PCCA Journal 4th Quarter 2010

The Official Publication of the Power & Communication Contractors Association 4th Quarter 2010 Also Inside • Stimulus Funding Offers Opportunity and Anxiety for Broadband Contractors • 2011 PCCA Convention Preview Managing Subcontractors in the Midst of Economic Meltdown

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4th Quarter 2010 President Kevin Mason ElectriCom, Inc. President-Elect Larry Libla W & L Constuction 1st Vice President Tommy Muse Aubrey Silvey Enterprises, Inc. 2nd Vice President Glen Amerine Amerine Utilities Construction, Inc. Treasurer Steve Sellenriek Sellenriek Construction Secretary Timothy D. Killoren North States Officer Directors Official Publication of the Power & Communication Contractors Association Board of Directors David Aubrey Okay Construction Tony Briggs Vermeer Manufacturing Ed Campbell Henkels & McCoy, Inc. James Dillahunty Henkels & McCoy, Inc. John Fluharty Mears Group, Inc. Herb Fluharty Mears Group, Inc. Matthew Gabrielse Gabe’s Construction Co., Inc. Jerrod Henschel Michels Corporation Dan Levac Preformed Line Products Todd Mix ElectriCom, Inc. Todd Myers Kenneth G. Myers Construction Robert Orr Sherman & Reilly, Inc. Larry Pribyl MP Nexlevel, LLC Brad Radichel Condux International Ron Tagliapietra Michels Corporation Matt Trawick Trawick Construction Co., Inc. Bryan Westerman MasTec, Inc. Publication Staff Publisher Timothy Wagner twagner@pccaweb.org Associate Publisher Cheryl Stratos stratosc@pccaweb.org Editor Michael Ancell mancell@pccaweb.org Advertising Sales Manager Victoria Geis vgeis@pccaweb.org Stimulus Funding Offers Opportunity and Anxiety for Broadband Contractors 17 By John Allen There are tremendous opportunities for contractors to benefit from the broadband provisions of the American Recovery and Reinvestment Act. But while there is plenty of excitement, there is also a fair amount of anxiety. Contractors bidding on these broadband projects created by the ARRA are subject to the provisions of the Davis-Bacon Act, which may be uncharted waters for many who haven’t previously worked on government-funded jobs. Managing Subcontractors in the Midst of Economic Meltdown 21 By Gregory T. Spalj The current economic decline has hit the stage when those who were just hanging on by their fingernails are starting to fail and fall. While contractors must always be attentive to ensure that subcontractors are passing along payments to lower-tier subcontractors, the impact of the current economy now requires that contractors be ever more vigilant in protecting themselves and their sureties from bond claims and mechanic’s liens by reason of payments diverted by an uppertier subcontractor that should have been passed on to a lowertier subcontractor. RDUP News 7 News Briefs 13 2011 PCCA Convention Preview 26 Safety News 30 PCCA Member News 32 Industry Calendar 38 Advertiser Index 38

PCCA Journal|4th Quarter 2010 7 On September 13 Agriculture Secretary Tom Vilsack announced the funding of 43 new broadband infrastructure projects that will create jobs and provide rural residents in 27 states and Native American tribal areas access to improved internet service. Funding is provided through the American Recovery and Reinvestment Act (Recovery Act). “The broadband projects announced today will give rural Americans access to the tools they need to create jobs and access improved health care and educational opportunities,” Vilsack said. “These projects will not only create jobs for the people who will build these networks, the completed systems will provide a platform for rural economic growth for years to come.” One example is in Louisiana, where Pride Network, Inc. will receive an $18.4 million loan and a $17.7 million grant to deploy a fiber-to-the-premises network to bring broadband service to St. Helena, Washington, and Tangipahoa Parishes. The project will benefit approximately 25,000 residents, 3,000 businesses, and about 200 community facilities. The company estimates the project will create 1,300 jobs. In Washington state, EcliptixNet Broadband, Inc. will receive a $6.1 million loan and a $14.3 million grant to provide high-speed broadband service to rural portions of Ferry, Stevens, and Spokane counties. Upgraded service will be available to over 68,000 residents, 3,600 businesses and 300 community facilities. The company estimates the project will create 230 jobs. In all, $518 million will be invested in the 43 broadband infrastructure projects with funding made available through the Recovery Act. An additional $34.1 million in private investment will also be committed to the projects. By leveraging $2.5 billion in Recovery Act funding authorized by Congress, USDA has been able to provide loans and grants of $3.6 billion to construct 307 broadband projects in 46 states and one territory. Funding is contingent upon the recipient meeting the terms of the loan, grant or loan/grant agreement. A complete list of projects receiving Recovery Act broadband grant awards today can be viewed in full at http://www.usda.gov/documents/ARRA_PDF_09-14-2010.pdf or by calling Mike Ancell at PCCA, (703) 212-7734. RDUP News RDUP News continued on page 8 USDA Announces 43 New Recovery Act Broadband Projects Vice President Biden on August 18 announced 94 Recovery Act investments in broadband projects that will create jobs and expand economic opportunities within 37 states. These investments in high-speed internet infrastructure will help bridge the technological divide in communities that are being left in the 20th century economy and support improvements in education, healthcare, and public safety. The August announcement included an investment totaling $1.8 billion. The projects receiving funds are part of a program administered by the Department of Commerce’s National Telecommunications and Information Administration and the Department of Agriculture’s Rural Utilities Service to expand broadband access and adoption across the country. The announcement includes 66 grants awarded by the Commerce Department for projects to deploy broadband infrastructure and connect community anchor institutions to broadband, create and upgrade public computer centers, and encourage the sustainable adoption of broadband service. It also includes 28 awards from USDA for broadband infrastructure and satellite projects that will provide rural residents in 16 states and Native American tribal areas access to improved service. A complete list of projects in the August 18 announcement can be viewed in full at www.whitehouse.gov/sites/default/files/microsites/20100818_Broadband_Awards.pdf or by calling Mike Ancell at PCCA, (703) 212-7734. Biden Announces Broadband Investments

PCCA Journal|4th Quarter 2010 8 RDUP News Continued from page 7 On August 30, Agriculture Secretary Tom Vilsack announced that 37 rural utilities and cooperatives in 20 states have been selected to receive guaranteed loans that will benefit more than 60,000 rural electric cooperative consumers by financing the construction and repair of almost 7,000 miles of distribution and transmissions lines. “USDA is investing in electric infrastructure improvements to provide reliable and affordable power to homes and business in rural America,” Vilsack said. “These guaranteed loans will enable cooperatives to deliver better service to rural customers.” The $1.2 billion in funding is being awarded through USDA Rural Development’s Electric Program. This program provides loans and guaranteed loans to electric utilities to upgrade, expand, maintain, and replace rural America’s electric infrastructure. The Electric Program also helps fund energy conservation and renewable energy system projects. Funding of each recipient is contingent upon their meeting the conditions of the guaranteed loan agreement. The following is a list of rural utilities that were selected to receive funding. Alabama Sand Mountain Electric Cooperative, a $17,000,000 • guaranteed loan build 215 miles of new distribution line and make improvements to 34 miles of distribution line. Arkansas and Oklahoma Arkansas Valley Electric Cooperative Corporation, a • $60,000,000 guaranteed loan to build 365 miles of new distribution line and four miles of transmission line and make improvements to 118 miles of distribution line. Rich Mountain Electric Cooperative, a $12,500,000 guar- • anteed loan to build 69 miles of new distribution line and one mile of transmission line and make improvements to 51 miles of distribution line. Arkansas, Louisiana, Missouri, Oklahoma, and Texas Arkansas Electric Cooperative Corporation, a • $620,960,000 guaranteed loan for system improvements and emission control projects to its existing generation facilities. Colorado Mountain View Electric Association, Inc., a $58,688,000 • guaranteed loan to build 257 miles of new distribution line and make improvements to 147 miles of distribution line. K.C. Electric Association, Inc., a $3,823,000 guaranteed • loan to build 26 miles of new distribution line and make improvements to 23 miles of distribution line. Grand Valley Rural Power Lines, Inc., a $15,707,000 guar- • anteed loan to serve 449 existing consumers and build 40 miles of new distribution line. Georgia Habersham Electric Membership Corporation, a • $22,338,000 guaranteed loan to build 213 miles of new distribution line and make improvements to 31 miles of distribution line. Iowa Maquoketa Valley Rural Electric Cooperative, a • $3,000,000 guaranteed loan to build 34 miles of new distribution line and make improvements to 55 miles of distribution line. Kentucky Jackson Energy Cooperative Corporation, a $20,000,000 • guaranteed loan to build 152 miles of new distribution line and make improvements to 116 miles of distribution line. Meade County Rural Electric Cooperative Corporation, • an $18,560,000 guaranteed loan to build 60 miles of new distribution line and make improvements to 309 miles of distribution line. Clark Energy Cooperative, Inc., a $14,000,000 guaran- • teed loan to build 104 miles of new distribution line and make improvements to 54 miles of distribution line. Minnesota and Iowa Tri-County Electric Cooperative, a $25,000,000 guaran- • teed loan to build 70 miles of new distribution line and make improvements to 79 miles of distribution line. Minnesota Minnesota Valley Cooperative Light & Power Associa- • tion, a $16,000,000 guaranteed loan to build 40 miles of new distribution line and 27 miles of transmission line and make improvements to 36 miles of distribution line. Red River Valley Cooperative Power Association, an • $8,000,000 guaranteed loan to build 46 miles of new distribution line and make improvements to 41 miles of distribution line. Lake Country Power, a $72,000,000 guaranteed loan • to build 210 miles of new distribution line and make improvements to 231 miles of distribution line. Lake Region Electric Cooperative, a $13,400,000 guaran- • teed loan to build 152 miles of new distribution line and make improvements to 25 miles of distribution line. USDA Announces Support for Rural Electric Infrastructure Improvements Continued on page 10

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PCCA Journal|4th Quarter 2010 10 Arrowhead Electric Cooperative, a $4,620,000 guaran- • teed loan to build 8 miles of new distribution line and make improvements to 16 miles of distribution line. Missouri Crawford Electric Cooperative, Inc., a $16,000,000 guar- • anteed loan to build 82 miles of new distribution line and make improvements to 51 miles of distribution line. Barry Electric Cooperative, a $3,370,000 guaranteed loan • to build 34 miles of new distribution line Montana Big Flat Electric Co-Op., Inc., a $2,177,000 guaranteed • loan to build 13 miles of new distribution line and make improvements to 88 miles of distribution line. North Carolina Pee Dee Electric Membership Corporation, an • $11,000,000 guaranteed loan to build 125 miles of new distribution line and make improvements to 42 miles of distribution line. Brunswick Electric Membership Corporation, a • $16,000,000 guaranteed loan to build 113 miles of new distribution line. Randolph Electric Membership Corporation, a • $25,000,000 guaranteed loan to build 113 miles of new distribution line and nine miles of transmission lines. New Mexico Roosevelt County Electric Cooperative, Inc., a • $16,412,000 guaranteed loan to build 67 miles of new distribution line and make improvements to 33 miles of distribution line. The Socorro Electric Cooperative, Inc., a $23,074,000 • guaranteed loan to build 344 miles of new distribution line and 16 miles of transmission line and make improvements to 75 miles of distribution line. Ohio Holmes-Wayne Electric Cooperative, Inc., an $11,000,000 • guaranteed loan to build 44 miles of new distribution line and make improvements to 147 miles of distribution line. Oklahoma Red River Valley Rural Electric Association, a $4,420,000 • guaranteed loan to build 30 miles of new distribution line Cotton Electric Cooperative, Inc., an $8,851,000 guaran- • teed loan to build one mile of new distribution line. Oklahoma and Texas Southwest Rural Electric Association, Inc., a $4,494,000 • guaranteed loan to build 58 miles of new distribution line. South Dakota Whetstone Valley Electric Cooperative, Inc., a $3,974,000 • to build 19 miles of new distribution line and make improvements to 53 miles of distribution line. FEM Electric Association, Inc., a $7,354,000 guaranteed • loan to build 27 miles of new distribution line and make improvements to 285 miles of distribution line. Douglas Electric Cooperative, Inc., a $1,200,000 guaran- • teed loan to build seven miles of new distribution line and make improvements to 46 miles of distribution line. Tennessee and Virginia Powell Valley Electric Cooperative, a $12,000,000 guar- • anteed loan to build 186 miles of new distribution line and make improvements to 52 miles of distribution line. Texas Heart of Texas Electric Cooperative, Inc., a $17,000,000 • guaranteed loan to build 221 miles of new distribution line and make improvements to 395 miles of distribution line. Virginia Southside Electric Cooperative, an $18,533,000 guaran- • teed loan to build 264 miles of new distribution line and one mile of new transmission line and make improvements to 164 miles of distribution line. Wisconsin Oconto Electric Cooperative, a $9,000,000 guaranteed • loan to build 30 miles of new distribution line and 15 miles of transmission line and make improvements to 94 miles of distribution line. RDUP News Continued from page 8

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PCCA Journal|4th Quarter 2010 13 News Briefs Thirteen percent of current pay TV subscribers in the U.S. say they are “somewhat” or “very” likely to cancel their current subscription in the next twelve months and not sign up with another provider, according to a survey of 2,000 U.S. households recently conducted by Strategy Analytics. The firm said that “cord cutting,” the practice of dropping traditional paid television service in favor of free broadcast or internet-delivered “over the top” content is a growing trend. “While it may represent only a relatively small percentage today, we anticipate the number of cord cutters to increase going forward,” said Ben Piper, director in the Strategy Analytics Digital Consumer Practice. “Service providers mustn’t overlook the next generation of TV subscribers; today’s teenagers are tomorrow’s customers.” Younger Americans consume and value content in a way far different from their parents’ generation and have little regard for how content is delivered, according to the report. Earlier this summer Apple relaunched its Apple TV product, hoping to revitalize the product and make it a real contender in an increasingly crowded OTT television market. Jia Wu, analyst in the Strategy Analytics Digital Consumer Practice, News Briefs continued on page 14 The adoption of broadband internet access slowed dramatically over the last year, according to research from the Pew Research Center’s Internet & American Life Project. Two-thirds of American adults (66 percent) now have a broadband internet connection at home, a figure that is little changed from the 63 percent with a high-speed home connection at a similar point in 2009. Most demographic groups experienced flat-to-modest broadband adoption growth over the last year. The notable exception to this trend came among AfricanAmericans, who experienced 22 percent year-over-year broadband adoption growth. By a 53-41 percent margin, Americans say they do not believe that the spread of affordable broadband should be a major government priority. Asked in a national phone survey about expanding affordable high-speed internet access to everyone in the country, respondents answered as follows: 26 percent of Americans said that expansion of af- • fordable broadband access should not be attempted by government, 27 percent said it was “not too important” a priority, • 30 percent said it was an important priority, and • 11 percent said it should be a top priority. • While younger users (those under 30) and AfricanAmericans are the most likely to favor expanded government efforts, those who are not currently online are especially resistant to government involvement in broadband promotion. Fully 45 percent of non-users said government should not attempt to make affordable broadband available to everyone, while just 5 percent of those who don’t use the internet said broadband access should be a top federal government priority. In addition to their skepticism towards government efforts to promote widespread broadband adoption, the 21 percent of American adults who do not use the internet are not tied in any obvious way to online life and express little interest in going online. They do not find online content relevant to their • lives. Half (48 percent) of non-users cited issues relating to the relevance of online content as the main reason they do not go online. They are largely not interested in going online. Just • one in ten non-users said would like to start using the internet in the future. They are not comfortable using computers or the • internet on their own. Six in ten non-users would need assistance getting online. Just one in five know enough about computers and technology to start using the internet on their own. “As broadband technologies have been adopted in the majority of American homes, a debate has arisen about the role of government in stepping in to ensure availability to high-speed internet access for all Americans,” said Senior Research Specialist Aaron Smith, author of the new report. “The majority think not, and the surprise is that non-users are the least inclined to think government has a role in the spread of broadband. It could be that the recession is causing Americans to prioritize other issues, or it could be general anti-government wariness. It could also stem from the fact that not many non-users are anxious to see government promoting technologies that they view as difficult to use and offering uncertain benefits.” Pew Research Center: Home Broadband 2010 Report: 13% of Americans Likely to ‘Cord Cut’ from Pay TV in the Next Year

PCCA Journal|4th Quarter 2010 14 says that Apple TV hopes to capitalize on its loyal and enthusiastic customer base to fill a void that currently exists in the market. “Like the music industry prior to iTunes and the iPod, the online premium video market still lacks a perfect provider that can connect a service with a device to create a great user experience,” Wu said. “With its new and improved TV product, Apple is now preparing itself to repeat the success it has had in the music business in the rapidly growing online premium video market.” NLRB Sides with Unions in Two Key Decisions The Coalition for a Democratic Workplace (CDW) reported that over the Labor Day weekend the National Labor Relations Board (NLRB) was quietly moving to circumvent the right of workers to secret ballot elections. CDW said its review of critical pending cases has revealed concrete examples of the NLRB’s efforts to implement card-check and curb worker free speech. “The board’s latest actions validate what CDW has said all along: Craig Becker’s recess appointment means that the board can move autonomously to promote card check without the need to pass the unpopular Employee Free Choice Act,” CDW Chairman Brian Worth said. Decisions in two key cases, announced in early September by the board, underscore the effort to undermine workplace democracy: In Rite Aid Store #6473, the NLRB • announced that it will revisit the 2007 Dana Corp. decision, which provided important protections to employees facing so called “voluntary” card-check agreements. In the second decision, Indepen- • dence Residences, Inc., the board refused to set aside a union representation election where New York state had unlawfully limited the employers’—but not the unions’— ability to communicate with employees about the advantages or disadvantages of unionization. In both cases, Republican board members Peter Schaumber and Brian Hayes filed vigorous dissents. “It’s critical that Big Labor’s back-door attempt to advance the principles of EFCA through NLRB decisions be exposed,” Worth said. “These cases are just a few examples of how union bosses will push an agenda that sacrifices the rights of employees and job creators at the altar of forced unionization by any means possible.” News Briefs Continued from page 13 Reflecting the evolution of performance standards and goals for broadband, the Federal Communications Commission (FCC) has updated and released its latest report on internet access service subscribership to better monitor these trends. Titled “Internet Access Services: Status as of June 2009,” the new report includes for the first time detailed data on the number of internet connections at speeds that approximate the national broadband availability target recommended by the National Broadband Plan. The report also focuses on multiple and higher speed tiers, rather than on the commission’s historical categories of “high speed” (any internet connection with speeds over 200 kilobits per second downstream) or “advanced services.” Report highlights include the following, as of June 2009: Out of a total of 71 million fixed—as opposed • to mobile—connections to households, only 44 percent met or exceeded the speed tier that most closely approximates the universal availability target set in the National Broadband Plan of 4 megabits per second (Mbps) downstream and 1 Mbps upstream, The number of mobile wireless service sub- • scribers with data plans for full internet access increased by 40 percent over the first six months of 2009, to 35 million, Cable modem connections increased by 3 percent • to 41 million and aDSL by 1 percent to 31 million in the first six months of 2009, A 23 percent increase in fiber connections, to 4 • million, was the largest rate of increase among fixed-location technologies, and Satellite internet connections increased by 6 per- • cent to 1 million. The data are based on information submitted to the FCC every six months by providers on FCC Form 477. The full report can be downloaded at www.fcc.gov/wcb/stats. FCC Releases New Data on Internet Access Services

PCCA Journal|4th Quarter 2010 15 FCC Releases New Local Telephone Competition Data The FCC in September released the second Local Telephone Competition report to be based on comprehensive information about subscribership to interconnected Voice over Internet Protocol (VoIP) service as well as more traditional telephone lines. The report summarizes data collected by FCC Form 477 as of June 30, 2009. Interconnected VoIP service represents an important and rapidly growing part of the U.S. voice service market, the FCC said. It found that in June 2009, there were 133 million traditional switched access lines in service and 23 million interconnected VoIP subscriptions in the United States. Of these, 93 million were residential connections and 64 million were business connections. Interconnected VoIP subscriptions increased by 10 percent during the first six months of 2009 and switched access lines decreased by 5 percent for a combined decrease of 3 percent. Verizon Releases Statement on FCC Net Neutrality Notice The FCC on September 1 issued a public notice seeking comment on net neutrality/reclassification. The following is a statement by Tom Tauke, Verizon executive vice president of public affairs, policy and communications: “Verizon continues to work with policymakers and other interested parties to develop a responsible policy that puts consumers in charge of their Internet experience. As the Federal Communications Commission gathers more information, the evidence will demonstrate that consumers are best served by a policy that promotes innovation and encourages investment, while ensuring that open Internet principles for wireline broadband are enforced on a case-by-case basis. That is the foundation for the policy recommendations recently made by Google and Verizon. “We are encouraged that the FCC is seeking additional information before acting on the net neutrality issue. At the same time, it remains clear that whatever action the FCC takes will be clouded by legal uncertainty until the Congress enacts legislation that spells out the authority of the FCC and establishes a broadband policy.” www.aevenia.com • 218.284.9500 3030 24th Ave So. Moorhead, MN 56560 We are Aevenia, Inc., a premier energy and electrical construction company. We offer a powerful bundle of services and back it up with 40 years in the energy and electrical construction industry. Every day, we show our customers what it’s like to do business where trust, integrity, efficiency and quality are principal values. We are Aevenia. The way energy moves. TRANSMISSION & DISTRIBUTION • DATA COMMUNICATIONS RENEWABLES • SUBSTATIONS • URBAN & RURAL TELECOM POWER PLOWING & TRENCHING • ELECTRICAL CONTRACTING

PCCA Journal|4th Quarter 2010 17 There are tremendous opportunities for contractors to benefit from the broadband provisions of the American Recovery and Reinvestment Act (ARRA), commonly called the stimulus bill. But while there is plenty of excitement, there is also a fair amount of anxiety in the broadband community about how contractors can benefit from the various competitive broadband grant programs. Specifically, the ARRA authorized $7.2 billion for broadband programs, including $4.5 billion designated for the National Telecommunications and Information Administration (NTIA) and $2.5 billion for the Rural Utilities Service (RUS). Part of the purpose of this program is to provide broadband service (e.g., faster internet access) to consumers in unserved areas of the country and improved broadband service to consumers in underserved areas. Contractors bidding on these broadband projects created by the ARRA are subject to the provisions of the Davis-Bacon Act, which may be uncharted waters for many who haven’t previously worked on government-funded jobs. What Is the Davis-Bacon Act, and How Does It Apply to Me? The Davis-Bacon Act is a federal law that applies to all projects funded by ARRA dollars. Passed in 1931, the law requires that any contract greater than $2,000 “to which the Federal Government or District of Columbia is a party, for construction, alteration or repair, including painting and decorating of public buildings and public works...shall contain a provision stating the minimum wages to be paid to all mechanics and laborers employed directly upon the site of the work.” In 2009, the Obama administration required that all projects funded by the ARRA, regardless of dollar amount, comply with the Davis-Bacon Act. The Davis-Bacon Act requires payment of locally “prevailing wages,” including the “anticipated cost of prevailing benefits.” Generally this is expressed as a per-hour wage and per-hour cash equivalent value of benefits and is often based on a union scale. Prevailing wages are set by the Department of Labor (DOL) or the local contracting agency and are included in the bid specifications of covered contracts. Thirty-one states have enacted state prevailing wage legislation, which are commonly referred to as “Little Davis-Bacon” provisions. These provisions require payment of prevailing wages and fringe benefits on state projects as well as federal projects. Offering Benefits Can Make Bids More Competitive When it comes to the prevailing wage provisions of the Davis-Bacon Act, contractors have choices as to how the fringe benefit portion is paid. Many contractors pay the fringe benefit portion of the prevailing wage as additional cash wages, believing it’s the easiest way to comply with the law. But allocating this amount to a bona fide benefit plan or plans can work to a contractor’s advantage on a number of levels. When contractors use the fringe portion of the prevailing wage to provide “bona fide” benefit plans for their workers, these dollars are taken off the payroll and are therefore exempt from payroll taxes such as FITA, FUTA, and SUTA as well as other expenses such as workers compensation and general liability. This represents considerable savings on job costs, which translates into lower bids and better chances of winning jobs. Benefits that might be included in a bona fide benefit plan offering are retirement, medical, dental, vision, and life insurance plans. Here’s an example of the savings that can be realized by putting the fringe toward benefits instead of in your employees’ paychecks. Although there are variances in the rates for unemployment taxes and workers compensation, conservatively these taxes represent an additional 25 cents on each dollar paid as cash wages. ARRA Offers Opportunity and Anxiety for Broadband Contractors By John Allen Continued on page 18 When contractors use the fringe portion of the prevailing wage to provide “bona fide” benefit plans for their workers, these dollars are taken off the payroll and are therefore exempt from payroll taxes such as FITA, FUTA, and SUTA as well as other expenses such as workers compensation and general liability. This represents considerable savings on job costs, which translates into lower bids and better chances of winning jobs.

PCCA Journal|4th Quarter 2010 18 Sample Calculation Assume XYZ Broadband Company has 15 employees doing prevailing wage work. These employees work approximately 1,000 hours each per year. The fringe amount above the base rate is $8/hour, and the average approximate additional payroll cost when paying fringe dollars as cash wages is 25 percent. 15 employees X 1,000 hours = 15,000 total hours 15,000 hours X $8.00 = $120,000 in additional payroll $120,000 X 25 percent = $30,000 XYZ Broadband Company savings Visit the interactive calculator at www.thecontractorsplan.com to calculate your company’s potential savings. Ready for an Audit? The Obama administration has hired hundreds of new investigators to make sure that ARRA funds are being accounted for properly. It is very important for contractors to prepare themselves for an audit and understand the following: Certified payroll responsibilities, • Hourly fringe benefit allocation(s), and • Correct labor classifications for workers. • Contractors intending to bid on ARRA-funded projects should take steps now to ensure compliance with the Davis-Bacon Act and other federal and state regulations that apply. Look for a prevailing wage benefits partner with experience in this highly-regulated industry—the U.S. DOL and IRS have significantly upped their workforce and, as a result, their oversight of contractors receiving ARRA dollars. Using a firm that understands compliance from the Wage & Hour Division of the DOL, the various state prevailing wage laws, and the many requirements for employee benefits can give contractors the competitive edge to win bids, especially in a crowded market with so much opportunity. John Allen, CRPS, is a regional vice president for Fringe Benefit Group, an industry leader in prevailing wage benefit plans for government contractors. Since 1979, Fringe Benefit Group has helped contractors be more competitive when bidding on government jobs by offering flexible benefit solutions that can significantly reduce a company’s payroll burden. Allen can be reached at (512) 663-0709 or jallen@fibi.com. ARRA and the Davis-Bacon Act Continued from page 17

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PCCA Journal|4th Quarter 2010 21 The current economic decline has hit the stage when those who were just hanging on by their fingernails are starting to fail and fall. While contractors must always be attentive to ensure that subcontractors are passing along payments to lower-tier subcontractors, the impact of the current economy now requires that contractors be ever more vigilant in protecting themselves and their sureties from bond claims and mechanic’s liens by reason of payments diverted by an upper-tier subcontractor that should have been passed on to a lower-tier subcontractor. I have seen a disturbing trend of claims from sub-subcontractors and suppliers against the general contractor’s bonding company or of mechanic’s lien claims against the owner, based upon the fact that although the initial subcontractor was paid for the work performed, the subcontractor never paid its sub-subcontractors or suppliers. Few object to paying once, but everyone objects to paying twice for the same service. The Problem: Paying Twice for Subcontract Work On public works construction projects, under the Federal Miller Act and the Little Miller Acts adopted by virtually every state in the United States, contractors are required to furnish payment and performance bonds. Subcontractors and suppliers, including lower-tier subcontractors that have no contract with the general contractor, who are not paid for their contribution of labor, equipment, supplies, and the like, have a claim against the contractor’s payment bond. Even on large private projects, payment and performance bonds are routinely required to cover the same obligation; that is, to ensure that subcontractors, sub-subcontractors, and suppliers are paid for their contribution to the project. Additionally, on private projects, even if no bond is required, nearly every jurisdiction has a mechanic’s lien statutory scheme under which unpaid sub-subcontractors and suppliers have claims against the project owner (who in turn will have indemnity claims against the general contractor) for unpaid labor, materials, and equipment on the project. What this all means is that in most instances, and with a few procedural hurdles, the general contractor (and the indemnitors on the bonding line) are ultimately liable for a “busted” sub’s failure to pay its subcontractors and suppliers. Read that last sentence again as it is the source of a substantial amount of angst and frustration to a general contractor who has never considered the possibility of this type of liability. True, there are many hoops through which mechanic’s lien claimants and bond claimants have to jump in order to preserve and perfect their rights, but once they’ve been burned once, they tend to become skilled at complying with the bond claim and mechanic’s lien statutes. Therefore general contractors need to be equally skilled at avoiding paying twice for the same service through proper management of subcontractors. With increasing frequency, lowertier subcontractors are not paying their bills. While there is a time during which the “robbing Peter to pay Paul” system works for the subcontractor who is slowly rolling down the economic hill, the scheme comes tumbling down when there is no future project to pay past debts. Similarly as jobs become more scarce, subcontractors lower their prices to garner work priced below cost. Many unpaid lower-tier subcontractors who face more demands on their construction funds than the funds will allow will frequently operate for many, many months before claims for unpaid work are turned into judgments, bond claims are filed, or mechanic’s lien claims are asserted. The general contractor may be completely unaware that its subcontractor is failing because the work is getting done and because the subcontractor is assuring Managing Subcontractors in the Midst of Economic Meltdown By Gregory T. Spalj Legal Watch Continued on page 22 Authors note: For simplicity, this article examines the problems caused by downstream subcontractors not paying their subcontractors from the perspective of the general contractor. The principles discussed, however, would be the same and the solutions posed would have applicability to a higher-tier subcontractor managing its lower-tier sub-subcontractors.

PCCA Journal|4th Quarter 2010 22 the general that there is nothing to worry about. Nevertheless, the results of the subcontractor not paying its workers, sub-subcontractors, and suppliers will be apparent eventually—at a time when it may well be too late to do anything about it. Compounding the Problem: Perception Versus Reality Many contractors who have never been involved in a bond claim or mechanic’s lien action may be surprised to learn that a lower-tier subcontractor or supplier (or even an employee of a subcontractor) may have a claim against the project owner, the contractor, or the general contractor’s bonding company for the unpaid value of the lower-tier subcontractor’s labor, materials, and supplies, even though the contractor has paid its immediate subcontractor for the labor, equipment, and supplies. Yes, you read that right: notwithstanding the fact that you may have paid your subcontractor, if your subcontractor did not pass those payments down to its lowertier subcontractors and suppliers and to its employees, those claimants can, in effect, make you pay twice. The perception among many contractors is that if they get lien waivers from their subcontractors, they are protected. In fact, they are not. The lien waivers that a contractor needs for protection against double payment are lien waivers not only from its subcontractor, but from all subcontractors and suppliers of every tier. In many states, even the subcontractor’s employees and their unions are protected, so that if the unpaid subcontractor does not make contributions to the union health and welfare benefit funds, those funds have a claim against the contractor’s payment bond or they can file a mechanic’s lien against the project. So, even though the employees are being paid and are themselves unaware that their union benefits are not being funded, the contractor who paid union scale to its subcontractor may be required to pay twice for those benefits if the union perfects its claim. In fact, the first sign that things are going awry is frequently a garnishment summons from the union health and benefit fund garnishing the subcontractor’s rights to payment to satisfy the obligation owed to the union for unpaid benefits. The unions are vigilant in prosecuting their rights, and that vigilance has the unintended benefit of often alerting the general contractor to a problem the general contractor did not know existed. Too often however, at that stage, it is too late to do anything to protect oneself. The 75 Percent Solution There is no complete remedy to Legal Watch Continued from page 21 Gregory T. Spalj A Lawyer serving the Power, Cabling & Telecommunication Industries for over 20 years. • Contract Review • Bid Protests • Differing Site Conditions • Scheduling Claims • Entity Formation • Mechanics’ Liens • Bond Claims • OSHA Citations • Insurance Disputes • Construction Defects 612-359-7600 www.FWHTLAW.com

PCCA Journal|4th Quarter 2010 23 immunize a contractor from having to pay twice for its subcontractors’ debts. The solution to the problem is only partial and involves a series of steps, the totality of which will cover most of the problem. Intake The first step involves subcontractor selection. Pay attention to the quotes you receive and the experience of those who are quoting. If one subcontractor quote is markedly lower that the rest, be suspicious and inquire. If the subcontractor is one not normally quoting that particular kind of work, be suspicious. Lean economic times often cause subcontractors (and general contractors) to venture off into areas of construction work for which they are ill equipped, and therefore they are ignorant of the some of the most important price considerations. Additionally, even experienced subcontractors bid work cheaply in order to keep their crews busy so as not to lose them to competitors. Unfortunately in the heat of bid preparation, there is not time for thoughtful reflection so your analysis must be immediate and quick. Common sense must be your guide here: if something looks too good to be true, it probably is not true. Bond and Lien Waivers Next, as a condition of periodic payments to your subcontractors, demand lien and bond claim waivers from subcontractors at any tier, and that means sub-sub-sub-subcontractors and suppliers. The problem is that many general contractors do not even know who their immediate subcontractors have used as subsubcontractors, let alone who that subcontractor used as a subcontractor. Even if you obtain lien waivers from every entity of which you are aware, unless everyone in the chain has made full disclosure, there will be those of whom you are not aware and therefore against whom you cannot protect yourself. Nevertheless, you could protect yourself from substantially most of the potential claimants by requiring two things: (1) require your subcontractors to disclose in writing the existence of any subcontractors and supply contracts they have entered into and (2) require lien waivers from your subcontractors and those sub-subcontractors and suppliers, and if the sub-subcontracts are large enough, from even the sub-sub-subcontractors themselves. The effectiveness of this portion of the cure depends on the truthfulness of your subcontractors. The waivers should contain an indemnity clause such that if a payment does not get passed downstream and the general contractor has to pay twice, the subcontractor agrees to assume the financial 5HDPHUV 3ORZ %ODGHV 1.507.387.6576 • 1.800.533.2077 (U.S. & Canada) See the complete line at condux.com! ® CONDUX 3DGGOH %LWV :LWK +'' &RPSDFWLRQ %RULQJ &DEOH 3ORZLQJ 6\VWHPV )URP &RQGX[ 6XFFHVVIXO XQGHUJURXQG FRQVWUXFWLRQ SURMHFWV VWDUW ZLWK WKH EHVW HTXLSPHQW DYDLODEOH DQG WKDW PHDQV &RQGX[ ,QWHUQDWLRQDO &RQGX[ LV QRZ D VXSSOLHU RI 7ULSOH ' +'' FRPSDFWLRQ ERULQJ DQG FDEOH SORZLQJ WRROV DQG HTXLSPHQW )RU RYHU \HDUV \RX¶YH FRXQWHG RQ &RQGX[ WR GHOLYHU\ WKH KLJKHVW TXDOLW\ FDEOH LQVWDOODWLRQ WRROV DQG HTXLSPHQW 1RZ WKH\¶UH WKH VRXUFH IRU HYHQ PRUH XQGHUJURXQG WRROLQJ $QG ZLWK WKH 7ULSOH ' QDPH EHKLQG LW \RX NQRZ LW¶V WKH EHVW ‡ 5HDPHUV SDGGOH ELWV DQG VRQGH KRXVLQJV IRU +'' DSSOLFDWLRQV ‡ &RPSDFWLRQ %RULQJ 7RROV ‡ &DEOH 3ORZLQJ 6\VWHPV ‡ 0RUH Continued on page 24

PCCA Journal|4th Quarter 2010 24 liability therefor. (This is usually a moral victory only inasmuch as, if the subcontractor was financially flush enough to cover the indemnity, it likely would have paid its subsubcontractor in the first place.) Certified Payrolls In addition, as a condition of payment to your subcontractors, your subcontracts should require your subcontractors to provide certified payrolls, which include a statement under oath that all taxes and fringe benefits have been paid. If the subcontractor is willing to lie under oath, you will get no protection from this, but it is at least a filter through which most subcontractors will not pass. In other words, most people will not out and out lie, but many would fail to volunteer the information if they are not asked. Remember though, once you obtain this information from the certified payrolls, you need to use it. Verify that the certified payrolls are current, and do not just stick them in a file drawer. Direct Payment and Joint Checks Next, if you have reason to believe that one of your subcontractors is not passing on payments to his lower-tier subcontractors, pay the sub-subcontractors directly or use joint payee checks for payment. The problem with direct payment to the lower-tier subcontractors is that it requires an agreement on what is owed among the lower-tier subcontractor and your subcontractor. If your subcontractor has claims against the lower-tier subcontractor or disagrees with the lower-tier subcontractor’s payment request, you run the risk of overpayment. Therefore, unless you have an agreement with your subcontractor to make direct payments to its subcontractors and suppliers, this can be a risky strategy. Joint payee checks avoid the problem of resolving any dispute between your subcontractor and its lower-tier subcontractors. If these parties are unable to resolve the dispute over what is owed, neither gets paid because it will take the signature of both to negotiate the check. This method of payment does require you to know to whom the payments should be made in order to make each entity a joint payee. If you decide to issue joint checks, notify both the subcontractor and the lower-tier subcontractor or supplier of your intention to issue a joint payee check. In order to avoid a false signature, if possible, personally deliver the joint payee check to representatives of both the subcontractor and the supplier or make a representative of each pick up the check from your office. On the check stub or voucher, type a directive that the proceeds of the check are to be applied solely and exclusively to debts arising from your project. (In some states in the absence of an express direction, creditors are free to apply payments to any debt owed. It is therefore a good practice to put the project to which the debt should be applied in the memo line.) Then, type on the back of the check an appropriately worded release of claims that becomes effective upon endorsement. This has the added benefit of wiping the slate clean as between the general contractor and the two joint payees upon the negotiation of the check. Another option you might consider for a subcontractor who may be on the verge of bankruptcy is to enter into a formal Joint Payee Check Agreement to memorialize the parties’ intentions. This agreement should expressly state (1) the purpose of the payment, (2) its allocation toward the project-specific debt, (3) the assent of the general contractor, subcontractor, and supplier, and (4) a partial waiver of the lien rights for the value conveyed in the agreement. That way, if the payment were subsequently scrutinized by a bankruptcy trustee, the Joint Payee Check Agreement will be evidence that the subcontractor was a joint payee for the purpose of holding the funds in trust for the lower tier subcontractor. (Trust funds are usually not a part of the bankruptcy estate.)* This will provide some protection against the bankruptcy of your subcontractor and right of the bankruptcy trustee to recover payments made within 90 days of the bankruptcy petition being filed. Conclusion There is no complete answer to the problem discussed here, just as there is no complete answer to the question of what is the right subcontract, what is the right insurance policy for a contractor, what is the right price to bid, how to eliminate OSHA citations, how to reduce your workers’ compensation modification, or a myriad of other questions contractors face daily. If there was a complete and definite answer, it would be known by now, given the fact that construction contracting is one of the oldest professions in the world. The truth is that you can implement processes to decrease many of these risks. The balance of the problems can be dealt with on a case-by-case basis as they arise. Contracting is all about risk brokering, shifting, avoidance, and balancing; it is not about risk elimination. Implementing the procedures noted above, however, will go a long way to place you “behind the fan” when the stuff hits. * Note: This is a gross oversimplification of the trust fund theory in bankruptcy, the explanation of which would take many pages of text. Greg Spalj is a member of the PCCA and represents many of its members. He has a national law practice representing construction contractors. He can be reached at (612) 359-7631 or gspalj@fwhtlaw.com. Legal Watch Continued from page 23

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