How To Create Advocates — Not Adversaries

Everyone we come in contact with can either help us achieve our goals, or create obstacles. The outcome is dependent on how we engage with them. When we are looking to grow our business, we interact with many people in many different roles. How we see them informs how we choose to deal with them. If we are wrong, we can hurt our growth.

Everyone we meet is not a prospect. There, I said it. Moreover, it is really dangerous to assume that everyone is a potential customer. When we believe that everyone we encounter is a possible client, we approach them from that direction. We decide our communication structure based on that belief. The problem with this belief is that most of the people we meet are not potential customers. So, we are instantly alienating people instead of attracting them.

The truth is that no one likes being treated like a “kill.” We are better off not even thinking about our business when we interact with people. That way we are more interested in finding out who they are than we are in telling them about our product or service. It is that curiosity that will help us build relationships.

Consider it this way — throughout our travels we will meet all sorts of people. Some will be colleagues. Others will be referral sources and resources for our connections. Others still will be conduits to our prospective clients. And, of course, some will become clients. That array of possibilities speaks to the value of leading with curiosity and respect.

The more advocates we have in our business, the easier it will be to grow. When you call to speak with a prospect or stop by to see a prospect, everyone you encounter can either help you or hurt you. The gatekeeper can be one of your greatest supporters or they can keep you from getting in to see the prospect. The receptionist can patch you through or keep you out.

The people you meet at networking events can become great resources for you and your business or they can simply be people you meet. The beauty is that you get to choose the result because you choose how you interact.

Let’s break it down.

Networking

When you are networking, you can choose how you approach people. When you decide to be curious about the people you meet you are out of sales brain. That’s good! Being curious allows you to be fully present. You will be listening and learning. You will be determining who you want to continue to build relationships with. And you will be someone other people want to get to know.

What you won’t be doing is selling. You won’t be telling other people about your product or service. You won’t be trying to gain a client. And, you won’t be disregarding people you think aren’t prospective clients.

When you attend networking events looking for clients, you dismiss anyone you think doesn’t look like a prospective client. And when you do that, you miss out on discovering resources and referral partners. It’s a very shortsighted strategy. Remember, you need a variety of connections in your business community in order to be successful.

Prospecting

When you reach out to a person or company to make a connection you are probably not going to speak with the decision maker first. Most likely you will have to go through a receptionist, assistant, or connection. How you interact with them will have a direct impact on your ability to get to the right person.

Their job is to ensure the people they support are not interrupted unnecessarily. You aren’t the only person seeking a conversation. If the gatekeeper let everyone in, the decision maker would never get anything done.

Decide to engage with the initial contact with respect for their responsibilities and workload. Too often salespeople take this blocking personally. However, it has nothing to do with the salesperson. It has to do with the responsibilities the receptionist/assistant/connection has in their role. When salespeople realize they can actually help these folks become allies and advocates, the whole conversation changes. You need that gatekeeper in your corner. So, figure out how you can first be in their corner. How can you help them? Stop seeing them as an adversary. Take the time to build a relationship with them. That’s how you will gain access to the decision maker.

Elsewhere

Wherever you go you are building a reputation. It’s your decision whether that reputation is good or bad. Whenever you interact with people they are creating a view of you and your company. They are deciding whether you are someone they want in their world or not. Realizing you need as many advocates as possible can help you decide how you will interact with everyone. Build the best reputation you can. That reputation should be one of problem solver, helper, giver. The more you show up as someone who is more interested in helping others than in gaining business, the more attractive you will be. And the more business you will gain.

Everyone is not a potential client. Potential clients are not the only people worth speaking to. Other people can directly impact your ability to grow your business. Remembering these things will help frame how you engage as you venture out on your business building journey. Seek to gain advocates. It’s the best way to avoid gaining adversaries.

About the author: Diane Helbig is a leadership and business development advisor helping business owners around the world. She is the author of Lemonade Stand Selling, Expert Insights, and Succeed Without ‘Selling,’ as well as the host of the “Accelerate Your Business Growth” podcast. For more information, visit www.seizethisday.co.

How to Prepare Your Company for an Immigration and Customs Enforcement Audit

Although President Trump’s attempts to pass sweeping immigration reform have been largely unsuccessful, since his inauguration there has been a sharp increase in enforcement of current immigration policies in the workplace. One such policy is that employers verify that all employees are authorized to work in the United States. Since 1986, the Immigration Reform and Control Act (IRCA) requires employers to verify work authorization by reviewing each employee’s identification documents and completing (and retaining) Employment Eligibility Verification Forms (Forms I-9).

Enforcement of IRCA is largely accomplished through the initiation of I-9 audits conducted by Immigration and Customs Enforcement (ICE), an agency within the Department of Homeland Security (DHS). According to the National Law Review, in 2018, the number of audits conducted increased by more than 400 percent, from 1,360 in 2017 to 5,981 in 2018.

What Is an ICE Audit?

During an ICE audit, ICE officials are legally permitted to examine Forms I-9 for compliance and determination of fines or other criminal penalties for violations. ICE audits may be initiated based on tips from various sources, but companies are also subject to being randomly selected from a national database of employers.

In most circumstances, an ICE audit begins when an ICE agent arrives at the workplace and delivers a Notice of Inspection (NOI). Upon receipt of a NOI, the company is provided with three days to respond. In some circumstances, with good reason, an extension to respond may be granted. After the three-day period, or any extension, the employer is required to produce for inspection Forms I-9 for all active employees and any employees terminated within the retention period. (Forms I-9 must be retained for certain periods even after an employee is terminated or leaves a position.) ICE officials may arrive on site to conduct an inspection or investigation. While on site, ICE officials cannot enter non-public areas of a building or speak with employees on the premises unless the officers have a warrant or the employer’s consent, unless certain circumstances exist to permit further investigation without a warrant, subpoena, or the employer’s consent.

Preparing for an Audit

The key to preparing for a potential ICE audit is to be proactive. One of the most effective ways for an employer to prepare for an ICE audit is to conduct an independent self-audit to ensure they are in order and in compliance with all requirements. An employer may choose to perform the internal audit or hire counsel to do so. Hiring independent counsel that specializes in this area of the law to perform the audit provides the employer with several benefits. Counsel can walk the employer through the audit process, determine any deficiencies that exist, and prevent the possibility of any deficiencies being covered up by staff members or other employees. Performing self-audits not only gives employers an opportunity to identify errors, omissions, or other deficiencies, but is also evidence of a good faith effort on the part of the employer to make all reasonable efforts to comply with the requirements.

Employers should prepare to take immediate action to correct any deficiencies a self-audit reveals. Forms I-9 should never be backdated, as that evidences an attempt to willfully and intentionally deceive government officials. Deficiencies should be corrected in a conspicuous manner. Use a different color ink to indicate a correction and have the person making the correction initial it. In addition, the internal audit process should be adequately documented. For example, attach a memorandum to the deficient Form I-9 identifying the deficiency discovered and the steps taken by the employer to correct it.

In addition to performing an internal self-audit, employers should always review or establish sound policies and procedures for completing Forms I-9 and maintaining adequate records. Employers should always exercise due diligence when making employment decisions to ensure that each employee is compliant.

Here are a few quick methods to avoid or reduce exposure:

  • Ensure that there is a Form I-9 on file for every active employee.
  • Ensure all reverifications are completed where an employee’s work authorization has expired and form a schedule for ensuring that reverification is completed timely.
  • Maintain copies of identity and work eligibility documents.

In any event, hiring independent legal counsel will prepare employers for any potential ICE audits and provide employers with an additional layer of protection should the employer receive a NOI. Introducing a systematic approach to records maintenance will make it simpler for internal audits and shield employers from the significant penalties IRCA imposes. Technical violations, those which are inadvertent or procedural, can carry fines between $230 to $2,292 for first-time violators. Fines for knowingly hiring, employing, or continuing to employ unauthorized workers are between $573 to $6,878 for first-time violators and can reach up to $20,130 for the third (or later) violation. In addition to civil penalties imposed for failing to comply with the provisions of IRCA, employers should be aware of potential criminal liability if ICE determines that the employer engaged in a pattern of hiring or recruiting undocumented workers.

Impact on the Construction Industry

In the midst of a nationwide shortage of skilled workers, many contractors are struggling to adhere to federal hiring requirements, exposing many employers to civil fines and criminal charges which would ultimately challenge their ability to survive.

It is important to note that both general contractors and subcontractors bear the same responsibilities when it comes to maintaining Forms I-9 documentation. General contractors should be further aware that they could be held responsible if a subcontractor fails to meet all requirements. Ultimately, liability depends on knowledge. If a general contractor or even a large subcontractor is aware that a lower-tier subcontractor is employing undocumented workers, they can be held liable as well. To prevent any issues regarding knowledge, contractors should always make proper inquiries into hiring and employment practices of subcontractors.

As previously discussed, it is critical that each employer implement and enforce sound employment and employee documentation policies to ensure compliance with all federal requirements. Hiring independent legal counsel can assist with identifying and rectifying any deficiencies which an employer is not even aware exist. Getting out in front of deficiencies is critical to avoid civil or criminal liability should an ICE official come knocking on the door.

About the author: Lindsey E. Powell is an attorney with Anderson Jones, PLLC practicing in North Carolina and Georgia. Questions about this article can be directed to her at lpowell@andersonandjones.com. Author credit is also given to Keith A. Boyette, attorney with Anderson Jones, PLLC who may be reached at kboyette@andersonandjones.com.

Author’s note: This article is intended only for informational purposes and should not be construed as legal advice.

State Sales Taxes Create Administrative Challenges for Contractors

As most of us know, taxes are among the few certainties we can expect in life.

And a look at state laws nationwide indicates that sales and use taxes in particular are having a moment, especially laws imposing sales tax on certain types of real property improvements and services. According to a 2015 publication by tax software provider Avalara, at least 18 states impose a sales tax on at least some services that are considered improvements to real property. These states include Connecticut, Florida, Hawaii, Iowa, Maryland, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, South Dakota, Texas, and Wisconsin. States appear to be trending toward collecting sales taxes from end customers on materials, labor, repairs, and services associated with real property improvements.

The impact is not only an increase in construction costs for consumers, but will also push contractors to overcome administrative challenges and to keep their prices competitive in spite of additional tax costs they must impose on customers. As discussed below, this is especially true for contractors who do both taxable and non-taxable improvements. Anyone unsure of how their state’s law applies to their activities should consult with a CPA, tax attorney, or their state’s department of revenue.

What Services Are Taxable in my State?

Generally, most states have long imposed a sales tax on purchases of goods both on consumers and on businesses. The growing trend appears to be that some states are also imposing sales tax on certain services that may or may not be related to taxable goods. In at least a few states, the distinction between capital improvement projects and repair, installation and/or maintenance work is important. Often, contractors who perform work in both categories — work subject to sales tax and work that isn’t — can submit some type of affidavit or other paperwork in order to be excused from sales tax liability or from the responsibility to pass it to others. However, in many cases, the distinctions between taxable and non-taxable services is highly technical and can depend on the circumstances of the transaction in question.

In Florida, the distinction between “tangible personal property” and “real property” determines when contractors must charge sales tax to the end customer. Under the Florida Department of Revenue Rule 12A-1.006, if contractors furnish parts directly to customers, they must charge sales tax to customers both for the parts and for “adjusting, applying, installing, maintaining, remodeling, or repairing” tangible personal property. Section 192.001(11)(d) of the Florida statutes defines tangible personal property as “goods, chattels, and other articles of value … capable of manual possession and whose chief value is intrinsic to the article itself.” The statute defines “real property” to include “land, buildings, fixtures, and all other improvements to land.” Contractors performing labor to install permanent fixtures that constitute “real property” do not have to charge sales tax to their customers; contractors who will eventually charge their customers sales tax are entitled to purchase the materials as tax-exempt.

A Florida Department of Revenue online guide cites permanent carpeting, roofing, tile, and landscaping as example of “real property” improvements that are not subject to sales tax. However, the same guide states that “carpet” constitutes tangible personal property unless it becomes real property; this provision seems potentially confusing and likely requires flooring contractors to impose sales tax on some of their services but not others. Similarly, the guide states that “stepping stones” constitute tangible personal property; it would therefore seem that landscaping contractors are tasked with taxing some of their services but not others, as the guide generally lists landscaping work as a “real property” improvement.

In Ohio, contractors need to understand the legal distinction between “construction contracts,” which are not subject to customer sales tax, and “tangible personal property” contracts, which are. According to the Ohio Department of Revenue, tangible personal property becomes real property when it is permanently installed or affixed upon the real property pursuant to a construction contract. The Department specifically lists carpet, carpeting materials, and landscaping materials as tangible personal property. The Department advises that for transactions that are not construction contracts and that include the sale of tangible personal property (TPP) for sales tax purposes, contractors should present their vendors with a direct pay permit that will allow them to buy the materials tax free, charge customers sales tax, and then pay the sales tax to the state on a monthly basis.

New York and North Carolina require contractors and other service providers to charge customers sales taxes on the sales price of “repair, installation, and maintenance” work (commonly referred to as RIM), whereas “capital improvements” are not subject to sales tax. The New York Department of Taxation and Finance’s Publication 862 purports to give guidance to contractors and property owners on New York’s sales tax rules. It explains that “repair” and “maintenance” work — work done to keep real property in good working order, safe, or to restore it to a good and safe condition — is subject to sales tax. Publication 862 cites replacing damaged roof shingles, repairing a broken railing, and replacing a faucet as examples of RIM services that, along with the materials, are subject to sales tax. It goes on to discuss taxable installation services and provides that “freestanding appliances” like washing machines, dryers, dishwashers, and refrigerators are among items that, although installed, do not become a permanent part of the real property under New York law.

North Carolina law similarly sets forth particular activities that constitute RIM services — like “floor refinishing and the installation of carpet, flooring, floor coverings, windows, doors, cabinets, countertops, and other installations where the item being installed may replace a similar existing item … .” The repair or replacement of roofing, gutters, and flashing appears to fall squarely within North Carolina’s definition of RIM services for which contractors must charge their customers sales tax. North Carolina’s law — N.C. Gen. Stat. § 105-164.3(33l) — goes on to say that RIM services that are part of a real property contracts for capital improvements are exempt from the sales tax.

“Capital improvements,” on the other hand, are not subject to sales tax in New York and North Carolina. In New York, whether a project constitutes capital improvement work appears to depend heavily on the particular circumstances; even the method of installation can affect how the work is taxed. For example, some projects that ordinarily would qualify as capital improvements are not considered capital improvements if a commercial tenant installs items as trade fixtures. Whether they are taxable depends on whether the intent is for the improvements to remain permanent. In North Carolina, capital improvements include new construction; work that requires a permit (with some exceptions); installation of equipment or fixtures that is “capitalized and depreciated”; paint or wallpaper not incidental to RIM services; landscaping; and HVAC unit or system installation or replacement.

How Is the Industry Being Impacted?

For many contractors performing RIM or other sales taxable work in one or more of these states, distinguishing which services are and aren’t subject to sales tax is only the first step. Contractors also need to comply with the requirements and, when applicable, take the administrative measures needed in order to avoid what is effectively double payment. When contractors buy goods and materials from wholesalers, they are generally responsible for paying sales tax at that time. Typically, though, the states that impose sales tax on RIM or other similar services don’t require contractors to pay sales tax on materials that will be used in transactions where the end customer will have to pay sales tax. In many states, including North Carolina and Ohio, contractors can submit a form E-595E and potentially be exempt from paying sales tax on goods they will eventually resell and assess taxes upon. But for those contractors who buy goods and materials to be used both for RIM and capital improvements — for example, roofers who perform both new construction and repair work in North Carolina — the logistics of keeping the purchases separate (and keeping two sets of books, essentially) might be too administratively costly to justify the tax savings.

Mike Tenoever is the president and owner of The Century Slate Company, a roofing construction company in Durham, North Carolina, and he also is a member of the Roofing Editorial Board. Tenoever stated that even though the new sales and use tax laws took effect in North Carolina in 2016, some general contractors don’t seem familiar with North Carolina’s affidavit of capital improvement form when he submits it — something that indicates that not everyone is complying with or aware of the new law yet. If that’s the case, then it would appear that contractors who aren’t complying with the law and charging sales tax to end customers would be gaining a competitive edge over contractors who are following the law and charging sales tax on projects that constitute RIM under N.C. Gen. Stat. § 105-164.3(33l).

Furthermore, requiring contractors to determine what materials and supplies for which they should pay sales tax versus for which ones to tax customers is burdensome and, at least in Tenoever’s case, has effectively resulted in double tax payment because purchasing capital-improvement materials and RIM materials separately from the same vendors has been too administratively burdensome for his company.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

Mediation, Litigation, and Arbitration … Oh My!

It’s a rare situation in this day and age that a construction contract or subcontract does not contain a dispute resolution clause, particularly the industry form contracts (such as the AIA, ConsensusDocs, and EJCDC). A contract may prescribe mediation, arbitration, or a combination of mediation and litigation or mediation and arbitration. Because parties are free to draft their own contracts, such provisions are generally enforceable. But what does all of it mean?

Mediation

First, mediation, though understood as a form of alternate dispute resolution, does not provide an ultimate decision maker. Rather, mediation is a settlement conference wherein the parties engage a neutral third party, the mediator, and meet (often in person) to present their respective cases. The mediator typically hears presentations regarding the facts of the case and assists the parties in understanding each side’s position and respective strengths and weaknesses to facilitate settlement. The mediator’s fee, generally calculated on an hourly basis, is split evenly between the parties (absent an agreement to the contrary). Importantly, the mediator has no authority to decide the case or compel a settlement or any particular outcome. In that sense, mediation only resolves the dispute if everyone voluntarily agrees to a settlement. That is why dispute resolution provisions sometimes use a combination of mediation and either arbitration or litigation to achieve a final resolution. If a voluntary settlement is not reached at mediation, an impasse results, and the parties should proceed as required by the contract.

Litigation

Litigation is initiated by the filing of a complaint in the appropriate jurisdiction and venue (which may be governed by the dispute resolution provision or other provisions in the contract). The parties are usually entitled to bring in additional parties who may be needed for a complete resolution of the issues. The litigation will proceed through a process of discovery, wherein parties exchange information and documentation related to the dispute, following strict rules of civil procedure and evidence. Eventually, a lawsuit will be tried either to a judge or jury who will render a verdict, which is reduced to an order or judgment. Any party that is unhappy with a verdict typically has the right of appeal.

Be advised that engaging in litigation doesn’t always mean that you won’t encounter alternative dispute resolution. For instance, North Carolina statutorily requires that all Civil Superior Court cases (typically involving actions for damages exceeding $25,000) be ordered to mediation before trial. Also, most Federal District Courts require parties to consider mediation or refer, and sometimes order, cases to mediation.

Arbitration

Arbitration is similar to a lawsuit but does not involve the court. Most dispute resolution provisions will designate a third-party association — often the American Arbitration Association (AAA) or JAMS — to act as the administrator of the arbitration. Arbitration is generally initiated with a demand by one party, after which an administrator is assigned to facilitate the process. Parties typically choose the arbitrator (or a panel of arbitrators) from a list provided by the administrator based on the subject matter of the dispute. Construction arbitrators are typically construction lawyers or other professionals with extensive experience in construction. The rules of evidence and procedure are relaxed in arbitration allowing the parties, with the assistance of the arbitrator and the administrator, to create their own scheduling, deadlines, procedures and rules for discovery and motions. Eventually, the dispute will be heard by the arbitrator(s), and there is no right to a jury. The arbitrator(s) will render an award which is only appealable in limited, and extraordinary, circumstances such as fraud or bias.

Arbitration is intended to be more efficient and inexpensive than litigation, but that’s not always the case. First, using a third-party administrator (AAA or JAMS) typically involves significantly higher filing fees than courts. Arbitration filing fees are determined on a sliding scale depending on the amount sought in the demand for arbitration. Also, unlike litigation, the parties must compensate the arbitrator(s) for the time spent in arbitration on an hourly basis. Because construction arbitrators are highly experienced construction professionals, their hourly rates are commensurate with those of construction attorneys.

Because arbitration is the product of an agreement to submit disputes to arbitration, only parties who are subject to an agreement to arbitrate (either the dispute resolution provision in a contract or a separate agreement) may be compelled to arbitrate. This can sometimes make arbitration inefficient. For instance, where a general contractor initiates arbitration against a roofing contractor, the roofing contractor may attribute the actual cause of the dispute to a lower-tier subcontractor or supplier. However, if that lower-tier subcontractor or supplier is not subject to an agreement to arbitrate, there is no mechanism whereby it can be compelled to join in the arbitration proceeding, whereas in litigation, it could usually be joined as a party. In that case, the roofing contractor may be forced to defend against the general contractor in arbitration and simultaneously prosecute a separate action against the lower-tier subcontractor or supplier, resulting in both increased costs and duplicated efforts.

Weighing the Advantages

Each method of dispute resolution has its advantages and disadvantages. Acknowledging the differences in the methods of alternative dispute resolution allows the parties to craft a procedure that’s right for them. Even if the contract is silent as to dispute resolution, the parties (with unanimous agreement) can submit their disputes to mediation or arbitration.

Other contract provisions that are particularly relevant to dispute resolution include choice of law and forum selection clauses. Choice of law clauses provide that a particular state’s laws will control dispute resolution, regardless of where the project is located or the proceedings will be held. Forum selection clauses prescribe the location of the dispute resolution proceeding.

Understanding the dispute resolution provision(s) in your contract and the law and procedures which will apply is critical. Engage legal counsel during contract drafting or review and negotiation to ensure the dispute resolution clause is appropriate and effective. Remember, an ounce of prevention is worth a pound of cure.

About the author: Lindsey E. Powell is an attorney with Anderson Jones, PLLC practicing in North Carolina and Georgia. Questions about this article can be directed to her at lpowell@andersonandjones.com.

Author’s note: This article is intended only for informational purposes and should not be construed as legal advice.

Speaking of Education…It May Be Back to Class for Contractors

It’s no surprise that almost all states require general contractors and some subcontractors to register with regulatory boards and pass a qualifying exam in advance of bidding, contracting, and certainly physically undertaking construction work. That’s not new. However, there is an emerging trend towards requiring general contractors, and even some subcontractors, to participate in continuing education. Depending on the jurisdiction, some contractors and subcontractors are now statutorily obligated to complete a certain amount of continuing education — similar to what has been historically required only of doctors, lawyers, and accountants — to maintain licensure.

For instance, this summer, North Carolina became the most recent state to impose continuing education requirements for general contractors. Effective January 1, 2020, general contractors will be required to complete 8 hours of continuing education per year. Because roofing contractors in North Carolina performing work in excess of $30,000 are required to be licensed as general contractors, they will now be subject to the new continuing education requirements.

This recent legislation and its impact on the roofing industry raises questions about what is required for roofing contractors nationwide. Does roofing require special licensure and registration or continuing education? The answer is entirely dependent on the jurisdiction where the work is to be performed.

The following states currently require licensure for roofing: Alabama, Alaska, Arizona, California, Florida, Hawaii, Illinois, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, New Mexico, North Carolina, Rhode Island, South Carolina, Utah, and Virginia.

Other states don’t require licensure per se but do require roofing contractors to register. For instance, Oklahoma requires roofing contractors to register with the Construction Industries Board. Failure to register is a misdemeanor, and registration and endorsement as a commercial roofing contractor requires 4 hours of continuing education every 36 months. Similarly, Idaho does not require a state license, but requires roofing contractors to register with the Idaho Contractors Board.

As seen in Figure 1, even among the states which require continuing education, the requirements vary greatly both in the amount and type of education required. For instance, Florida law requires contractors holding a roofing license to take 1 hour of wind mitigation methodologies as part of the 14 annually required continuing education hours. In Massachusetts, construction supervisors within the roofing industry are required to take 2 hours of continuing education in code review and four one-hour courses in topics of workplace safety, business practices, energy, and lead safe practices.

Figure 1. Licensing and continuing education requirements by state.

Finally, in those states which don’t require licensure or continuing education, some industry groups have developed self-regulation. These industry groups are aimed at consumer protection and seek to secure public confidence in the roofing industry. In Georgia, which does not require a state roofing license, the Roofing and Sheet Metal Contractors Association of Georgia (RSMCA) provides a voluntary licensing program. Similarly, Kentucky has no license requirements for roofing contractors. However, the Kentucky Roofing Contractor Association (KRCA) is a nonprofit and professional organization which certifies roofing contractors. To obtain and maintain KRCA certification, roofing contractors must complete 10 hours of continuing education per year.

But just because a state legislature or professional association has not enacted regulations necessitating continuing education does not mean contractors are free from such requirements. While not mandated by the state itself, many cities have imposed their own directives. States such as Kansas, Kentucky, Illinois, Indiana, Maine, Missouri, New York, Oklahoma, Wyoming, and Pennsylvania each contain at least one municipality that compels contractors to take board-accredited continuing education courses. For example, Idaho Falls, Idaho, requires 8 hours of continuing education.

Regardless of where you are engaged in the practice of roofing contracting, it is imperative that all contractors exercise due diligence and review and comply with all state and local regulations before undertaking any project.

Contractors and trades are seeing a rise in regulation through the government by way of mandated continuing education courses. Do you think contractors should be required to take continuing education classes? Is this a necessary void that needs to be filled by the government intervention or is this just another example of unnecessary government regulation? Tell us what you think.

About the author: Lindsey E. Powell is an attorney with Anderson Jones, PLLC practicing in North Carolina and Georgia. Questions about this article can be directed to her at lpowell@andersonandjones.com. Special research credit is given to Kyle Putnam, Juris Doctor candidate and summer law clerk with Anderson Jones, PLLC.

Author’s note: This article is intended only for informational purposes and should not be construed as legal advice.

OSHA Education and Training Requirements For Contractors

Many licensed contractors have been getting “on-the-job” training for years — some, since they were working on jobsites as young laborers. But what formal education and training are required for contractors? The short answer is that it differs slightly from state to state, but no one can escape OSHA.

Perhaps the best-known training requirements for contractors are those set forth in the federal Occupational Safety and Health Act of 1970 (OSHA) and the regulations OSHA enables.

OSHA permits individual states to develop and enforce their own occupational safety and health plans, statutes, and enforcing agencies as long as the states meet federal requirements (29 U.S.C. § 667), so many contractors may be more familiar with their state’s occupational safety and health act than the federal. According to the U.S. Department of Labor, jurisdictions with their own federally-approved plans governing both public and private employers are Alaska, Arizona, California, Hawaii, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Nevada, New Mexico, North Carolina, Oregon, Puerto Rico, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, and Wyoming. (Connecticut, Illinois, Maine, New York, New Jersey, and the Virgin Islands have plans that apply only to public employees.) State laws must be “at least as effective” and stringent as OSHA.

In most of these states, and in states that simply follow the federal OSHA requirements, construction-industry employee training is required to comply with the federal requirements set forth in 29 CFR 1926. California, Michigan, Oregon, and Washington have more stringent requirements than the federal rules.

What Training Does OSHA Require?

The Department of Labor’s regulations contained in 29 CFR 1910 and 29 CFR 1926 give employers numerous “accident prevention responsibilities.” These responsibilities specifically include the duty to train each “affected employee” in the manner the standards require. The regulations specifically require training for employees on topics including scaffolding, fall protection, steel erection, stairways and ladders, and cranes. Both federal and state courts interpret OSHA training requirements; state courts interpret them in states with their own laws but look to federal decisions for guidance.

Court decisions indicate that training requirements are interpreted broadly. For example, in 2002, the U.S. Court of Appeals for the First Circuit evaluated 29 CFR § 1926.21(b)(2)’s requirement for employers to instruct each employee in the “recognition and avoidance of unsafe conditions.” The case, Modern Continental Const. Co., Inc. v. Occupational Safety and Health Review Commission, involved vertical rigging in a tight working space during an underground project involving submerging a section of highway. The operation resulted in a fatality. The court found that the employers’ duty “is not limited to training for hazards expressly identified by OSHA regulation” and that employers are obligated to instruct their employees in the recognition and avoidance of “those hazards of which a reasonably prudent employer would have been aware.” The court recognized that while the training does not have to eliminate hazards, the training must focus on avoiding and controlling dangerous conditions.

Furthermore, merely holding or sponsoring training courses may not be enough to comply with OSHA; the regulations require employers not only to ensure training but also to ensure that each affected employee has received and understood the training. The District of Columbia Circuit emphasized this requirement in Millard Refrigerated Services, Inc. v. Secretary of Labor. The Court upheld a citation against an Alabama company operating a refrigerated storage facility after an anhydrous ammonia leak even though the employer claimed it didn’t know that its employee didn’t understand the training and therefore wasn’t wearing a respirator.

Decisions like this make it incumbent upon employers to recognize and anticipate hazards and ensure that employees have the proper education and quality training to handle them.

Penalties for Training Violations

Employers’ duty to train is worded as a duty to its individual employees: “The employer must train each affected employee in the manner required by the standard, and each failure to train an employee may be considered a separate violation” [29 CFR 1926.20(f)(2)]. The statute and regulations do not explicitly state the penalty for failure to give required training; penalties will depend on the facts of each case. OSHA violations generally fall into one of four categories: willful, serious, repeated, or other-than-serious. According to the Department of Labor, the current maximum penalty is $13,260 per serious violation and $132,598 per willful or repeated violation.

Courts have upheld steep penalties for certain training violations, particularly for repeated failure to train employees. For example, in Capeway Roofing Systems, Inc. v. Chao, a roofing contractor was fined $6,000 for failing to train an employee on fall protection. (The Secretary of Labor also assessed other fines against the contractor for failure to comply with rules on fall protection, personal protective equipment, and other regulations.) The court reasoned that the fine for failure to train was appropriate, though relatively high, because it was a third “repeat” violation. Additionally, in some states, certain OSHA violations, especially willful and repeated violations, can subject employers to criminal liability.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

3 Best Practices for Communicating During a Crisis

From jobsite accidents to employee or management misdeeds, no business is immune from crisis situations — including the roofing sector. Contractors, manufacturers, distributors, and stakeholders throughout the supply chain do their best to safeguard against crisis situations and hope such events will not occur. But of course, hope is not a strategy and even the most stringent procedures cannot guarantee a crisis will not damage a business’s operations or its reputation.

As with many aspects of managing a business, advance consideration and planning can help minimize the consequences of a crisis situation. Have you asked yourself, “What would I do if a crisis situation threatened my business and the media/social media were at my door?”

A good place to start is by understanding not all crisis situations are the same. Most crises fall into one of two categories: “sudden” or “smoldering.” As the name implies, a sudden crisis arises without warning. Industrial accidents, terrorism, workplace violence and acts of God are all examples of sudden crisis situations. There is little time to prepare in these events and they are more likely to generate the public’s sympathy. In contrast, smoldering crisis events generally emerge over time and present problems not generally known that could generate negative public sentiment if they become public. Examples of smoldering crisis situations include business concerns such as audit findings, drug use by an employee, board mismanagement or a potential regulatory violation. A smoldering crisis may rapidly evolve into a sudden crisis if the news becomes public on the news or social media. As opposed to sudden crises, smoldering crisis events are rarely viewed positively.

Three Keys to Crisis Communication

Regardless of whether a crisis is sudden or smoldering, communication is imperative. A crisis communications plan can help manage either type of crisis. The plan should outline a central spokesperson to deliver all messages and include specific processes for who within the organization to contact in the event a team member is contacted by the media. While the details of a crisis management plan are beyond the scope of this column, every crisis management plan requires communication. When crafting crisis communications, three “best practices” can be applied to most situations. These practices are:

1. Tell the truth. Rarely are all of the facts readily available as a crisis situation unfolds. Yet members of the media are trained to “demand the facts” as news is still breaking. Obviously, trade secrets, confidentiality agreements and legal issues typically limit what can be disclosed. And the reality is, many times an organization simply does not know all of the details surrounding an unfortunate event. As such, it can be tempting to refrain from making any statement during a crisis situation or uttering the words “no comment.” But evasiveness naturally breeds suspicion. While organizations should never speculate during a crisis, they can share some truths about what they are doing.

A good technique to use in these situation is the “why plus what” approach. For example, “While not all of the facts are clear based on the investigation underway at the site of the accident, we are cooperating with first responders and posting updates on our website.”

The “why plus what” approach is a very useful technique for communicating without speculating or refraining from comment. Using this approach, spokespersons explain why they cannot elaborate and follow up with what they can share right now. For example: “While I can’t speculate about the root cause as research is still underway, what I can tell you is (approved statement).” A classic example of this technique used by reporters covering unfolding stories is, “While the details are still emerging, what we do know is ¼”

2. Tell it fast and with empathy. Not only is it important to tell the truth (what you can tell) quickly, but it is important to be prompt in response and empathetic to those affected by the situation. History provides some unfortunate examples of the damage a company can suffer from delaying its response, or not responding empathetically. The 1989 Exxon Valdez oil disaster in Alaska is a good example of the damage that can arise when timeliness and empathy are lacking. The company waited a full week to address the media following the oil spill. When the executive did speak in a TV interview, he delivered a strong impression that he didn’t really care about the environmental impact of the disaster, committing a huge PR cardinal sin — lack of empathy.

More than 20 years later, after another oil disaster, another oil executive committed a crucial PR blunder. (Google “Tony Hayward get my life back.”) BP former CEO Tony Hayward conducted a number of high-quality media interviews before complaining halfway through a conversation with a reporter, “There’s no one who wants this thing over more than I do. I’d like my life back.” His comment demonstrated a lack of sympathy for the many lives lost and the hundreds of jobs lost due to the incident’s aftermath throughout the affected area. Unlike the Exxon leader’s interview, BP’s situation unfolded in the social media era, amplifying the damage of the negative PR as the unfortunate interview went viral.

In any crisis situation, it is imperative for an organization’s leadership to put themselves in the shoes of those affected. This means thinking like a customer — and just as important talking like a customer — personally affected by the situation. Leaders should acknowledge the affected parties’ fears and frustrations. In stark contrast to the corporate speak of a prepared statement, empathy acknowledges that the speaker feels and shares the customer’s pain. Effective crisis messages project empathy and concern while explaining clearly and succinctly what can be shared. The best examples also provide perspective by framing the issue in context. For example, “Each year, our operations produce XX metric tons of product without incident.”

3. Tell your employees first. Despite all the efforts companies invest in developing messages for their website and official statements, a company’s people are usually the most sought-after and trusted source of information. Thus, in crisis situations, it is a company’s people who will receive questions from customers, friends and family about what’s “really” taking place. Employees must be a key audience in any crisis management plan. The plan should educate employees on the issue and provide clear information on how to direct inquiries to the appropriate spokesperson.

Whether it’s a sudden or smoldering crisis, the crisis communications best practices outlined above coupled with a crisis management plan can help members of the roofing community navigate the challenge.

About the author: Susan Miller is director of public relations at 5MetaCom, a marketing agency for companies selling technical and scientific products, including building products.

Contracts Can Provide Protection From Escalating Prices

If you work in the construction industry and you aren’t familiar with the impact of price escalation, chances are you are about to learn.

It’s hard to make sense of the so-called “trade war” between the United States and China, and the economic forces in play are complex. But in essence, reports are that the events of past months are continuing to impact building costs in the United States.

President Trump and his administration have imposed tariff increases on certain Chinese goods in a claimed effort to boost the United States’ economy. As several news outlets have reported, Trump started with a 10 percent increase on certain Chinese products; then on May 10, he announced an increase from 10 percent to 25 percent on products like electronics, clothing, and seafood. A May 14 Los Angeles Times story reported that the tariffs had already added $1 billion – a number that could increase to $2.5 billion – to the annual cost of housing construction due to price increases in Chinese granite, cement, vinyl floor coverings, waferboard, tile, and stainless steel. Some roofing materials, like aluminum, are projected to cost more in the near future, too. (See, for example, BBC News’ May 10 article “Trade wars, Trump tariffs, and protectionism explained.”)

The Los Angeles Times’ prediction was that cost increases would be borne by American consumers investing in housing and construction. But the only thing that truly allocates risk of price increases will be contract terms.

And this gets us back to why we care about material price escalation and how players in the construction industry can assert some control over what are, at their core, factors beyond their control.

None of us can control what President Trump says, does, or tweets, or what China does in response. But if parties think about these issues before entering into construction contracts, they can at least know who will bear the risk of these types of increases and try to prepare accordingly. Although factors like federal economic policy and market forces can impact material prices, who bears the cost of these increases in a commercial setting is solely dependent on the parties’ contract terms. 

Assessing Risk in Pre-Existing Contracts for a Fixed Price

If standard-form construction agreements, like AIA or ConsensusDocs contracts, are a guide, then contractors and subcontractors will probably bear the risk of material price increases in contracts to which they are already a party, assuming they are contracts for a fixed sum or guaranteed maximum price. (Of course, cost-plus agreements will give contractors much more potential to recover for price increases.) Although price escalation can be addressed in provisions on contingencies — percentages of the contract value set aside for unpredictable changes in the work — unless the agreement specifically mentions price increases or escalation, contractors probably are not entitled to an increase in a fixed contract sum due to price escalation.

To understand the legal significance of a price escalation claim, it is important to understand the distinction between changes in scope of work and changes in price. Nearly all standard-form construction agreements provide for how “changes in the work” will be handled. For example, AIA A201 (General Conditions of the Contract for Construction) provides in §7.3.1 that “the Owner may … without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions, or other revisions, the Contract Sum and Contract Time being adjusted accordingly.” However, because per §1.1.3 the term “Work” includes “all … labor, materials, equipment, and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations,” contractors will not be entitled to an increase in the contract sum unless there is a change in the scope of the work or materials themselves.

Addressing Price Escalation in Future Contracts

Because price escalation claims don’t fit neatly into most standard provisions on change orders or equitable adjustments, parties who want to reduce their risk with respect to material price increases should explicitly address the issue when negotiating contracts. Contractors can do this by considering cost-plus contracts, inserting a price escalation clause into fixed-price agreements, or simply increasing the contract sum in an attempt to protect themselves in the event of price increases.

Cost-plus contracts could be a useful tool for contractors hoping to shift away, or more evenly distribute, the risk of higher material costs. While most cost-plus agreements will still contain a guaranteed maximum price that potentially won’t cover builders for all price increases, these arrangements still probably give contractors greater ability to pass cost increases to owners than fixed-price agreements. Because these contracts charge owners for the cost of labor and materials plus a fee, owners can also benefit from any decreases in material costs. Negotiating a guaranteed maximum price may also allay owners’ concerns about rising costs.

In fixed-price agreements, parties who want to address material cost issues should likely insert clauses that either condition the contract sum on material costs existing at the time of the contract, or clauses explicitly entitling them to make a claim for additional payment in the event of price increases. Such provisions might be more appealing to owners if they similarly entitle owners to the right to reduce the contract amount in the event of material price decreases.

If price escalation clauses are based upon time, they should specifically state the date through which the contract sum can be guaranteed. They should then specify how a contract increase, if any, should be imposed so that the parties will have a clear understanding of how a new price will be calculated. If provisions are contingent not on time but on the amount of the price increase, they should address how much of a cost increase is actionable — for example, a clause could apply to material cost increases of 3 percent and above — and should explicitly state what documentation is required in order for the contractor to make a claim for increases. In anticipation of making such a claim, contractors should consider preserving documentation of prices as they exist at the time of bid so that they can prove that price increases in fact occurred later when they are asserting a claim for price escalation. With both types of clauses, providing cost savings for the owner in the event of a price decrease, or placing some limit on the ability to claim an increase, could be crucial to making a deal with owners.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

How to Reduce Labor Expense Without Sacrificing Quality

Photos: CertainTeed

Labor shortages have been a longstanding issue in the construction industry. With not as many skilled tradespeople as needed to do the work, roofing contractors have to work smart to stay competitive and maintain profits. Roofing manufacturers have adapted to the labor shortage by developing labor-saving products that are easier to master and install.

To help commercial roofing contractors make more informed product decisions, CertainTeed commissioned Trinity|ERD, a well-recognized building envelope consulting firm, to conduct “Factors Impacting Low-Slope Roofing: A National Labor Study,” which quantifies the labor differences between self-adhered modified bitumen, traditional bituminous systems and single-ply roof coverings. This independent, five-year low-slope labor study analyzed the installation of 45 different roofs with six popular roof covers in 18 different configurations in various regions of the country, isolating and timing product and task-level installation data, and observing where efficiencies or inefficiencies occurred. The study also combined observed labor data with national average labor and material costs to allow for a comparison of installed costs across 12 popular modified bitumen and singe-ply roof assemblies.

While the study confirms that product selection impacts labor efficiency and ultimately earnings, a contractor’s ability to turn a profit is multifaceted. In addition to product labor analysis, the study produced a wealth of information on how commercial contractors can improve their efficiency across any roof covering by optimizing their crew management, project management and estimating accuracy.

Here are some observations from the study that can improve the productivity of commercial roofing contractors, regardless of product selection:

Roofing manufacturers have adapted to the labor shortage by developing labor-saving products, including self-adhered modified bitumen roofing. Photos: CertainTeed

· Estimate for Temperature and Environment. Environmental factors associated with a project should always be factored into estimates. Productivity can slow down in both high and low temperatures. Cold weather often creates more work due to heating adhesives being required, longer periods for relaxing rolls, longer welding times of membranes (APP, SBS, TPO, PVC) and the need for cumbersome cold-weather clothing. Heat can often cause fatigue and the need to hydrate often, resulting in more break periods. Also, projects taking place at night are typically slower than daytime projects, as the area of work is constrained to lighted areas and tools are more difficult to find in the darkness.

· Improve Crew Communication. Roof cover installation is optimal when the installing crew works as a coordinated team. Crews that spoke multiple languages or crews with limited understanding of one another tend to have longer installation times.

· Specialize Crew Tasks. Productivity increased when multiple crew members carried out narrowly defined work activities to complete a task as a team, as opposed to a single man completing the full breadth of the task alone. For example, when hand-held screw guns were used, laborers that staged and placed screws/plates as one phase of work — and either dropped back to install or were followed by another crew member to install — were more efficient than a single individual carrying pouches of screws and plates.

· Stage Products With Foresight. Material movement and staging was a critical component in speed at application. Projects that were staged with easy material access for installers resulted in faster installations. Crews that relied on installers to stage their own materials required fewer personnel on the roof, but at the cost of slower overall installation times.

· Employ Strong Management. Rooftop supervision and direction – including effective management of roof loading, managing break times, staging materials for easy access, prefabrication (such as combining screws and plates) and staging materials which have already acclimated to the temperature/environment – played a pivotal role in faster installation times.

Environmental factors associated with a project should always be taken into account during extimates. Extreme weather can slow down productivity. Photos: CertainTeed

· Implement Quality Control. Across the country, the labor study observed a variety of quality control methods ranging from no in-application quality controls to extensive quality controls conducted by both foremen and in-house, third-party quality managers. A lack of in-application quality control reduces upfront labor, but increases the likelihood that a crew will need to return to correct issues found post-inspection. As with many things, an ounce of prevention is worth a pound of cure.

· Use and Manage Tools Wisely. The efficient use of tools and tool accessories has a measurable impact on installation times. For example, the installation of a bituminous cap membrane with a multi-torch cart (a.k.a. “dragon wagon”) was completed in 86 percent of the time required in comparison to a hand-held torch. Automated screw and plate installers provide a measurable time advantage; however, a knowledgeable mechanic or crew member who has rooftop access to spare parts is crucial in case the machine jams or malfunctions. Poorly maintained automatic welders (single-ply TPO/PVC) with inconsistent power and/or damaged parts (nozzles and silicone wheels) slow down productivity and hamper the quality of the application. Blowers used on roofs to clean surfaces and move large sections of membrane on a cushion of air were effective and increased productivity in multiple applications.

Increasing Efficiency

The ability of a crew to quickly and profitably install a low-slope roof system cannot be isolated to the specific type of roof cover being installed. A roofing crew’s efficiency is also impacted by climate, project parameters, tools, safety requirements, quality requirements and crew management. Roofing estimators and managers should clearly identify the factors impacting their crews, optimize productivity whenever possible and adjust their estimates accordingly. While project parameters and management apply a high degree of variability to every job, proper training, project management and crew management can significantly increase efficiency and help contractors extract the most profit from projects.

Understanding the many factors that impact crew efficiency can help contractors produce better results in less time. The labor study can help roofing contractors better understand labor efficiencies by product, more accurately estimate the labor associated with certain tasks and improve installation efficiency across all roof covering types.

For the full 20-page CertainTeed/Trinity|ERD study, including detailed analysis of labor data and installed cost for various roof assemblies, visit www.certainteed.com/laborstudy.

About the author: Abby Feinstein is Product Manager, Commercial Roofing for CertainTeed Corporation. For more information, visit www.certainteed.com.

Business Succession Planning Tips for Roofers

Business succession isn’t as simple as choosing someone who will run your roofing company after you decide to hang your contracting hat up — or an unfortunate event cuts your time as the owner of your business short. Business succession requires you to put into place a plan that will ensure the success of your company after you’ve moved on. Business succession planning is time consuming, complicated, and dependent upon your business’ structure. It is therefore wise to begin thinking of what you want to do with your business long before you will need your plan.

One of the more obvious questions that need to be answered in business succession planning in the roofing industry is who will be the successor. Do you plan on training an employee to take over the company? Is it best to keep the company in the family and to name a family member as the successor? Are there multiple owners and succession will remain within the company? The answer to this question will vary from roofing company to roofing company. For some companies, they may already have a family member who is an employee, making the decision relatively simple. Some newer companies may not have the option to appoint a family member as a successor because the family member is too young or not willing.

Business succession planning is complex, but it can still be broken down into manageable segments to help owners better understand the process. Some of the common components of business succession planning include: buy-sell agreements; gifting; merger and acquisition transactions (M&A); employee stock option plans; key-man life insurance; and management buyouts. A basic understanding of these components will give roofing contractors a good place to begin their business succession planning.

Buy-Sell Agreements

Buy-sell agreements are especially useful in a multi-partner business to ensure there is an agreed upon plan in the event a partner dies or there is a dispute. Also known as buyout agreements, these types of agreements have control over when someone can sell their interest in a business, who can buy that interest, and the amount which is paid for said interest. What triggers a buy-sell agreement varies, but typically an event such as retirement, bankruptcy, disability, or death will be the triggering event that creates an automatic offer to the current owners of the company to buyout the departing members’ interest in the company.

A good example of a buy-sell agreement is the cross-purchase agreement where owners typically purchase insurance policies on one another. Different triggering events (death, incapacitation, age, or something similar) cause the Agreement to go into effect. In a hypothetical cross-purchase agreement arrangement, Owner B, who owns 30 percent of the business, would carry insurance equal to 70 percent of the business value. This allows the remaining partners to continue business as usual without the need to fill the vacant position within the company’s ownership.

Gifting (Family Succession)

Before the recent tax overhaul, if your estate was above the $5.6 million ($11.2 million for couples) estate and gift tax exclusion, then gifting was an incredibly powerful tool. However, in 2018 the IRS announced that the 2018 federal estate and gift tax limit has been elevated to $11,180,000 for individuals and $22,360,000 for couples, which makes gifting helpful for a smaller subset of business owners. It should be noted that there are some 15 states that impose estate taxes at a lower level than the federal government, and a prudent business owner should consult a professional to see if his or her state enforces their taxes in such a manner.

Depending upon the vehicle chosen and size of your company, taxes will vary from unaffordable to little or nothing. If family succession is the vehicle chosen, states have varying amounts of money which can be gifted without being subject to a gift tax. Certain trusts also allow you as a business owner to transfer in the neighborhood of $10 million without being subject to a gift tax. The amount of taxes due when succession takes place will depend on you and your company’s finances and your state’s tax laws.

Merger and Acquisition Transaction

A merger or acquisition transaction with a competitor or company or individual is another method of maximizing the value of your company and retirement as you look to transition away from your business. Oftentimes you won’t know if the person that you are handing control of the roofing company over to is going to maximize the value of the company once you leave or if they’re going to run the business into the ground and leave your former employees out of a job in the process. By merging with or selling to a larger, proven roofing company with similar culture to your current business, an owner can assure that his or her business will continue to thrive, albeit with a different name, and continue to serve both employees and clients suitably.

Some professional business owners often encounter issues that force them to make the tough decision to sell his or her roofing company and decide that the time has come to pursue other ventures. A sale would allow him or her the freedom (and cash) to pursue other business opportunities, and if he or she so chooses, he or she could still retain a minority ownership in the business so that if the business measures fail, he or she still has a profitable asset in the form of his or her minority position.

Employee Stock Option Plans

An employee stock option plan is also an excellent method for monetizing your business outside of its traditional cash flow and often gives you time to transition out of the business over the course of several years. An employee stock option plan, also known as an ESOP, is a tool that business owners can create to incentivize current employees, all while planning for a smooth transition once the owner exits the business. In its most basic form, an owner seeking to transition out of his ownership role sells the company to a trust (the ESOP), designating key employees (hard-working managers, promising family members, etc.) as beneficiaries, and receives full payment for the business as a loan from a lender (who now controls the ESOP). Over time, the company can make tax-deductible payments to the principal on the loan, which slowly releases equity control from the ESOP to the employees who are listed as beneficiaries.

Management Buyout

A management buyout occurs when the management group of a business purchases the roofing company directly from the owner or parent company. The management group typically acquires a loan for the full value of the company, which compensates the transitioning owner for full value of the company without having to liquidate the company’s assets. The typical management buyout scenario occurs when an owner is ready to transition control to a group of committed managers, but also wants to ensure that he or she can provide for a spouse or child upon sale of the company. These acquisitions are particularly intriguing for many business owners, as they can be assured that those taking over the company have knowledge of the business and share the departing owner’s vision.

Key-Man Life Insurance

Finally, company paid key-man life insurance can be a good tool to ensure that the company can afford to redeem your share of the company upon your death. This provides cash to your heirs while helping you sleep better at night. Key man life insurance operates in a similar fashion to your run-of-the-mill life insurance policies. The company takes out a life insurance policy on a key member of the business (often an owner) and names itself as the beneficiary. The company pays the premiums on the policy, and when the owner dies, the company receives the applicable monetary disbursement. In a succession-planning context, you often see key-man life insurance policies utilized in situations where an owner is quickly aging or in poor health and wants to ensure that his family is financially stable upon his or her death, but does not necessarily want his family to take control of the company’s operations upon the owner’s death. When packaged with a management buyout, key man life insurance gives the owner the ability to do just that. It ensures a smooth transfer of control to a group of trusted employees and guaranteed compensation for the family upon the owner’s death.

As it should now be clear, business succession is necessary, time consuming, and requires a number of difficult questions to be made. If you do not have a business succession plan in effect, or you’ve come to the realization that your business succession plan isn’t as reliable as you believed, the time is now to start planning for the future of your roofing company.

About the Author: David Kronenfeld is an attorney at Cotney Construction Law who focuses his practice on a broad range of transactional matters. Cotney Construction Law is an advocate for the roofing industry and serves as General Counsel for FRSA, RT3, NWIR, TARC, TRI, WSRCA and several other industry associations. For more information, visit www.cotneycl.com.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. Regulations and laws may vary depending on your location. Consult with a licensed attorney in your area if you wish to obtain legal advice and/or counsel for a particular legal issue.