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Preventing Fraud In Your Organization

in Columns

By Ken Van Bree 

Here’s a statistic that will keep you up at night: according to the Association of Certified Fraud Examiners (ACFE), fraud within the construction industry is now costing an average median loss of $245,000 for organizations. Further, ACFE report that the construction industry’s median loss is approximately $90,000 higher than the average fraud losses across all industries. 

Type of Fraud Schemes

The threat of fraud can never be wholly removed, but leadership should take steps to identify schemes their organization might face. Below are a number of schemes frequently used to defraud construction companies.  

Billing Schemes

The ACFE indicates that billing schemes account for 35 percent of the fraudulent activity within construction companies. Such schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee), and purchase of personal items with company funds. 

Bid Rigging & Corruption

The ACFE reports that nearly 47 percent of the fraud cases examined in the construction industry had an element of corruption, whether it is bribery, kickbacks or quid pro quo situations The bid process can be riddled with opportunity for this type of fraud. 

Theft

The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Job sites can be in remote areas or some distance from the  corporate headquarters and subject to less supervision. Additionally, materials on job sites are hard to track and measure during the construction process. Items lying around a job site such as lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place. 

Misuse of Company Equipment

Similar
to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.
 

Other Fraud

The construction industry is subject to the same fraudulent activities faced by every other industry. These include payroll fraud through fictitious employees, check tampering, and fraudulent expense reports. 

The Importance of Internal Controls

After identifying common fraud activities, an organization should design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees, the foundation to a strong internal control environment is proper segregation of duties. For example, the person in charge of setting up vendors should not be the same person who approves vendor payments or reconciles bank statements. Proper segregation of duties applies to all areas of business and can be employed effectively at little or no cost. 

Here are some other simple yet effective internal controls organizational leadership should consider implementing: 

·         Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.

·         Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.

·         Require that estimates for materials above a specified amount include quotes from two or more vendors.

·         Make purchases only with pre-numbered purchase orders, and match them to both receiving reports and invoices before payment is made.

·         Check vendor invoices against estimates to ensure proper discounts and pricing.

·         Always refer to specific job numbers, phase codes or work order numbers in onsite communications.

·         Obtain ink or electronic signatures on change orders before work begins and revise contract values accordingly.

·         Allocate equipment usage to contracts weekly and record equipment maintenance expense in the ledger as they occur.

·         Review all billings for timeliness, accuracy, conformity with contract terms, and correct customer information.

·         Reconcile contract billings with general ledgers monthly, and calculate under-billings and over-billings.

·         Prepare and review monthly financial statements and reconcile them to supporting ledgers, bank statements, and loan schedules 

Not all controls are created equal when trying to detect and prevent fraud.  For instance, according to the ACFE, an external audit was performed in 80 percent of the fraud cases reported, but detected the fraud in only three percent of those cases. The majority of fraud was uncovered through tips to a fraud hotline or management, and employees or customers were the leading sources of those tips. A fraud hotline was in place
for 54 percent of the fraud cases examined.
 

Based on this information, it is important not to put too much reliance on a single control, but rather have a series of processes that will prevent and detect fraud. 

Know The Signs

The profile of a fraudster can be as important to know as understanding the typical fraud schemes employed themselves. Per the ACFE, fraud typically is not perpetrated by a repeat offender. In fact, only 5 percent of fraudsters had been previously convicted of a fraud-related offense prior to committing fraud crimes. 

Additionally, 82 percent of fraudsters had never been punished or terminated by an employer for fraud-related conduct, which shows that while background checks are useful in screening out some bad applicants, they might not be effective in predicting fraudulent behavior. 

Most fraudsters were employed for more than one year before committing fraud, but most displayed some, such as living beyond their means, financial difficulties, or having unusually close associations with vendors or customers, that could have served as warning signs. Training management to recognize these warning signs for employees, vendors and auditors is important to help detect fraudulent behavior. 

Protect Your Company’s Reputation

Ultimately, knowing the types of fraud, what controls to implement and the profile of a fraudster can help mitigate the chances of a significant fraud loss, but maintaining your reputation is another critical factor. 

Reputation is a construction company’s most important asset since the construction industry is small enough for word of mouth to carry great weight in the decision process of sureties, bankers, suppliers or customers. Across all parts of the organization, companies should operate under a code of ethics that builds their reputation in the community. 

Ken Van Bree, CPA, is a partner of St. Louis-based accounting firm RubinBrown and serves as the partner-in-charge of the firm’s Construction Services Group. For information, visit: http://www.rubinbrown.com Contact: 314.290.3429 or

Sales Death by Product Knowledge

in Columns

By Tom Woodcock 

Often, when I’m brought in to train prospective sales personnel, I’m presented with employees with tremendous product knowledge. When it comes to the features of the product or the service, no one can hold a candle to them. Man, do they ever know their trade or the nuts and bolts of the equipment. Customers will be wowed by the expertise they bring to the table.  

Sound like the perfect sales agent, right? 

Well, all the knowledge in the world is worthless if the customers are bored out of their minds. Information is useless if it isn’t received. A glazed-over look indicates the customer isn’t engaged, and your presentation is falling on deaf ears. 

As a sales trainer, I run into this scenario all the time. Though noble in its quest, putting product or service knowledge ahead of engagement is to blatantly disregard the customer. Even a potential client that loves product information will lose interest if he or she is not dialed in to the presenter. 

Have you ever been to a seminar where the topic was relevant and detailed, but you found yourself looking at your watch through the whole thing? Sadly, a high percentage of seminars fall in this category. The presenter is more into the data than the attendees. 

The same dynamic happens in selling, but on a smaller scale. Companies look at their personnel and choose who will go to the customer. They often conclude that those with more product or service expertise are more critical to get in front of customers than the likable employee who can own a room. They just want that person with people skill to get a little more knowledge first. Sooooo, are they going to get the person with product awareness a little more socially skilled? 

What do you think is easier to teach? 

You have to come to the realization that developing a relationship trumps product knowledge in relation to price. A potential customer can take your product knowledge and measure it to the competitor’s product. It’s easily carried. I cannot take the level of personal connection I have with the sales agent from your company and transfer it to the competitor. So where is the competitive edge? 

Now, I’m not saying product knowledge isn’t important. The ultimate sales person has both strong people skills AND significant product or service knowledge, but these thoroughbreds are very hard to find. They’re actually much easier to develop. 

Taking the raw, but socially talented person and educating him or her on both product and sales knowledge is a formula for success. I see many talented young reps  wasted as they get bogged down and belittled for their limited product knowledge that they never are comfortable using their God-given abilities. Long-term employees call them “green” or “shallow” and chase them into the woodwork to become product wonks. They try to use social media as an outlet and are even restricted in those avenues by management. 

As a rep I was never the best at gaining product knowledge. There were so many different types of products and my customers knew them from daily use better than I ever could. I felt it was more necessary that I respected their knowledge and made sure my approach was likable. They not only respected me in return, they appreciated my honesty, often educating me through the process. A good rep will take that education in relation to the individual customer and bank it. Then the next time the need arises with that client, they’re ready with the customer’s preferences. This is the art of making the deal. 

Understanding your customers as people and functioning as a customer-friendly liaison to your product or service are the crucial roles of a salesperson. You meet their needs and expand the relationship. Pricing then becomes far less of an issue because of the amount of trust you’ve developed. For that to work, it’s also important to establish product support to your strong social reps so that they have access to support personnel or resources that can assist them in answering questions or objections. 

Many times those steeped in product and service knowledge come across as arrogant or condescending. That’s a complete customer turn-off. The ability to take the vast knowledge a product-oriented rep has and transferring that information to a potential buyer is difficult. The key to growing in this regard is learning how to listen first and then suggest, not tell customers why they’re wrong or off base. That’s hard to do when you know more than them. The mastering of this skill will begin the process of social skill development. Notice I said process. The higher levels of social skill require personal stretching even for the most outgoing sales personnel. 

Belief in your product or service is extremely important. Customers need that knowledge. The problem is: if they don’t connect with the messenger, they rarely connect with the message.  

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.

Your Company Can Take Advantage of The Research & Experimentation Tax Credit

in Columns

By Richard L. Wile, MBA, & Richard K. Pickett

Does your construction or engineering services firm engage in projects involving the development or improvement of designs (particularly design/build and design/assist projects)?  If so, you may want to consider taking advantage of the Research & Experimentation (R&E or R&D) tax credit.

The R&E tax credit is an income tax credit that rewards companies for developing innovative solutions to many of the challenges encountered on a daily basis.  The credit applies to taxpayers engaged in the development and/or improvement of a product, process, formula, technique, software, or invention.  Within the construction industry, these projects include developing or improving designs where the company is at both economic risk (think lump sum contracts instead of time & materials) and design risk (think design/build and design/assist projects).

The R&E tax credit is a federal (and sometimes state) wage-based initiative rewarding innovation, including the development of designs for new structures or electrical and mechanical systems, or research on new and improved materials, or even the validation of these systems and designs during the commissioning process.

Interestingly, because of recent changes to the regulations and several relevant court cases, this credit may be available to your company using information that is already maintained within your project tracking software. These changes and judicial decisions have clarified the types of contracts and project types that are eligible for the credit.

Evolution of the R & E Tax Credit

The R&E tax credit has evolved substantially over the years, with significant changes and clarity coming from a variety of sources including the US Treasury Department, the judicial system, and Congress. Many of these changes have been taxpayer friendly.

The biggest change occurred when the Treasury Department issued Treasury Decision (TD) 9104 in 2004, which backed away from what was called ‘the discovery test.’ The level of innovation needed to pass the discovery test was that the research had to expand or refine knowledge within the industry. This usually required a patent to support the position. TD 9104 removed the  discovery test language, effectively lowering the “innovation bar” to where it only had to be new to the company.

“Research” defined

“We don’t have scientists wearing white lab coats using beakers and test tubes. Improving our designs and fabrication processes is a normal part of our company culture.  How can this be research?”

This is a common reaction when introducing the R&E tax credit to companies. People often think of research as needing to revolutionize an industry or redefine a technology to qualify for a research credit. Those activities are indeed research in the traditional sense the innovation, but the U.S. Tax Code’s current requirements have a unique definition of research and experimentation.

Four-part Test

A four-part test defined in the IRS regulations must be satisfied for projects and activities to be eligible for the research credit.

The first, known as the “Business Component” test, references six project types — product, process, formula, technique, software, or invention.

The second requirement requires the existence of uncertainty in one of three categories:

  1. Capability (Can we do it?)
  2. Method (How do we do it?)
  3. The appropriateness of the design (What will it look like?)

The ultimate success or failure of the project is not relevant.  In fact, projects need not to have been awarded. Therefore, you may even want to consider re-visiting large projects you’ve lost in the bidding process if they involved significant up-front design costs.

The third requirement is that the research must be technological in nature: fundamentally relying on the principals of the physical or biological sciences, engineering or computer sciences.

The final requirement calls for the existence of a process of experimentation, which can include modeling, simulation, and/or a systematic process of trial and error.

A research project is not eligible if the taxpayer is not at economic risk for the research or does not retain substantial rights to the outcome of the research.  For this reason, in the construction and engineering fields, projects where the compensation is structured based on lump sum fees (as opposed to cost-plus or time and material arrangements) are the primary focus in the identification of “qualified” projects.

Qualifying Expenditures

There are three types of expenses that qualify for the credit.  These include eligible wages calculated from the qualified hours spent on projects, supply costs (for mock-ups, new material trials, etc.), and the expense contract research, which are costs incurred for third-party services that would have been qualified had they taken place within the company.

Examples of qualified activities in the construction industry include: presenting alternatives or improvements in precon and design review meetings, development of designs during the conceptual, schematic, and design development phases of a project; improvement of designs based on conditions encountered on the job site; development of CAD or fabrication plans; BIM simulations for identification of conflicts from other systems; and validation of system performance during the commissioning process.

How much?

The net benefit of the federal R&E tax credit is approximately six percent of the qualified expenditures. Therefore, for every $100,000 in qualified wages, supply costs, and contract research, the company (or its owners in the case of flow-through entities) receives approximately $6000 in dollar for dollar reduction in tax. Many states (unfortunately not Missouri) also have state programs. The credit can be included on the originally filed tax return, and also can be captured by amending the returns still within statute (typically three years).

Why now?

If your company has not taken advantage of the research credit in the past, now is a great time to review your activities to determine if you are eligible. Due to recent activity by the Treasury Department and in the courts, there have been many changes with the R&E tax credit in the last year. If you have taken the credit in the past, you will want to make sure you are in compliance with all the recent changes and that you are maximizing the credits available to you.

Richard Wile, MBA, is partner-in charge and Rich Pickett is manager and vice-chair of RubinBrown’s Research & Experimentation Tax Credit Services Group:  Contact:

314.290.3367; richard.wile@rubinbrown.com, or 314.678.3610; richard.pickett@rubinbrown.com.

Dispute Over Parking Lot Access Lands One Party in Contempt

in Columns

By James R. Keller

After years in court before four different trial judges, owners of adjacent commercial properties will continue their dispute over access to their common parking lots. The Western District of Missouri dismissed an appeal, leaving in place an order of contempt against one of the owners and sending the case back for more trial proceedings.

The case is Relaxation, Inc. v. RIS, Inc., 452 S.W.3d 743 (Mo. App. W.D. 2015).

Relaxation and RIS own adjacent commercial properties. Two common parking lots between the properties were set up for use as common customer parking. This included a requirement that an existing 25-foot wide driveway was to always remain open.

In July 2011, RIS began construction of a new shopping center on its property. The development included several big box stores as future tenants including Menard’s, Kohl’s and CVS. During construction, RIS altered or destroyed portions of the two parking areas, barricaded and restricted access, stored construction vehicles, supplies and other equipment on the areas, and ran power lines and other utilities across the areas without Relaxation’s permission.

Relaxation filed a lawsuit against RIS seeking a temporary restraining order (TRO), a preliminary and permanent injunction and damages. The first judge ordered the parties to agree on a location for the common parking area and ordered RIS to open the driveway of the parking lot and restore the area to its agreed dimensions within 10 days. The court stated that it would issue a TRO if those conditions were not met.

The next day, Relaxation had the area surveyed and stated that if RIS had any disagreement with the boundaries, it should contact Relaxation’s counsel. RIS did not respond and did not restore the common parking area.

A week later, RIS moved in court for a change of judge. The court had noted that construction work was still continuing in the disputed common area in spite of the court’s previous order.  The trial

court concluded that it could “entertain absolutely no reason for defendant’s contemptuous behavior.” The case was then assigned to another judge.

The new trial judge gave RIS 30 days to reach a settlement. The court stated that if there was no settlement, it would enter a TRO. The court also ordered RIS not to perform any additional construction work on the disputed property.

During the next 30 days, RIS continued performing construction work on the disputed property. The trial court then issued a TRO requiring RIS to restore the two parking easement areas within 96 hours and remove any utility poles and construction materials.

That judge then recused himself and the case went to yet another judge.

From March through May 2012, the trial court through its new judge issued additional extended temporary restraining orders at Relaxation’s request.

Relaxation then filed another motion for contempt based on RIS’s failure to comply with the prior court orders. Relaxation requested daily fines and the incarceration of Gary Prewitt, the principal owner of RIS. The trial court issued another TRO and a show cause order on why RIS should not be held in contempt.

At the contempt hearing, Prewitt testified that he did not even read the prior court order and that his company took no steps to comply with it. RIS’s construction manager further testified that additional construction work had occurred in the disputed areas in violation of the court’s orders. RIS also constructed a large commercial sign partially within one of the disputed lots.

In April 2012, the court issued an order of contempt, finding RIS’s conduct constituted a trespass and issued a preliminary injunction.

RIS’s defense to its actions was that there was a potential condemnation action, which might affect the property in question and therefore RIS felt that it did not need to comply with any of the court orders. The City of Lake Ozark did in fact file a condemnation proceeding.

At this point, the trial court ordered RIS to pay $45,892.94 for Relaxation’s attorney fees and surveyor fees. The court then entered an order that Prewitt would be incarcerated if he failed to strictly comply with the orders of the court including payment of the $45,892.94 and if he failed to restore the parking areas.

RIS argued that the condemnation action superseded the parking lot dispute and thus the action should be stayed. The court agreed and stayed the parking lot dispute and then the trial judge recused himself and a fourth judge was assigned to the case.

RIS appealed the contempt order. The Western District dismissed the appeal as being untimely.  This sent the case back to the trial court once again with the order of contempt remaining in place

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.

Sales, It’s a People Thing

in Columns

ByTom Woodcock

Selling can be either a simple process or very complex one. In the construction industry, people often make it more complicated than it really is.

The format of competitive bidding can be frustrating, but if you don’t let the pricing mechanism dictate your actions, you can see through the fog. Even very intelligent contractors have to
work not to buy into the conventional wisdom on bidding. It’s extremely easy to get sucked into the “It’s all about low bid” crowd.

The pressure to focus on pricing can be intense. It takes discipline and effort to realize that there are other factors in the construction buying decision. Failing to recognize those factors
can lead to a lack of understanding of why you’re not winning projects. 

Getting on a bid list is a small accomplishment, but getting inside information on the bid process, needs, or results is significant. That is not achievable through a great Facebook page or
social media activity.  Getting the information requires engaging with the customer and establishing a relationship.

Being connected to your customer base is old school, but it is necessary. The impact of social media is beginning to level off, which brings us back to good ol’ fashion customer contact.

I thoroughly enjoy helping a client get connected to the customer base and watch his bid volume increase. They develop strong relationships with their clients that even turn into
friendships. They don’t just entertain their clients, but connect with them socially.

It isn’t a matter of throwing money at them, but of treating them as people. Learn their preferences and likes, and then take advantage of that to secure quality opportunities. Your investment of
time and treasure produces significant returns if you stay with it. The easy thing to do is write off the necessary customer contact as time wasting and expensive. The majority of contractors tend to lean in that direction. Those that persevere get the desired results.

The process of connecting with a wide swath of customers is simple if you don’t complicate it. Getting in front of customers and doing so consistently will pretty much meet the requirement.
Talking about life in general will incorporate business conversation nine times out of ten.

Forcing conversation or pressuring a customer usually backfires. You’ll experience a lot of one appointment and done results. Relax as much as you can and ask reasonable, personal questions. Be genuinely interested in your customers’ opinions and lives. They’ll appreciate it and want to know about you. Stepping out in this fashion will grease the path to success. Just stick with it.

Personal contact is very difficult for some people. For them, it’s a struggle to meet new people and feel comfortable. It can sometimes seem amazing that some other people can connect at the drop of a hat. If you have one of the latter type of individuals, don’t saddle them behind a desk or computer. People with topnotch people skills can be very  difficult to find, but often they need structure and support.

For those who dread connecting with people or working a room, getting in the position to do so is half the battle. Pushing yourself to introduce yourself to a new business contact breaks the
seal. Most people feel exactly as you do so that little step can begin the relationship process. If there’s no other choice but having to connect with the customer base, you have to learn how to make a first move.

It’s easy to hide behind Linkedin or Twitter, send an email, or post on a wall. The problem is it relegates you to virtual invisibility or white noise.

Gaining the separation from competitors that everyone says is necessary requires personal contact. The more you try to structure your approach, the more complex it becomes. Ten-second
elevator speeches and cute ice-breakers are easily spotted. Trying to get out what you do in the first 90 seconds of a conversation is amateurish and flat out cheesy.

The construction consumer is much more astute than in generations past. The ability to secure information and project knowledge is at our fingertips. The more you’re simply yourself, the more
impact you have on the customer. Let’s face it, being yourself should be easier than pretending to be something you’re not.

As I train dozens of construction personnel on selling, I find the greatest impediment is the willingness to get around people as much as possible. It’s much easier to make excuses for why you
can’t get around potential customers than it is to raise the priority of such behavior in your schedule. Paperwork, project visits, and financials are actions with immediate results. Sales is the definition of delayed gratification. Accepting this premise and persevering anyway will separate you from a high percentage of the competition. It’s not enough to think it’s a good idea to connect with customers, you have to put feet to it. Yes, selling can be complex, if you make it so.

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.

Reducing Risk in the Internet Age

in Columns

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.

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.

On-Premise or “The Cloud”, Which is Right for Your Business?

in Columns

By Joe Balsarotti

Talk of “The Cloud” permeates tech advertising nowadays and even though the majority of people can’t explain what it really is, more and more are trusting their businesses to it.

In reality, The Cloud is nothing more than another phrase for using resources across the Internet. Some years ago, someone drew a cloud on a diagram in their presentation to represent the inner workings of Internet connections and bingo! Both, the name and symbol stuck.

Services like Microsoft’s Office 365 or Google Apps are examples of Cloud Services. With a cloud-based service, the data and the program (now generally called an app) no longer reside on your computer. They are off-site, hosted at one or more data centers across the globe. On-Premise programs, such as traditional accounting, client management, inventory and design programs run on servers and PCs  housed within your walls.

To decide which is right for your business is, unfortunately, a long and arduous task in most cases. On-Premise and Cloud versions of even the same program are rarely identical. True prices, not to mention any savings or additional cost, can be difficult to calculate since Cloud services tend to be rented, rather than licensed. And while the initial monthly cost might be easy to see, there are no assurances that costs will not rise substantially in subsequent years when businesses are ‘hooked.’ Conversely, On-Premise programs require substantial capital expenses upfront. Cash flow considerations make monthly payments look attractive for Cloud, but being able to stretch another year, or two out of an On-Premise program might be a lifeline to a business dealing with an industry downturn.

Another wrench in the works when trying to decide Cloud vs. On-Premise is what happens when the

Cloud service is not as advertised, or the vendor goes out of business. Moving from one service to another is not an easy task and can lead to considerable cost. A number of Cloud services have gone under in spectacular fashion, but sometimes clients have less than a month’s notice that they will be without the ability to bill, collaborate, do payroll or have access to their own data. With a traditional server and software program, a vendor’s demise doesn’t mean the program can’t continue to be used while a thoughtful search for a replacement is made.

Then there are legal ramifications to consider. Businesses dealing with compliance issues, Government contracts, or sensitive data, need to be assured that any Cloud service they choose uses only US-based data centers, since data held offshore is subject to the laws of the country the center resides in. This becomes a very sticky situation when a Cloud vendor merges or is bought out by one from another country. If a business has become overly dependent on a single vendor, they could find themselves breaching their confidentiality agreements without even knowing it.

Finally, there are infrastructure considerations to add to the decision mix. If some ‘genius’ with a backhoe cuts the Internet line to your office, your office is completely down for the duration whereas with the traditional client-server programs, you might not be able to send and receive email, or research on the Internet, but staff can still enter invoices, prepare bids and get some work done.

Whether going to The Cloud, using On-Premise software or some combination of the two is the way for

your business to go can be a difficult decision and requires more advance-planning and research than many businesses may be accustomed to do, but that research and planning are essential to keeping a business running smoothly.

You can reach me at: businesstech@software-to-go.com

Joe Balsarotti is President of Software To Go and is a 35 year veteran of the computer industry and member of the Computer Industry Hall of Fame. 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.

Digital Vandalism

in Columns

By Joe Balsarotti

The digital world, more and more, reflects the real world. In the world we live and breathe in, what we call it vandalism and theft we call hacking in the digital world.

It seems as if each month we hear about another major company, organization or government getting hacked. What we don’t hear about, but is even more prevalent, are all the individuals, and privately-held small and mid-size businesses whose websites are hacked, vandalized, or seized and remotely control seized. Even the websites of the smallest businesses are being stolen or vandalized.

It’s obvious when hackers deface a site, but many times the vandalism is hidden. Subtle programming changes made behind the scenes of even the most basic of websites can wreak havoc. Someone just visiting a compromised web page can become infected, easily causing tens of thousands of dollars in damage, ruining your company’s reputation, and creating a PR nightmare. After all, if a client’s infection is traced to your web site how likely are they to trust you with their next project ?

A compromised website can look normal at first glance, but when a client or prospect simply visits the site, a hidden program moves to their machine. That infection could do anything from stealing account numbers to logging every keystroke to taking over that machine and using it in cyber crime. In less dire, but still costly instances, the graphics and text of the site could be changed to say your company give bad service, or convey vulgarities or hate messages. Or, in other instances, it may simply reroute visitors trying to visit your site to other websites, be it for a competitor, or for some totally unrelated and possibly embarrassing or illegal product or service.

Every website is a unique computer program, rarely written ‘from scratch’ but designed with the computer version of Legos, a bunch of standardized blocks or “routines,” which have almost infinite combinations. Examples of blocks are a ‘ticker’, ‘sign up for newsletter’, a video window, or even the current time and temperature. Since these routines are commonly available, those with less than virtuous motives pick them apart, find flaws and develop ways to exploit them – and your web site is full of them. Even the basic template for your site probably came off of a list of standard templates. To not use these common tools would put the cost of developing a website well out of the reach of most businesses.

As computer programs, websites require constant updates too, even more so than your PC, since they are available to every single person on the planet with Internet access. When is the last time your web designer updated your site’s security? How strong is the password to edit your website and how many people know it? Do you have levels of security to keep those who make updates from changing other aspects of the site? In how many cases do you even have an ongoing relationship with your web designer? Did they hand you the keys, take your check and walk away? If so, you have a serious issue to deal with and the sooner the better.

Of course, ecommerce sites (those that facilitate purchases of products and services) have unique challenges. Credit card processors, however, now require ongoing testing for PCI Compliance, thereby forcing that at least basic security be in place and up to date. Unfortunately, this basic testing does nothing to assure the non-shopping aspects of a site are secure.

Since websites are your company’s billboard to the world, they can be very powerful tools to promote your company, provide customer service and act as your 24/7 sales force. As with a billboard, to keep your message clear, fresh and understandable your web designers need to not just put together ‘the look’ you want to convey, but must understand that the site is a complex program and needs regular, scheduled updates to the security of underlying programming elements and checks for ‘injected code’ that may alter what the site is doing. This is especially problematic when a company uses a do-it-yourself site creator, with no access to the underlying security.

As with your company’s physical plant and network security, there is no single fix. Maintaining websites require the same level of vigilance that you use in the physical world. Just as you install locks and change the keys when staff turns over, use surveillance cameras, or replace blown bulbs on your premise lighting, you need to have security in place and regularly maintain your website. After all, what good is all the time, effort, and expense that you put into getting your website launched in the first place, if it ends up a detriment to your sales and support efforts or a liability when it damages the property of others.

You can reach me at businesstech@software-to-go.com

Joe Balsarotti is President of Software To Go and is a 35 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, 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.  

So You Have a Backlog?

in Columns

By Mark J. O’Donnell

It has been a very long time since the Saint Louis region’s construction market has been this strong. Backlogs for a wide range of general contractors and subcontractors are significant. Many contractors have already booked contracts exceeding revenue for all of 2014!

Be careful what you wish for. All of that good news can be overwhelming. It can overwhelm job site supervision, company management, and the financial capacity
of your company. Let’s take a look at the financial stress points that will or are already occurring.

Accounts receivable

The heart of your business is cash flow. Poor timing of cash receipts versus cash disbursements for otherwise profitable contracts can wreck havoc on overall
financial performance.
  With a sudden surge of business, billings exceed collections and receivables swell quickly. At the same time cash, used to fund payroll and operations, quickly dissipates.  Two critical aspects must be carefully and regularly managed; billing and collection. These seemingly obvious issues frequently are overlooked with a heavy load of contacts in progress.

The process of billing for contracts is frequently defined by the contract so that the timing of the billing within contract terms may be the only task within the contractor’s control. Accordingly, all contract billings should go out as soon as allowed. In addition, time and material billings should be processed and mailed immediately.

Collection efforts are not fun for anyone, but they are necessary. The timing of payment
is not only subject to the contract but to the habits of the ‘upstream’ parties as well. Nevertheless, it is true that the squeaky wheel does get attention.
  When needed, the threat of a lien can be effective and accordingly tracking lien deadlines is key. Don’t let
this important leverage slip thru your fingers.

Line of credit

It is difficult for most contractors to fund the front loaded outflows of cash with existing cash balances during a significant upsurge. Virtually all use their line of credit to fund cash flow shortfalls until late in the contract when collections finally exceed  disbursements. Three things to consider are

  1. borrowing base
  2. maximum borrowing amount and
  3. amount of availability left on the line.

The borrowing base varies by loan agreement, but frequently is defined as a percentage of ‘qualified receivables,’ which are receivables under 90 days old, that are not related to a bonded job, and of course excludes retainage. At any point in time, or with unexpected bad timing, excluded receivables may be so significant that the available line of credit is tapped out. Many companies track the borrowing base and rated available borrowing (borrowing base less actual borrowings) weekly for that very reason.

It is not unusual for a surge of business to create the need for a line of credit greater than the amount of the current borrowing agreement.  Make sure you have more line than you “need,” because you may unexpectedly need it.  The banking industry has become heavily regulated handshake deals are virtually gone. Give your banker a chance. Talk to him early. 

Finally, both banks and sureties watch you closely. They rely on a number of reports
including your monthly financials. If possible, manage your line of credit to be as low as possible at any month end. The amount of borrowing available on your line of credit will help your financial positioning.

Accounting and job costing

After many years of relatively lean times most accounting departments are staffed at
minimum levels. They will be pressed as the new volume of contracts get underway. Busy accountants produce reports later than normal. That can be a disaster on many levels, but in particular in billing, job in progress reporting, and monthly financial statements. In addition, when things get hectic, forward looking responsibilities, like cash flow projections and future line of credit needs get put to the side; don’t let them.

Change order processes and controls

Change orders are the bane or icing of all contracts, depending on your point of view.
How often when we get busy do we verbally commit to do the work, agreeing the paper work will come along? Predictably the owner objects to the change order and/or the project runs over budget. Suddenly the poorly documented change order is worthless. Contract profits dwindle or disappear and opportunity for a great year is wasted. Contractors have leverage before the extra work is performed to get the paperwork IF they take the time to focus on it. It may not seem to on site personnel to be an issue at the time, but it will be later, and it will cost the company money and relations with other contractors.

In closing

Our economy is such that we cannot count on three to five more years of prosperity.
The larger projects and pent up demand we are currently experiencing do not mean we have returned to the ’80s. Accordingly, it is important that 2015 be a very profitable year, and that contractors improve their financial position. Careful utilization of your company’s precious financial resources is required and the reporting systems that provide financial feedback during this welcome surge in revenue are critical to convert this opportunity to a bright financial result.
 

Mark J. O’Donnell, CPA, is a partner at Schmersahl Treloar & Co.

Fraudulent Lien Waivers Cost Owners of Contracting Company

in Columns

By James R. Keller

After a bench trial in Jackson County, MO, the circuit court awarded a defrauded owner $124,299.23 to reimburse for all payments to its contractor plus $13,051.42 in prejudgment interest, $150,000.00 in punitive damages, and court costs.

The Western District Court of Appeals recently affirmed the court judgment. The Missouri Supreme Court declined further review, making the judgment final.

The case is John Knox Village v. Fortis Construction Co., 449 S.W.3d 68 (Mo. App. W.D. 2014).

John Knox Village (“JKV”), as the owner, entered into a contract with Fortis Construction Company as the general contractor for a project known as the PACU Project. Fortis represented and warranted that with each application for payment, all work to that point would be free and clear of all liens and claims and all subcontractors would be paid.

JKV also contracted with Triad Construction Company, Inc., as a general contractor, on a project known as the Hospice Project. Triad made the same representations as Fortis regarding payments and liens.

Fortis was a limited liability company owned and controlled by Armando Diaz, Tom Nadler, Don Nadler and Gary Rodenberg. The two Nadlers and Rodenberg also were owners of Triad. Triad and Fortis frequently subcontracted work to each other.  Both companies had offices in the same building.

JKV entered into a joint check agreement with Triad and Fortis on both projects. Fortis was the subcontractor to Triad on the Hospice Project.

The appeal involved the Hospice Project. JKV paid Triad and Fortis pursuant to the joint check agreement a total of $124,299.23 for the Hospice Project. JKV received lien waivers per applications for payment and a final waiver of lien. Triad had certified that all subcontractors had been paid or would be paid.

JKV’s architect discovered after final payment that none of the subcontractors on the Hospice Project had been paid and that $127,121.14 was owed to them.

Several of the subcontractors provided notice of their intent to file liens on the Hospice Project property. JKV negotiated payments in lieu of the filing of mechanic’s liens at 70 percent of what was owed for some, 90 percent for one and 100 percent for another. In total, JKV paid an additional $70,373.78 directly to the subcontractors.

Triad filed a petition for Chapter 7 bankruptcy in federal court. JKV then filed a lawsuit against the individuals who owned Triad.

The issue on appeal was JKV’s claim against the individuals (not Triad) for  fraudulent representation, fraudulent conveyance, and civil conspiracy, all of which the trial court found in favor of JKV.

The appellate court agreed that there was sufficient evidence that Triad falsely represented that it would timely pay any subcontractors for work performed on the Hospice Project after receiving JKV’s payments. The court also found that the individual defendants had entered into a civil conspiracy to unlawfully benefit themselves by “absconding with the money JKV paid.”

The individual defendants argued that the bankruptcy court had exclusive jurisdiction and thus the circuit court could not enter judgment against them. The appellate court determined that the bankruptcy trustee was aware of the JKV lawsuit and never asserted that this claim belonged in the bankruptcy proceeding.

The appellate court found there was sufficient evidence to pierce the corporate veil from Triad to its owners so that the owners were personally liable. The court affirmed that when a corporation is used for an improper purpose to perpetuate an injustice, the usual protections of the corporate veil no longer exist and the individuals behind the corporation can be personally liable.

In essence, piercing the corporate veil requires a finding that the owners of the corporation had sufficient control over the finances and the policies of the company, used such control to commit fraud or other wrongful actions and that  such control was the proximate cause of the damage claimed, in this case by JKV.

The Western District also affirmed as damages the money JKV paid to the contractor even though this exceeded the money JKV ultimately paid to the subcontractors and defendants had completed the construction project. The court decided that JKV received nothing of value in return for its payment because in reality the owner was subject to mechanic’s liens in excess of what it had paid.

The appellate court also determined there was clear and convincing evidence of outrageous conduct by the defendants to infer an evil motive and justify punitive damages.

The appellate court noted that it was the knowingly false representations by defendants that elevated this case and allowed the piercing of the corporate veil. This is a distinction from what the court described as a “garden-variety breach of contract action involving the non-payment of subcontractors.”

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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