Psychology-Based Strategies Can Help You Close More Deals

Getting potential customers to choose your roofing company rather than the competition comes down to more than just a name or reputation. Because consumer buying decisions are based in human psychology and emotion, you need to know how the brain interprets information so you can adjust your sales strategy accordingly.

To help close your next big roofing job, try incorporating some of the following psychology-based strategies into your advertising and sales pitch.

Use the Framing Effect

Consumers hate to miss out on opportunities.

For example, consider these two statements:

  1. Book an appointment online and receive a discount!
  2. Book an appointment online before August 1 and receive 10 percent off a new roof installation!

Both offer essentially the same proposition — book online to save some money. Put the first one on your website and you would get a few responses. Use the second appeal, however, and you could expect a considerably higher conversion rate.

Adding a deadline triggers a psychological technique known as the framing effect in your customers’ minds.

According to the framing effect, people react differently based on how options are presented. The thought of being left out — a condition known as loss aversion, or FOMO (fear of missing out) — causes a stronger, more immediate response than a simple discount or reward does.

Marketingland.com used college students to document how the framing effect works. Researchers sent emails reminding Ph.D. students to register for an economics conference. Some emails offered a discount for registering early, others mentioned a penalty for registering late. The penalty email had a much bigger impact, spurring 93 percent of the recipients to sign up early. By contrast, only 67 percent registered early when presented with the discount option.

Understanding the framing effect helps you position your value more effectively to customers. Combine that knowledge with some local market research and you have a good chance of outmaneuvering your competitors.

You Get What You Pay For

In addition to urgency and gain, consumers generally feel better when paying more for things that have tangible value versus paying less on a purchase with suspect quality or little value. To most consumers, price is a reflection of the quality of your work. Furthermore, your willingness to price match is a reflection of how much value they should place in you.

Consider the psychology of “we match all competitive quotes,” “lowest prices in town” or “free roof inspections.” You have set an expectation that your time has no value and your brand is built around a willingness to be cheap. When you take the time to defend your price with a well-developed sales pitch and refuse to compromise on quality, your customer will view your bid as a benchmark for all the rest.

Just keep in mind that you won’t win them all — because there will always be a segment of the market looking for the lowest cost and a company willing to offer it.

Avoid Analysis Paralysis

Always give customers fewer options. This strategy may sound counterintuitive, but if you give consumers too many alternatives, they are likely to avoid choosing any — a result known as “analysis paralysis.”

Instead of overwhelming buyers with every shingle type and color, group your products into a handful of categories from which they can choose, or perform a needs analysis to condition the sale before presenting product options.

Provide Social Proof

People like to fit in with the crowd and follow their peers. If one person approves of your services and products, his/her friends and family are likely to approve too. It’s a technique called social proof.

You can use digital media platforms to provide social proof and showcase how your current customers are benefitting from your roofing expertise.

For instance, always ask recent customers to write reviews on Facebook, Google and the Better Business Bureau (BBB). And don’t forget Yelp and other review sites. You can also encourage your customers to share your social content on their own Facebook pages, which they are more likely to do if you post transformative before-and-after photos and/or videos of their home.

Apply the Theory of Reciprocity

Giving people something helps create a bond between them and your company — even if it’s something as simple as a “like” on Facebook, a helpful video you share or an EagleView Report showing aerial images of their home.

Creating a feeling of loyalty can inspire customers to remember you when they are ready to tackle their next big project.

Let Your Body Talk

When meeting with prospects in person, use nonverbal cues in your body language to help make a good first impression and establish trust.

For instance:

  • Open your arms. Crossing your arms signals a closed-off or defensive attitude. Keeping your arms open and relaxed shows that you’re fully involved and interested in the discussion.
  • Lean forward. Leaning forward and in toward customers illustrates that you’re engaged in the conversation and paying attention.
  • Mirror. Try to match and mirror the body language of prospective buyers. Reflecting back the same posture, gestures and movements as your customers helps them to relax and feel comfortable during the sales pitch.

Tap Into The Reptilian Brain

Consumers continuously evaluate whether products and services are worth the cost. This decision-making process takes place in the reptilian brain — the oldest evolutionary layer of the brain. The reptilian brain is made up of the brain stem and cerebellum, which not only control the body’s vital functions, such as breathing and heart rate, but also instinctual actions and decisions.

Grab the attention of a customer’s reptilian brain with your company’s website or advertising and you’ll have a much better chance of guiding them toward a sale. This strategy is known as neuromarketing.

For example, the reptilian brain easily understands contrast. Show customers why your business is better than your competitor’s and why what you have to say is important. To stand out, use phrases such as “We are the only …” and “We are the best.”

The reptilian brain is geared to respond to visuals, so images can be far more persuasive than words. Be creative in your communications. Use short, simple sentences and include images that demonstrate the value of your claims. Incorporate customer testimonials as proof and share quick demonstrations of your products that will grab a consumer’s attention.

Incorporating psychology into your sales pitch and advertising is not about trying to trick customers. It’s about understanding how people’s brains interpret information so you can make decisions and focus your messaging accordingly.

Using these strategies to understand people’s minds can help you be more confident in your dealings with prospective customers and ultimately help you land more jobs.

Expert Advice on Exit, Succession and Contingency Planning

Images: Beacon Exit Planning

When the time comes to retire from your roofing business, will you have all of the proper financial and legal arrangements in place to avoid being clobbered by taxes or ending up in costly litigation?

Planning for your exit or succession requires a series of complex strategies that can take many years, so don’t waste any time getting started! Sit down with a knowledgeable, professional advisor who can guide you through the process of preserving your business legacy and securing your financial future.

Business-planning experts Kevin Kennedy and Joe Bazzano explain why roofing contractors need an exit or succession plan, common mistakes made during the process and best strategies for success. They also stress the importance of a contingency plan, which covers you and your business in case of life-changing events such as injury, illness or death.

Kennedy, CEO of Beacon Exit Planning, specializes in exit and succession planning for private business owners. He has firsthand experience with the challenges that come with selling a business after he and his two co-owners sold their 63-year-old roofing company to the business’ fourth-generation team. Making a few financial mistakes during the sale, and realizing he didn’t have a solid understanding of the technical aspects of exit planning, Kennedy put himself through two years of school to learn everything he could. Now he helps others avoid the same mistakes.

Bazzano, COO at Beacon, is a certified public accountant, certified valuation analyst and certified business exit consultant. His areas of expertise include financial reporting, consulting, business valuations, mergers and acquisitions, exit strategies, and tax planning and compliance for individuals and businesses. Bazzano shows business owners how to increase the value of their companies and save on taxes.

Exit Planning

An exit plan helps you control and visualize the process of transferring and monetizing your business, while also gaining a better understanding of all the financial aspects involved in the transaction.

In most situations, business owners have 70 percent of their wealth tied up in their illiquid business, which means the company and its assets cannot easily be converted into cash.

Images: Beacon Exit Planning

If you’re fortunate enough to sell your roofing business, you could pay up to 60 percent or more in taxes, depending on which state you live in. And if you can’t sell your company, you will essentially have to liquidate it, which could leave you with only 10 percent of your wealth.

During the exit-planning process, Bazzano says they look at the three basic circles of a business owner’s life: business planning, personal planning and financial planning.

The business-planning circle is about protecting the business — determining valuation, planning for succession, evaluating tax ramifications and managing buy/sell risk. The personal-planning circle involves the emotional side of the business and considers the owner’s emotional attachment to the business, whether he or she is ready to leave it and if family members are involved. The financial-planning circle includes identifying the liquid assets business owners need to survive and maintain their lifestyle.

Contractors have several options for exiting their business, including:

  • Selling to an outsider (e.g., consolidator, investor)
  • Selling to employees/ESOP (employee stock ownership plan)
  • Selling to managers (manager buyout)
  • Selling to family
  • Gifting the company

Kennedy says the most common type of sale for a roofing business is a manager buyout, which can take from eight to 12 years because the company pays for everything.

“They don’t go to the bank and get the big loan,” Kennedy says. “The company can’t afford to do that. What they do is take their profits, and the profits pay for the owner’s stock, which is then given to the managers.”

Common mistakes during the exit-planning process include issues with entity structure, taxes, not planning for catastrophic events, being underfunded with buy/sell agreements, and inaccurate valuations.

Bazzano says lessening your dependency on the business as an income source after you leave is a particularly important strategy to keep in mind.

“It doesn’t always happen because business owners grow and reinvest in their business,” he explains. “But there’s nothing worse than being 65 years old and realizing that 92 percent of your wealth is in this business. Basically, you’ve reinvested everything and you’re completely dependent on monetizing this business as you try to retire. That’s pretty risky, as opposed to somebody who’s got maybe 20, 30 or maybe even 50 percent of their net worth in the business. So taking some chips off the table really helps.”

Having a good understanding of your options early on can help you generate more value in your company and lessen your financial risk down the road.

At Beacon Exit Planning, Kennedy and Bazzano use a proprietary process — known as DAD — that covers three phases of actions needed for a successful exit plan:

  • Discovery. Interviewing owners to get an understanding of their business, personal and financial goals.
  • Analysis.Looking at underlying documents such as wills, trusts, buy/sell agreements, financial statements, tax returns and entity formation, and evaluating whether they support the owners’ intentions and goals.
  • Design. Putting together a blueprint to solidify goals, going over findings from the analysis phase and presenting alternatives owners can use to exit their business.

The DAD plan can range from 50 to 120 pages. “It’s like being fed with a fire hose,” Kennedy says. “But we always tell our clients that we when we deliver the plan, it’s not the end — it’s the beginning.”

Succession Planning

In contrast, a succession plan prepares your company to succeed without you by moving your managers into leadership roles, then into ownership and eventually establishes the new CEO.

Exit planning focuses on replacing your wealth, but succession planning focuses on replacing yourself, Kennedy explains.

“In a broader sense, it’s about building value — creating a culture of continuous improvement that focuses on educating the next generation of owners so they can protect the future of the company,” he says.

Fewer than 30 percent of all private companies ever transfer to the second generation, according to Kennedy. This means that 70 percent fail. The statistics are even worse for transferring from the second generation to the third generation, which has a 90 percent fail rate. The odds that company founders will transfer their business to their grandchildren are less than 3 percent.

When Kennedy and his partners sold their roofing company via a management buyout, the process took seven years and $250,000.

“Our company overspent millions of dollars in taxes that were unnecessary because of the cookie-cutter advice [we received] from our advisors,” he explains. “They weren’t specialists. It wasn’t a coordinated plan, they didn’t have the right advice, and they didn’t understand the laws, so we were put in a taxed position.”

Succession plans can take anywhere from three to 10 years, depending on the maturity of the management and how much the owner is working. The process requires more time than exit planning because of the learning curve required for new managers.

“At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue,” according to the Small Business Administration (SBA). “The primary cause for failure is the lack of planning.”

Some 75 percent of a typical business owner’s net worth is tied up in the company, Kennedy adds, citing data from the SBA, and only 22 percent of owners report planning for their succession or exit.

“Wise people plan early and implement slowly,” he says. “I like to see people going through the process of visualizing their financial future at least 15 years out. That would be ideal because it may take three or four years to set the plan in motion.”

Succession planning may be complicated more when family is involved. Children or other family members who think they’re entitled to the company can be poisonous to the process, especially when owners don’t hold them to the same standards and accountability as other employees.

Another issue business owners face is that they can’t see their financial future and are dependent on their business for their day-to-day lives, Kennedy says. “If they don’t relinquish what duties they have so they can build new leadership, they tend to get stuck in their businesses.”

Bazzano shares three important steps for a successful succession:

  1. Have a good financial plan so you can understand the future income needs for the company.
  2. Get a business appraisal so you understand if you have a value gap. In other words, if you have not saved enough money for retirement, the shortfall is going to come from the sale of the business.
  3. Put a good management team in place so it can support you in generating the income the business will need to pay you out. This step typically takes the longest — anywhere from two to 10 years.

“The great news about succession is it always adds to the bottom line, not just the financial value,” Kennedy says. “The key is to start early because succession takes time. It’s a complex process. The exit plan will get you started and the succession plan will bring everything together to allow a graceful exit from your business and protect your wealth.”

Contingency Planning

Regardless of your exit strategy, your plan should also include preparing for the unexpected.

What would happen to your business if you were diagnosed with a life-threatening disease or were critically injured in an accident — or worse? Having a contingency plan for “just in case” can help to cement the future of those you love.

One of the most important parts of a contingency plan is a buy/sell agreement. This document governs what will happen if one of a company’s multiple owners and/or shareholders dies or experiences divorce, disability or voluntary/involuntary departure.

“A buy/sell agreement should have the appropriate documentation and appropriate wording to support the owner’s intentions,” Bazzano says.

This type of agreement allows co-owners to decide who else can buy into the company and how the process will work. It also provides an opportunity for owners to discuss potential scenarios ahead of time to avoid ending up in pricey litigation down the road.

Despite the importance of creating a buy-sell agreement, more than 70 percent of business owners do not have documented succession plans for senior roles, according to the 2014-2015 U.S. Family Business Survey conducted by the consulting firm PwC.

Contingency plans and buy/sell agreements are living, breathing documents and should be started as soon as the business is established, according to Bazzano. They should also be reviewed regularly to account for changes in the company’s structure or value, or an owner’s intentions.

The most difficult event to plan for, of course, is death. The loss not only puts an emotional burden on a family, it can also create a financial one. Without a proper contingency plan in place, a family could lose its income stream and experience financial turmoil.

One of the most common mistakes Kennedy and Bazzano see in contingency plans is improperly structured documents. For instance, the owner of a roofing business may think everything is in place because he/she has a will, trust and insurance — yet each document was set up by different people, none of whom talked to each other during the process.

Another issue in contingency plans is that companies are underfunded with their buy/sell agreements and insurance, Bazzano says, which often includes issues with valuation that prevent a widow from receiving the full worth of the company.

Business owners can also fail to understand how to manage their risk. Bazzano says business owners need to do a better job of protecting their wealth and the companies themselves, which involves understanding insurance requirements and asset protection, and knowing how to structure their estate and the business to limit exposure to frivolous lawsuits and creditors.

Planning to leave your roofing company — whether to retire, pursue another interest or because something unexpected happens — can be an overwhelming and confusing process. However, enlisting the services of an exit-planning professional can help you avoid big headaches and save you countless dollars in taxes.

To find a consultant you can trust, ask questions such as:

  • What is your training in exit planning?
  • How many exit plans have you delivered?
  • How much have you saved your customers in taxes?
  • Do you have any referrals from existing clients?

To learn more about Kevin Kennedy and Joe Bazzano, and for access to more in-depth information about the exit planning process, visit www.BeaconExitPlanning.com.

 

Tax Cuts and Jobs Act a Big Victory for Roofing

Recent legislation is expected to provide a boost to the commercial roofing industry. A commercial roofing application of Lapolla FOAM-LOK spray foam roofing is shown here. Photo: Icynene-Lapolla

2017 proved a significant year for the roofing industry. Not only was optimism high and demand still on the uptick in both the new construction and re-roofing marketplaces, but when The Tax Cuts and Jobs Act of 2017 passed in December last year, it marked a huge victory for those involved in roofing. The tax reform essentially opened the door for a series of tax related benefits likely to boost business in 2018 and beyond.

There are a few key areas of the tax reform applicable to roofing entities. One of the key sections — IRC Sec. 179 expensing provision (deduction) — intends primarily to benefit small businesses who can purchase equipment, then write-off the amount of those purchases during the same calendar year. For 2018, qualifying property purchases include most business equipment such as computers, certain vehicle types, virtually all construction equipment and machinery.

“For contractors in our sector specifically, this portion of the reform is key, as it allows them to write off the equipment and vehicles they purchase specific to transporting and installing spray foam roofing on the jobsite,” says Kurt Riesenberg, executive director of the Spray Polyurethane Foam Alliance (SPFA). “Some of our members have been quite pleased to learn about these tax changes, and although we worked hard with other groups to make them happen they still seem like one of the best kept secrets. We need to change that so all of our members know about them.”

Perhaps one of the most notable aspects of IRC Sec. 179, however, is that the qualified property listed under it now includes non-residential roofs. Hailed as a huge win, the new limit on the total amount of Sec. 179 property that a business can purchase each year before being totally phased out is $2.5 million (up from the previous $2 million), and the annual limit for the deduction itself has been raised to $1 million (up from $500,000). A property owner is now able to write off up to $1 million the same year that a commercial roof is purchased. Additionally, the $1 million annual deduction and $2.5 million business investment limit are now permanent and indexed for annual inflation starting in 2019.

“The commercial roof inclusion in the tax reform is likely to spur increased sales and installations of new roofs this year, and we want our members making the most of the opportunity,” adds Riesenberg.

There was one tradeoff made in order to make commercial roofs eligible for Sec. 179 — the elimination of the deduction for the interest on loans to finance the purchase. However, it’s still a significant benefit for contractors able to leverage IRC Sec. 179’s equipment purchase write-off.

Bonus Depreciation Deduction

Another key area of note is IRC Sec. 168(k) — the Bonus Depreciation Deduction — which the act raises to 100 percent for qualifying new and used property acquired, and placed in service, after September 27, 2017 and before January 1, 2023. Property with a depreciable tax life of 20 years or less generally qualifies and includes: machinery and equipment, furniture and fixtures, computers and computer software, and vehicles utilized primarily for business (with a dollar cap on cars and trucks with a loaded vehicle weight of 6,000 pounds or less).

More broadly, the tax rate for C corporations, or the corporate tax rate, was cut through the new reforms to 21 percent (from 35 percent). Also of note to many roofing contractors and contractor firms, pass-through entities organized as S corporations, partnerships, LLCs and sole proprietorships now receive a 20 percent deduction on taxable income up to $157,000 or $315,000 if filing jointly that is phased out at $207,500 or $415,000 respectively.

Many contractors are structured as pass-throughs and pay their business taxes on individual returns, so it also helps that the top individual rate has been lowered from 39 to 37 percent.  However, the rules for pass-throughs are complex and consulting with a tax expert is encouraged.

For contractors that are family businesses, the new tax code doubles the estate tax exemption so that estates of up to $11 million ($22 million for couples) are now exempt from taxation. In addition, the Alternative Minimum Tax (AMT) exemption and phase-out amounts for individuals have been sharply increased.

Finally, in a separate bill, Congress renewed the Residential Energy-Efficiency Tax Credit (IRC Sec. 25C), the Energy Efficient New Home Tax Credit (45L), and the Commercial Building Tax Deduction (179D).  While renewed retroactively only for tax year 2017, the door remains open for these incentives (tax extenders) to be renewed for 2018 and beyond.

“These incentives help, but the tax act’s reforms are a big, long-term win for both the spray polyurethane foam sector and the roofing industry at large,” says Riesenberg. “All indications point to this act giving the roofing industry and its many players a boost in business. It’s business and jobs that drive the economy, and when you add in the resulting benefits direct to our members, this news hits the trifecta for an exciting and optimistic 2018 and beyond.”

You Might Have More Employees Than You Think You Do

If you are a contractor in the construction industry, there is a chance that a person who isn’t on your payroll is legally considered to be your employee.

If you meet the above description and you operate in North Carolina, South Carolina, Virginia, West Virginia, or Maryland, there is a particularly good chance that’s the case.

You might be thinking this is because of employee misclassification — which occurs when laborers are wrongly classified as independent contractors instead of employees. But that isn’t the whole story. Increasingly, unanticipated employer liability occurs not because of employee misclassification, but instead due to joint employment — a related but totally distinct issue.

This is happening because the definition of what constitutes employment, and joint employment particularly, has become increasingly broad in recent years. Many courts expanded the definition in response to stricter guidelines the Department of Labor’s Wage and Hour Division set forth during the Obama presidency. But this is perhaps most apparent in the Southeast, where, in January 2017, the Fourth Circuit Court of Appeals expanded the definition of joint employment in Salinas v. J.I. General Contractors, Inc. The Salinas decision, along with Hall v. DirecTV, a case involving employee misclassification decided the same day, predate the Department of Labor’s June 2017 rollback of the Obama administration’s restrictive guidelines. However, despite any efforts by the Trump administration to curtail the expanding joint employment doctrine, the Salinas and Hall decisions still control in the Fourth Circuit — and case law in other jurisdiction still controls as well. It’s unclear whether a change in the law is in store anytime soon; however, in January, the United States Supreme Court declined to hear DirecTV’s appeal in the Hall case.

The Salinas court found that a general contractor was considered the joint employer of its subcontractor’s employees and therefore that the general contractor was responsible for wage violations under the Fair Labor Standards Act (FLSA). The Salinas decision and the new standard it set for joint employment represent a significant change from the more than 30-year precedent on joint employment. This means contractors — and other entities who could be considered joint employers — need to understand the risks involved in joint employment and try, to the extent possible, to manage that risk.

Defining Joint Employment

So, what is joint employment? It generally occurs in two scenarios: horizontal joint employment and vertical joint employment. Vertical joint employment is the type at issue in Salinas and the type more likely to be applicable in the construction industry. The typical scenario is one where a contractor arranges or contracts with an intermediary employer to provide the contractor with labor in certain scenarios — in essence, the contractor-subcontractor relationship. Vertical joint employment can also arise when a contractor or subcontractor contracts or engages with a staffing company to provide it with laborers for a certain project or merely to carry out certain employer functions, like administering payroll and benefits.

Due to the Salinas decision, the law in the Fourth Circuit (North Carolina, South Carolina, Virginia, West Virginia, or Maryland) is that alleged joint employers must be “completely disassociated” from the intermediary employer. Otherwise, they will be considered joint employers of the intermediary’s employees. The court set forth six factors that determine whether two entities are not completely disassociated. Here are the factors with some analysis of how they could be applied to a general contractor-subcontractor or contractor-staffing firm relationship:

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;”

If a general contractor and subcontractor agree — or if they operate in such a way — that the contractor has the authority to direct the subcontractor’s employees, set their schedules and work assignments, enforce project site rules, and/or supervise their employees, this factor would support a finding of joint employment. Similarly, if a subcontractor contracts with a staffing firm for laborers and the subcontractor has the authority to set workers’ hours and locations, and/or dictate how they perform their work, the subcontractor is probably a joint employer.

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to — directly or indirectly — hire or fire the worker or modify the terms or conditions of the worker’s employment;”

When this factor is applied, any contractor who is authorized to assign a subcontractor’s or staffing firm’s employee to a particular project — or remove the individual from a project site — will likely be considered a joint employer of that individual.

  1. “The degree of permanency and duration of the relationship between the putative joint employers;”

Many general contractors establish long-term working relationships with certain subcontractors and/or staffing agencies and work with the same companies repeatedly on many jobs. These contractors are at risk of being found to be joint employers. Likely at an even higher risk are contractors that have few to no employees on their payroll and instead retain all of their workers through an intermediary, such as a staffing firm. These contractors may believe that using staffing firms reduces or eliminates their liability under federal and state employment laws. While it might allow these companies to delegate administrative functions like administering payroll and benefits, the law in the Fourth Circuit won’t allow them to avoid much liability.

  1. “Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;”

This scenario is perhaps less common than the others but appears to apply when a contractor controls a subsidiary or affiliate. The contractor could be considered the employer of the subsidiary, affiliate, or indirectly owned entity.

  1. “Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another;”

Most general contractors or construction management firms are obligated to control and supervise the project site. This factor, as applied to such firms, would establish them as joint employers of subcontractors’ and staffing firms’ employees.

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work.”

This factor pertains to the above scenario where entities try to delegate certain employer functions to staffing agencies. Virtually every staffer/client agreement is one where the parties “jointly determine” who has what responsibility for these functions. Even if the staffing agency is in charge of screening, payroll, workers’ compensation, and benefits, if the client performs any employer functions — like supervision, hiring, firing, and/or providing instructions, tools, or materials — then the client will likely be seen as a joint employer.

Examine Your Business Model

If a court within the Fourth Circuit is faced with any federal employment issue and a joint employment question exists, it will consider the above factors. Such a court would then likely analyze whether the laborers in question are employees or independent contractors — another, separate test. But the Salinas factors alone are enough to cause concern for most contractors who contract for labor.

Because the above factors apply regardless of the terms of any subcontract or staffing agreement, consulting with counsel about how to better draft those agreements is only one step for contractors who are concerned about expanded liability. They also need to consult with counsel about the way they conduct business and whether it still works in light of the expanded joint employment doctrine.

Otherwise, they should understand that they may have more employees than they realized.

 

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

Recent Changes in Tax Legislation Could Save You or Cost You Beginning in 2018

The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Everyone in business — including roofers — should have at least a passing knowledge of what to expect beginning in tax year 2018. Most of the changes are effective for tax years beginning in 2018 and lasting through 2025.

Tax rates — personal and corporate. The new law imposes a new tax rate structure with seven tax brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The top rate was reduced from 39.6 percent to 37 percent and applies to taxable income above $500,000 for single taxpayers and $600,000 for married couples filing jointly.

The corporate income tax rate used to be graduated with a maximum cap at 35 percent. It was reduced to a flat 21 percent. The corporate tax rate reduction puts the United States in line with most of the rest of other developed nations. The reduction is designed to increase spending, increase jobs, increase employee salaries, foster corporate improvements, and continue to incentivize the overall economy.

Standard deduction. The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.

Exemptions. The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.

New deduction for “qualified business income.” Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the United States. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for “services” provided to the trade or business. In other words, lawyers are out of luck! The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in; and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 or $400,000 for joint filers.

State and local property taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000.00 starting in 2018.

Mortgage interest. Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000, starting with loans taken out in 2018. This sum is down from $1 million. There is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.

Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.

Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the adjusted gross income floor was 10 percent for most taxpayers.

Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.

Overall limitation on itemized deductions. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds.

Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.

Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.

Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).

A lot of the details of the simple descriptions listed above remain to be completely formalized, and some of it may still change. Stay aware of the tax revisions and consult with an attorney in your locale if you have any questions.

How Sales Management Can Hurt Sales

There’s a sales management philosophy in too many companies that is actually working against sales growth. And the salespeople know it. The philosophy goes like this:

  • Walk in 40 doors a day.
  • Make 40 calls a day.
  • Hand your business card to everyone.
  • Gather as many business cards as you can.
  • Sell, sell, sell.

While this is a lot of activity and can look good on a sales report, it isn’t usually productive. And it shifts the goal from getting business to participating in a specific behavior.

This usually happens because the owner or sales manager found great success using these methods. That’s great for them! But it doesn’t mean everyone is going to be successful doing it that way.

sIn addition, today’s business environment doesn’t really offer a welcoming landscape for this kind of behavior. The consumers are very well educated and are really looking for someone they trust. The salesperson is better off working on relationship building rather than tallying the number of doors knocked.

Many companies with this philosophy have a lot of turnover in the sales department. And do you know why? Because people join the company with the best of intentions and in many cases a great method for gaining sales. When they discover that they can’t implement their method, but rather have to engage in behavior that doesn’t work for them, they don’t hit their sales goals. So, they leave — either voluntarily or by request.

Either way, it’s not good for the company. The cost alone of bringing on a new employee is significant. Think about it. You’ve got to run ads, sift through resumes, interview, hire, onboard, train, and then exit. Go ahead and put dollar values on each of those items, then add them up. Now include the lack of sales into the cost. All the business you didn’t do! It’s an expensive proposition.

Building Confidence

Another key concern is the image that develops of the company in the community. Think about things from the prospect or client’s point of view. If, every time they turn around there’s a new salesperson introducing themselves, you’re telegraphing instability within your company. Is that really the message you are trying to send? Customers want confidence that the salesperson they’ve grown to trust will be there for more than a hot minute. If they keep seeing new salespeople, their trust goes down. That’s never good.

So, I ask you, which is more important?

  1. Engaging in a specific activity
  2. Gaining new clients

I’d say No. 2. And if that really is more important, then it doesn’t matter how it is done — as long as it is moral, legal, and ethical.

Sales managers would be better off sharing the vision and the goals of the company with their sales staff while leaving the sales strategy to each salesperson. Empower the sales team to develop their own process and then monitor their results. Give them the resources they need to be successful. Be there for them when they need advice, or training. And communicate with them on a regular basis about their results. As long as the results are there, the process shouldn’t matter.

Think about why you hire someone. Is it because you believe they have the skills and personality necessary to succeed at sales? Probably. And if so, don’t you owe it to them to trust them to do the job? Whenever we tell someone how to do something, we’re really saying that we don’t trust them to do it right. There’s a confidence killer!

It’s like hiring someone for their great attitude and then squashing that attitude. Makes no sense. Respecting the sales staff means talking with them, not at them. It means listening to what they have to say, respecting their ability, and expecting them to deliver. Period. The best way to disrespect the sales staff is to tell them to do things your way. Then you are telling them that you don’t trust them to do it right, or well, or successfully. Believe me when I tell you, you won’t get what you are wanting if you engage in this sort of “management.” Instead, lead your team. Help them be the best they can be.

After all, sales is about relationships, not dialing for dollars. Let your salespeople network and develop relationships with referral partners, prospects, and clients. Their time will be better spent, the results will be there, and everyone will be happier. If one of the salespeople decides to make 40 calls a day, great! That is their preferred method. It should be more important to make sure your salespeople have a strategy that makes sense to them than to have a strategy that only makes sense to the sales manager.

Changes to Contractor/Subcontractor Agreement Can Have Profound Effect on Roofers

Whether they like them or not, most subcontractors and contractors have used American Institute of Architects (AIA) standard form contract documents at some point in their careers. Several options exist for those wanting to utilize standard form documents, like ConsensusDocs, Design-Build Institute of America, and the Engineers Joint Contract Documents Committee forms. However, the AIA, being founded in 1857 and having published standard form construction contracts for more than 100 years, is the most established of these organizations, and its form contracts are still the most prevalent and most commonly used forms for commercial construction projects in the United States.

The AIA updates its forms every 10 years and completed its most recent revision in late April 2017. The updates included revisions to several forms in its A-Series (Owner/Contractor Agreements), including its widely used General Conditions (AIA Form A201) and its standard Contractor/Subcontractor Agreement, AIA A401. While these are only a few of the AIA’s updates, these changes may be particularly pertinent to subcontractors and those working in the roofing construction industry. Some highlights of the 2017 updates to A401 follow here.

Designated Representatives and Notices

Both the Contractor and Subcontractor are now required to designate (in the space provided in Section 14.2) an individual who will serve as each party’s “representative” for the project. This requirement is set forth in Section 3 for the Contractor and Section 4 for the Subcontractor. Parties are permitted to change their designated representative only if they provide 10 days’ notice. This is significant for both parties because the updated form requires that notices — for example, notices of a party’s potential claim arising from the subcontract — must be made in writing and are valid only if served upon the designated representative. The new form allows notices to be made via e-email or other electronic means only if an electronic method is set forth in Section 14.4.3. Parties should remember not only to designate a point person who is prepared to serve as a project representative and an email address for notices, but they should also ensure that the other party has done the same. Failure to do so could result in notices not being made by the proper means and to the proper individual — which in turn could result in parties waiving potential claims.

New Contractor Responsibilities — With Limitations

Although it has long been a standard practice (both on AIA projects and elsewhere) for the Contractor to include the prime contract as an exhibit to the subcontract, the updated form takes this a step further and requires the prime contract to be attached to the subcontract as “Exhibit A.” If Subcontractors hold Contractors to this requirement, Subcontractors will be able to review all of the contract documents with greater ease before signing.

Furthermore, Section 3 requires Contractors to “render decisions in a timely manner and in accordance with the Contractor’s construction schedule” and to “promptly notify the Subcontractor of any fault or defect in the Work under this Subcontract or nonconformity with the Subcontract documents.” However, in Sections 3.4.4 and 3.4.5, the phrase “written notice” has been changed simply to “notice” with respect to the Contractor’s requirement to notify the Subcontractor of defective work as a prerequisite of finding the Subcontractor to be in default. Section 14 still clearly states that all “notices” must be made in writing to the designated representative. This change could result in debate over what Contractors must do in order to notify Subcontractors of defective work before they avail themselves of remedies for breach, such as withholding subcontract payments.

Contractors also now have additional duties to provide Subcontractors information they may need in order to preserve their lien rights. Section 3.3.6 previously required Contractors to provide Subcontractors “a correct statement of the record legal title to the property … and the Owner’s interest therein.” The revised A401 now requires the Contractor to request this information from the Owner if the Contractor does not have it and give the Subcontractor the information upon receipt; a corresponding section in AIA A201 requires the Owner to provide it to the Contractor.

New Subcontractor Duties and Concerns

The above requirement to submit lien information is perhaps balanced by revised Section 11.1.10, which provides Contractors additional rights to indemnification from certain lien claims. “If Contractor has paid Subcontractor in accordance with the Agreement, Subcontractor must defend and indemnify the Contractor and Owner from liens and claims from lower tier subcontractors and suppliers, including being required to bond off liens,” the new form states.

Another noteworthy change concerns alternates — alternatives to a base bid that provide for a change in the level of quality, or scope of the work specified in the base bid. Alternates provide the owner with the option to modify the project by accepting or rejecting the alternate. The newly revised A401 contains a new section, 10.2.2, which allows the parties to list alternates that the Contractor can accept after execution of the agreement. Subcontractors should consider carefully whether it is wise to include alternates under this section.

Payment and Retainage

Finally, subcontractors and contractors alike should familiarize themselves with the newly revised Section 11, which concerns progress payments. Sections 11.1.7.1 and 11.1.7.2 break down the calculation of progress payments into separate subsections for additions, deletions, and retainage. This includes additions for construction change directives and deletions to allow for defective work remaining uncorrected (assuming that Contractor has duly notified the Subcontractor of the issue). Other portions of A401 allow for additions and deletions in these scenarios, but they are often conditioned on the owner’s approval and other factors. It remains to be seen whether this section could change normal progress billing procedures.

Section 11.7.2 opens the door to retainage options other than the typical arrangement (where the Contractor simply withholds the amount the Owner is withholding). Newly added subsections allow the parties to designate items that are not subject to retainage, as well as set forth an arrangement for reduced or limited retainage. This new section (11.1.8.2) could be a helpful avenue for early finishing trades to propose release of retainage upon 50 percent completion of the project as opposed to substantial completion — or even a way for parties to negotiate the retainage percentage down.

The above are just a few highlights of changes to AIA Form A401. For additional information or questions, visit www.aiacontracts.org or email Caroline Trautman at ctrautman@andersonandjones.com.

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

Bonding 101: What Do Roofing Contractors Need to Know About Bonds?

In a number of states, roofing contractors need to get licensed in order to perform roofing work. Obtaining a roofer license bond is a common licensing requirement. Not all states require a roofing contractor license and bonding, but contractors may have to get a bond to meet county criteria, too.

Even if you’re not new to bonding, the concept of how surety bonds work may be a bit difficult to grasp. However, it’s important to understand the basics if you need to get bonded as a part of your contractor licensing.

Besides a legal requirement to fulfill, bonds are also a strong sign for your customers that you are safe to do business with. Being licensed and bonded is one of your advantages on the market.

Here’s an overview of the states which require roofing contractors to obtain a bond, as well as the most significant facts about bonding that matter for your roofing business.

Where You Need to Post a Roofing License Bond

There is no nationwide requirement for roofing license and bonding. Each state defines its rules regulating roofing specialists. Usually state contractor license boards are in charge of the licensing process. They include roofing as one of the specialty contractor licenses that can be obtained. Additionally, towns and counties may impose their own licensing requirements for contractors operating on their territory.

If you want to operate in California, Texas, Minnesota, Oklahoma, Illinois, or Arizona, you will have to obtain a roofing contractor license and bond. The bond amount in Oklahoma is $5,000. In Illinois it is $10,000. California and Minnesota roofers have to obtain a $15,000 bond. Roofers in Texas have to post the biggest bond amount—$100,000.

Town and county licensing varies across the country, so it’s best to check with your local authorities about their exact requirements and bond amounts. In some cases, you will need to obtain a general contractor license and bonding, while other licensing bodies will require a special roofing license and bond.

How Surety Bonds Work

Roofer license bonds are a type of contractor license bonds, which are required from a number of construction specialists. As such, they are a contract between your roofing business, the licensing authority, and a surety. The bond provider backs your contractorship and guarantees financially for you in front of the local or state body issuing your license.

In order to get bonded, you need to pay a bond premium. It is a small percentage of the bond amount that you have to obtain. The premium is determined on the basis of your financial situation. Your surety provider examines your personal credit score, as well as business finances and any assets and liquidity. That’s how it can assess how risky your profile is.

If your finances are in good shape, your bond premium is likely to be in the range of 1 percent to 5 percent. For a $15,000 bond, this can mean a bond price of $150-$750. To reduce your bond premium, you can work on improving your credit score and financials before you apply for the bond.

As you need to stay bonded throughout your licensing period, you can decrease your bond cost with every bond renewal.

Responsibilities Under the Bond

Licensing authorities require a surety bond from roofing specialists in order to exercise a higher level of control over their operations. The purpose of the bond is to protect your customers.

However, it does not protect your business like insurance does, for example. It ensures your compliance with relevant laws by providing an extra layer of guarantee for the general public. In practical terms, this means an extra assurance that you will perform the contractual roofing work you have committed to.

In case you transgress from your contractual and legal obligations, the bond can provide a financial compensation for an affected party via a claim. Such situations include not completing the work you have agreed to in a contract, delaying the completion, delivering low-quality work, or similar issues with performing your contractual agreements.

If a claim against you is proven, you are liable to reimburse the claimant up to the penal sum of your bond. If your bond is, say, $15,000, that’s the maximum compensation that can be claimed.

At first, your surety may cover the claim costs. This is the immediate protection for consumers who have been negatively affected by your actions. However, your responsibility under the bond indemnity agreement is that you have to repay the surety fully. This means that the surety bond functions similarly to an extra line of credit, which is extended to your business temporarily.

Bond claims can be quite costly for your business, not only in terms of finances, but also by harming your reputation as a professional in the field. The wisest course of action is to avoid them.

Roofing contractors in a number of states have to obtain a surety bond as a part of their licensing. If you’re launching your business as a roofer, make sure to check with your state authorities about the requirements you have to meet. This will ensure your legal compliance, as well as a smooth start in your trade.

About the Author: Todd Bryant is the president and founder of Bryant Surety Bonds.

Learn to Delegate: Determine Which Tasks You Can Let Go and Concentrate on Your Zone of Genius

You have 168 hours each week to design your life. You use some of the hours for sleeping, some for exercising, some for eating, some for showering, some for work, and some for family—but when you run out of your 168 hours, you are out!

Time is the one commodity you can’t create more of. Once it is gone, it is gone. You can always make more money; you can’t make more time. Or can you?

You are limited in what you can accomplish each week by the mere fact you only have 168 hours. However, there is no limit to what can be accomplished each week if more people pitch in to help.

When you effectively delegate some tasks, it’s like adding 10, 20, 40, 80, 800 hours to your week. It’s almost as if you are creating more time each week.

When I work with clients, one of the first things they share with me is they just aren’t sure what they can delegate. They admit that delegating, in theory, makes sense. However, they aren’t sure how to apply it to their business.

There isn’t a “one size fits all” solution to the delegation challenge. However, there is a process you can follow to find a solution that works for you.

Use the Acronym A.W.E.

You can determine which tasks to delegate by following a three-step process represented by the acronym A.W.E.

  • A—Awareness. What are some of the tasks currently on your plate?
  • W–Work. How do you decide which tasks to delegate?
  • E–Evaluation. What worked and how do you do more of it?

Get ready to delegate! The following exercise will take about 20 minutes to complete–and the payoff is you’ll gain a minimum of three hours of you do it effectively. That’s pretty good ROI on 20 minutes, wouldn’t you agree?

Awareness: The exercise begins by defining what is important and determining what is on your plate.

Step #1: List your top 3 goals.

Step #2: What is your Zone of Genius? That is, list the things in your life and your business that only you can do. (Hint: If you are honest, this list should be pretty short.)

Step #3: Next, list all the things that you “don’t have time to do.” What are the tasks you put off because you don’t like doing them? What are the tasks you are waiting to start until the “timing is right”?

Step #4: Pull out to-do list out from the last week and your to-do list for next week.

Work: At the next stage, you can start to narrow down the tasks you can delegate.

Step #5: Look at your to-do list and your “I don’t have time to do this” list, and for each task, ask yourself, “What goal does this task support?” Write the corresponding goal next to the task. (Hint: Writing the goal down ensures you don’t just skip this part.)

Step #6: You are almost finished with the exercise now! Put a smiley face next to all the tasks that line up directly with your Zone of Genius.

Step #7: Circle the items that relate to a goal, but do not have a smiley face. These are the tasks in your business or life that can be delegated. They support a goal and they are not in your Zone of Genius. They don’t need to be done by you to be done effectively. (Bonus tip: If a task doesn’t directly support a goal, why are you doing it?)

Step #8: Delegate at least three of these tasks.

Evaluation: Determine how effectively each task you delegated was completed and how much time it saved you. Do more of what works! When you can do more of what works and less of what doesn’t, life becomes much easier. Yet many people forget to slow down long enough to think through what is working. Take 10 minutes to check back at the end of the week and ask yourself these questions: Who was a great delegating resource? What tasks were easy to let go of? What tasks do you want to outsource next? Where were the struggles? How can you fine-tune the process?

Congratulations! You have at least three tasks circled. Start delegating and start increasing the number of hours you have available each week to accomplish your goals.

Remember, this process is not a one-and-done kind of thing. To be effective, as your tasks and goals change, the evaluation process becomes more important. Regular process improvement means you are always on task for your Zone of Genius!

How Can Roofing Contractors Protect Themselves if a Project Gets Delayed?

Project delays can have serious financial consequences for both contractors and subcontractors. When such issues arise, one option for affected contractors is asserting delay claims to recover losses. Delay claims, however, must meet several criteria to survive in court, and claimants can pursue them in many different ways. This article will discuss different types of delay claims and the methods for asserting them, as well as what subcontractors can do to protect themselves the next time they encounter a project that is behind schedule.

In simple terms, a delay claim arises when a project is delayed and a contractor or subcontractor needs more time (and possibly more equipment and labor) than originally budgeted to fulfill its contractual obligation.

A delay claim can help a contractor extend an original deadline for completing a job or compensate it for the additional costs associated with the delay, which may include the overtime and additional manpower necessary to keep a job on schedule, as well as consequential damages like lost profits, lost opportunities, and home office and administrative costs.

Some delays, of course, cannot be avoided and do not qualify the impacted contractors for compensation. Examples include weather-related delays and delays arising from foreseeable circumstances. Although, when an owner or general contractor causes or is responsible for a preventable delay—also known as an inexcusable delay—the lower-tier contractor may recover the additional costs to complete the project. Some examples of inexcusable delays include the customer not having the job site ready on time, supplying defective materials to its contractor, giving its contractor insufficient access to the job site, or wrongly interfering with the project schedule.

Before committing to the complicated and risky delay claim process, most subcontractors should seriously consider resolving delay disputes either through informal means or, if applicable, through the “equitable adjustment” clauses within their contracts. Pursuing equitable adjustments can be less confrontational than pursuing delay claims. What equitable adjustment clauses allow varies from contract to contract, and parties are entitled negotiate contract terms to define what constitutes such an adjustment. Generally, however, an equitable adjustment is an adjustment in the contract price to reflect an increase in cost arising from a change in the completion date or duration of time for the contracted scope of work. These price adjustments typically encompass overhead and profit as well as actual costs. (In contrast, a change in the actual scope of work is typically addressed via an additive or deductive change order.)

Some jurisdictions that lack a legal definition of “equitable adjustment” will enforce the parties’ contract terms and, in the absence of evidence to the contrary, an equitable adjustment can simply mean cost, plus reasonable overhead and profit. For example, a recent North Carolina Court of Appeals decision (Southern Seeding Service Inc. v. W.C. English Inc., et al) involved a contract provision stating that unit prices were based upon the project being completed on schedule and that should the contractor’s work be delayed without its fault, “unit prices herein quoted shall be equitably adjusted to compensate us for increased cost… .”

Although neither the contract nor North Carolina law defined the term “equitable adjustment,” the court considered the parties’ intended definitions of the term. Both parties testified that essentially, “equitable adjustment” meant the difference in cost. The court allowed the claimant, Southern Seeding Service, to recover the difference in its actual per-unit costs and the per-unit costs in its bid, plus overhead and profit.

This decision indicates that even in the absence of a contract specifically stating otherwise, contractors can sometimes use equitable adjustment clauses to recover their cost increases resulting from delays. In the case of Southern Seeding, where a “no damage for delay” clause barred Southern Seeding from making a formal delay claim, this proved valuable. One downside to the approach, however, is that it does not necessarily compel upper-tier contractors or owners to speedily compensate contractors for delays. And, unlike some delay clauses, equitable adjustment clauses do not provide for interest accruing on properly noticed claims that go unpaid. Informal methods and equitable adjustments may prove more effective for contractors who have stronger and more positive relationships.

If equitable adjustment claims will not resolve delay issues, delay claims can help—given the right circumstances. One of the biggest hurdles to establishing delay claims is first giving proper notice to the upper-tier contractor or owner. Often, contracts contain notice provisions that restrict the time window in which contractors may present delay claims. For example, some contracts require contractors to submit their claims within a certain number of days—often, as few as two days—of the date that a delaying event occurs or is known to the contractor. Courts generally enforce notice provisions strictly, though there are exceptions.

Additionally, many contracts contain “no damage for delay” clauses that can eliminate delay claims entirely. Under such terms, courts have ruled contractors may only acquire extra time “in the owner’s discretion” and cannot receive damages unless the defending party has clearly breached the contract.

Courts in most jurisdictions recognize some exceptions to “no damage for delay” clauses, particularly when owners or upper-tier contractors deal in bad faith, unreasonably refuse to provide additional time, or unreasonably interfere with the claimants’ work.

Calculating Damages

Even if a delay claim is allowed by contract, selecting the proper method of measuring and reporting damages from a delay is essential to success. The two primary methods for calculating delay claims are the critical path method and the total cost method.

The critical path method is an analysis of a project’s schedule, which shows the length of a delay and how that delay disrupted the sequence of dependent tasks required to complete a project as scheduled. Ideally, actual records of project hours, materials, and other expenses, as well as agreed-upon schedules, can enable contractors to piece together the contemporary cost of a delay. Although most courts strongly prefer these actual records to calculate damages, contractors without schedule information may also attempt the critical path method by relying on scheduling experts who can retroactively reconstruct the project’s as-built schedule and testify on critical path items to estimate how much the delay impacted them.

If there is no way to collect the information sufficient for the critical path method, the total cost method might be an option for potential claimants. This approach calculates delay damages by subtracting the total anticipated costs of a project from its total actual costs. To use this method, contractors must show (1) the customer is completely at fault for the increased costs from a delay; (2) there are no other ways to measure the damages; and (3) both the bid and actual costs are reasonably calculated.

All three of these points can be difficult to prove, and most courts, regardless of jurisdiction, treat them with a great deal of scrutiny. The New Hampshire Superior Court for Merrimack County, for instance, in the case Axenics Inc. v. Turner Construction Co., wrote “the total cost method is a ‘theory of last resort.’”

One reason why some contractors gravitate towards the total cost method is that it does not require a full account of actual costs, and many contractors can easily calculate the losses themselves. The method also allows them to potentially recover lost profits. An additional approach to the total cost method is the modified total cost method, where contractors use the same formula as the total cost method but adjust it for bidding inaccuracies and/or performance inefficiencies to make their delay claims appear more accurate. The methods using actual costs, though, generally provide stronger evidence for damages, and most courts will only accept the total cost method if a contractor is able to prove there is no other way to account for the actual costs.

Many contractors who hope to recover home office expenses in delay claims use what is known as the Eichleay formula to determine such damages. Like other aspects of delay claims, however, the effectiveness of this method depends on the circumstances of the claim, a contractor’s documentation, and the jurisdiction. Furthermore, more conservative estimates may have greater chances of success. At its core, the Eichleay formula determines the amount of home office damages by multiplying the number of delay days by the average daily rate of home office overhead attributable the delayed contract. This daily overhead rate is calculated by dividing the delayed project’s share of a contractor’s total billings and dividing it by the number of days in the delayed contract (both the on-schedule and delay days). For cases involving government contracts, federal courts have deemed Eichleay claims as “the only proper method” for calculating home office damages provided they meet certain requirements. These requirements are: (1) the government caused the delay; (2) the period of delay was uncertain and the government required the contractor to be ready to resume its work on short notice; and (3) the contractor was unable to seek other work to cover its office expenses during that period.

Outside of matters involving federal contracts, courts treat Eichleay claims with a higher level of scrutiny than critical path claims. In an effort to discredit delay claims, defending parties often claim (correctly) that the Eichleay formula is only an estimate and not necessarily an accurate indicator of damages. To ensure the numbers within the calculation are true, contractors will likely have to provide audited financial statements—information smaller contractors may not be able to provide. Also, Eichleay damages may decrease if many of the office overhead costs were from bidding for the contract or if a contractor already paid most of its office expense before a delay late in a project. Although the federal government prefers the Eichleay formula, some state courts do not accept it and instead use the terms of a contract to determine the costs of overhead. Still, many contractors try to use the Eichleay formula whenever possible because it can potentially yield hundreds of thousands more in recovered expenses than other methods. Ultimately, the jurisdiction of a delay claim is a strong factor for deciding whether or not to use the Eichleay formula.

When project delays are inevitable, contractors have options to recover at least some of their losses. For many contractors, pursuing equitable adjustments will prove to be the most cost-effective and least adversarial solution. Companies that maintain detailed schedule records and give adequate, timely written notice of their delay concerns may successfully assert delay claims to avoid serious harm when a customer refuses to accommodate them (if contract provisions allow). Ultimately, consulting with a lawyer or delay consultant early in the delay process is the best protection from losing a legitimate claim.

Author’s Note

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.