Looking for Work?

There is a large hospital complex being constructed in Camp Pendleton by the Clark/McCarthy Joint Venture and they are looking for contractors to help build it out.  I believe it's set to be completed sometime in 2014.  It seems that Athena Construction Group will be awarded the contract.

The website you will want to visit is right here.  On this site you can review the overall project as well as click on the "Procurement" tab to see the table of subcontracts already awarded and still to be awarded.  They are also inviting interested subcontractors to complete a registration form on the site.  Per Lou Palandrani of Clark/McCarthy JV, there are still a significant number of opportunities available and you can see the list on this site.  It's clear there is much work still left to bid throughout the rest of this year.  The work is out there, you need to take action and go get it!


As always, let me know if you have any questions or comments and good luck!

Importance of Financial Forecasting

Happy New Year to everyone!

As we turn the calendar to 2011, we look forward to a fresh start and hopefully better times ahead.  Many, if not most or all, businesses know what they are looking to accomplish over short, intermediate and longer time horizons.  They are looking to arrive at a destination and mile markers along the way.  In order to track how the organization is doing in achieving its financial goals, a roadmap should be created.  If a business goes astray in achieving its financial goals and has no barometer to measure against on a line item basis (think income statement line items) to determine why it is off course and by how much, it runs the risk of not being able to timely identify the problem areas and take corrective action.

As we’re mid-way through January if you aren’t done, or at least close, to getting a final financial budget in place for 2011 you should begin immediately.  It really isn’t too difficult a task and it provides a great tool for the business owner to measure actual against expected results.  Rather than simply looking at the bottom line on the interim financial statement and wondering why it’s not what it should be, the budget, used in a regular and timely fashion, provides the much needed benchmark management should have to run the business efficiently and profitably.

In addition to creating a financial forecast/budget, it’s also very important to create a cash flow forecast.  A typical time horizon is 13 weeks, updated on a rolling basis, however you can also create a longer view cash flow forecast as well.  There are few industries, if any, where cash flow forecasting is more important than in the construction industry.  Knowing when, and where, your cash is coming from and going is vital.  Additionally knowing if, when and how much financing from your bank partner, in the form of the working capital line of credit and other debt facilities, is also of the utmost importance in helping you run your business.

There are other advantages to creating these plans as well.  Important business partners for most of our clients include the bond company, the surety broker as well as the bank.  These businesses that extend credit to contractors obviously prefer to work with contractors who have their “act together” in terms of running and managing their businesses.  How do you think your bond company or bank would react if, during your annual or semi-annual meeting with them, you handed over these plans in addition to other management reports that are critical for those business partners to continue extending, and maximizing, the credit you need?  How many of your competitors would you guess actually hand over these financial and cash flow forecasts?  The answer is some perhaps, but certainly not all.  You must take any advantage you can in order to maintain, and again maximize, surety and bank credit.

If you would like templates for either a financial or cash flow forecast, please contact me and I’ll be sure you get a copy.

Parkinson’s Law and the Pareto Principle

You may not have heard these names before, but I’d guess you have heard the concepts that each address by other names/phrases.  I thought it made sense to address both of these as they impact business each and every day.  Also, since my other article this month addresses budgeting and forecasting essentially to aid in business efficiency and effectiveness, I thought these concepts all fit well together.

Parkinson’s Law, in a nutshell, is the concept that work expands to fill the time allotted for such work.  That means that if we tell a worker that he or she must work from 9AM to 5PM every day, that worker will at the end of the day clock 8 hours worth of work regardless of whether they provided 8 hours of productivity.  I’d venture to guess that in many cases, if you told one of your employees that if they completed the tasks they needed to for the day by 3PM, they could go home, they would have little problem getting their work done by 3PM.  This scenario may ring true to some of you reading this.  You may be thinking about the two hours that are essentially “wasted” by requiring someone to stay in place until 5PM just because.  You may also be thinking this is a problem or challenge and I’d tend to agree!

One of the greatest areas of risk, particularly for subcontractors, is the management of labor.  It is also one of the greatest areas of opportunity as well.  In a competitive bid environment, there are many variables that don’t change dramatically from one contractor to the next in terms of putting together a number, or price such as materials and fixed overhead.  One area that has the potential to be a “game changer” in making you extremely competitive is how you manage and incentivize labor.  In my above scenario, the employee gets paid the same whether they do a full 8 hours, or 5 or 6 hours, of work in a day.  The employee most likely fully realizes they are not producing 8 hours of quality work and they either know how to get to 8 hours of work in a day or they are just purely underutilized and there is possibly too much labor in the company relative to the real need.  

What if you as a business owner, both empowered and incentivized your employees to produce more quality work in less time?  What would that mean to a subcontractor’s pricing potential if they could be lower by say 20% in their labor line item to their bid?  What would that capability mean to their overall business?  We all have many intelligent people who can be utilized more effectively if we allow them to do so and reward them when they produce results.  If in fact you could tap into the inefficient and wasted time in the labor area of your business and maximize that potential?  If you reduced labor costs on a bid by 20% across the board (easier said than done I understand, but it can be done if executed correctly with your team), that would save a typical subcontractor doing say $20 million in revenue $800,000 (assuming a 20% direct labor starting point).  If you split the savings evenly with your labor force, you would be able to hand out $400,000 in bonuses and increase your equity in the business by almost $250,000 (your 400K share less taxes)!  I’d venture to guess that many of your employees would be interested in their share of $400,000 annually (or whatever your savings would be) if given the opportunity to help identify inefficiencies and maximize productivity.  Further if you were a contractor offering total compensation, including this bonus, which exceeded that of most of your competition, you would be better able to attract top talent further potentially enhancing efficiency and capability.

Pareto Principle

The Pareto Principle is best known as the “80/20” rule.  Examples often used are 80% of your business comes from 20% of your customers, 80% of your HR/employee headaches come from 20% of your employees, etc.  It doesn’t necessarily have to be 80/20, it could be 70/30 or 90/10, but 80/20 tends to be the more likely scenario/example.

When doing a business plan, it may make sense to focus on your 20% if it’s a good thing (as in the 20% of your customers/sources of business) or mitigate/reduce the 20% of your headache areas (those employees and/or customers not worth doing business with).  Focusing and growing the more productive areas in your business is an excellent use of time producing the highest yield.  It will allow for more time to do what matters to you whether that be continuing to focus on how to grow your business and employees as well as perhaps spending more time with family and friends.

If 20% of the activities you do yield 80% of your desired results, do more of those types of activities and/or do them better!  Borrow the time from the 80% of the lesser productive activities (ideally the bottom, lowest productive percentile of course) and re-allocate to that top 20%.

We’ve known these principles all the while, I thought it would be nice to discuss them as well as offer the proper names for these often discussed, important and solid theorems.

The Importance of Corporate Culture

Last weekend I attended a Holiday party a client graciously invites me to each year.  We've all been to numerous Holiday parties over the years and they are generally good fun and we enjoy good company!  This particular party last week was very different in one way...this company's marketing group put together a film production chronicling a number of subplots and themes (one such example is the "rumor" that tunnels exist below their office building which they were accessing by going under their desks...looked to be true!).  The main message of the film was congratulatory in nature.  This company, and its President, have been in business for 30 years.

The performance given captivated the entire audience for what seemed approximately 30 minutes, give or take, in duration.  It wasn't as much the message that really grabbed my attention (no offense, 30 years in business is quite an accomplishment).  No, it wasn't as much the message...it was the messengers that really made quite an impression on me.  Virtually all the employees of the company were featured in this film (yes, it was good enough of a production to be called a film) and they were HAVING FUN!  One of the ladies was even singing the "I want to be a billionaire so f*&^%!g bad" song at one point and then the original song played in the background...good times!

This company has figured it out, something special that can't easily be quantified or bottled.  It would be great if we could all have organizations where the morale was at the high levels I saw depicted throughout this film, especially in these tougher times!  Although not easily quantified, the business results are generally very directly correlated to the attitudes and morale of the team producing those results.

Are you taking advantage of the "DPAD" Deduction?

Earlier this month, I was connected with a contractor who was using a CPA who didn't have much construction financial/tax background.  In reviewing the tax returns it was clear that the predecessor CPA hadn't taken the Domestic Production Activities Deduction ("DPAD") which many contractors qualify for.  Generally, this deduction is calculated as 9% (for tax year 2010 and later years, it used to be less in previous years) of taxable income and can be significant.  In the simplest terms, the deduction is permitted for taxpayers engaging in a number of activities including the construction of new, or substantially remodeled, real property.  As always, I advise any contractor to consult with their tax advisor regarding their particular circumstances.

The contractor I refer to above will have nearly $500,000 in taxable income for 2010 and engages in the construction of qualifying real property.  The basic, rounded math translates into a tax savings for this contractor of approximately $18,000.  I arrive at this number by taking $500,000 and multiplying it by the 9% rate permitted by Section 199 ("DPAD") and arriving at $45,000.  This $45,000 is a deduction (as opposed to a dollar for dollar credit against the company's tax bill) and as such will result in an approximate 40% savings (effective tax rate).  The $45,000 result multiplied by the 40% effective rate is how I arrived at the $18,000...no small change!

This DPAD deduction had not been taken previously for this particular contractor and most likely would have been missed again for 2010.  Please be sure you are considering this deduction for your business.  If you are a surety professional, banker, attorney or other services provider be sure to make the contractors you are associated with aware as well.

Important Changes to California's Mechanic's Lien Laws

I recently had lunch with Dave McPherson and Mike Germain of Watt, Tieder, Hoffar & Fitzgerald LLP.  In addition to the fine company, they provided me with the letter you see below outlining some of the significant changes in the process of filing Mechanic's Liens taking effect January 1, 2011.  The changes are outlined in the letter below along with their recommendations.  They also included a sample copy of a lien which I included below their letter.  As always, please consult with legal counsel before using any of the information provided below, in part or in whole, to ensure you are in full and proper compliance with the law.  Additionally, Dave or Mike would be willing to provide legal counsel if need be.

It's always important to perfect one's lien rights and it's never been more true than in these challenging times.  It would be quite a shame if one was unaware of these changes which are right around the corner.  Please take the time to read all of this information and feel free contact Dave at dmcphers@wthf.com or Mike at mgermain@wthf.com with any questions or comments.

            IMPORTANT CHANGES TO CALIFORNIA’S MECHANIC’S LIEN LAWS

            The purpose of this communication is to inform you of important changes to the California Mechanic’s Lien laws that will take effect on January 1, 2011.  Under the old law, a mechanic’s lien claimant could record a mechanic’s lien without informing the property owner that a lien had been recorded.  Beginning on January 1, 2011, this is no longer the case, and a lien claimant must take a number of additional steps in order to properly perfect its right to pursue its lien claim.  Importantly, if these steps are not taken, the claimant’s lien will be invalid.  The steps are:

1.         The claimant must serve (by registered mail, certified mail, or first class mail) a “Notice of Mechanic’s Lien.”  This Notice must include specific wording, which is shown on the attached “Notice of Mechanic’s Lien” form.  The Notice must utilize at least 10-pt. bold faced type and the last sentence must be in upper case type, except for the website address of the Contractors’ State License Board.

2.         The claimant must serve (by the same means as the Notice of Mechanic’s Lien) the actual Mechanic’s Lien that it records in the County Recorders Office.

3.         The claimant must prepare and mail a “Proof of Service Affidavit,” which states the manner by which the Notice of Mechanic’s Lien and the Lien have been mailed.  This affidavit must be sent, along with the Notice of Mechanic’s Lien and the Lien, to the owner or reputed owner of the property on which the work was performed at the owner or reputed owner’s residence or place of business, or at the address shown on the building permit on file with the authority issuing a building permit for the work.  If the owner or reputed owner cannot be served, the notice may be sent to the general contractor or construction lender.

 

            Although the statute permits the mailing of the documents by first class mail, we strongly recommend that they be sent via registered or certified mail, so that it is easier to prove that the documents were properly mailed if there is a dispute as to whether they were received.

            After mailing, all three of the documents described above must be timely recorded in the County Recorders Office of the county where the work was performed.  Because the documents must be mailed prior to recordation, we strongly recommend that you mail the mechanic’s lien, notice of mechanic’s lien and the affidavit of proof of service 5-7 days prior to the last date in which to record your lien.  Attached hereto is a sample of the three documents.  

            If you have any questions concerning compliance with this new law, please do not hesitate to contact me.

                                    Very truly yours,

                                    Watt, Tieder, Hoffar & Fitzgerald, LLP

                                    David F. McPherson  and  Michael D. Germain

___________________________________________________________________________________

Recording Requested By                                                       

and

When Recorded Mail To:

                                                                                                                 (SPACE ABOVE THIS LINE RESERVED FOR RECORDER’S USE)

MECHANIC’S LIEN

(Claim of Lien)

The undersigned, _________________, referred to in this Claim of Lien as the Claimant, claims a mechanic’s lien for the labor, services, equipment and/or materials described below, furnished for a work of improvement upon that certain real property located in the County of ________________, State of California, and described as follows:

           

After deducting all just credits and offsets, the sum of $___________, together with interest thereon at the rate of ten percent (10%) per annum from _________________, is due Claimant for the following labor, services, equipment and/or materials furnished by Claimant: 

The name of the person or company by whom Claimant was employed, or to whom Claimant furnished the labor, services, equipment and/or materials is:

 

The name and address of the owner or reputed owner of the real property is:

 

Name of Claimant: 

By:__________________________________________________

VERIFICATION

I, the undersigned, declare: I am _____________ of __________________________, the Claimant named in the foregoing claim of mechanic’s lien; I am authorized to make this verification for the claimant; I have read the foregoing claim of mechanic’s lien and know the contents thereof, and the same is true to my own knowledge.

I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct.

Executed on _________, 2011, at ___________, California.          

                                                                              __________________________________

NOTICE OF MECHANIC'S LIEN
ATTENTION!

Upon the recording of the enclosed MECHANIC'S LIEN with the county recorder's office of the county where the property is located, your property is subject to the filing of a legal action seeking a court-ordered foreclosure sale of the real property on which the lien has been recorded. That legal action must be filed with the court no later than 90 days after the date the mechanic's lien is recorded.

The party identified in the mechanic's lien may have provided labor or materials for improvements to your property and may not have been paid for these items. You are receiving this notice because it is a required step in filing a mechanic's lien foreclosure action against your property. The foreclosure action will seek a sale of your property in order to pay for unpaid labor, materials, or improvements provided to your property. This may affect your ability to borrow against, refinance, or sell the property until the mechanic's lien is  released.

BECAUSE THE LIEN AFFECTS YOUR PROPERTY, YOU MAY WISH TO SPEAK WITH YOUR CONTRACTOR IMMEDIATELY, OR CONTACT AN ATTORNEY, OR FOR MORE INFORMATION ON MECHANIC'S LIENS GO TO THE CONTRACTORS' STATE  LICENSE BOARD WEB SITE AT www.cslb.ca.gov.

Please complete and sign at least one (1) of the following proofs of service and record it along with your Mechanic’s Lien:

PROOF OF SERVICE AFFIDAVIT

California Civil Code Section 3084 (a)(6), (c)(1)(A)

I, _____________________, declare that I served a copy of the enclosed Mechanic’s Lien and Notice of Mechanic’s Lien by:

[  ]            (BY FIRST CLASS MAIL)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at _______________, California.

[  ]            (BY CERTIFIED MAIL, Return Receipt Requested)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at __________________, California.

[  ]            (BY REGISTERED MAIL, Return Receipt Requested)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at __________________, California.

evidenced by a certificate of mailing, postage prepaid, addressed to the following owner or reputed owner of the property ______________________________________________ at the following address:

                (Name and title of person served)

                                                        ________________________________________________________________________________________________________.

       (Owner’s residence or place of business or owner’s address on building permit or otherwise as per California Civil Code Section 3097(j))

On this date:  ____________________________.  Signed at _______________________________________________________.

                                         (Month/Day/Year)                                                                (City, County of person making service)

On this date:  ____________________________.                  _______________________________________________________.

                                 (Month/Day/Year)                                                                    (Signature of person making service)

           

ALTERNATE PROOF OF SERVICE AFFIDAVIT

California Civil Code Section 3084 (a)(6), (c)(1)(B)

Use this alternative Proof of Service affidavit only if the owner or reputed owner cannot be served as specified above.

I, _________________________, declare that the owner or reputed owner of the property specified in the enclosed Mechanic’s Lien and Notice of Mechanic’s Lien could not be served by Registered Mail, Certified Mail, or First Class Mail, evidenced by a certificate of mailing, postage prepaid.  Therefore, I served a copy of the enclosed Mechanic’s Lien and Notice of Mechanic’s Lien by:

[  ]            (BY FIRST CLASS MAIL)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at _______________, California.

[  ]            (BY CERTIFIED MAIL, Return Receipt Requested)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at __________________, California.

[  ]            (BY REGISTERED MAIL, Return Receipt Requested)  I caused such envelope(s) with postage thereon fully prepaid to be placed in the United States mail at __________________, California.

evidenced by a certificate of mailing, postage prepaid, addressed to the construction lender ________________________________

                                                                                                                                                           (Name of  Construction Lender)

at the following address:  ____________________________________________________________________________________

                                                                                                    (Construction Lender Address)

or to the original contractor ___________________________________________________________________________________

                                                                                                     (Name of Original Contractor)

at the following address:  ____________________________________________________________________________________

                                                                                                    (Original Contractor Address)

On this date:  ____________________________.  Signed at _______________________________________________________.

                                         (Month/Day/Year)                                                                (City, County of person making service)

On this date:  ____________________________.                  _______________________________________________________.

                                 (Month/Day/Year)                                                                    (Signature of person making service)

Outlook for 2011 and beyond

I’ve always enjoyed following the markets and the economy.  One of the reasons I follow economic data is to gain insight as to what it might mean for the near and intermediate term in our economy and its impact on business.  I get information from a variety of sources, as many of us do, including the U.S. Department of the Treasury (http://ustreas.gov/).  From this website you can subscribe to U.S. Economic Statistics.  You can choose from a variety of reports as well as frequencies of those reports.  What does this have to do with running a construction business like many of you are charged with doing?  Understanding economic information and, more importantly, how it impacts you and your business is of critical importance.

One piece of data from the Quarterly Data Update published at the end of September that jumped off the page for me was “Business Investment – Equipment and Software”.  For 2009, the average business investment in Equipment and Software declined by approximately 5%.  In the first quarter of 2010 this number showed an increase of just over 20% and for the second quarter of 2010 this same statistic showed an increase of just under 25%.  It seems to me that if business is sharply increasing its spending on equipment, it follows that business will soon need to increase its spending on labor to operate and manage the equipment.  This latest quarterly increase in equipment spending is the most since 1983 (similarly the U.S. was coming out of a recession which began in July 1981 and officially ended in November 1982).  Back then, unemployment was at 10.4% in January 1983 and fell to 8% one year later in January 1984.  I’m not saying our economic challenges and situation today is exactly as it was in the early 1980s.  Instead, I’m focusing on the trend in business equipment spending.  What I am suggesting is that business will need to hire labor to protect their investments in equipment much the same way labor was employed in 1983 following a similar spike in equipment spending.  When unemployment decreases and people have jobs, consumption will resume, the housing market will improve and the need for building out retail, industrial and residential spaces will return.  This of course will take some time to unfold but if the connection between equipment spending and job creation is real, as I think it is and if history is any guide, the timeline may not be as long as some people may think for improvement in our overall economy.

This information may not help you to sleep better tonight, reduce the number of bidders (including desperate and/or incompetent ones) on jobs or increase your margins and backlogs today.  However it could signify better, or at least not worse, times ahead for many Americans.  The quantitative easing the government has undertaken in the last few years (buying bad mortgages, TARP money to financial institutions, purchasing treasury bonds, etc.) will most likely come at a price for us and our children down the road in the form of inflation and other headwinds.  That being said, my perspective is things will be better in 2011 even if marginally so for our overall economy.  Health in the construction industry will most likely take longer as the need for building will lag the general recovery.  Most, if not almost all, construction companies have already eliminated much of the excess in their operations.  If you are one who has held on, either to people, idle/underused equipment or any other inefficient overhead, now is a good time to consider how long you really think you can hold on to those assets hoping things are going to improve significantly anytime soon and jeopardizing the health and/or existence of your company.  If the people, for example, you are keeping in your organization have very unique, hard to replace skillsets and you have the capital structure to keep them on without harming your business, then perhaps keeping them makes sense.  However, if on the other hand you can relatively easily replace the people, equipment, etc. down the road when revenue levels can support that spending, you should act now and get as lean as possible.

The good news is that this too shall pass.  In the meantime, it is important to stay on top of what is happening out there in the market and our economy.  The information you gather is useful in making business decisions that can help you live to fight another day and maximize opportunities when strong, healthy activity resumes.