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The Basics of Electrical Preventive Maintenance and Its Implications for Controlling Costs

in Perspective

By Emily Aschinger Martin

On December 2, 2014 the city of Detroit experienced a widespread shutdown of its electric power due to a failure of the grid. This power failure “forced evacuations, trapped people on elevators and darkened hospital rooms,” according to the Detroit News. The report continued with a statement from Randi Berris, DTE Energy spokeswoman. “Everybody is aware the system has not gotten the attention it needed over the past several decades because of the city’s ongoing financial problems.”

While your own building may not have the potential for the widespread, dramatic consequences of the Detroit power failure, deferring preventative maintenance on your electrical systems can be equally problematic. Building managers are recognizing the economic value in not kicking this expense down the road.

Power consumption is costly. Efficient use of power generated by maintained electrical systems reduces the expense associated with peak energy months. Still, the most obvious consideration for having an electrical preventive maintenance (EPM) program is employee safety, followed by damage to property and equipment due to heat build-up from fire. Any serious injury or resulting loss of life due to operating under unsafe conditions may open up a company to costly liability.

According to a report from Hartford Steam Boiler, the “failure rate of electrical equipment is three times higher for components that are not part of a scheduled preventive maintenance program than those that are.”

A full-service, qualified electrical company can provide a regular, preventative maintenance program which should significantly extend the life a company’s electrical systems. The ROI with this maintenance program is typically very high due to the significant costs of installing new systems versus the relatively low cost of the program.

This same electrical contractor can and should be able to provide a cost-benefit analysis to companies who are considering replacing their old systems with new ones. The ROI again is high in this case due to the significant potential savings in making a highly-informed, replace/no-replace decision when compared to the relative low cost of the cost–benefit analysis. We recommend finding a company qualified to do both.

Several factors may go into the scheduling decision for how often you need to perform maintenance. How often a business needs EPM is based on environment and the weather co nditions where the building is ocated. Or it may depend on the quality and type of the equipment. Even the part of the city in which your building is found can be significant in this decision. Stadiums, auditoriums, office buildings downtown or in inner ring suburbs in most cities are ripe for attention given that the age of these neighborhoods is usually older and typically built with greater density. In general, annual EPM by a licensed professional, with a full de-energized electrical maintenance service performed at least every three years, is a good practice.

Just like a maintenance contract for your home, the contractor you hire to service your business should: maintain a personalized checklist for your individual company and building; trouble shoot for the potential hazards and identify those that require immediate attention, while maintaining an accounting of the red-flag spots to look out for on a follow-up; and let you know at what point your money is better spent on replace rather than repair. Remember, there is little point in testing and inspections if you don’t plan on fixing the problems.

The recommended thorough inspection includes: switchgear, air circuit breakers, vacuum circuit breakers, air disconnect switches, oil circuit breakers, molded-case circuit breakers, battery stations and chargers, cables and bus, protective relays and uninterruptible power supply systems. Cleaning; dusting; identifying worn, loose or missing parts; checking for unwanted water; checking that batteries, lights, and casing are in working order; and ventilation should be part of the mix for all these areas.

Our clients schedule EPM during times that are convenient for them within their distinct scope of operations. For example, we work with 24/7 businesses such as hospitals that can shut down to skeleton operations during the weekend we are scheduled. Though not entirely disturbance free, interruption during pre-scheduled maintenance service is nowhere near the havoc caused by the disruption of unforeseen, ill-timed, electrical failure. 

In the electrical industry, making wise decisions about electric preventive maintenance has more importance for owners and managers than merely how and when to spend money. As in Detroit, it means taking responsibility for controlling those conditions with the potential to escalate into dangerous fire exposures to building employees and visitors; and in the least, averting the inconvenience of unplanned power outages and equipment break downs. 

Emily Aschinger Martin is president and CEO of Aschinger Electric, a St. Louis based, fourth-generation family business celebrating 75 years of service. One of the largest electrical contractors in the region, Aschinger Electric is ranked seventh by the St. Louis Business Journal (based on total revenue, 2013), which also named Martin one of St. Louis’ Most Influential Business Women in 2014. For more information about Aschinger Electric, please call (636) 343-1211 or visit http://www.aschinger.com

Three Contractors Denied Sales/Use Tax Exemptions

in Columns/Law

by James R. Keller

In three separate cases, the Missouri Supreme Court denied on January 13, 2015, the requests of two contractors and one subcontractor for exemptions from sales and use taxes for construction-related activities.

The cases are Ben Hur Steel Worx, LLC v. Director of Revenue, 2015 WL 161747, Fred Weber, Inc. v. Director of Revenue, 2015 WL 161751 and Alberici Constructors, Inc. v. Director of Revenue, 2015 WL 161935.  All three cases stem from hearings with Missouri’s Administrative Hearing Commission (AHC).

In the Ben Hur Steel Worx case, Ben Hur had applied for refunds of nearly $200,000 for 2008-2010.  Ben Hur contracts with commercial construction companies to provide labor, materials and equipment to furnish and install structural steel beams, plates, angles and other components for construction of large-scale commercial buildings and structures. Ben Hur buys steel beams and steel plates directly from steel mills.

Ben Hur modifies the steel beams according to project drawings and specifications to cut them to length, provide proper drilling holes and slots, bevel the edges, chamfer, curb, cope and cut the steel.

If the steel components that Ben Hur purchased were for a taxable construction project, Ben Hur paid tax on the components. If the project was for a tax-exempt entity, such as an educational institution or health care
organization, Ben Hur did not pay sales tax on the purchased materials. 

The dispute involved whether Ben Hur could seek tax reimbursement for materials purchased to fulfill construction contracts it had with non-exempt entities. 

Section 144.054.2 of the Missouri Statutes exempts the following from sales tax: electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product, or used or consumed in the processing of recovered materials, or used in research and development related to manufacturing, processing, compounding, mining, or processing any product.

Both the AHC and the Missouri Supreme Court found that Ben Hur as a subcontractor was using steel beams, plates and angles to fulfill contractual obligations to construct steel frames for commercial buildings. These activities were part of construction contracts, an activity not exempt under the language of Section 144.054.2. The Missouri Supreme Court decided that if the Missouri Legislature had intended for “construction” activities to be included in this section, it would have used words that included construction activities and no such words are in this section.

In the Fred Weber case, Weber in 2008-09 sold various paving companies approximately $2.6 million worth of rock base and asphalt. Weber applied for a sales tax refund under Section 144.054.2 of $139,654.62 for those sales. The AHC agreed with Weber. 

The Missouri Supreme Court, however, found that this section was meant to apply to large-scale industrial activities. The paving companies were not engaged in such activities. Instead, they were engaged in construction. 

Since the word “construction” does not appear in Section 144.054, the high court concluded the Missouri Legislature did not intend that such activities should be exempt from sales and use taxes.

In the Alberici Constructors case, the dispute was whether Alberici was entitled to a refund of $18,593.11 for use taxes it paid for rentals of cranes and a welder to construct manufacturing equipment at a new cement plant in Missouri and a use tax for the delivery of one of the cranes to the manufacturing job site.

In this case, the applicable exemption is in Section 144.030.2(5), which reads as follows: Machinery and equipment, and parts and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption.

The Supreme Court decided that the only question was whether the cranes and welder were materials within the meaning of this section. The court concluded that even if a dictionary definition of material could include machinery, machines such as cranes and welders do not appear to be what the Legislature intended by materials.

Alberici also sought a tax exemption for the delivery charge of $15,000.00 paid to Bulldog Erectors to deliver one of the cranes to the job site. The Supreme Court supported the AHC finding that it was the intention of Alberici and Bulldog Erectors that the delivery service was to be part of the crane rental and therefore the delivery charge was subject to the use tax.

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.

Is Technology Working For or Against Your Business?

in Perspective

By Joe Balsarotti

Technology relentlessly marches on. Just think back ten years, when Blackberry and Palm were the phones of choice, computers ran Windows XP and the iPod was everywhere. Now, connected thermostats, Dick Tracy watches, tablets on the job site, and constant attacks by hackers are the news of the day.

The lifeblood of small businesses is contained in their computers: customer lists, invoices, accounting, designs, tax returns, bank registers and more. To lose this data is usually the death knell of a business. Only six percent of all businesses were still around five years after a “major loss” of computer records, 43 percent of firms taken out almost immediately, according to a Gartner survey.

As startling as those statistics are, what is even more startling is that many small businesses turn to ‘the kid down the street that they’d never, never, never let their daughter date’ for IT help, giving them extensive access to financial, legal and personal information. As Grand Moff Tarkin said to Princess Leia, “You’re far too trusting my dear….”

With the advent of the smart phone and tablet, technology seems much easier and information so much closer, but it is also much easier to lose. ‘The Cloud’ brings lightning and rain if you seed it with easy-to-get goodies. It isn’t some mythical place where everything is secure. In reality, it encompasses data centers across the world where some of our rules (and laws) don’t apply.

Target, Home Depot, and Apple are ripe targets to be sure, with millions of users, but when those entities harden their defenses, where do you think the hackers will look next? Your business is the next front in the battle with techno-terrorists.

  • How vulnerable is your business? Ask yourself these questions to get an idea.
  • Does someone perform regular maintenance on your equipment? Computers, servers and the like require the equivalent of an ‘oil change’ just as much as any other machine in your business.
  • Is the person you trust with your most valuable asset, your data, a professional or a hobbyist? Professionals keep up with industry news, they have colleagues to confer with on more involved projects and they can articulate their value to you. Hobbyists, know a lot about the specialty they are interested in, but what good is a hardware guy, when your software doesn’t work right?
  • As with any other tool, you need the right one for the job. Are you buying Yugos when you need panel vans, or a backhoe? Could that computer advertised right next to toilet paper really be the right machine to run a business on for 3-5 years?
  • What disaster plan do you have? If your office burns to the ground, where is the second set of tax records, A/R, A/P and all those drawings, models and customer notes? How much time will not be spent ‘doing  business’ but instead trying to put the digital pieces together?
  • What security have you implemented to keep your financial, legal and customer data safe? Does every employee have to ‘log into’ their machine with a password? Does everyone, including the janitor know that password? Can you track their usage?
  • Are you using a ‘free’ antivirus, trusting that someone worked hundreds of thousands of hours to develop a piece of security software out of the kindness of their heart? Really???
  • Do you REALLY have a technology plan?

Computers and technology can be a boon to businesses, especially small businesses by allowing one to do the work that used to take many. They allow free exchange of ideas and allow designs to come to life in proposals before a single beam is lifted, increase cash flow by allowing instant information on invoicing and payments, and free staff up to deal with clients and prospects instead of pushing paper around, but computers can only work well, when they are treated and maintained as the invaluable tools they are.

In future installments of this column, we’ll look at these pitfalls in depth and explore the rise of new, exciting technologies which can benefit your business. Have a question you want answered in a future column? Send it to me.

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; was Chairman of the Clayton, Missouri, Merchant Association; 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. 

Don’t Be the Breach In Data Management

in Perspective

 By Lucie Huger

It’s easy to understand why the retail and banking industry are highly motivated to protect themselves from a data breach, less so for service providers, like the construction industry. That is until you realize that Target’s data breach – the largest ever – is reported to have originated from the breach of an HVAC contractor’s access to Target’s data network. In an industry that absolutely relies on cultivating and sustaining trusted relationships, secure data management is essential. The construction consumer demands it.

To date, the California-based Privacy Rights Clearinghouse reports 189 data breaches made public this year spanning healthcare, retail, financial, government, education, and miscellaneous businesses, including service providers. The breaches involve the three most common causes: negligence, criminal (hackers or the theft of a device), and corporate espionage/malfeasance.

In response to consumer demands, 46 states now have data breach laws. Multiple states may come into play in a single breach. Consider the rupture of trust that would occur if a contractor performing work for a university learns of a data breach in its business, which unleashes malware into the university network. If the university’s student data is compromised, the school can face scrutiny from every state in which its students reside.

On the federal level, a weak link in the chain of data protection could expose contractors to penalties from the Health Insurance Portability and Accountability Act (HIPAA) and Gramm-Leach-Bliley Act (GLBA). Last year, HIPAA announced the tightening of enforcement of protected health information. A contractor providing a value-added promotional service to its hospital client by helping with a ribbon cutting for a newly built cancer wing must ensure its public relations firm doesn’t expose the names of cancer victims, who will be helped by the new facility. HIPAA requires every link in the chain of information be secure.

To protect valued relationships, contractors should carefully consider data breach vulnerabilities in their own operations and demand equal scrutiny from their building partners or vendors who could come into contact with protected information. This would include:

  • Developing policies and educating employees on their role in data management. This includes establishing, publicizing, and encouraging internal reporting mechanisms of suspected breaches. 
  • Creating a data management team with clear responsibilities and a thorough understanding of the types of data collected, processed, and developed. The team should also understand legal responsibilities and regulatory requirements. 
  • Developing a risk assessment and mitigation plan. This includes reviewing vendor contracts to find weak links that could expose data. Even if a company shuns the exchange of data online, they can be held liable for data shared with vendors who do expose that data, however unintentionally, in a breach.  If a vendor doesn’t have an electronic security policy that addresses employee background screening and data management, then your company should write one for them.
  • Consider engaging a third party audit to review policies, compliance efforts, and technical infrastructure. This is often done after a breach. It’s best to find any holes before they are compromised.

Contractors may also consider “cyber” insurance policies, which can afford some protection against losses, but be aware that not all cyber policies cover the risks a company faces. Cyber policies should cover the costs associated with the data breach, including engaging legal counsel, hiring investigators, providing credit monitoring if needed, and enlisting public relations experts to facilitate communications with all parties served by the company.

If a data breach does occur, contractors obviously need to focus on discovering its source, mitigating the impact, and complying with appropriate state and federal regulations. But equally important is taking immediate action to be in a position to recover from the breach. That means engaging legal counsel to provide protection from potential civil litigation and the discovery process through the attorney-client privilege. This is especially important because third party reports from IT forensic, accounting, or crisis communications firms, as well as internal company communications, may be discoverable in civil litigation. If outside counsel is engaged, these communications may be protected under the attorney-client privilege. 

Technology is a wonderful business tool that enables contractors to conduct business much more efficiently. But it carries evolving risks of inadvertent exposure of sensitive information that can destroy a hard-earned reputation. Don’t waste the trusted relationship you’ve build through neglect. Show your customers that you are serious about data management.

Lucie Huger is a member of the data breach practice group and an officer in the health care practice group of Greensfelder, Hemker & Gale, P.C.

 

Diversity Inclusion in Construction is More Than a Construction Problem

in Opinion

By Scott Wilson

Achieving meaningful diversity has risen to the top of the St. Louis area construction industry’s agenda, and nowhere was that more evident than at a recent construction industry event, where more than 450 people representing trade associations, contractors, subcontractors, unions, project owners, educators and activists discussed the challenges and opportunities that lie ahead  locally.  All agreed that a diverse industry is a powerful goal that brings more economic opportunities to women and minorities and creates a broader, more competitive base of employees, contractors and subcontractors.  But the advance of technology in construction today requires a more highly trained workforce than ever before.  This means society must better prepare disadvantaged students and entrepreneurs to enter and succeed in construction than ever before.

Construction today is commonly viewed by the public as an unsophisticated industry.  The fact is there are only skilled workers in construction.  Today’s journeyman carpenters, plumbers,  electricians, equipment operators, laborers and others on the job site are professionals, having completed three to five years of training and apprenticeship experience.  Technological advances touch virtually every job in construction today.

Further, today’s construction skills training requires basic reading and mathematics skills that exceed what many disadvantaged students are bringing with them to high school.  At the St. Louis Construction Careers Center (CCC), the average high school age student entering the program is 3-4 grade years behind where they should be in reading and math skills, and thus require taking remedial reading and math courses before proceeding into technical training.  In fact, most CCC students do not graduate, and of those that do, most leave the construction field altogether in just a few years.

On the minority subcontractor front, many women and minority construction entrepreneurs entering the construction field have little business experience to support their companies.  Their focus on daily job site operations takes away from learning proper fiscal management and risk management.  This usually leads to a premature demise of these businesses and lingering feelings of frustration and mistrust.

Thankfully, there are a number of construction industry efforts underway to help address the diversity problem, although they are all done at the industry’s expense.  Most construction projects today now feature a voluntary (or mandatory) set of goals designed to promote inclusiveness and diversity.  The contractors on these projects have turned to on-the-job training of workers and mentoring of minority subcontractors to achieve these goals.  In the past it was up to the general contractor or construction manager to make this happen, and to pay the tab for getting it done.

Now it is time for the owners of projects to step up and help pay for diversity inclusion costs.  And in a bigger way, it is time for the public to understand that diversity inclusion is not just a construction industry problem – it is a community-wide problem.  Societal problems run deeper than what the construction industry alone can address.  Society must also realize that today’s
construction industry is more technology driven and sophisticated than in the past.

As the post-Ferguson public dialogue seeks long term solutions to the social and economic issues facing minorities in our community, construction wants to be at the table to do our part.  But we can’t do it alone.

Scott Wilson is Chief Executive Officer of S. M. Wilson & Co.  He received the 2009 ‘Diversity Champion Award’ by the St. Louis Council of Construction Consumers in recognition of his extensive efforts to promote diversity in the local construction industry. The Minority Contractors Association of St. Louis recruited Scott to serve on its first Executive Committee. He served as chairman of the Regional Business Council Diversity Committee, where he was instrumental in securing funding for the Career Coaching Program.

Sales Coaching, Is it Worth It?

in Sales

Sales Coaching, Is it Worth It?

By Tom Woodcock

I’ve been penning articles for this esteemed construction publication for years. My hope has always been that I help the industry move forward in regards to sales dynamics. Now, I speak of what I know best, sales training.

Having trained tens of thousands construction personnel over the years across the country, I’ve witnessed the value training brings. The companies that invest in training their people in regards to sales reap definitive improvements in sales performance. Those that don’t often make significant mistakes in the sales process. They feel the results of that amateur sales approach in both revenue and profitability numbers. They are either frustrated with their sales team or blame customers and the marketplace for their failure. In reality, without training, what would they expect?

Why doesn’t the construction industry embrace training their people to sell?

There are several reasons. I’ll try to outline the most prominent.

  • Performance Based Selling: Contractors historically have believed that they get the next project based on how well they performed on the last. If we do a good job, the client will use us on the next. This philosophy has long since faded away. Performance is the ante. It’s expected by the client. Competitors tout their performance as much as you do. Throw in extensive contract language and litigation methods, and the project
    owner feels very insulated from poor performance. Sorry, performance is not a sales vehicle in this day and age.
  • Price Selling: Price is the weakest sales methodology. It merely requires a calculator. Estimating to the point you make as little as possible on a project to win it is a losing business format. The companies that function this way the most are usually the least trained in sales. They put little value on customer relationship and sales work. They also rarely have any sales or marketing strategy. Their close rate is meager.
  • Wrong Personnel Selling: It’s rare when I find any contractor with a dedicated business development rep (sales person truth be told). They have estimators or project managers, who excel in calculating and math principles, doing their sales work. Really? You’re expecting a numbers person to have strong people skills? Owners of construction firms back off the sales effort as they begin to get work. Then they wonder why business tanks 6 months down the road. Having the right, trained person in place to get work will easily bring a great ROI.
  • Disrespect of Sales Trainers:  This one hits close to home. The lack of respect of professionals that train people to sell is pervasive. The concept that they don’t understand “your” sales situation is extremely  shortsighted. If sales is the most important aspect of your business, and it is, professionals that focus on teaching sales are worth their weight in gold! Find the right one and use them!

Now, being a sales trainer you’re probably thinking I’m being a bit of a homer. To be honest, I’ve actually toned down my perspective. I’ve seen spending on marketing go through the roof while the company makes no investment in training personnel to follow up on that marketing. They may as well set the money ablaze!

I have worked closely with dozens of companies to train their people and retool their sales efforts. Those that implement the changes see success fairly quickly. The ones that balk at change usually struggle in the same fashion they already are. Often they’ll increase spending on their marketing, buy a $1,000 sponsorship at a golf tournament, and don’t show up. They’ll attend networking events with no clue as to how to work the event. Many can’t even name their top ten customers. They’ve set zero customer targets and hope the bid invites come in the mail. Amazingly, they refuse to train their people because of expense.

Structuring a sales training program that is geared towards your personnel and specific trade is a must. Put the proper sales format in place and work at it diligently and it will produce.

The root of any training program is targeting your top end revenue, profitability or both. Reducing estimating time by raising your close rate allows you to sell more effectively. The process builds upon itself and your greatest challenge will be keeping up with the volume on the performance side of the business, which, hopefully, you’ve got down pat.

I tend to be very selective about which contractors I’ll do training for. If you’re not willing to incorporate the proper sales practices and implement an accountability plan, I’m not interested. Expecting a sales trainer to wave a magic wand and fix your sales dynamic is a bit pie in the sky. This is especially true when you’ve neglected doing any training for years.

The good news is you can turn around a sales effort fairly quickly if you roll up your sleeves and get after it. The alternative is to continue to find excuses to leave your team untrained in relation to selling. I hope my contractor clients compete against you if you choose the latter!

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 314-775-9217314-775-9217.

 

Federal Contractors Get Slammed Again Regarding New Disclosure Provision

in Opinion

By Terry Potter, Partner – Husch Blackwell, LLP

It seems that every time we turn around there is another Executive Order placing additional burdens on federal contractors.  This time it is the Fair Play and Safe Workplace Executive Order which President Obama signed on July 31.  Under this new Executive Order, before prospective contractors can obtain a contract with the federal government, they must disclose labor law violations from the past three years encompassing fourteen different federal statutes and equivalent state laws.

The contracting officers must take into account these violations in the issuance of such contracts.  However, the standards for such review have yet to be established.  Indeed, each agency will have to designate a
senior official as a “labor compliance advisor” to provide guidance on whether the contractor’s actions rise to the level of a “lack of integrity or business ethics.”  These are rather broadly stated standards which ultimately will likely result in a great deal of inconsistency and abuse.

What is especially concerning in this situation is that the Executive Order states that companies with workplace violations are more likely to encounter performance problems, and so the Executive Order is being issued
to improve the efficiency of federal contracting resulting in a greater return on federal tax dollars.  Well, if performance is really the issue then that should be the topic of discussion, not setting up a whole new level of bureaucracy.  In my experience, I have never known a contracting officer who was not well aware of any ongoing investigations regarding potential labor law violations with their contractors.  Quite frankly, they do a very effective job of being the watchdog over those situations.

Moreover, hidden away in the middle of this Executive Order is a very odd inclusion which specifies that companies with federal contracts of $1 million or more may not require their employees to enter into pre-dispute
arbitration agreements arising out of Title VII or from torts related to sexual assault or harassment.  The recent decisions by the Supreme Court clearly indicate support for the arbitration process over burdening the courts with additional matters that are best handled on a private basis through an arbitration procedure in the workplace.  That would be an efficient use of federal tax dollars.  So if your purpose is to save tax dollars, this provision runs totally counter to that goal.

The final key provision of the Executive Order provides that employees shall receive information about their paychecks (hours worked, overtime and deductions) which normally is specified under state law in any event, so this inclusion is of very limited value, especially for federal contractors who have to provide certified payrolls on a regular basis.

The various agencies will have to spend a lot of time and effort on this Executive Order as it places substantial burdens on them in investigating a myriad of potential violations that could potentially effect the contracting company’s ability to obtain a contract to ensure that due process and fair play take place with respect to each of the contractors.  As these standards develop we will keep you informed, but it is obviously going to be a long, slow process.

Appellate Court Upholds Finding For Contractor Regarding Defective Work at Taum Sauk Plant

in Law

by James R. Keller

Missouri’s Eastern District Court of Appeals has upheld a trial court’s finding in favor of a general contractor and against a subcontractor for defective work the subcontractor performed at Ameren’s Taum Sauk plant. The case is Scheck Industrial Corp. v. Tarlton Corp., 2014 WL 3428402, decided July 15.

Tarlton Corporation had entered into a contract with Ameren to perform repairs at Ameren’s Taum Sauk hydroelectric power plant. The contract required Tarlton to cut eight drain access ports into the lower section of the plant’s penstock, weld steel collars composed of carbon steel around each port and install removable covers and doors over these ports. The penstock is a one-mile long tunnel, 18 feet in diameter, that transfers water from a water reservoir to turbines.

Tarlton did not have the requisite expertise to install the collars, so it entered into a subcontract with Scheck Industrial to perform these repairs of the penstock on a “time and materials” basis.

The upper portion of the penstock is comprised of A201 steel, but the lower portion where the drain access collars were to be installed is composed of T-1 steel. Scheck Industrial did not investigate whether that made a difference to welding procedures. When 85 percent of the welding on the drain access ports was complete, Scheck Industrial identified cracking in the penstock just outside the completed welds.

Ultimately, Scheck Industrial applied a recommendation from an outside engineering firm (Briem Engineering) on a welding procedure to repair and rework the faulty welds. This included the removal of all defective welds, fixing the cracks in the penstock and re-welding.

Tarlton sought a total of $733,416.00 from Ameren, reflecting the cost to complete the repair and rework of both Scheck Industrial and Tarlton. Ameren initially rejected the claim, but eventually Scheck Industrial received payment for all of its work on the project except $553,135.51 related to the repair and rework of the penstock.

Scheck Industrial filed a lawsuit against Tarlton for breach of contract and account stated and  sought $553,132.51. Tarlton counterclaimed for breach of contract, breach of warranty, and indemnification and alleged that it was owed $220,094.00 plus attorney fees for costs and expenses it incurred as a result of Scheck Industrial’s faulty work and breach of contract.

After a four-day bench trial, the trial court awarded Tarlton $220,094.00 for “labor and general conditions costs” and an additional $190,383.19 for attorney fees. Scheck Industrial recovered nothing on its claim.

The $220,094.00 broke down into $94,599.00 for “support labor and remedial work” and the remaining amount was for general conditions costs including project management time, forklifts, job trailer rental, trucks, fuel, amounts paid to the outside engineering firm, testing costs for re-welds and related items.

On appeal, the Eastern District noted the testimony of Scheck Industrial’s quality control consultant, who submitted Scheck Industrial’s welding procedures for the drain access collars. He testified that he never saw or asked for the drawings or specifications for the project and that in hindsight the welding procedures he submitted and that Scheck Industrial used were not appropriate for welding A572 carbon steel to T-1 steel and would cause the penstock to crack.

The appellate court also noted that the subcontract contained an indemnity provision that indemnified for liability and loss. The provision required Scheck Industrial to “indemnify and hold harmless [Tarlton] from and against any and all loss, claims, suits, causes of action, liability, damages, costs [and/or] expenses . . . incurred by [Tarlton] . . . as a result of . . . any work or operations under or in connection with this Subcontract.” The court found that this language was sufficiently broad that it supported Tarlton’s counterclaim for its damages and attorney fees incurred by Scheck Industrial’s improper work.

Rejecting Scheck Industrial’s argument that Tarlton failed to mitigate its own damage, the Court of Appeals noted that Tarlton acted promptly to cease further defective welding. Tarlton worked with Scheck Industrial for a reasonable amount of time to develop a solution and when one did not come about, Tarlton retained an outside consultant.

James R. Keller is a partner at Herzog Crebs LLP where he concentrates his practice on construction

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