Thank you for Trying

We worked hard, contacted as many people as we new, worked with a Lobbyist. In the end, the special interests changed the law because everyone was distracted by trying to balance the budget (a good reason for keeping non-budget matters OUT of the Budget).

Now we need to protect bids, contracts, mechanic's liens and bond claims (see the next entry in this blog) AND work on new legislation to correct the damage that has been done, maybe even make it better.

American Subcontractors Association is the only construction trade association that works as an advocate (in both the courts and legislatures) in Ohio and across the country solely for subcontractors and suppliers. Join ASA of Ohio today to help make Ohio a better place to build.

http://asaofohio.com/pdfs/MembershipApplication09_10.pdf

CAN YOU STILL GET PAID ON PUBLIC PROJECTS?

Sometimes you just can’t tell

Yes, the economy is tough, but even worse, as a Subcontractor or Supplier; the way you do business on public construction projects has just changed. Now, in addition to everything else, you have to ask yourself:

Who did I bid to (who did they bid to?) Is the prime contractor exempt from having to post a Payment Bond to guaranty that I will be paid for my work?

Do I qualify my bids and negotiate my contracts to protect my right to be paid for my work?

Do I get a copy of the Notice of Commencement (it will tell you if there is a payment bond)?

Do I serve my Notices of Furnishing properly? Timely?

Do I file my Mechanic’s Liens when I should?

Do I serve my Bond Claims when I should?

Your rights to be paid on a public project used to be a protected by a 2-prong safety net, your Mechanic’s Lien and your Bond Claim. Due to some special interests in the Ohio Legislature, that has just changed. While the House, the Senate and the Governor were arguing over whether we would try to balance our State budget with slot machines Senator Shirley Smith, Democrat from Cleveland, slipped in an amendment to the Budget Bill that has little, if anything to do with the Budget.

The amendment exempts certain minority and EDGE contractors from having to post bonds: Bid Bonds; Payment Bonds; and Performance Bonds on State and local public projects. The exempted contractors are contractors that do not have the financial wherewithal to obtain a bond. They have the right to bid on and win up to four contracts of increasing amounts, starting at a maximum of $25,000 and increasing up to $300,000 without any bonding, contingent upon the successful completion of the prior contact and the participation in or completion of a “Qualified Contractor Assistance Program.” If, after the completion of the fourth exempted contract they are still unbondable, they have the right to repeat the four contract process. The worst part is that you may be bidding on the project before you know whether your right to be paid will be protected by a bond.

This exemption eliminates one of your payment safety nets AND changes that way you do business. If your unqualified bid is used on a project with an exempted contractor, you can be required to work on the project without the assurance that you will be paid.

While the retainage withheld by the State or local government against the exempted contractors has been increased, purportedly for your protection, the two problem realities are that increased retainage hurts the contractor’s cash flow and decreases their ability to pay you, the more insidious problem is that IT IS THE GOVERNMENT, NOT YOU, that has the first right to the retained funds if the contractor defaults. It is in this situation that the payment bond is supposed to be there to protect you. If the contractor is an exempted contractor, you just lost that protection.

12 Things That You Need To Do, STARTING TODAY To Protect Your Company:

1. Only deal with contractors that have a good reputation. Darlene East, President of Holes, Incorporated and President of American Subcontractors Association NATIONAL, advises to Research each contractor’s and owner’s business and credit history through services like D&B. In Ohio, you can review and exchange information on project owners, contactors, subcontractors and suppliers at ConstructionCreditNewsBlog for free.

2. Qualify your bid by restricting your bid to only being used on bonded jobs

3. Qualify your bid to include all of the terms important to assure that you will be paid into your contract (American Subcontractors Association has good-Free to Members-Bid Forms and Subcontract Addenda written by its Attorneys’ Council, to protect your rights)

4. Negotiate your contracts to include the restrictions of your bid or walk away from a bad contract. Let your competitor lose money on a bad deal (you can do that if you properly qualified your bid);

5. Eliminate Pay-if-Paid clauses;

6. Eliminate No Lien clauses;

7. Confirm your Right to Stop Work if you are not being paid;

8. Confirm your Right to obtain Financial Assurances that you will be paid;

9. Avoid Change Order Clauses that require that the Government and the Contractor agree to the Change Order and Make the Payment before you have the right to be paid;

10. Obtain the Notice of Commencement and Serve your Notice of Furnishing before you start work (or at least within 21 days of your first day of work);

11. Because your lien rights are limited to the money that the government still owes the contractor, if there is no bond, consider filing your lien as soon as you are complete.

12. If you are scheduled to work in phases, don’t measure your lien time by the promise that you will be called back to work on the next phase. If the contractor defaults, there is no performance bond to back it up to permit it to finish the job, you may never be called back to finish, your lien rights will have expired and there is no bond to back YOU up.

The economy is tough, but don’t make it tougher on yourself by taking bad jobs. Not getting a bad job is better than being sorry that you did. Protect your company, use all of the tools that are available to you and look for legal seminars offered by the Builders Exchange and American Subcontractors Association of Ohio to use them all to your advantage.

CONTACT YOUR STATE SENATORS AND REPRESENTATIVES TODAY TO STOP NEW UNFAIR PUBLIC CONTRACTING RULES

Eliminating the exemption for minority contractors from the obligation to post a Bid Bond, Performance Bond and Payment Bond is bad for Ohio, bad for the construction industry and bad for your business.

Contact your legislators TODAY:

Representative:
http://www.house.state.oh.us/

Senator:
http://www.senate.state.oh.us/senators/SenateZipSearch.html

Read the Amendment to the Budget Bill, Lines 8,427 through 8,563

Budget Bill:
http://www.legislature.state.oh.us/bills.cfm?ID=128_HB_1

Audio File about the Budget Bill Amendment:

http://www.ohiolienlaw.com/bx/Memo.m4a

The Budget will is in committee now and WILL BE PASSED INTO LAW BEFORE JULY 7, 2009. Your legislators need to hear from you before they vote and BONDING IN OHIO WILL NO LONGER BE UNIVERSAL. CONTACT THEM TODAY.

LETTER TO STATE REPRESENTATIVE/SPEAKER OF THE HOUSE, ARMOND BUDISH

I have sent this letter to Armond Budish as Speaker of the House, my State Representative, Robin Belcher, Representative Josh Mandel, President of the Ohio Senate, Bill Harris, and Senator Thomas Patton. Please feel free to borrow from this letter to write to your own Representative TODAY, decisions will likely be made this week.

Dear Armond:

I appreciate your time and I understand the difficult task this budget presents.

I am following up on my original email to your office regarding Senate provisions that deal with Waiving the Obligation of Some Contractors to Post Payment and Performance Bonds. It is my understand that discussions are occurring on the issue.

Relying on my years of practicing construction law, I respectfully request that due to the complexity of this issue and the number of questions the construction community has, that this provision be pulled and addressed in a standalone setting. This process will guarantee that hearings and deliberate action can be properly dedicated to the bonding matter.

A possible suggestion is to address this in the construction reform panel debate if that occurs in the fall.

There are a multitude of questions I have heard regarding this provision some of which could possibly enhance the provision:

1) Why doesn’t the state back the bonds or public entities to ensure stability for all those involved on the job the way that the Federal Government does?
Without the backing of the public entity, the party taking the risk of dealing with the unbonded contractor are the subcontractors and suppliers who are providing the labor and materials in furtherance of the construction project. This will cause them to either increase their prices to the unbonded contractor to cover the additional risk, even worse, not bid to them at all. The result would be the exact opposite of the intent of the legislation.

2) Why is the retainage amount being set so high?
Retainage, if held at all (none is held on Federal Work), was originally designed to give the contractor the incentive to finish the project by withholding his or her profit, allowing enough to be paid to permit the contractor to pay itself and all of its laborers, subs and suppliers. Withholding any more will require the contractor to over withhold from those who should be paid, or not pay some less pressing accounts like contributions to unions on behalf of its employees or withholding taxes to be paid to the IRS. If the goal of the legislation is to permit financially disadvantaged minority contractors to successfully participate in more public work, retainage should be held to reasonable levels or completely eliminated, at least for these companies.

3) Could this provision include the public authority in the Notice of Furnishing and lien waiver process to assure that subcontractors and suppliers are being paid?
To assure that subcontractors and suppliers are being paid, the public authority can take an active role in the payment process. Under the current law, the public authority, unlike the private project owner, is not even given a copy of the Notice of Furnishing, because it has not interest in the payment process, unless a lien is filed. Changing the rule, at least for participation with an unbonded contractor, would permit the public authority the ability to know the identity of all of the subcontractors and suppliers working on the project and then obtain lien waivers from the subcontractors and suppliers so that the public authority actually knows that the tax dollars that it is spending for the improvement are being paid to the people and companies doing the work.




I believe everyone involved in this discussion is looking to produce a policy that enhances quality construction , keeps jobs in Ohio, and simply allows companies to be paid for their hard work. Hearings and public testimony will only help in this goal, anything less will likely result in severe, unintended consequences.


R. Russell O’Rourke

O’Rourke & Associates Co., LPA
President of American Subcontractors Association of Ohio, which has regional groups in Cleveland, Columbus, Cincinnati and Dayton.
General counsel of the Builders Exchange (Cleveland, Toledo, Dayton and Cincinnati)
Member of the Executive Committee of ASA (National)
Chair of the ASA Subcontractors’ Legal Defense Fund

2 Summit Park Drive, Suite 650
Independence, Ohio 44131
216/447-9500
RORourke@ORourke-Law.com

LETTER TO STATE REPRESENTATIVE/SPEAKER OF THE HOUSE, ARMOND BUDISH

I have sent this letter to Armond Budish as Speaker of the House and my State Representative, Robin Belcher. Please feel free to borrow from this letter to write to your own Representative TODAY, decisions will likely be made this week.

Dear Armond:

As you know from our time together at Hahn Loeser, I am an attorney, but you probably do not know that I focus my practice in the area of construction law, am the President of American Subcontractors Association of Ohio, which has regional groups in Cleveland, Columbus, Cincinnati and Dayton. I am also the general counsel of the Builders Exchange (Cleveland, Toledo, Dayton and Cincinnati) and am a member of the Executive Committee of ASA (National) and Chair of the ASA Subcontractors’ Legal Defense Fund. I am also the author of the treatise, Ohio Mechanic’s and Materialmens’ Liens 3d Ed., published by Thompson/Reuters.

As a tax payer and a person who is very involved with clients who will be injured, I am very concerned about the probable result that passage of the Budget Bill, with the amendment inserted by Senator Shirley Smith, will have on the construction industry in Ohio. The amendment waives the requirement that some contractors, financially challenged minority contractors, post a payment and performance surety bond to assure that they not only complete the project and the public will not have to pay more because of a contractor default, but will also assure that all subcontractors and suppliers are paid for their labor and materials used for the public benefit. The amendment, while well-intended, will negatively impact every level of construction participants. The point of the amendment is to permit minority contractors who can demonstrate that they are not financially responsible to bid along with others who are, on an even footing. This increases the risk, without the ability to control the risk, to all bidding subcontractors and supplier. This will also have a negative impact on the taxpayer and other bidding principal contractors, particularly financially responsible minority contractors.

A bond is generally required in public projects because, unlike private projects, the unpaid subcontractor and supplier can only lien the money that is still due from the public authority to the principal contractor, not the improved real estate itself. If there is no money left to be paid to the contractor, the lien of the subcontractor or supplier is valueless, which is where the payment bond provides the required security to make the construction industry work as it does, with acceptable risk. This leads to the improbably security that, in this amendment, is provided to the subcontractors and suppliers by increasing the amount of Retainage withheld from the unbonded contractor. The problem with this “security/protection” is discussed below.

Of the multiple levels of injury, the first is to the public authority/tax payer, with no performance bond, accepting the lowest bidder means that there will be no protection for the public authority/tax payer if the contractor has underbid the project. Rather than saving money, when a contractor defaults it almost always costs more to hire a replacement contractor to complete the work. This is such a strong proposition that, in the event of a termination for default of the contractor, when the surety becomes responsible for the completion of the project, it is common for the surety to hire the defaulting contractor to complete the work. The surety, of course, makes up the short fall required to complete the project, minimizing the financial exposure for all. Here, there will be no surety to make up the short fall. With the surety bond, in all but the most financially stable companies, the principals of the companies are personally liable to the surety, keeping their bids and performance within reason. Without the surety relationship the corporations or limited liability companies that are awarded public contracts with a waiver of the obligation to post a payment and performance bond, there is no personal liability, permitting the bidding contractor to take more risks in the bidding process, unfairly taking work away from companies that have properly bid because they do have personal risk and are otherwise financially responsible.

Second, other, well financed minority contractors will suffer because there will not be a good way for bidding subcontractors or material/equipment suppliers to know in advance whether their bid will be accepted by a contractor that is or is not posting a payment bond. If the bidder is bidding to be in direct contract with the principal contractor, they could have a better opportunity to determine if the contractor to whom they are bidding will be posting a bond, if that information is properly required, however, at this point, the first time that one would determine whether there is a bond is when they read the Notice of Commencement which divulges the identity of the surety, only after the contract has been awarded. If they are bidding to a subcontractor, rather than a potential principal contractor, they will have little control over who the subcontractor that they are bidding to, is bidding to. As potential first tier subcontractors frequently bid to multiple contractors, it would not be uncommon to bid to both bonded and unbonded, potential contractors. They would be offering their labor and materials ultimately to different contractors which are giving them resulting different levels of risk, risk which they cannot easily control. This could cause subcontractors and suppliers to bid in situations where they could be bidding to minority contractors to bid at higher levels to cover the perceived risk, or not to bid to them at all, unfairly prejudicing the financially responsible contractor that has earned a good reputation to receive the bids that it deserves. Without the proper bids, the experienced, well capitalized, bonded minority contractors may be unjustly denied the work that they deserve to win.

Third, first tier subcontractors will, without substantial due diligence, be unsure the level of risk that they are taking by bidding to a minority contractor. The result is that bids to minority contractors will likely be higher than to other contractors who are required to have payment bonds, either by forcing the bidding subcontractor to submit two bids, one if there is a bond, a higher one if there is no bond.

Fourth, lower tier subcontractors and suppliers will, unless they qualify their bids to exclude the use of their bid to bid to an unbonded contractor will have absolutely no control over the risk to which they will be exposed. Because such a qualified bid is unlikely, except by only the most sophisticated subcontractors, the only rational way to control this will be to increase the price of their bids to offer a better return to offset the perceived risk.

In these tight economic times when prime bids are coming in at or substantially below the architect’s estimate, no one can afford to take the additional risk. The lower the tier participant, the lower the ability they have to properly perform any reasonable due diligence and still make a profit. One possible result is that suppliers may stop supplying in Ohio, or raising their prices so high to cover their risk that construction becomes even more unaffordable for the taxpayer. When speaking of the taxpayer, if it is the will of the people to afford the financially insecure minority contractor a monetary advantage which includes increased risk of subcontractors and suppliers, the only possibility that is fair to all contractors, subcontractors and suppliers is to have the public authority guaranty the payment of all subcontractors and suppliers in lieu of the payment bond. Of course, this just increases the cost to the taxpayer.

The other, related problem arises as a result of what is seen as additional “protection” for the subcontractors and suppliers, that being that rather than the current 8% of labor only on the first 50% of the project and 0% thereafter for an effective rate of 4% Retainage on LABOR ONLY over the life of the project held by the public authority from the principal contractor, to increase Retainage for projects with contracts over $50,000 a 15% Retainage on the contract and for contracts of $50,000 or less a 12% Retainage. Retainage is an amount of money to be withheld from the contractor for payment otherwise due for properly performed work until the completion of the job, just to keep the contractor interested in completing the project. The point, when the concept of Retainage was first instituted, in England in the mid-1800s, in railroad construction projects, was to withhold the contractor’s profit only. At the time, it was widely accepted that contractors worked on a 10% profit margin. Retainage was set at 10%, affording the contractor sufficient cash flow to permit the contractor to pay all of its bills. If more than the profit margin is withheld, the contractor has to withhold money from others (subcontractors, suppliers, withholding tax which should have been paid to the IRS or fringe benefit payments which should have been paid to labor unions). The last option is to borrow the money from a lender. Because the target contractors are, by definition, financially challenged, this will not be an option. When money is withheld from a subcontractor or supplier that is otherwise due its payment, it cannot pay its bills, bills for its materials, labor, bills to the IRS, or bills for union fringes. As you can see, over-withholding payments due to the principal contractor has a cascading effect that will injure the entire payment stream to all involved. To protect themselves, the subcontractors and suppliers will need to file mechanic’s liens earlier and law suits faster to protect their own payment and their businesses. The problem with the lien and the lawsuit is that neither are guaranties that they will either be paid or be paid in full. Making the situation even worse, if the contractor does not have sufficient cash flow and elects to withhold payments from the IRS or any other taxing authority or from payments due to unions, the contractor will suffer prohibitive penalties which will even further hurt the financially challenged company and its owners.

The two issues with the existence of a bond is first and foremost that there is security for the payment that is due and second, that the surety has performed all of the due diligence to assure that the contractor is bondable, financially responsible. This amendment provides the right of the contractor who is not financially responsible or bondable to have the same rights without any risk, all the risk being placed on the shoulders of the subcontractors and suppliers.

This amendment unfairly shifts the risk of financial ruin to subcontractors and suppliers who cannot control the risk, in our already struggling construction industry, with only an illusory benefit to the contractor itself, as the Retainage it will suffer in exchange for the waiver of the bond will cause it to fail or constantly defend itself against liens and in law suits. It is neither the time nor the manner to provide the intended benefit. If this additional assistance to the financially challenged minority contractor were a good idea, it deserves to be in its own legislation where it can be properly debated and vetted to provide the intended benefit, while still protecting others, not placed in a “must approve” unrelated budget fill. Please, revise the Budged Bill, removing the Smith amendment, and return it to the Senate for proper approval.

Please contact me if you have any questions that might help you make a decision on this important issue.

Thank you,

R. Russell O’Rourke
O’Rourke & Associates Co., LPA
RORourke@ORourke-Law.com

The Budget Bill has been Amended to Permit Waiver of Payment and Performance Bonds from Minority Contractors Working on Public Projects

The State of Ohio by law has to approve the new Budget by July 1. The House of Representatives passed its version of the Budget bill and sent it to the Senate for approval. Senator Shirley Smith from Cleveland inserted an amendment to eliminate payment and performance bonds for some minority contractors on public work. The Senate version was approved as Amended HB 1 and sent back to the House for concurrence. View the Senate version of Am.HB 1 here http://www.legislature.state.oh.us/BillText128/128_HB_1_PS_N.html

While well-meaning, the amendment, designed to help disadvantaged minority contractors could very well change the face of construction in Ohio for the worse AND keep all minority contractors from getting competitive bids from subcontractors and suppliers.

This amendment includes provisions to allow the Director of Development to waive the protections of bonding for the first five public projects that a minority contractor is awarded—state or local. Upon the successful completion of a $25,000 construction project without bonding, the contractor can obtain a $50,000 contract without providing the bonds required by law. The third contract, at $100,000, doubles the amount from the second project that can be obtained without bonding. The fourth contract triples the amount of work that can be done without bonding to $300,000, and the fifth public project doubles that amount to permit a $600,000 project to go forward without the protections for workers and state taxpayers that bonding provides. These “protections” will be offered to those who have the least financial ability to successfully complete a construction project.

In addition to providing for the waiver of a bond, to “protect” subcontractors and suppliers, the amendment also increases the amount of Retainage from an effective rate of 4% on a public project to as high as 15% (the actual amendment provides that for projects over $50,000 the Retainage will be 15%, for those contracts values at $50,000 or less, it will be 12%). While the intent is to have more money withheld to protect those doing business with the contractor, the reality is that it will eliminate the cash flow which is the life blood of every construction company from those who need it the most, the disadvantaged business that can’t qualify for a bond.

When this money is taken away, it will cause the contractor to hold more of the money that should have been paid to you, hurting your cash flow, making you file more liens earlier and file more law suits faster, just to protect the money that is rightfully yours. Forget about your other standard protection, the bond claim, because it will be eliminated, with no guarantee that you will be paid, at all.

Committee meetings within the House of Representatives are happening this week. You need to act now to help stop this change by contacting your Representative to tell them how badly this amendment will hurt your business and construction in Ohio at a time when we can least afford it. Find your Representative Here http://www.house.state.oh.us/

Tell them that every Ohioan should be afraid of this amendment. The goal of the amendment is to assure that minority contractors can be more competitive with their pricing because they are not required to protect either the public authority (you and me as taxpayers) or their subcontractors and suppliers (you again) by paying for the same payment and performance bonds that responsible contractors must pay for, but the result will likely be just the opposite.

It may be that the prudent subcontractor or supplier selling to a minority contractor may not offer the same prices that they do to other contractors or may not bid to them at all. This could even hurt the good, well capitalized minority contractors because you won’t be able to tell whether they are posting a bond or not. Will you condition your bid on only being effective if the contractor is posting a payment bond?

What about a supplier selling to a subcontractor? Will you condition your bid on their only bidding to contractors supplying a bond? You won’t know until it is too late because your customer may be bidding to contractors who have posted bonds and those who haven’t. Your price may be the same, but your risk will be dramatically different. This, together with a pay-if-paid clause in your contract, could spell you never being paid.

When these contractors without bonds and higher retainage can’t pay their bills because there is no cash flow, are they going to stop taking a pay check or are they going to stop paying the things that don’t hurt right now: withholding taxes; union fringes; and payments to subcontractors and suppliers?

There are alternatives, look at the Federal process. There is no Retainage, but when the bonding minimums were raised, the Federal Government had to put other security measures in place to assure that those actually doing the work to improve the public’s buildings would be paid for their work. If Ohio is going to take away your rights to be paid by the company that hired you, to be fair, they should be taking the risk of non-payment, NOT YOU. The government is trying to hand out a benefit when the only person taking the risk is you. This will hinder construction business in Ohio and raise prices for everyone.

No one wins here.

We have a legislative process to fully vet ideas, have reasonable and thoughtful debate over the issues, not to have such a major change to the way we do business hidden in another piece of legislation that has to be passed. If they want to offer another incentive to disadvantaged businesses, then do it, but do it in a process that permits everyone to make a reasonable decision based on open discussion and debate, not just pass it because the budget has to be passed.

Call or email your representative today. Get this amendment stopped before it is too late. Find your Representative Here http://www.house.state.oh.us/