remaining dinosaurs.

Google's Floating Mystery Boxes

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Bonds and fraud - not the best combination

Mr. Litvak

Former Jefferies Group trader Jesse Litvak was found guilty of defrauding clients on mortgage bond trades.  This was a large victory for the government as its investigation into the big banks in the years after the financial crisis has finally found some guilty parties.

Mr. Litvak was found guilty on all 15 counts he faced.  By the way, it’s really rare to find someone guilty on all counts; usually the defense can win on a couple of counts.  This is a big loss for the defense.

Prosecutors tried Mr. Litvak on the counts of cheating clients out of more than $2 million by helping to inflate the price of mortgage bonds by lying about how much Jefferies Group paid for the bonds.  Mr. Litvak even created a bogus trail of sellers to help with this fraud.  This would, in turn, make Jefferies Group more money on the bonds, which would in turn help Mr. Litvak on his bonus.

The jury found Mr. Litvak guilty on the ten counts of securities fraud, which comes into play as the bonds were traded over the markets.  The jury also found Mr. Litbak guilty on four counts of making false statements and a final counts of fraud connected to the Troubled Asset Relief Program (TARP).

Mr. Litvak faces up to twenty years in prison on EACH securities fraud count and his sentencing is scheduled for May 30.

Strangely, Jefferies Group (now a part of Leucadia National Corp.) was not charged in the case.  This is interesting as it was the bank that directly benefited from the fraud by Mr. Litvak.  Thus, it seems that either the bank worked out a deal earlier with prosecutors or the prosecuting team determined that Mr. Litvak was a “lone wolf.”

Unfortunately, I am not a big fan of the lone wolf defense.  That’s because the internal controls of a bank should have immediately flagged the profit/loss being gained on the bond trades.  When that is done, Mr. Litvak’s trades should have been significantly more than his peers.  Thus, it seems that the internal compliance division was missing.  Totally missing.

If they weren’t missing, then they were complicit in the fraud.  Given the state of the market in 2008, well, you can make your own decision.

 Gary Swiftbonds, Our short bio

Bonds and fraud - not the best combination

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Treasurys (30-year bond rates) rally

The current situation in Ukraine’s Crimean peninsula has helped force a flight to safety, which has lowered the yields on most United States Treasury bills and bonds. Thus, the 10-year Treasury note yield has hit a low of 2.592% with the 30-year bond yield falling to 3.554% and the 5-year note yield sinking to 1.458%.

What this means is that interests rates are again lowering, which helps you with your borrowing costs and even with the bond costs. Lower interest rates filter throughout the system and, thus, the costs of surety bonds are likely to follow.

Further, any risk analysis of your company includes a discount rate when figuring out your cash flow. The lower the discount rate (which is pegged using long-term bond rates) will raise the current net present value of your business.

This is all good news for your business. Better financing is available and cheaper than ever.

Treasurys (30-year bond rates) rally

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Subdivision Bonds and the public works project

Shakespeare with Yankees hat and iPod

To Be or Not to Be – Subdivision Bonds Does Not a Public Works Project, Make it Be by Garret Murai

“To be, or not to be, that is the question— whether ’tis Nobler in the mind to suffer the Slings and Arrows of outrageous Fortune, or to take Arms against a Sea of troubles . . .” – Hamlet, William Shakespeare

I’ve never been much of a Shakespeare fan.  I only moderately tolerated even the MTV-inspired Romeo + Juliet set in fair Verona Beach with rapiers metaphorically replaced with guns manufactured by Dagger and Sword.

But you’ve gotta give Shakespeare props for his quotability, which have transcended his plays written 400 years ago to modern day, as in the next case R&R Pipeline, Inc. v. Bond Safeguard Insurance Company, Case No. B246974 (January 27, 2014).

To Be or Not to Be

In 2008, R&R Pipeline, Inc. (“R&R”) entered into a construction contract with developer Los Valles Company, LP (“Los Valles”) to install a storm drain, sanitary sewer line and other related improvements on property being developed into a golf course and residential community.  In connection with the project, Bond Safeguard Insurance Company (“Bond Safeguard”) issued a labor and material bond.

Los Valles later failed to pay R&R for the work it performed to the tune of over $1 million.  And, R&R, in turn, filed suit against Los Valles for breach of contract and against Bond Safeguard under the labor and material bond.

However, Bond Safeguard, seeking to taketh what it had earlier giveth, successfully argued to the trial court that nay, its bond was not subject to R&R’s claim, because R&R’s claim was fatally flawed!  Because the work performed by R&R was work required by the County of Los Angeles (“County”) as a condition of receiving a final map, argued Bond Safeguard, R&R’s work was part of a public work of improvement and R&R failed to either serve: (1) a preliminary notice on the County under former Civil Code section 3098; or (2) a special bond notice on Bond Safeguard under former Civil Code section 3252.

The trial court, noting that Bond Safeguard’s bond was labeled a “Los Angeles County Public Works Department Labor and Material Bond,” found that R&R’s work was part of a public work of improvement and that R&R failed to serve either of the notices required on public works projects under Civil Code sections 3098 or 3252.

Subdivision Bonds Does Not a Public Works Project, Make it Be

On appeal, the Court of Appeals for the Second District, noted that the “primary issue in [the] case is whether the work of improvements contracted for between Los Valles and R&R is properly characterized as public work or private work.”  If a public work, R&R was required to serve either of the notices under Civil Code sections 3098 or 3252.  If a private work, R&R was not required to do so.

Looking at the agreement between Los Valles and the County and the payment bond itself, the Court of Appeals held that R&R’s work was not part of a public works project, and that R&R was not required to serve either of the notices under Civil Code section 3098 or 3252.

As to the agreement between Los Valles and the County, the Court held that the agreement between Los Valles and the County was not a public works contract, because the definition of “contract” under former Civil Code section 3088 is a contract between an “owner” and an “original contractor” and the County did not own any portion of the property being developed.

As to the payment bond, the Court held that there is a difference between paymentbonds under former Civil Code section 3248 – which requires a surety bond in the sum ofnot less than 100 percent of the total amount payable on the contract for works of improvement contracted for by a public entity – and subdivision bonds under Government Code section 66410 – which requires a bond of not less than 50 percent nor more than 100 percent of the total estimated cost of the improvement.  The bond issued by Bond Safeguard were not for 100% of the total amount payable to R&R, but rather, approximated only 50% of the estimated cost of the improvements.

Conclusion

We’ve reported on a couple of cases recently in which lines were blurred as to whether a project was a public or a private works project. - California Paving and Nissho - both of which, coincidentally, were also discussed in the R&R case. The common thread running between these cases is that when seeking to enforce your statutory construction payment remedies, it’s important to know what kind of project you are working on, because the construction payment laws have different requirements depending on whether a project is a private or public works projects.  And, as discussed in those cases, when making that assessment, you need to look at the project as a whole, including:

1. Who owns the underlying property, a public entity, or a private entity?


2. Were prevailing wages paid which would indicate it is a public works project?


3. Is the bond in which you are making claim for 100% of the cost of the improvements, indicating a public works project, or something less than 100% of the cost of improvements?

Be careful out there.

Subdivision Bonds and the public works project

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