H.R. 674 Seeks to Repeal the 3% Withholding Requirement on US Government Contracts

The 2005 Tax Increase Prevention and Reconciliation Act contained a requirement (Section 511) for Federal, State and Local Governments with annual expenditures greater than $100 million dollars (and most purchases greater than $10,000) to withhold 3% on payments to all vendors and service providers.  This means that in addition to retention on government contracts, an additional 3% would be withheld.

This requirement has been postponed on several occasions and is currently set to be effective January 2013.  In May 2011, Representative Walter Herger (CA) introduced H.R. 674 which would amend the Internal Revenue Code to repeal this 3% withholding requirement.  The bill is scheduled to be debated in the House this week.

If you would like to see H.R. 674 passed, repealing this 3% withholding, it makes sense to write letters to members of Congress expressing your position.  The Associated General Contractors of America sent a letter to Mitch McConnell in support of the repeal.  Also, I found this letter sent by the American Medical Association (this withholding affects all service providers to the government).  These letters can serve as a guideline for any letters you wish to send in support of H.R. 674.  If you wish to sent a letter to your Representative in Congress,  a list of Representatives in the House can be found here.  In addition to writing your Representative, I'd suggest reaching out to those serving on the Budget committee, such as Tom McClintock or John Campbell as well as to Dave Camp, Chairman of the House Ways and Means committee.  Their Washington D.C. addresses are toward the bottom of each of their pages.

CA Enterprise Zone Update

Earlier this year I wrote about the newly proposed CA Enterprise Zones.  Recently the Housing and Community Development Department (HCD) and Governor Brown's office have acted with regard to the proposed/conditional California Enterprise Zones.  These zones include sections of Anaheim, LA and San Diego.

Governor Brown's administration will resume the process of completing the final designation of the following conditional Enterprise Zones bullet pointed below.  These conditional zones will have until April 7, 2012 to satisfy all outstanding conditions in order to complete the final designations.  Once the deadline has passed, the HCD will announce which zones met the requirements and how soon the cities can continue providing its businesses with tax credits and incentives.

• City of Anaheim
• Harbor Gateway Communities of LA, Huntington Park and County of Los Angeles
• City of Pittsburg
• County of Contra Costa
• Sacramento (cities of Sacramento, West Sacramento, Rancho Cordova and county of Sacramento
• San Diego (cities of San Diego, Chula Vista and National City)
• City and County of San Francisco
• Santa Clarita Valley
• Sequoia Valley (cities of Dinuba, Exeter, Farmersville, Lindsay, Porterville, Tulare, Visalia, Woodlake and County of Tulare)

Conducting business within an Enterprise Zone allows for significant tax incentives and savings.  If you have any questions regarding Enterprise Zones feel free to contact myself or your service provider for more information.  For a top level overview on the savings for businesses in Enterprise Zones, read this post.

Update on SB 293 (Retention) and SB 474 (Indemnification)

Earlier this week Governor Brown signed a number of bills including SB 293 by Senator Alex Padilla (D - Pacoima) and SB 474 by Senator Noreen Evans (D - Santa Rosa).  As mentioned in a previous post, SB 293 caps retention on public projects at 5% and provides for quicker payment.  SB 474 limits liability on projects by allocating damages and related costs to those contractors who caused those damages.  The below summary of the bills was taken from an email distributed by the American Subcontractors Association.

SB 293 takes effect January 1, 2012. It:

1. Decreases, from 10 to 7, the number of days by which a prime contractor or subcontractor must pay a subcontractor after receiving a progress payment, unless otherwise agreed to in writing.

2. Requires a subcontractor to give written notice to the surety and bond principal that he or she is enforcing a claim prior to completion or recordation of the Notice of Completion of a project, except as specified, if the 20-day public works preliminary notice was required by any person that has no direct contractual relationship with the contractor and who has not given notice as provided in Civil Code Section 3098, that person may enforce a claim by giving written notice to the surety and bond principal within 15 days after recordation of a notice of completion. If no notice of completion has been recorded, the time for giving written notice to the surety and the bond principal is extended to 75 days after completion of the work of improvement. This provision would not apply in the event that all progress payments, other than those disputed in good faith, have been made to a subcontractor who has a direct contractual relationship with the general contractor to whom the

claimant has provided materials or services, or in the case of a subcontractor who has been terminated from the project pursuant to the contract, all such progress payments have been made as of the termination date, except those disputed in good faith.

3. Exempts a laborer from preliminary notice requirements to a surety and bond principal and any deadline to enforce a claim after the completion of a project for private works of improvement.

4. Prohibits a public entity from retaining more than five percent of a contract price until final completion and acceptance of a project.

5. Requires that retention proceeds between an original contractor and a subcontractor, or between two subcontractors, not exceed five percent of payment or contract price. Does not apply if the contractor provides written notice to the subcontractor, prior to or at the time that the bid is requested, that a bond may be required and the subcontractor subsequently is unable or refuses to furnish to the contractor a performance or payment bond issued by an admitted surety insurer.

6. Prohibits progress payments on public works contracts from being made in excess of 100 percent of the percentage of actual work completed.

7. Authorizes a public entity to retain more than five percent of the contract price in public works projects under the following conditions:

A.   For certain projects awarded by state departments, the project is substantially complex and the department includes this finding and the actual retention amount in the bid documents;

B.   For projects awarded by local entities, the governing body of the local public entity, or its designee, has approved or ratified by a majority vote during a properly noticed and normally scheduled public hearing prior to bid that the project is substantially complex, and includes this finding and the actual retention amount in the bid documents;

and,

C.  Retention proceeds between an original contractor and a subcontractor, or between two subcontractors, shall not exceed the specified retention percentage in the contract between the public entity and the original contractor.

1. Sunsets these retention provisions on January 1, 2016.

2. Defines "public entity" to mean the state, including every state agency, office, department, division, bureau, board, or commission, the California State University, the University of California, a city, county, city and county, including chartered cities and chartered counties, district, special district, public authority, political subdivision, public corporation, or nonprofit transit corporation wholly owned by a public agency and formed to carry out the purposes of the public agency. 

SB 474 takes effect on January 1, 2013
 

SB 474's staff synopsis as enrolled and sent to the Governor:

  

1. Prohibits construction contracts requiring indemnity, insurance, or defense obligations by a subcontractor for the active negligence or willful misconduct of a general contractor, his/her agents, or certain other subcontractors.

2. Provides that, unless otherwise prohibited under this bill, the parties to a construction contract can freely contract for other protections and obligations of each party, but allows numerous exemptions, including residential construction contracts, direct contracts with a public agency or owner, and insurance contracts for project wrap up and workers' compensation.

3. Requires an insurer to uphold their contractual obligations to additional insureds pursuant to Presley Homes, Inc. v. American State Insurance Company (2001) 90 Cal.App.4th 571.

4. Provides that an insurer maintains reimbursement rights from a general contractor or other subcontractor pursuant to the holding in Buss v. Superior Court (1997) 16 Cal.4th 35.

5. Provides a defense or settlement option for commercial construction contracts similar to existing law regarding residential construction contracts under which a subcontractor, after receiving claim information from the general contractor, has the option to defend the claim or pay its portion of the claim.

6. Provides that in the event a contractor fails to maintain its obligations to defend or pay its portion of the claim, the general contractor may make a claim for compensatory and consequential damages and reasonable attorney's fees.

7. Clarifies that a public agency is prohibited from shifting its liability for its active negligence to a contractor, subcontractor, or materials supplier.

8. Establishes that a project owner, not acting as a project manager, general contractor, or materials supplier, is prohibited from shifting liability for its active negligence to a contractor, subcontractor, or materials supplier.

9. Provides that these new rights and obligations shall be construed to affect the obligation, if any, of either a contractor or construction manager to indemnify, including defending or paying the costs to defend, a public agency against any claim arising from the alleged active negligence of the public agency under Civil Code Section 2782(b) or to indemnify, including defending or paying the costs to defend, an owner of privately owned real property to be improved against any claim arising from the alleged active negligence of the owner under Civil Code Section 2782(c).

10. Provides that the foregoing changes shall not be construed to affect the obligation, if any, of either a contractor or construction manager to provide or maintain insurance covering the acts or omissions of the promisor, including additional insurance endorsements covering the acts or omissions of the promisor during ongoing and completed operations pursuant to a construction contract with a public agency under Civil Code Section 2782(b) or an owner of privately owned real property to be improved under Civil Code Section 2782(c).

Union Contractors: Get Ready for New Disclosure Requirements

by Rachel Rico, Partner - SingerLewak

In September 2011, new accounting guidance,  Update No. 2011-9 -Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan, was finalized for Companies who participate in Multiemployer Plans.  Initially, the FASB put out its proposal September 1, 2010 through an exposure draft, and received over 300 responses or comment letters from various parties, including contractors, unions and other parties involved with such plans through November 1, 2010.  Without getting into the finer minutia of what the original proposal included, the final copy as released appeared to carefully consider the over 300 comment letters received and reduced the accounting and disclosure requirements as originally drafted.  

The guidance, as amended, is intended to provide additional qualitative and quantitative disclosures, i.e. transparency, with the goal of providing the financial statement users with more detailed information about the Company’s commitment to multiemployer plans and potential future cash flow implications of such commitment.  Companies will continue to effectively account for these plans a defined contribution plan recognizing and recording the actual cost for the period, plus any liability as of balance sheet date.

The old guidance required the following in the financial statements:

Company contribution amount to multiemployer plans for each annual period, without specifying the amounts attributable to pension plans and other postretirement benefit plans

Disclosure if possible or reasonably possibly of the Company’s withdrawal from the plan and if an obligation would arise, any shortfall contributions for negotiated benefit coverage 

The new guidance requires the following in the financial statements:

In a tabular format, the following information is required (see sample below taken from the guidance):

Legal Name of the Plan

The Plan’s Employer Identification Number (EIN), and it’s plan number if available

For each balance sheet date, the most recently available zone status as defined by the Pension Protection Act of 2006.  If the zone is not available, the Company should indicate the funded status.

The expiration dates of the collective bargaining agreements

For each statement of income, the Company’s contributions, identify if the Company’s contribution represent more than 5 percent of total contributions to the plan, and specify the year-end date of the plan.

As of the date of the most recent annual period, disclosure if a funding improvement plan or rehabilitation plan was implemented or pending, whether the Company paid any surcharges to the Plan, and a description of any minimum future contributions are required.

Sample of the Tabular Format

								Expiration Date
		Pension Protection Act		FIP/RP Status				of Collective
Pension	EIN/Pension Plan	Zone Status		Pending/	Company Contributions		Surcharge	Bargaining
Fund	Number	20X2	20X1	Implemented	20X2	20X1	Imposed	Agreement
ABC Fund 12	12-9999999	Green	Green	No	$   250,000	$   275,000	No	12/31/20X3
ABC Fund 34	34-9999999	Yellow	Red	Pending	$   350,000	$   400,000	No	12/31/20X4
ABC Fund 45	45-9999999	Green	Green	No	$   450,000	$   450,000	Yes	9/30/20X4
Plan's for which plan financial information is not publicly available outside of the Company's financial statements
ABC Fund 56 (1)	N/A	N/A	N/A	N/A	$   175,000	$   125,000	N/A	5/31/20X3
				Total Contributions	$1,225,000	$1,250,000
FIP = Funding Improvement Plan
RP = Rehabilitation Plan
(1)  Plan Information for ABC Fund 56 is not publicly available.  ABC Fund 56  provides fixed retirement payments on the basis of credits earned
by the partipating employees.  However, if the event  that the plan is underfunded, the monthly benefit can be reduced by the trustees of the plan.
The Company is not responsible for the underfunded status of the plan because ABC Fund 56 operations in a jurisdiction that does not require
withdrawing participants to pay a withdrawl liability or other penalty.  The Company is unable to provide additional quantitative information on the plan
because the Company is unable to obtain that information without undue cost and effort.  The collective bargaining agreement of ABC Fund 56 requires
contributions on the basis of hours worked.  The agreement also has a minimum contribution requirement of $125,000 each year.

The Company should provide a description of the nature and effect of any significant changes that affect comparability of total Company contributions from period to period.

The information is the tabular format assumes the financial statement user can obtain information in the public domain.  If such information is not available, i.e. through Form 5500, the Company needs to provide additional disclosures to include the following:

Description of the nature of the plan benefits

A description of the extent to which the Company could be responsible for obligations of the plan, including benefits earned by covered employees while employed with another Company.

Other information to the extent available to help financial statement user understand the financial statement information about the plan.

In the event information can’t be obtained for certain required items mentioned above: (1) zone status, (2) whether the Company represents 5% of the total plan contributions, and (3) other information required when not available through the public domain without undue cost and effort, that information may be omitted and the Company should indicate that such information has been omitted and why.

Effective Dates: 

Non-public/private entities for annual periods for fiscal years ending after December 15, 2012; meaning for most will be effective for the December 31, 2012 financial statements.   

Public entities for annual periods for fiscal years ending after December 15, 2011; meaning for most will be effective for the December 31, 2011 financial statements.   

Early adoption is permitted for both and amendments should be retrospectively applied for all period presented.  

The requirements, while pushed back an additional year for non-public entities, will require an increase in information for companies with multiemployer plans to obtain from the one or more plans they are signatory to.  Gaining an understanding of the requirements now will help facilitate this transition and ensure your financial statements are not unduly delayed due to waiting on information to comply with your disclosures.

Another Idea for Sourcing New Work

By Rachel Rico, Partner, SingerLewak

According to the most recent ENR’s Top 400 Contractors list, the Top 400 generated $259.4 billion in contracting revenue in 2010, down 10.8% from 2009’s figure of $290.9 billion. Domestic revenue for the Top 400 fell 11.5% in 2010 to $208.2 billion from $235.3 billion in 2009, while international project revenue fell 7.8% to $51.24 billion.  Taking a different view, there is somewhere in the neighborhood of 90% of the work available.  It is, as you know too well, more challenging to win in this competitive environment.

I have spoken with many contractors throughout Southern California, both clients and non-clients, and the consistent theme I hear is concern for sources of new work as we head into 2012.  It would be easy to say there’s a silver bullet that will cure this ill, but there simply isn’t.   For so long, the work simply showed up and most had more than enough to support the Company.  I’ve taken note that during this time, relationships were not driving new business, the economy was.  Many of the construction owners have become accustomed to this easier business climate and getting back to working hard for profitable new business has proven challenging.  Having to get back to doing this type of activity doesn’t appeal to many who thought they’d be thinking of their exit strategy in 2011, but now find themselves having to delay such.  The reality is that no one has more to lose than the owner and the time to focus on business development is now if you haven’t already started.  Sure, your employees may be motivated to keep their position and steady paycheck, but you also have a paycheck, if you’re still able to draw one, and beyond simply getting a paycheck you have a significant investment in your business to protect.

The list I’ve included in the below links contains the Top ENR 25 contractors regardless of where they are headquartered as many have a presence reaching into southern California.  I’ve also included all of the California and Arizona contractors as well.  The website links will take you to their general website or a section in their website which includes a link to get your Company pre-qualified.  I would encourage you to reach out to these Companies’ key personnel and establish new relationships and/or restart the relationships you haven’t maintained.

Click this link if you are using Firefox or Google Chrome for the Top ENR 25 List

Click this link if you are using Internet Explorer for the Top ENR 25 List

Retention Cap on Public Projects (SB 293) and Indemnification from Damages Caused by Others (SB 474)

The American Subcontractors Association (ASA) sent an email out recently providing guidance to contractors interested in these two issues.  The first, the subject of SB 293, caps retention on public projects at 5% and provides for quicker payment.  The second, addressed by SB 474, limits liability on projects by properly allocating damages and related costs to those contractors who actually caused those damages.

The ASA did a very nice job in providing contractors with template letters to use in order to help contractors have their voices heard.  I will copy the instructions and template letters below for use by contractors with a vested interest in these issues.

 

Would you like 5% Retention in public projects?   IF SO... HELP MAKE SURE THAT Senate Bill 293 is signed into law by the Governor. YOUR company needs to be listed in support because dozens of public agencies are opposing it right now!   Here's what to do: 1.      Copy and paste the sample letter below onto your letterhead 2.      MAIL it to the Governor TODAY 3.      FAX it to his staff TODAY at (916) 558- 3177 4.      FAX it to ASAC's office at (530) 662- 2865 (We will put you on the support list.) 5.      SHARE this email with other GC's and Subcontractors TODAY (all support the bill)

LETTER Supporting 5% Cap On RETENTION on Public Works: On Your Letterhead:

The Honorable Jerry Brown Governor State of California State Capitol Sacramento, CA 95814 Dear Governor Brown, Our company supports SB 293 which caps retention in public works projects at 5%, provides for speedier payments, and protects payment rights of sub-tier subcontractors. Timely and adequate cash flow is absolutely essential in construction. If more than 5% is withheld from my earned payments I cannot timely purchase materials, nor can I pay some of my employees' salaries or benefits. When this occurs, jobs are lost and projects are delayed... at additional taxpayer expense! The CA Department of Transportation has utilized zero retention (0%) since January 2009 pursuant to Senate Bill 593 (Margett).   According to DOT, its construction projects have NOT ENCOUNTERED ANY PROBLEMS related to 0% retention. This proves that reduced retention works! The Federal government also uses zero retention on projects it funds! This bill is good for business and our employees. I ask that you sign SB 293. Thank you. Sincerely,

SB 474 Needs Your Letter to the Governor TODAY!

Would you like NOT to be liable for damages caused by other contractors?   IF SO...  HELP MAKE SURE THAT Senate Bill 474 is signed into law by the Governor.   YOUR company needs to be listed in support because general contractors are opposing it right now!     Here's what to do: 1.             Copy and paste the sample letter below to your letterhead 2.             MAIL it to the Governor TODAY 3.             FAX it to his staff TODAY at (916) 558- 3177 4.             FAX it to ASAC's office at (530) 662- 2865 (We will put you on the support list.) 5.             SHARE this email with other Subcontractors TODAY

LETTER Supporting INDEMNIFICATION Reform: On Your Letterhead:

The Honorable Jerry Brown Governor State of California State Capitol Sacramento, CA 95814 Dear Governor Brown, Our company asks that you sign SB 474 (Evans) into law. The bill rightly apportions liability for damages and defense costs to those who actually caused the damages.       I know of cases where just the defense costs were four times the estimated damage; having to pay these costs (and fees) when one hasn't caused the damage is simply not right. Our State's existing law actually serves as a tool to force us or our insurers to pay for everything (unless another contractor is completely...100%... responsible for causing the damage).      A few years ago, the statutes were amended to remedy this problem in home building construction. SB 474 similarly applies to commercial projects and certain public works. Comparative negligence is an equitable tenet in law that has been upheld in court decisions for centuries in other states and countries, yet California's statutes have harmed subcontractors like me because they don't parallel that policy. This is a long overdue proposal deserving of your support and signature. Please sign SB 474. Sincerely,