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Subcontractor Denied Bond Claim Against St. Louis County

in Law

By James R. Keller

James R. Keller
James R. Keller

The Supreme Court of Missouri recently ruled that a subcontractor cannot pursue a bond claim against St. Louis County, but may pursue its mechanic’s lien claim against the leasehold interest of a company that acted as St. Louis County’s agent. The Missouri Supreme Court rarely decides construction cases involving bonds and mechanic’s liens, making this decision significant in how subcontractors will pursue future claims.

The case is Brentwood Glass Company v. Pal’s Glass Service, Inc., Clayco, Inc., Cornerstone VI, LLC, St. Louis County, National City Bank of the Midwest, N.A., Paul M. Macon, UMB Bank, N.A. and Victor Zarilli, 2016 WL 4444039, decided August 23.

St. Louis County had purchased property known as Six CityPlace Drive in Creve Coeur, Missouri, which the County had planned to develop as the headquarters of Smurfit-Stone Container Enterprises, Inc.

The County entered into a contract with Cornerstone to construct the project on the County’s behalf. Cornerstone acted as the County’s agent.

Clayco, Inc. was the general contractor for the project. Clayco entered into a subcontract with Pal’s Glass to supply glass and glazing work. Pal’s Glass entered into a sub-subcontract with Brentwood Glass for some of this work.

No contractor on the project obtained a bond that would comply with Section 107.170.2 of the Revised Statutes of Missouri. This section provides that all public entities (such as St. Louis County) must require every contractor for work on public property to furnish a bond to cover materials and labor.

Brentwood Glass filed a mechanic’s lien on the property in the amount of $1,061,464.08. Brentwood Glass then filed a nine-count petition against Pal’s Glass, Clayco, Cornerstone, St. Louis County, as well as various banks and individuals, seeking recovery on its mechanic’s lien and in one count pursuing an action against St. Louis County for its alleged failure to require a payment bond under Section 107.170.

Pal’s Glass admitted it owed $593,261.47. It consented to a judgment for that amount plus costs.

Because the property was owned by St. Louis County at the time Brentwood Glass began working on the building, Brentwood Glass could not pursue its mechanic’s lien against the County. Public property is not subject to a mechanic’s lien.

Cornerstone, however, held a leasehold interest in the property. Cornerstone is a private company and not a public entity.

The Supreme Court reversed the decision of the trial court and found that Brentwood Glass could pursue its mechanic’s lien against Cornerstone’s leasehold interest. The Supreme Court of Missouri sent back for further consideration by the trial court whether Brentwood Glass’s lien statement properly complied with Missouri law, which requires a “just and true” account of any money that is due.

The lien statement included potentially non-lienable items. Brentwood Glass admitted that its statement incorrectly included efforts to recover for payments that Clayco had paid directly to Brentwood Glass’s subcontractors and material suppliers.

The Missouri Supreme Court determined that the trial court must decide whether these non-lienable items were included in the lien statement with an intent to defraud or were honest mistakes. If honest mistakes, presumably the trial court will determine that the mechanic’s lien is proper.

Regarding the public bond claim against St. Louis County, Section 107.170.1 requires a bond for any “contractor” that “provides construction services under contract to a public entity,” but not a party that merely arranges for such services to be provided by others. The Supreme Court decided that Cornerstone did not provide construction services under its contract with the County. Therefore, Cornerstone was not a contractor within the meaning of Section 107.170.1.

The Supreme Court of Missouri also decided that even if this section required a bond, Brentwood Glass’s claim must fail because it did not name as a party in its lawsuit any individual officials of St. Louis County, but instead named as the defendant only St. Louis County. The court held:  “The decisive fact is that the County—a political subdivision—is immune from suit under the doctrine of sovereign immunity.”

The Missouri Supreme Court’s decision was far from unanimous. Two of the Justices, including the Chief Justice, filed concurring/dissenting opinions.  They believed that Cornerstone was a contractor within the meaning of the statute and therefore Brentwood Glass should have been able to pursue its bond claim. They also believed that Brentwood Glass should have been given the opportunity when the case is sent back to the trial court to amend its petition to name individual officials as defendants.

Three other Justices filed a different concurring/dissenting opinion. They believed that Brentwood Glass did not demonstrate substantial compliance with Missouri’s mechanic’s lien statute that requires a “just and true account.”  These three Justices believed that Brentwood Glass should not have been allowed to pursue its mechanic’s lien claim.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

 

True Sales Support

in Columns/Sales
Tom Woodcock
Tom Woodcock

By Tom Woodcock

I understand sales personnel need to be as accurate as possible before moving transactions to sales support. The better the information on the front end, the better the support effort on the back. With that being said, true sales support is tough to find.

The sales process may vary from company to company or product to product, but each sale has a process. Securing the customer and landing the deal are only the first steps. In construction, there are many additional facets to the sales transaction, any one of which can make or break the transaction.

Efficiency in the sales process directly relates to the customer experience and success rate of the corporate sales effort. Don’t let paperwork, material ordering, or communication with subcontractors interrupt the project or sales schedule. Not keeping the customer first lets details get bogged down in procedures or red tape. Throw a dose of company politics, mixed with mutual disrespect between sales and administration, and a mess develops. This can cause customers dissatisfaction and frustration, which often ripens into negative reviews and lack of referrals. Perish the thought of ever getting another project if that customer has recurring business.

Many companies have brought me in to help generate greater business volume. They want a full backlog of work at great margins. They tend to feel their front end sales approach is the problem. Often, I find their sales process is lacking or broken. There is no sense of urgency, little initiative to help the selling party and often resistance to sales if the documentation isn’t perfect. Whether it’s an issue of control, lack of understanding of the customer’s experience, or a perceived respect problem, the customer takes the hit. This can manifest in delays or cost overruns.

Support personnel need to understand that securing business in a sales environment is the most important aspect of any business. No sales, no paper. Not that their position isn’t critical, but those charged with getting business are there to do just that. Internal support networks are built to do just that, support. They end up making the sales agent look like a rock star, or incompetent.

The reinforcement of the commitments made by the sales rep goes a long way towards the establishment of the company’s credibility. By counteracting the sales person’s commitments, they send the customer the message that the rep is less than genuine and the company is inefficient.

I’m very aware of the fact that many sales agents promise the impossible, but that’s a different topic. Doing everything that you can to meet the customer’s expectations, if at all possible, is the essence of great sales support. The easy thing to do is to not perform and then blame the sales individual. That may be accurate, but it’s not optimum for the company.

I’ve mediated many battles between sales and support, some of them pretty nasty situations. Mutual understanding and respect for each party’s role in the sales process closes the gap between them. Good communication back and forth, verbally if feasible, clears up discrepancies. Avoiding condescending tones, venting, and blaming shows a higher level of business maturity. Few companies take the time to cultivate this type of environment. They let these internal relationships develop organically hoping for the best. Rarely do they end up with the result they hoped for.

Merely stating that you need cohesion between sales and support isn’t enough. It’s a daily practice that needs to be nurtured and reinforced. Ignoring a problem can result in delayed transactions, disgruntled employees, and loss of personnel, all of which are detrimental to a strong sales effort. Investing in training on the internal customer for sales personnel and the critical aspect of sales for the support personnel can bring an awareness of each party’s role.

Companies that work to develop the relationship between sales and support end up with a smooth flowing machine. They achieve a higher standard and set the bar high for competitors. This all takes self-evaluation and effort to be successful. Companies willing to practice this development will enjoy the fruits of it: high morale, extra effort, and increased revenue. Not to mention the value it brings to customers.

The reasons are critical. Gaining separation from the competition is not just the result of value, which is what is often taught. It is also the culmination of team effort, a value proposition rarely taught and seldom seen. The greater the customer experience front to back, the greater the value they perceive. This can reduce competitive influence and breed loyalty.

True sales support is simply part of a more profitable equation. The alternative can only result in more price competition and number shopping. Usually, contractors blame the customer for this behavior. In reality, looking internally may be the solution. Interesting to realize that the way we interact with one another in the sales process is so influential on the sales success of our companies.

Tom Woodcock, president, seal the deal, is a speaker and trainer to the construction industry nationwide. He can be reached at his website: www.tomwoodcocksealthedeal.com or at 314-775-9217.

The Sun Does Not Shine on Homeowner’s Solar Panels

in Columns/Law
James R. Keller
James R. Keller

By James R. Keller

After three trials and one appeal, a homeowner must remove part of its solar panel system, because the homeowners’ association did not approve it, and pay up to $56,000 in attorney fees to the association.

The case is The Lake at Twelve Oaks Home Association, Inc. v. Hausman, 2016 WL 1579124 (W.D. Mo. April 19, 2016).

In July 2012, Matthew and Stacy Hausman installed a photovoltaic solar array system on various roofs and on the ground of their home, which is located within a subdivision in St. Joseph, MO.  The subdivision was part of The Lake at Twelve Oaks Homes Association, Inc. Homeowners were subject to a declaration of covenants, conditions and restrictions for the subdivision.

One of the restrictions was that homeowners must submit written plans and specifications and obtain written permission from the Association’s Design Review Committee (DRC) prior to construction of any structure that materially changed the exterior appearance of that homeowner’s property. The Hausmans did not submit anything to the DRC.  Ironically, Matthew Hausman was a member of the DRC.

The Association demanded that the Hausmans remove the solar array as being in violation of the restrictions of the subdivision. The Hausmans did not remove the system. The Association filed a lawsuit seeking a permanent injunction.

In the first trial, the judge ordered the Hausmans to present their plans for the solar array system to the DRC for its review and approval in total, in part or not at all.

Shortly thereafter, the St. Joseph City Council enacted an amendment to its zoning ordinances regarding solar energy systems within the city limits.  It provided in part that no homeowner’s agreement could be more restrictive than the new city ordinance.

The DRC approved the portion of the system installed on the rear roof but rejected the portion of the system that included the panels installed on the side roof of the garage and the ground-mounted panels on the south side of the garage. The DRC’s decision was based on a provision within the Solar Guidelines previously adopted by the DRC that required panels to be constructed only within a fenced yard or patio at the rear of the main structure.

The DRC also based its decision on how the solar panels affected the character of the subdivision and considered individual homeowner complaints plus compatibility with surrounding properties and impact on the value of subdivision homes.

After a second trial, the court ordered the Hausmans, consistent with the DRC decision, to remove the part of the solar array system erected on the garage and the ground-mounted panels on the south side of the garage.

The trial court then set aside its own judgment, deciding that the parties should have included the city as an indispensable party given its new ordinance on solar panels.

After a third trial, the trial court again found in favor of the Association and ordered the Hausmans to remove the solar arrays not approved by the DRC. The court also determined that the city’s solar ordinances could not be applied retroactively to the Association’s Solar Guidelines and further found that the DRC’s decision was reasonable.

Finally, the trial court awarded attorney fees (provided in the subdivision declarations) to the Association.

The Hausmans argued on appeal that the trial court erred in upholding the DRC’s decision as being reasonable. They argued that sale prices for homes in the subdivision actually increased after the solar panels were installed.

By contrast, the DRC chair testified at trial that most members of the DRC did not find the solar energy system to be esthetically pleasing.  He further testified that the Association had received complaints from approximately 20 neighbors who expressed negative views regarding the appearance of the solar system and concern that its installation lowered the value of surrounding properties.

The Hausmans’ former next-door neighbor testified that the glare from the solar panels focused on his property four to five hours a day.  He further testified that he made $20,000 in concessions in the sale price of his home due to the negative impact of the solar system.

Another neighbor who lives in the home across the street from the Hausmans testified that the glare from the panels during the evening penetrated into his front window and negatively affected the value of his home.

The appellate court discounted evidence from the Hausmans that the DRC had approved a solar array system of another homeowner in the subdivision and thus by denying the Hausmans’ system the DRC had acted in an arbitrary and capricious manner. The Western District noted that the system for this other homeowner could not be seen by anyone and that there were no complaints from the neighbors.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

Are You and Your Company Suffering from Data Overload?

in Columns/Technology
Joe Balsarotti
Joe Balsarotti

By Joe Balsarotti

The amount of data on the Internet is staggering. Back in 2011, USC researchers estimated humans had already stored 295 billion gigabytes, and here I am adding to the total with this column. Here in 2016, tweets rack up at a rate of about 6000 every second. While I write this, there are over a billion separate websites, with over 3.89 billion pages (You can see the ‘size of the Internet’ change in real-time at http://www.worldwidewebsize.com/)

You’re wondering how this makes any difference to your business. The statistics above are interesting, but here’s the one that brings it home. Every second of every day, more than 2,000,000 emails are sent. How many are unread in YOUR inbox?

Data overload is happening to everyone. We’re inundated in emails, tweets, Facebook posts, pins, and a host of other calls for attention. Technology has not, as of yet, developed the solution for keeping up with it all, namely the 25th, 26th and 27th hour of the day. Since those extra hours aren’t here, yet, although I keep trying to invent them, how can one manage the time consumed by both ‘good’ emails and time wasters?

First off, use more than one email address. Yes, more makes for simplicity. Use a Yahoo, Gmail of other ‘freebee’ email service for all those companies who send newsletters, sale fliers, blogs, and the like. Using something completely divorced from your primary work email address (which should NOT be your primary personal email address) gets right at the heart of the problem. When you have spare time, go to the freebee email portal and dig in. DO NOT have that address automatically sent to your phone, Outlook, Thunderbird or whatever you view normal emails with. There needs to be a barrier between that type of email and your business and personal correspondence.

After you have that general email address set up take an afternoon, subscribe only to the ones you want (times do change and your sign ups from 2005 may not be relevant anymore) at that new address. As soon as you do, unsubscribe from those lists on your ‘real’ email address. Use this opportunity to clean house and make your days easier.

Now, back to my pithy comment above, if you are using the same address for work and personal emails, time to split those up too. It’s fine to have those two addresses hitting your phone and computer, but when you await an important message about your child, you don’t want it mixed in with work and when that contract comes in, you shouldn’t need to sort through PTA emails to find it.

Next, use the power of the computer and the software you paid for. Create folders for general topics you deal with, be it your kid’s soccer team, church group, purchase orders, legal docs, etc. There’s no need to go hog wild with fifty folders when ten will do, but make those ten folders reflect topics you can easily prioritize on a hectic day. If a deadline is nearing, go straight for that project folder instead of having to sift through dozens of messages irrelevant to getting the job done on time.

Lastly, set rules for the incoming emails, this may be a time when you need your tech staff to assist you. When the sender is a subcontractor, have Outlook dump that email immediately into the folder for them, or for the project they are working on. If the sender is your child’s school, into the folder for that child it goes. Vendor invoices or correspondence goes into the vendor folder, then maybe a sub-folder for just them. What you have to learn to do is look at the folders for the highlight or number denoting new messages, rather than the inbox. In this way, you immediately know the topics of many of your incoming emails and can prioritize with just a glance.

Start with very general folders and rules and refine them as you become comfortable with the new ‘normal’. If do it correctly, you can deal with 200-400 emails a day (as I get) and still have time for lunch. Now, if only you can get your staff to do the same thing …

I welcome your questions or comments at businesstech@software-to-go.com

Joe Balsarotti, president of Software To Go, is a 36-year veteran of the computer industry, reaching back to the days of the Apple II. He served three terms as chairman of the National Federation of Independent Business’ (NFIB) Missouri Leadership Council, was chairman of the Clayton, Missouri, Merchant Association for a dozen years, chaired Region VII of the Federal Small Business Regulatory Fairness Board, and currently serves on the Dealer Advisory Panel of the ASCII Group, an organization of over 1000 independent computer and technology solution providers in North America.

Reducing Risk in the Internet Age

in Technology
Joe Balsarotti
Joe Balsarotti

By Joe Balsarotti

Seems every tech article nowadays is about the liabilities of technology. Hacking, lost data, damaged online reputations, and the legal and ethical ramifications of technology and stored data.

So, it seems appropriate to delve into how to, if not minimize, at least mitigate the liabilities that the digital world has created for all businesses large and small.

Does your business host its own website?

Unless you have private components to yours site for vendors or customers to access your database, there is no reason to host your own site. Cutting off that entry point to your network goes a long way in reducing your risk. Besides, except for keeping internal I.T. people busy, there’s not much upside in hosting your own website. Outsource it to professionals after you’ve done due diligence to make sure there are backups, redundant sites, and uptime guarantees. In short, let specialists deal with it.

How about email, why would you host your own?

Forget the security concerns for a moment. Since over 95 percent of all email transmitted gets rejected at the server as spam, that means that 95 percent of the Internet ‘pipe’ you are paying for is wasted on trash. Find a reputable provider whose focus is on providing email.  After all, there are very few individual businesses with access to datacenters across the country for redundancy, battery and generator backup, communication lines from multiple providers, and 24/7 staffing, but quality email providers do.

Granted, going with one of the ‘big guys’ for email or hosted Exchange has its own set of issues as they are larger targets to hackers. If someone breaches your in-house email server, however, you don’t really have recourse, but if a multimillion or billion dollar provider gets breached, they will have far more resources to bring to bear on restoring service and recovering damaged or lost data. Plus, it’s a fair bet that lawyers will be lined up to help you recover compensation for any losses you suffer.

Passwords, remember them?

One of the easiest ways to minimize liability with technology doesn’t cost a penny, but it is essential. ANY notebook, phone, tablet, or home PC that can access your company and/or customer data must always be password protected and should lock if unattended.

When replacing old PCs and servers, businesses generally know to keep the hard drives or get a certificate of destruction. However, the same precaution goes for those tablets or phones. Getting a couple bucks for trading in an old phone or tablet turns into a really bad deal when the tablet or phone falls into the hands of foreign hackers and organized crime, who buy old electronics by the pallet, looking for data off of hard drives.

Save yourself some headaches and reduce your company’s risk in the digital world by getting a certificate of destruction for every device that you dispose of.

I welcome your questions or comments at businesstech@software-to-go.com

Joe Balsarotti is president of Software To Go and is a 35-year veteran of the computer industry, starting back in the days of the Apple II. He served three terms as chairman of the National Federation of Independent Business’ (NFIB) Missouri Leadership Council. He was chairman of the Clayton, Missouri Merchant Association for a dozen years, chaired Region VII of the Federal Small Business Regulatory Fairness Board and currently serves on the Dealer Advisory Panel of the ASCII Group, an organization of over 1000 independent computer and technology solution providers in North America.

What Do You Mean Our Data’s Gone?!?

in Columns/Technology
Joe Balsarotti
Joe Balsarotti

By Joe Balsarotti. Software To Go

A web-hosting firm we deal with had a disaster recently. The initial problem was beyond their control, then that irritating thing we call ‘human error’ came into play and made a minor disruption into a weeklong catastrophe for its customers.

This brought to light a glaring weakness in most business’ digital disaster plans (assuming the business even has a disaster plan)— their websites. Even if your website is just a glorified brochure for your services instead of a full-blown e-commerce site, you did pay money to have it designed. Ask yourself: who has a backup copy of it? Are you trusting that the hosting company has backups? In the case I mentioned, they did, but they weren’t enough. Maybe you assume the PR firm / web designer / programmer who built your site has backups of it, but they probably do not.

There may be an initial copy of the site as you first had it made, but then over the months and years, you had revisions made to it. Your offerings may have changed, the contact names of your staff as they come and go, graphics, and descriptions all probably morphed as time moved on. (If they haven’t, then your website is in desperate need of a rework) That original copy is now as usable as a faded roll of thermal fax paper.

How many of you have contracted with a backup service for your website? Along with that, how many of you have contracted for an archive of all those years of email for not only you, but for all current and past staff? Are you trusting the first marketing piece a prospect will ever see to someone somewhere in ‘The Cloud,’ who you think/hope/pray is backing it up?

How damaging would it be to your business to have customers and prospects see a blank screen when they expect your website? What goes through their mind when the email they sent you gets returned as undeliverable, not-found, or, even worse, is never acknowledged? All the money you spent on advertising, marketing, and web design all goes for naught in the case of a failure like that.

Email archiving is standard practice in some industries, such as financial, but for most it’s never given a thought as everyone thinks the email company “takes care of that”… right? Well, no. Sure email providers and web hosts probably make backups, but in a world where viruses can sit dormant on systems for weeks or months and then trigger without warning, what good is a backup from last week? That backup is infected too. What happens if the server hosting your website is in a building damaged by a fire, flood, earthquake, or tornado and the backup drive was sitting right next to the server?

The ‘how’ of the failure isn’t the important part of this story, in the end, enormous sums of time, energy and money were thrown at the problem by the hosting firm and the data center they utilized and eventually the customer websites were online again, but with a loss of a week and some irretrievable data. Then again, not all providers would go to the extremes this particular one did to make their customers whole again.

The moral of this story is to make sure you have automatic backups and archiving in place for not just your PCs and servers, but for everything you have in the Cloud, as well. Trusting your company’s lifeblood, its data, to just one provider is a bad plan. Put a backup in place separate from your primary vendor. It’s no doubt the cheapest ‘insurance policy’ your company will ever purchase.

I welcome your questions or comments at businesstech@software-to-go.com

Joe Balsarotti is President of Software To Go and is a 36-year veteran of the computer industry, reaching back to the days of the Apple II. He served three terms as chairman of the National Federation of Independent Business’ (NFIB) Missouri Leadership Council. He was chairman of the Clayton, Missouri Merchant Association for a dozen years. He chaired Region VII of the Federal Small Business Regulatory Fairness Board and currently serves on the Dealer Advisory Panel of the ASCII Group, an organization of over 1000 independent computer and technology solution providers in North America.

Subcontractors’ Mechanic’s Liens Enforceable For Work at Allen Edmonds, Plaza Frontenac

in Columns/Law
James R. Keller
James R. Keller

By James R. Keller, Herzog Crebs LLP

Subcontractors Crafton Contracting Company and Vogel Sheet Metal & Heating, Inc. can proceed to enforce their mechanic’s liens against Plaza Frontenac Acquisition, LLC, owner of Plaza Frontenac shopping mall, general contractor Swenson Construction Company, Inc. and mall tenant Allen Edmonds Corporation. With this result, the Missouri Court of Appeals for the Eastern District reversed a trial court decision that found the liens were not valid.

The case is Crafton Contracting Company and Vogel Sheet Metal & Heating, Inc. v. Swenson Construction Company, Inc., Allen Edmonds Corporation, and Plaza Frontenac Acquisition, LLC, 2016 WL 1469981, decided April 12.

The Eastern District has now made clear that the size of an owner’s property (in this case, the entire mall) should not be the deciding factor in determining whether an agency relationship has been established for the purpose of Missouri’s mechanic’s lien statute.

The parties stipulated to the facts at trial. In 2012, Plaza Frontenac and Allen Edmonds entered into a 10-year lease for space at the Plaza Frontenac mall located at Lindbergh Boulevard in St. Louis County.

The lease required Allen Edmonds to make certain improvements. Allen Edmonds submitted and Plaza Frontenac approved plans for those improvements.

Allen Edmonds accepted the bid of general contractor Swenson Construction Company of $207,398.40 for construction work. Swenson subcontracted demolition, framework, drywall, carpentry and barricade work to Crafton for $67,023.00, and heating, ventilating and air conditioning work to Vogel for $15,975.00. Both subcontractors completed their work.

Allen Edmonds paid Swenson in full. Swenson did not pay Crafton or Vogel. Swenson went out of business in June 2013, prompting Crafton and Vogel to file mechanic’s liens and a lawsuit to enforce them.

Section 429.010 of Missouri’s Revised Statutes (Missouri’s Mechanic’s Lien Act) provides that a mechanic’s lien may be placed upon an owner’s property for “any work or labor” completed upon such land by anyone who contracts with the owner or “his agent.” The issue in this case was whether Allen Edmonds was Plaza Frontenac’s agent.

The Eastern District decided that the term “agent” as used in Section 429.010 must be interpreted broadly. The level of authority required to create an agency relationship is less for a mechanic’s lien action than is otherwise required. This is not a typical principal-agent relationship, but rather, a special, limited agency pursuant to Section 429.010.

The answer to whether there was an agency relationship, according to the appellate court, turned on what the lease required. If the lessee (Allen Edmonds, in this case) was not required to make improvements to the property or to make improvements on its own, no agency relationship exists.

The Eastern District concluded that Allen Edmonds was Plaza Frontenac’s agent. The lease required Allen Edmonds to make substantial and permanent improvements to the property, including that the premises could only be used as an Allen Edmonds store. Allen Edmonds was to submit plans for construction requiring Plaza Frontenac’s approval, and Allen Edmonds was required to perform a complete build-out of the lease premises to conform with Allen Edmonds’ other stores including installation of storefronts and storefront signs, entrance doors, flooring and interior decorating.

The lease also required Allen Edmonds’ contractor to post a security deposit with Plaza Frontenac in case the work was not completed, and provided that all of the improvements became the property of Plaza Frontenac upon lease termination.

The trial court compared the subcontractors’ work to the value of the entire mall. The improvements comprised less than one percent of the mall’s space. The value of the improvements was no more than two percent of the mall’s value as a whole.

The appellate court decided that the trial court’s use of a mathematical equation and its comparison of the leased space to the entire mall misapplied the law.

Instead, the Eastern District emphasized that the subcontractors’ work enhanced the value of Plaza Frontenac’s property. They replaced vacant tenant space with a shoe store, improvements the lease required.

Plaza Frontenac relied on a 1986 Missouri case to support the trial court’s use of a simple mathematical formula to determine agency. This case did not apply, the Eastern District decided. The lease in that case did not require improvements.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator.

The Risk of Selling on Cruise Control

in Columns/Sales
Tom Woodcock
Tom Woodcock

By Tom Woodcock, Seal The Deal

As companies in the construction industry begin to see life in their sales, they take a big sigh of relief. Finally they have some breathing room. No more stressing on every bid opportunity. Contractors are filling to the brim with work and the insane pricing war is coming to an end. They feel they can sit back and wait for the phone to ring. To be honest, it is ringing more.

Not so fast! Thinking you can put your sales effort on cruise control can be a tragic mistake, a quick way to declining revenues and shrinking profitability. The concept that a sales effort can simply be turned on and off is a flawed philosophy. Any true sales forward company will tell you they are always selling.

Opportunity can be elusive. When it’s plentiful, everyone’s happy. When it’s not, panic can ensue. I regularly challenge my clients to keep pushing the envelope on their sales efforts.

Don’t become lax in approach, financial commitment, or time commitment. It’s easy to do and it is extremely commonplace in the construction industry. Why does it occur? There are some very common causes:

Tangibility: Sales has many intangibles. Sales work often seems fruitless. Most people don’t understand the cumulative aspect of sales work. The construction industry is notorious for wanting A to B results. I put A effort in therefore, I should get B result. You’re fooling yourself if you believe this is the reality of selling. Much of the fruit of a strong sales effort is difficult to trace to a specific action. That can drive owners nuts. They want to try and justify a sales event, lunch, or ballgame.

The sales agent states that the investment was worthwhile, but the bid or order is a long time in coming. This is where I see many companies back off on their efforts and shift into cruise control to handle what simply comes to them. A couple months pass then the well is dry. I’ll have clients that will stop working with me and feel they’ve got it. Then, a month or two down the road, sales are down and the bid requests aren’t flying in at the same high rate. Since sales is far from black and white, contractors struggle with the lack of tangible results.

Fatigue:  Sales work takes effort, such as going to events you’ve been to before or meeting with clients and tracking customer data, to name a few practices. Consistently practicing these disciplines, along with repetitive presentations of competitive differentiation, can sometimes border on monotonous. That can tire even the most enthusiastic of sales personnel. Losing occasional evenings or weekends can be a challenge, especially if you can’t immediately see the results of your efforts. It’s much easier to rest and handle what you have. The more tired you are of selling, the easier it is to stop doing it.

Buy In: Having a staff that doesn’t buy into the effectiveness of sales work can produce pressure that makes that effort even more challenging. People that don’t sell for a living, and are in a support position, can kill the sales drive by challenging the need for a strong selling effort. Selling is a team effort. Getting each department or staff member in lock step is important to maintaining a continuous sales plan. Then all members work together to keep each other accountable in pursuing quality opportunities.

Simply coasting along and not looking to be innovative and consistent in your sales approach can result in a severe drop off in business, especially if the market shifts or competitors target you specifically. Trust me, it will happen, usually before you can get a handle on it. The key is to create a sales culture that permeates the company front to back.

Thinking you’ve locked in your sales direction and believing you can back off on your effort is not a beneficial mentality. Whether done consciously or not, it can result in a deficiency in future sales direction. Panic is no foundation for going after business. Customers sense it and it causes companies to do crazy things, like bidding at cost just to have activity. I’ve seen this happen on many occasions.

Thinking you can slow down or stop selling and fly on cruise control may seem okay, but in reality it is a bad decision. Keeping a good, consistent sales plan based in customer engagement will prevail. Even if you don’t have the capacity to take on more projects, you’re communicating with your client base about exactly where you are. This makes you a desirable option. When you have the room to do so, you can grab the opportunities. The last thing you want to do is disengage with the customer base. Reengaging can be a difficult proposition, which is all the more reason to avoid hitting cruise control.

Tom Woodcock, president, seal the deal, is a speaker and trainer to the construction industry nationwide. He can be reached at his website: www.tomwoodcocksealthedeal.com or at 314-775-9217.

Manage Your Company Finances like a Project Contract

in Columns/Finance
Mark O'Donnell Photo
Mark O’Donnell

By Mark J O’Donnell, CPA, Schmersahl, Treloar & Co

If any one thing is required to succeed in contracting, it is managing the contract. The best contractors have a reasonably well-defined processes for bidding, preconstruction planning, execution and project close out. Very few details are left to chance. Each job is different, and the details are critical to profitability. There are both external factors (unions, other contractors, environment, etc.) and contract changes to be considered. And of course, there is getting paid. In summary the major steps are;

  • Planning (take off, estimate, bid, etc.)
  • Execution
  • Check on benchmarks
  • Modify the contract with CO’s as needed
  • Complete the job.
  • Get paid.

We have noticed that some, but not all contractors take a similar approach to managing the financial health of the business. Consider for a moment how similar the financial process is to the contract management process;

  • Develop an expectation (planning)
  • Execution
  • Check on benchmarks with month to month feedback (timely financials and job reports)
  • Modify the plan based on significant changes
  • Near the end of the year review the results and make key decisions (Complete the job)
  • Get paid

Many privately owned businesses do not plan the year due to a general distaste for ‘budgeting’. No doubt, it is a negative concept. But would you even consider starting a contact without a detailed set of plans? Of course not, it is a recipe for disaster. If you just wing it, you will be lucky to get what you expected. Oddly enough, that is exactly how many of us manage our financial future, we just wing it. The most often used response is related to a general lack of the ability to control the financial results, that they cannot be reasonably predicted. It is very difficult to predict next year’s revenue with pinpoint accuracy. However, our experience is that when asked, many contractors can estimate how they will do (e.g. revenue) the next year with amazing reliability. If you can estimate revenue, most of the balance of the plan can be complied and spread out over a year. Even the most basic effort will establish a basic expectation and an effective tool for decision making.

During the year, monthly financials and job reports are critical to determine if you are meeting your benchmarks / financial objectives for the year. Just like a project, things will go well, or not so well. With timely and accurate financial reports and comparisons to your expectation, information will be there to support decisions to make changes (CO’s if you will) or remain status quo. Without those reports, the year-end results will be a surprise. More importantly, some of the decisions made during the year may not have been optimal, at best. Think about the analogy that was popular years ago. To sail a ship across an ocean, you have a clear starting place and a destination. Along the way there will be regular checks on the ships actual position and thousands of course corrections to deal with the many variables encountered at sea to get back on course. It is true of contract management and financial management as well.

As the year comes to a close, you will need an accurate projection of the financial results for the year, and appropriate advice as well. At least two topics are very important. First, a plan to minimize tax to the company (and its shareholders) over the year just ended, and the next year. Both years must be considered to take advantage of our current income tax structure. Second, a decision regarding how much of the current year’s profits must be retained in the company to build equity and support growth. Accomplishing those two tasks, its time for the owner to get paid!

The similarities between managing a construction contract and your corporate finances are striking. Affixing that same level of attentiveness brings a similar result, a job well done.

Mark J O’Donnell, CPA is a partner with Schmersahl Treloar and Co, a locally owned CPA firm serving successful privately owned businesses, not for profit entities and the professions. A significant portion of the clients Mark represents are either contractors or the companies that serve them. Mark is also Treasurer of the American Subcontractors Association Midwest Council.

Contractor and its Owners Liable for Damages and Attorney Fees

in Columns/Law

By James R. Keller

The Missouri Court of Appeals for the Southern District has upheld a trial court’s judgment in favor of a homeowner and against a contractor and its owners for damages and attorney fees.

The case is Rogers v. Superior Metal, Inc., SD 33696, 2016 WL 442773 (S.D. Mo. Feb. 4, 2016).  This decision may open new personal liability against owners of construction companies.

Superior Metal, Inc. is a construction company that installs metal buildings, roofing, siding and windows.  In 2013, Harley Rogers decided he wanted to build a shed on his property for storage.  He discussed the project with Randy Mueller, one of the owners of Superior Metal.  Mueller told him that “it would be a stand up product” and that “the building would be straight, free of defects, and would be good lumber.”

Rogers and Superior Metal entered into a written agreement for $13,500.00 for Superior Metal to build a pole barn on Rogers’ property.

During construction, Rogers noticed defects and mentioned his concerns to Jonathan Holtzman, co-owner of Superior Metal.

Once completed, according to the appellate court opinion, the building had numerous construction defects.  Rogers demanded his money back.  Superior Metal refused to issue a refund.

Rogers sued for breach of contract, unjust enrichment, fraudulent misrepresentation, negligence, and violations of the Missouri Merchandising Practices Act (MMPA).  Rogers also sued Mueller and Holtzman individually based on an allegation of fraudulent misrepresentation.

The trial was in front of a judge instead of a jury.  The trial court found for Rogers on all counts, awarding $23,500.00 in damages, $10,000.00 in attorney fees, and $1.00 for punitive damages.  The appellate opinion offers no explanation why the award was $23,500.00 when the original contract price was $13,500.00.

The contractor’s first challenge on appeal was that the owner did not present any evidence as to how the alleged construction defects diminished the value of his property.  In Missouri, there are two measures of damages regarding defective performance of a building contract.

One is the cost-to-repair method, and the other is the diminished-value method.  The cost-to-repair method measures damages by the cost of repairing the defective work.  The diminished value method measures the difference between the value of the property before and after the defective work.

The Southern District noted that the cost method is the preferred method to recover damages and that the diminished-value measure should be used when the cost to repair method would cause “unreasonable economic waste.”  In other words, if the cost to repair far exceeds the diminished value of the property, then the diminished value of the property is the proper measure of damage.

In this case, once the landowner presented evidence on the cost to repair, the contractor has the burden to establish that the cost to repair is disproportionately high when compared to the diminution in value of the property.

The contractor presented evidence through an expert that it would cost only $445.00 to repair the defects in the building.  But the contractor presented no evidence regarding the diminution in the value of the property and thus the Southern District on appeal affirmed the trial court’s decision that the damages for faulty construction were $23,500.00.

The appellate court also decided that owners Mueller and Holtzman were individually liable given the trial court’s finding of fraudulent misrepresentation.  Their communications with Rogers, according to the court, were “affirmative participation in the actionable wrong and so justify imposition of individual liability.”  Their personal liability stemmed from fraud, not just breach of contract.  This result will trouble construction company owners.

Regarding attorney fees, the Missouri Merchandising Practices Act allows a trial court to award attorney fees based on the amount of time reasonably expended as well as punitive damages.  Defendants contended that there was no evidence to itemize any attorney fee time and thus no support for attorney fees.

The Southern District concluded that it is well within a trial court’s discretion, as an expert on attorney fees, as well as having familiarity with the case at hand, to decide what attorney fees are proper.

The Southern District also decided that on remand the trial court could determine what attorney fees should be assessed for the appeal since Missouri law allows that the award of attorney fees can include those attorney fees incurred on appeal.

There is no mention of the $1.00 assessed in punitive damages.  The trial court’s decision was affirmed on appeal.  It appears this award stood as well.  A $1.00 punitive damage award usually reflects a statement of disapproval with defendant conduct and is not intended to reflect plaintiff’s actual damages.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction law, complex business disputes, real estate and ADR.  He also is an arbitrator and a mediator.

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