Seeing You Through Tough Times

The collapse of Demand Electric, Inc., showcases one type of service that lawyers and accountants provide in the construction industry. They can help clean up the mess when a company blows up. But lawyers and accountants can also help forestall business failures and even help to grow businesses in tough economic times.

Dennis Daugherty, formerly a project manager at Guarantee Electrical Company, founded Demand Electric in August 2003, near the peak of the boom. He reported revenues of $22 million in 2007, earning Demand Electric sixty-ninth place in Midwest Construction’s August 2008 list of the largest specialty contractors in the Midwest. Even as the list appeared, however, the company was in the final stages of collapse.

Two dozen plus court filings outline the final stages of the demise of Demand Electric. On April 21, 2008, Demand Electric filed a mechanic’s lien against JFK Construction, Forever 21 stores, and Chesterfield Mall. That probably was not the only job to go bad, however, for soon Demand Electric was buried underneath claims from its suppliers and vendors.

Access Courier filed suit against Demand Electric for breach of contract on July 2. Two weeks later, the Demand Electric’s landlord sued for possession of the property. In August, City Lighting Products filed a suit on account and Graybar Electric filed a mechanic’s lien against Demand Electric, Duke Construction, and 625 Building LLC.

The pace of claims picked up in September. IBEW Local 1 and NECA-St. Louis filed suit in federal court against Demand Electric, The Business Bank of St. Louis, and Providence Counseling, for contributions Demand Electric owed to electrical industry trust funds. French-Gerleman Electric filed a mechanic’s lien; Graybar and Colorado Electric Supply each sued Demand for breach of contract.

The avalanche of claims picked up strength in October with more mechanic’s liens filings against the company, now from Liebert, Western Extralite, Rexel Electric Supply, and multiple liens from Butler Supply Co. and Warren Sign Co. On top of that, an eviction order was served on the Demand on October 6. Butler Supply and Western Extralite followed their mechanic’s liens with breach of contract suits in November.

Lawyers clearly had been busy, while behind the scenes accountants toiled to get all the numbers right for all the liens and other claims.

“Going forward, we’re going to see a lot more disputes where one party cannot pay,” said Andrew Manuel, shareholder, Greensfelder, Hemker and Gale, PC, and that is where mechanics’ liens, and properly documenting costs covered by liens, are important.

Manuel said he is seeing legal work in the construction industry unfold in two ways. “The first thing we’re seeing is more mechanic’s liens and bond claims and the type of payment dispute where money has stopped flowing. That is something going on right now,” he said. “The other area we’re seeing is suspension or termination of projects. Those raise issues of how to suspend or terminate a contract. We’re seeing questions about that up and down the whole business chain. And then with those, we are seeing issues around bankruptcy and reorganization and pension fund liabilities,” he said.

Walt Bazan, from Bazan Painting and the American Subcontractors Association Midwest Council, said worries about getting paid have rapidly moved up the list of subcontractor concerns. “We now have to find out how projects are financed and underwritten to see if there is enough cash,” he said, and that means getting the right in a contract to look at the developer’s financial information.

“I’m making sure my clients are more aggressive on protecting themselves on payment issues,” said Len Ruzicka, a partner in Stinson Morrison Hecker, who represents large general contractors. “I’m making sure they have the right to suspend work for nonpayment, the right to terminate a contract for nonpayment, and the right for a financial audit of the owner at any time on job, so if they get a change order they can say ‘show me the money.’ I also encourage them to have negotiations up front with the owner on cost escalations on certain items,” he said.

Raising Your Game

“A good lawyer can help a party be more competitive, no doubt,” Manuel said. “We do some of our best work up front in helping clients get projects and understand the roles and risks so they can manage them and go forward,” he said. Greensfelder clients, he said, “are getting pretty creative on how to pursue contracts. We’re seeing more joint ventures, more teaming, and more collaborative contracts.”

Bill Wilbrand, a partner in Brown Smith Wallace LLC, said a good accountant can help a company be more competitive, too.

“If everyone is in sync, if everyone in the company knows its objectives, its vision, and its goals, this is just a bump in the road, an opportunity for weeding out the opposition,” Wilbrand said. “If the company knows its goals, we can put the proper management tools in place to measure progress towards those goals. That will help a company come out dramatically better, stronger, and probably more profitable when things do change,” he said.

Wilbrand said one of the biggest areas in which he sees contractor clients needing help from the outside now is in rightsizing their companies. “They need to know what is the break even point, what are their goals, what are the company’s sweet spots, what should they be targeting, and what are the critical success factors and key indicators they need to manage,” he said.

Dave Winkler, director of the business intelligence group at BSW, called the firm’s methodology “balanced scorecarding.”

“It allows you to align the activities of the organization with the goals of the organization,” he said. “You want to get everyone on task,” he said. “We put the tools in place that help an organization measure how well employee activities align with objectives,” he said.

Cutting Wages

Productivity always is important, but right now, cutting costs is critical to a lot of companies, said John Wunderlich, head of the consulting group at BSW, and the only way to make meaningful cuts is to cut payroll costs, he said. The dilemma for contractors is how to do that while retaining key people for when things turn better. “We’re talking to a lot of companies about dropping back to four-day work weeks with employees taking a commensurate drop in pay, or in some cases asking for volunteers to go part time,” he said. “We’re also helping companies look at suspending the employer match to 401k plans. When times are this tough, you have to be getting to wages,” he said.

Gerry Richardson, an attorney with Evans & Dixon, L.L.C., who specializes in employment and labor law, said, “many companies are facing difficult decisions about reductions in force and closing certain businesses.” Discrimination laws and the Worker Adjustment and Retraining Notification (WARN) Act add layer of complexity to what are already difficult decisions.

WARN, which applies to layoffs of at least 100 employees or a plant closing that affects at least 50 workers, is one of the issues in the plant occupation of a building components manufacturer in Chicago. In general, a company that fails to give the required notice “is liable for wages equivalent to 60 days of work,” Richardson said. The exception, he said, is if a company that thought it had financing suddenly and unexpectedly lost it’s financing and had no money to operate. Republic Windows and Doors put 250 people out of work when it closed its factory on December 5 after giving the workers only three days notice.  The workers immediately occupied the factory to keep the finished products from being shipped out to customers until they received the vacation pay they said was owed them and the severance pay they said was due them under WARN.

“If doing a reduction in force (as opposed to a layoff, where you expect to call people back in less than six months) an employer needs to take a systematic approach to how layoffs are done to avoid claims of discrimination from older workers, or claims based on gender or race,” Richardson said. “Ideally, you try and keep the best employees and let go of the weak ones, but if you don’t have documentation in the form of say performance appraisals that prove your determination of who is best, you will have a hard time defending against claims of discrimination if women or workers over 40 or another protected class tended to be laid-off more than other people,” he explained.

“To avoid liability, employers want to use criteria that means they are not picking by protected class. A lawyer can help select criteria and do an analysis to see how it would work – how it affects people in protected classes. If there is a disproportionate result, you have to reevaluate that selection criteria,” he said.

There are other hoops, too, but the important point is to “exercise caution on the front end,” he said. “If you end up in court, remember that almost everyone in the jury pool has lost a job at some point. So if there is any doubt, their sympathy goes with the employee,” he said.

Looking for Work

Some contractors are actively seeking new markets so they can avoid laying off employees. “Our proactive clients are aggressively pursuing projects outside of Missouri and Illinois,” said Manuel.

“I see a move to more work in the public sector,” Ruzicka said. “There is a lot of public work out there, Obama has announced there is going to be even more, and there is a general sense that the way we will move out of this recession is more public work,” he said.

In federal work, however, “the bidding structure is much different,” he said. “Most often there is no opportunity to negotiate; you can’t even take exception to the bid package,” he said. He helps guide clients through the differences in bidding structures, prevailing wage requirements, bonding requirements, “and more importantly,” he said, new ethics requirements.

“Regulations passed a year ago, and regulations just approved, are very much more demanding in terms of documentation. Any contractor or subcontractor who is getting over $5 million has to demonstrate that he has an ethics program in place and has to document certain things,” he said. “I’ve done three presentation in the last month to six weeks on ethics compliance,” he said. “Just last month, another four regulations were published with more requirements. The underlying requirements are the same, it is the reporting that has become the issue and there are some pretty sophisticated contractors out there who don’t know about it,” he said.

Ruzicka said he thinks the new reporting requirements started because of problems in Iraq, “because of that there has been a lot,” and although they may seem a burden, he said he thinks they will end up being good for contractors.

Change Is Coming

A potent emerging issue is the Employee Free Choice Act, which Richardson said is very likely to pass Congress next year. This year it passed the House, but the Senate held it up. Richardson does not think the new Senate will do the same. “If you went to a bookie to get odds on the Employee Free Choice Act passing, he would tell you it is a poor bet to bet against it,” he said.

The Employee Free Choice Act would make it much easier for private sector employees to join unions, he said. In the version that passed the House, “all it would take would be for a union to have signed authorization cards from 50 percent of a recognized group of employees, then the employer would have to negotiate and if they didn’t reach agreement within 120 days, the law would require interest arbitration to set the terms of the first contract.”

Currently a union has to have at least 1/3 of the employees sign cards and then it can get an election. There is a minimum of 42 days between a union request and when an election occurs, which gives the employer six weeks to get its message out, he said. If a union does win an election, currently there is no time limit for reaching agreement on a first contract. “It could take 5 years as long as everyone is bargaining in good faith, or they may never reach an agreement,” said Richardson.

If either provision of the Employee Free Choice Act passes, unionization by signed authorization cards instead of election or interest arbitration after 120 days, “it would radically change labor relations,” Richardson said.

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