Subcontractors are making headway in public policy reform, but…

Mechanical contractors everywhere are scrambling for work, and what work they’re managing to land isn’t very profitable. Yet there’s at least one little silver lining amid all the clouds. According to the American Subcontractors Association, legislators in various states across the country are adopting reforms that ensure prompt and full payment for the work performed by construction subcontractors.

That’s the gist of a report issued by ASA last November: “The ASA Report: The Policy Environment in the States.” Details can be accessed at www.asaonline.com.

ASA is the lobbying arm for subcontractors and their trade groups across the spectrum of construction trades. “There’s a saying in the industry: The only thing worse than no job is a job with a nonpaying customer,” said 2010-11 ASA President Timmy McLaughlin of Austin Construction Co., Summerville, S.C. “Subcontractors provide credit for projects on promises of future payment and are operating at the tightest margins. In this economy, they can’t afford clients who pay late or hold excessive retainage, just as the clients can’t afford subcontractors who don’t perform. It’s a two-way street and legislators can grasp the fundamental fairness of prompt and full pay for prompt and full performance.”

Arizona, Oklahoma and Nebraska are among states that last year enacted laws both strengthening prompt payment and restricting the practice of retainage. Kansas and Massachusetts were singled out for making significant strides in improving individual prompt payment or retainage laws. Also noteworthy is a new anti-indemnity law in Louisiana (S.B. 625) severely limiting risk transfer.

ASA’s report scores and grades each state in seven policy areas and uses the results to calculate an overall score, grade and rank for each state. Taking into account both laws and judicial decisions, the report evaluates: prompt payment protections; treatment of pay-if-paid clauses; mechanic’s lien protections; payment bond protections; retainage limitations; anti-indemnity protections, including limits on “additional insured” endorsements; and anti-“bid shopping” measures.

Beginning in 2009, ASA added “extra credit” for states that have taken the initiative to regulate controlled insurance programs. These nonstandard insurance programs can have hidden risks for subcontractors.

Research showed great variation among the states in the level of protection and support they offer to subcontractors and suppliers, and scoring was complex. For example, mechanic’s lien laws vary in how many tiers of construction can claim liens, the construction owner’s liability, whether lien rights can be contractually waived, and notice and filing requirements. ASA developed evaluation factors for each policy area and assigned a maximum number of points that could be accrued for each factor. The result was a numerical score and letter grade for each policy area for each state.

Now for the bad news. If this were a classroom and the states were students, almost nine out of 10 would be flunking the course. According to ASA’s scorecard, 45 out of the 50 states, plus the District of Columbia, received an overall grade of “F.” California, Delaware, Massachusetts and New York squeaked by with barely passing grades of “D,” while Kansas was awarded a “gentleman’s C.” Only New Mexico made the Dean’s List with a “B” average. Not a single state earned an “A” in ASA’s estimation.

The real-world situation may not be as dire as these letter grades suggest. ASA’s scoring reflects a point of view whereby every public policy should be skewed in favor of the organization’s subcontractor constituency. Here on Planet Earth where GCs and owners also have legitimate interests, that’s never going to happen, and if it did there would be no reason for ASA to exist.

Moreover, as ASA itself acknowledges, the numerical scores within the “F” range vary from 0 to 60 points, meaning all the states with a failing letter grade in any policy area are not necessarily equal in the harshness of their policies relating to subcontractors and suppliers. A couple of minor reforms could well boost some of those states into a passing grade.

In any case, ASA wants those of us in the trade media to share the report results as a means of reminding subcontractors of weaknesses in their state laws, and that ASA offers advocacy information to help them change the laws. ASA also wishes to remind subcontractors about the need to remain vigilant when negotiating contracts in a harsh public policy environment.

Media mission accomplished. The rest is up to you.

Links