THE BOTTOM LINE

Atlantic Coverage Corp.

EXCELLENCE IN SURETY BONDS

January 2004 Volume 6, Issue 1

Prevailing Wage and Related Statutes “Famous Quotes” “The time to repair the roof is when the sun is shining.” John F. Kennedy “You cannot run a business, or anything else on a theory.” Harold S. Geneen “Victory often goes to the army that makes the least mistakes, not the most brilliant plans.” Charles de Gaulle “No river is shallow to a man who can’t swim.” Richard Boone “Expect the worst and your surprises will always be pleasant ones.” Louis E. Boone “Luck sometimes visits a fool, but never sits down with him.” German proverb            Atlantic Coverage Corp. recently hosted a seminar presented by the Law Firm of Goldberg & Connolly – Henry L. Goldberg, Esq. and Janet M. Connolly, Esq. presenting. This seminar was regarding NYS Prevailing Wage and Related Statutes. We had several surety underwriters in attendance, and while the information that was provided was very informative, it was also very frightening to say the least. We would like to take this opportunity to share some of the information presented.           The surety’s exposure under their payment bond has been significantly increased. Prior to November 1, 2002, the time period for which a worker, their union, Dept. of Labor (DOL), or Comptroller’s Office could begin an action on the payment bond to seek unpaid wages and benefits was one year from the date of the underpayment. After November 1, 2002 the time period has been extended. It is now either one year from the date of the underpayment or one year from the filing of an order determining the wage or benefits underpayment by the DOL or Comptroller’s Office. In addition to underpayment of wages, a claim can be made for penalties and interest up to 25% and 16%, respectively.           Before this change, by the time a complaint was made and investigated, a year would almost certainly have passed and the right to sue on the payment bond expired. After November 1, 2002, sureties are now exposed to claims during the entire investigation period, during the administrative trial, and then for one full year after the decision is filed.           This change in the statute has prompted sureties to take a good hard look at their contractor accounts, especially non-union contractors. They need to be sure that their contractors fully understand the Prevailing Wage Statutes and the ramifications of not complying with it. One of the things emphasized in this seminar is that many contractors found to be in violation were not intentionally disregarding the statutes, but in many instances, didn’t fully understand the statutes or, by acting in a manner that they thought was fair, was actually violating the statutes. The most common error made was misclassification of workers or type/scope of work.           Both state and federal laws require that certain provisions of the prevailing wage statutes as well as the wage rates to be paid be included in the contract. Contractors should not only review and familiarize themselves with the requirements in their contracts, but they should also review all subcontracts to confirm that compliance with recordkeeping and payroll obligations are a material provision of the contract.           One of the most interesting things we learned is that under state law, the prevailing wage rate can increase during the life of a public works project and the increased wages must be paid. This doesn’t apply on federal contracts and the wage rate at the beginning of the project continues through the life of the project, unless the contract is renegotiated.           As part of the recordkeeping requirements, all wage rates and supplements must be posted and certified payroll records made each week must be kept at the work site. There are serious consequences under Prevailing Wage as well as False Claims Act in federal cases that can result in treble damages if the principal fails to comply. It was strongly recommended that general contractors that have no employees file records anyway.           The statutes of limitations vary between Federal and State projects. On federal projects there is no statute of limitations, but certain US offices of the Dept. of Labor use the six-year federal statute for enforcement proceedings. Under the NYS October 1998 “look back” amendment it is now two years for investigations commenced after October 1998. But there is a requirement to keep records for three years. The Comptroller’s office uses a three year look back and District Attorney offices uses other statutes of limitations: felonies other than “A” are five years and misdemeanors are two years.           There are civil and criminal remedies for those who violate the statutes. One of the 1998 amendments to the NYS Statute makes it an E felony, not a misdemeanor, to file false records. If there is substantial evidence that the violations are willful and in violation of a criminal statute, the matter will be referred to the Attorney General or District Attorney.           Besides monetary penalties, which can be very substantial – ranging from $5,000 to $10,000 per false claim in addition to the payment of the underpayment plus 25% for penalties and 16% for interest – debarment can be imposed depending on the facts of each case. Three-year debarment may be imposed at the discretion of the US Dept. of Labor on a federal job. As a result of the 2002 Amendment, the State requires that any contractor will be debarred if there is any conviction of a felony offence “for conduct directly relating to obtaining or attempting to perform a public work contract” if the underlying facts would constitute                                                         - Continued on page 3

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THE BOTTOM LINE

“Hindsight is an exact science.” Guy Bellamy “You only live once, but if you work it right, once is enough.” Joe E. Lewis “It is a bad plan that admits of no modification.” Publilius Syrus “There is nothing so useless as doing efficiently that which should not be done at all.” Peter Drucker “Life is what happens while you are making other plans.” John Lennon “Plans are nothing; planning is everything.” Dwight D. Eisenhower “On to Little Big Horn for glory. We’ve caught them napping.” George A. Custer “If I had known I was going to live so long, I would have taken better care of myself.” Anonymous “You shouldn't take a fence down until you know the reason it was put up.” G.K. Chesterton Focus on the bottom line           McGraw-Hill Construction believes that non-residential building markets will begin to rebound in 2004. It predicts that public works construction, specifically, will bounce back 2% in 2004, following a 10% decrease in 2003.           Many construction executives are increasingly realizing the need to manage assets and profits in these tougher times. Many firms’ revenues have been and will be impacted by the budget cuts occurring at many public agencies, and, as such, they feel that this is a major risk for 2004. Insurance and bonding issues are, also, considered by many to be major risks for this year.           Of course, there are bright spots and all is not doom-and-gloom. However, construction executives need to look very closely at their businesses to make sure that they are properly positioned to succeed. Profitability is the lifeblood of a construction firm, for any firm for that matter. This is where the attention needs to be spent; not on the top line – Revenues. To be sure, Revenues have a place, but profitability must be the focus.           Every construction executive knows the problem of battling the daily barrage of operating information. Without a consistent monitoring of the correct information, the days get even longer as they sift through the endless reams of paper. We are still amazed at how few contractors really understand their business. Cash on hand and accounts receivable are usually known, but other key numbers are, at best, a guess. To us, one of the most important numbers, the gross profit on a project, turns out to only be a guess based on prior gross profit margins! Not having a handle on the financial status of your business can have devastating effects.           While there may be a few rules in running a successful construction business, we believe that RULE #1is that the business of Construction is meant to be a profit-making venture. Otherwise, take the money that you would have to invest in a project and in the business and invest it elsewhere to realize a higher return.           Sales/Revenues - Check the Sales level (Billings) at least monthly on each individual project and for the company as a whole. Compare this with projected levels. Look at what is in the pipeline. Revise your forecast. It is important to know your breakeven point.           While you are doing this, look at the revenues (not billings) realized on each particular project. This is the contract price multiplied by the percent complete on a cost basis. See if you are underbilled on a project and then find out why.           Gross Profit - Revise your gross profit margins accordingly, always erring on the side of conservatism. Forecast your remaining gross profit and when it will be realized over the course of the remaining months of the project. Every month review the gross profits on the different types of projects. Is one type of project more profitable than others, one geographic area, etc? Factor this into your estimating functions, and in some cases, eliminate certain projects from your bidding until prices firm up. Refer to RULE #1.           While some arguments could be made to take a job for cost, cost should be direct project costs plus overhead. That is your cost. If you take a project for less than that number, you are taking a step backwards. There better be a real good reason to do that. Keep in mind, you probably do not need the practice.           General & Administrative Expenses (Overhead) – These expenses should be reviewed monthly and every check in excess of a certain amount should be closely examined. Include an analysis of executive compensation (including distributions). Nothing can destroy a credit relationship as quickly as a company with negative results and the executive officers maintaining or increasing their compensation and distributions, especially if that compensation may be viewed as excessive, or the repayment of Officer Loans by the company at a time when the company can ill afford to do that.           Cash flow analysis - Tie the above into your cash flow analysis. Analyze when the receivables will come in, whether it is 30, 60 or 90 days after the sales are recognized. Analyze the accounts payable - which subcontractors will be paid when you are paid, which subcontractors need to be ‘fed’ to keep the project moving, which suppliers need to be paid. Combine this with your monthly Overhead/G&A outflow. Do not forget to include the full amount of any debt service in your cash flow analysis. In your Profit and Loss analysis, only the interest is an expense, but we are concerned about cash flow, not just accounting profit. We have seen firms with accounting profits file for bankruptcy because of the inability to meet the cash flow needs of the company. Determine when cash flow will be tight. Line up financing now when you do not need the money. It is our experience that banks don’t often lend money to firms that have no cash. Eliminate discretionary spending prior to a cash flow crunch.           Treat this monitoring as an appointment. Projects should be individually reviewed weekly. The entire company should be reviewed monthly. Put it in you palm pilot/appointment book and do not break it unless absolutely necessary. There really is nothing more important. Find out the best time to do this. We do not recommend a weekend for various reasons, primarily because this analysis will result in questions for the various persons in the firm that may not be in the office over the weekend. We have found it best to ask the questions immediately and move on.             Remember – never lose sight of the Bottom Line. Good luck and best wishes for a healthy and profitable 2004!

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THE BOTTOM LINE

“Pick battles big enough to matter, small enough to win.” Jonathan Kozol “In investing money, the amount of interest you want should depend on whether you want to eat well or to sleep well.” J. Kenfield Morley “Some people are making such thorough preparation for rainy days that they aren’t enjoying today’s sunshine.” William Feather “One should never wear one’s best trousers to go out and battle for freedom and truth.” Henrik Ibsen “If a man dies and leaves his estate in an uncertain condition, the lawyers become his heirs.” Ed Howe “Once the toothpaste is out of the tube, it’s hard to get it back in.” H.R. Haldeman “The opera ain’t over till the fat lady sings.” Daniel J. Cook Adapting to the Cycle of Business           Contractors today are facing a tough environment. Competition from other contractors continues even in the face of increased insurance and bonding costs. There seems to be less work being offered or contracts too large to bid. Such dilemmas may even seem tame because you first must find insurance and bonding companies that are willing to consider your business writeable. Taking aspirin is becoming as necessary as that first cup of morning coffee for owners of construction firms. After taking your aspirin of choice perhaps you should consider a few different ways to approach your business.           Both insurance and bonding are cyclical. The losses that have taken place with insurance companies have been addressed and companies are taking steps to avoid such problems in the future. What has been affecting your prices the most (and this is a very general interpretation) is that Insurance Carriers have realized, for now, that they need to underwrite business based on an underwriting profit. In the past “capital investments” (Surplus cash that was invested in the stock market) were included as part of an insurance company’s profit. Almost all Insurance companies have taken a beating on investments based on the falling stock market prices these last few years. The profits earned on these investments (and they were in the 10-15% range) were heavily relied upon to negate underwriting losses (costs of underwriting vs premium generated). Now that the stock market is not as profitable, the Insurance company executives are looking at their core business results, which is to say, they are now looking to get back to underwriting profitable business.           The construction industry happens to be a very difficult market to insure. Many carriers had to “rewrite” the book on how to approach providing insurance to this industry. NY State insurance laws as they stand now also make it a higher risk to insure contractors today. Bonding also had to tighten up because Surety Companies have realized that the premium being charged was based on a “Zero loss ratio”. Such loss ratios have not been the case in Surety underwriting for over two decades. For the most part new underwriting procedures have been adapted. That is to say underwriters are actually starting to underwrite once again and are not looked upon as sources of production first then perform their real job of risk evaluation. Bonding is becoming a valuable asset again and not the commodity it has become over the past decade.           Everything is a cycle. A hard market and slow economy does not signal the end of opportunities. Of course if you want to remain stubborn and not change with the times odds are you will go the way of the dinosaur. If you decide to be proactive and adapt then you will enter the upturn in the cycle of business much stronger and in a better position for success and growth. Now is the time to spend some time on improving your operation, especially if your backlog is low and time is available to you.           Cutting costs works to some extent, but now is the time to find out how efficient your operation really is. Are you working at maximum efficiency? Is your staff up to the challenge of the times? What about the professionals you have working for you, are they providing sound advice now, when you need it most? If you address these items now so that you are successful in this hard market, imagine how you will do when the positive cycle returns. You might find out some information about your company that will improve your chances of success. Prevailing Wage and Related Statutes (Continued from Page 1) a violation of the statute. As if this isn’t bad enough, imprisonment is also a very real possibility.           It is important to remember that this is not only a corporate or company problem, but there is personal liability to the principals of the business. Since 2002 any shareholder with 10% or more ownership, affiliates and officers with knowledge are held liable.           This issue is important enough for every contractor to make sure he is familiar with and in compliance with both the Federal and State Prevailing Wage Laws. Take the necessary precautions to keep you from being the subject of an investigation. GC’s, remember, you are responsible for your subcontractors. Check prevailing wage rates with the State periodically throughout the job and keep them posted, do head counts and match daily time sheets with certified reports. If you find yourself the subject of an investigation, immediately get in touch with an attorney familiar with this area of the law. It is too important an issue to ignore. Update Your Bonding File           It’s time to work on your Year End Financial Statements! Give your bonding agent a heads up and let them know how things are looking. Personal financial statements should be updated concurrently with your Year End Financials as well. Also, please include an accounts receivable aging report and work in progress schedule in all financial statements. Financial Statements are due 90 days after the year end. This means that if your year end is 12/31, a copy of your statement should be in the hands of the bonding company by the end of March—at the latest.   Anything that has renewed recently, such as a bank line of credit or your certificate of insurance should also be sent in. The best way to impress your bonding company is to send in all this information at the appropriate time, without being asked. It not only demonstrates responsibility, it also shows your dedication to surety.

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