MCAA - Management Methods Manual PDF

MECHANICAL CONTRACTORS
ASSOCIATION OF AMERICA, INC.

1385 Piccard Drive
Rockville, MD 20850-4340
301-869-5800
Fax 301-990-9690
www.mcaa.org
______________________________________
MANAGEMENT
METHODS
MANUAL
Management Methods Manual
Mechanical Contractors Association of America, Inc.

1385 Piccard Drive
Rockville MD 20850-4340
Phone 301-869-5800
MCAA Management Methods Manual

2015, Mechanical Contractors Association of America, Inc.
This manual is the property of the Mechanical Contractors Association of America, Inc.
All rights reserved. The material contained herein is owned by the Mechanical
Contractors Association of America, Inc. (MCAA) and is protected under the copyright
laws of the United States of America (Title 17, United States Code) as well as the
copyright laws of other jurisdictions.
The duplication, reproduction, storage in a retrieval system, exhibition, dissemination, or

transmission in any form by any meansmechanical, electronic, photocopying,
recording, or otherwisewithout prior written permission of MCAA is strictly prohibited.

Mechanical Contractors Association of America, Inc.

1385 Piccard Drive
Rockville, MD 208504340
Foreword
The Management Methods Manual has been developed under the auspices of
MCAAs Management Methods Committee. The information contained in this
manual is the result of many years of effort by the members of the committee.
This publication reflects the members best information about current industry
practices and procedures of mechanical, plumbing, and service contractors.
The material contained in this manual is intended as a business reference. It is

not meant to provide absolute costs nor percentages that would be incurred, nor
verbatim examples of how you should handle your companys business
decisions. Each project, locale, and situation is unique and variances will occur
even within the same jurisdiction. Each company utilizing this manual should
determine how the material contained within these pages will apply to its specific
circumstances. Every company must decide its own contract terms. It is
unlawful for contractors to agree to use any particular cost or percentage figure in
contract provisions which can affect the ultimate price.
MCAA wishes to thank the many members of the Management Methods

Committee past and present who have served and contributed their time,
insight, and experience to the development of the material found in this manual.
Management Methods Manual
Table of Contents
Number Publication Date
ACCOUNTING AND FINANCE
AF 1 Labor Burden 1996

AF 2 Credit Policy Criteria 2002
AF 3 Cash Flow 1996
AF 4 Tips to Help Contractors Manage Through an Economic Downturn 2012
AF 5 Service Mark-ups vs. Construction Mark-ups 2008
AF 6 Guide to Financial Statements 2012
AF 7 Other Direct Job Costs (ODJCs) and Indirect Job Costs 2013
BUSINESS FORMS
BF 1 Business Forms 2002

BF 2 Forms for Temporary Heat or Cooling 1996
CHANGE ORDERS
CO 1 How to Identify and Manage Change Orders 2014

CO 2 How to Organize and Submit a Claim 2014
CO 3 Time Impact Analysis Measuring Project Delay 2014
Please refer to Change Orders, Productivity, Overtime (#M3) for revised

sections.
CONTRACTS
CT 1 Construction Contract Proposal for Cost of Work Plus a Fee 1996

CT 2 Contract Terms and Conditions 2010
CT 3 Payments Clause 1996
CT 4 Disputes and Arbitration Clauses 1996
CT 5 AIA A201 General Conditions of the Contract for Construction 1996
CT 6 Warranty 1996
CT 7 Cautions for Contractors: Asbestos Hazards 1996
CT 8 Understanding Manufacturers Warranties 2008
CT 9 Managing Killer Contract Clauses 2014
CT 10 Fixed-price Construction Contracts, Material Price Volatility and
Contract Cost Adjustment Clauses 2010
CORPORATE PLANNING
CP 1 Strategic Planning 1996

CP 2 Corporate Structure: Using Outside Advisors/Directors 1996
CP 3 How to Get Out and Let Others In 1996
CP 4 Valuing the Closely Held Mechanical Contractor 1996
CP 5 The Management Audit: Peer Group Guidelines 1996
CP 6 Total Quality Management 1996
CP 7 Mechanical Contractors Guide to Crisis Management 2014
CP 8 Disaster Recovery: Getting Your Business Back in Operation After
a Disaster 2008
CP 9 Fraud Prevention 2014
EDUCATION AND TRAINING
ET 1 Business Writing for Success 2010
ESTIMATING
* Refer to MCAA WebLEM
ES 1 Rule Of Thumb Parameter Estimating 1996

ES 2 Unit Pricing 1996
FABRICATING
FB 1 Factors to Consider in Establishing a Piping Fabrication Shop 1996
HUMAN RESOURCES
* Refer to MCAA Guide to Human Resources Policies
HR 1 How to Find, Hire, and Manage Student Interns 2015

HR 2 Dos and Donts of Effective Employment Interviews 2009
HR 3 Avoiding Potential Liability from Employees Use of Company Vehicles 2010
HR 4 Guidelines to Using Social Media in Your Business 2012
INSURANCE/BONDING
IN 1 Insurance Punch List 2012

IN 2 Risk Management 1996
IN 3 Hold Harmless Agreement 1996
IN 4 How Large Should Insurance Deductibles Be? 1996
IN 5 The Dos and Donts of Obtaining Bonding 1996
IN 6 Insurance for Catastrophes 2002
IN 7 Subrogation Can Spell Trouble 2005
IN 8 What are the Pros and Cons of OCIPs and CCIPs? 2007
IN 9 Subguard/Subcontractor Default Insurance 2014
IN 10 Builders Risk & Installation Floater Insurance 2015
JOB MANAGEMENT
JM 1 Team Management In Construction 2002

JM 2 Job Supervisors Manual 2005
JM 3 Scheduling 2010
JM 4 Pre-Job Conference 2013
JM 5 Effects of Job Schedule Delays on Construction Costs 2002
JM 6 Working With Owners 2014
JM 7 Jobsite Coordination 2002
JM 8 Partnering 1996
JM 9 Project Forecasting 2010
JM 10 Controlling Project Costs Caused by Third-Party Commissioning Agents 2014
JM 11 Temporary Usage of HVAC Equipment 2009
JM 12 Integrated Project Delivery (IPD) 2015
JM 13 Minimizing the Risk of Poor Site Conditions 2015
JM 14 Design-Assist Project Delivery 2015
JM 15 Turnover MeetingsEstimating/Sales to Project Management 2015
JOINT VENTURES
JV 1 Joint Ventures 2014

JV 2 Failure of One Corporate Member of a Joint Venture to Qualify
as a Foreign Corporation May Penalize All Venturers 1996
LABOR RELATIONS
LR 1 Labor Relations 2012

LR 2 Market Recovery Programs 1996
LR 3 United Association National Labor Agreement Summary and
Comparison 2015
LEGAL
LL 1 Protecting Lien Rights 2012

LL 2 Purchases and Sales of Goods Under the Uniform Commercial Code 2013
LL 3 Summary of State Regulations and Taxes Affecting Contractors 2013
LL 4 Truth in Lending 2002
Consult with local counsel
LL 5 Funding Liability Under Multi-Employer Pension Plans 2002
Consult with local counsel
LL 6 Records Retention 2012
LL 7 Employers Liability When Contributing to Union Testimonial Dinners 2013
LL 8 Compliance with Antitrust Laws 2013
LL 9 Tax Requirements Applicable to Travel Reimbursements, Advances
And Bargaining Units Subsistence Allowance 2013
LL 10 Federal Prompt Payment Act 2012
LL 11 Contract Clauses 2012
LL 12 Liability of a Prime Contractor for Interference with a Subcontractor 2014
LEGISLATION
LG 1 Business and Politics 1996
MANAGEMENT INNOVATION
MI 1 5 SsRoad to Improvement 2004

MI 2 Managing Office Operations with PaperVault 2010
MI 3 Serviceeye 2012
MI 4 Articulating Weld Boom 2012
MARKETING
See Guide to Marketing Your Business
MK 1 Fundamentals of Marketing Your Own Services 1996

MK 2 Why Mechanical Contractors Should Furnish Equipment 1996
MK 3 Diversification for Profit and Growth 1996
MK 4 Value Engineering 1996
MK 5 Listening to Our Customers 2002
MK 6 Public Relations: An Important Marketing Tool for the
Mechanical Contractor 1996
MK 7 Guidelines to Using Social Media in Your Business 2012
MK 8 Creating a Readable Corporate Newsletter 2013
OVERTIME
OT 1 How Much Does Overtime Really Cost? 2014

OT 2 Shift Work Costs and its Effects on Productivity 2014

sections.
PRODUCTIVITY
PD 1 Maintaining Control of Labor Productivity 2014

PD 2 Factors Affecting Labor Productivity, including How to Use the
MCAA Labor Factors 2014
PD 3 How to Apply the Measured Mile Method of Productivity Analysis 2014
PD 4 How to Estimate the Effects of Cumulative Impacts 2014

sections.
PURCHASING
PC 1 Purchasing for Profit 2010

PC 2 Purchase vs. Lease Considerations 2002
PC 3 FOB Terms 2002
PC 4 Why Mechanical Contractors Should Be Paid for Materials
Stored On/Off Jobsite 2002
QUOTING AND BIDDING PROCEDURES
QB 1 What Is Indirect Job Cost? 1996
SAFETY
* Refer to MCAA Safety Publications
SF 1 Company Safety Programs 2001

SF 2 Emergency Procedures 2004
SF 3 Safety and Productivity: Does Improving One Increase the Other? 2005
SF 4 Proactive Safety Approach 2005
SUBCONTRACTS
SC 1 Suggested Subcontract Form 2012

SC 2 Indemnification Clauses 2012
SC 3 Comparison of Industry Standard Form Agreements Between
General Contractor and Subcontractor 2012
TAXES
TX 1 Should You Elect Subchapter S Treatment? 1996

TX 2 Compensation Planning for Closely Held Corporations 1996
TX 3 How To Set Up Tax-Wise Corporate Minutes 2002
TX 4 Meeting the Requirements for Travel and Entertainment Deductions 1996
TX 5 ESOP (Employee Stock Ownership Plan) 2002
TX 6 Preparing for a Sales Tax Audit 2005
TX 7 Estate Tax Planning and Succession 2012
TECHNOLOGY
Refer to MCAAs Technology Publications
TC 1 Laser Scanning 2013

TC 2 Electronic Tablet Use in Construction 2014
TC 3 BIMWhat Is It and Is It Right for My Company? 2015
TOOLS AND EQUIPMENT

Refer to MCAA Tool & Equipment Rental Guide
TE 1 Cost and Control of Tools and Equipment 1996

TE 2 How to Cost Corporate-Owned Equipment 1996
TE 3 Vehicle Maintenance Program 1996
TE 4 Contractors Equipment: A Guide to Better Security 2007
TE 5 Temporary Usage of HVAC Equipment 2015
To order any MCAA publication referenced in this table, visit www.mcaa.org/store or call
301-990-2200.
Bulletin No. AF 1
File: Accounting & Finance
Labor Burden
Labor burden is best described as the b. Fringe Benefits

costs a contractor must pay in addition to
wages and fringe benefits. Vacation
Pension
The purpose of this bulletin is to aid the
Health and Welfare
contractor in determining his actual hourly
National Guaranteed Wage
cost for labor. This information should save
(SASMI)
time in estimating, invoicing and cost ac-
Uniforms and/or Special
counting. Any presentation on this subject
Protective Clothing or Gear
may overlook some items. Therefore, it
Training, Apprenticeship,
should be considered a guide or checklist and
Industry Funds
modified to fit the actual cost per manhour. A
contractor should consider at least the fol-
lowing: 2. Direct labor burden is the cost the con-
tractor is required to pay in addition to
1. Wages and fringe benefits are costs wages and fringes, either by law, union
contained in a union agreement, includ- agreement or business necessity. These
ing: may include:
a. Base Wages
a. Taxes and Insurance
Zone Pay
Shift Pay F.I.C.A.
Paid Holiday Federal Unemployment
Hazard Pay State Unemployment
Supervisory Pay Workmens Compensation
Premium Time Liability Insurance
Copyright, Mechanical Contractors Association of America, Inc., 1996
1
Accounting & Finance
b. Tools and Equipment e. Clean Up

f. Warehouse Men and Yard Equip-
Small Tools
ment Delivery Men and Trucks
Expendable Materials
g. Warranty
c. Trucks (Assigned to Mechanics Only) h. EEO and OSHA Regulations
Operation and Maintenance i. Equipment and Truck Expenses
Insurance and Depreciation j. Engineering
d. Travel and Subsistence When Not Detail Drawings

Included in Item No. 1, Wages and Operation Instruction
Fringe Benefits Marking, Tagging
Subsistence k. Other
Transportation Fares Ice Water
Parking and Toll Charges First Aid
Auto Mileage Toilet Facilities
Travel Time Special Equipment
Emergency and Safety Temporary Heat
3. Indirect labor burden is the cost the Move OnMove Off
contractor will incur in addition to direct Tests, Job Photos
labor burden to support the mechanic in Job Phone
the field.These items may sometimes be Job Office
referred to as job expenses but they Fees and Permits
should be carefully considered and pos- Equipment Rental
sibly added as a percentage to the cost Blue Printing
per manhour. They consist of, but are not Shop Expense
limited to: Special Tools and Instruments.
a. Off-Job Supervision and Scheduling As indicated, the above lists are not ex-
b. Lost Time, Show-Up Time, Stand By haustive. They contain suggested items and
c. Labor Contract Administration should serve only as a guide in preparing your
d. Training and Qualification or Testing own lists to calculate labor burden.
2 AF 1
Bulletin No. AF 2
Bulletin
Credit Policy Criteria

Introduction crued to th e job at the end of e ach
billing period. Service d epartments may
A credit policy is a vit al ingredient for need a different approach, such as nam-
any well-run mechanical contracting ing C.O.D. customers (choose those
business. The essential ingredients of a whose past actions indicate they will not
credit policy are: pay with-out prodding or new accounts
on which credit checks are not re adily
the policy itself, in cluding all rule s available) and service billing terms as
and regulations to be followed by net 10 or 30.
company personnel;
the personnel to implement the It is better to have a st andard policy on
policy; company billings, either a net 10 or net
outside sources of credit information; 30. Net 10 is pre ferable because if a
and customer does not pa y within 10 days
legal and/or professional collections after invoicing, you have sufficient time
services to augment failures of in- to remind him that your invoices are
house policy. marked net 10. This gives you a ch ance
to get paid within a month after the in-
Credit Policy voice is se nt out. Whereas, in net 30
billings, you have to wait a full month to
find out if the customer will not pay. The
A short cre dit policy in memoran dum
result: it will probably be 60 to 90 days
form should be established for each of
before you can persuade him to pay.
your departments. For example, the
sales department should have a p olicy
Personnel Implementation
requiring that the same credit terms be
stated on each contract. You ma y wish
to have 20 percent down with equipment Your credit policy should be in writing
delivery on each negotiated job, or per- and clearly stated. T hen, someone
haps have t hat policy only for sales up should be assigned to act as credit
to $10,000. For larger jobs you might manager. In most co mpanies, this will
want a billing policy of no deposit when probably be the treasurer or controller.
the order is placed, but a mont h-to- He, in turn, can deleg ate the various
month billing with terms requiring pay- tasks, such as collection phone cal ls or
ment of the net amount of the bill within payment and past due notices, to staff in
10 days (net 10), the exact amount to be his area. T hey will report to him the
determined by labor and materials ac- success they are ha ving with accounts
Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 1

receivable and the collection of past due ness with n ew accounts without th e
accounts. In the case of sensit ive ac- proper credit check, o r fail to go
counts, the credit ma nager might call C.O.D. if n o credit check has been
upon other officers of the compan y to made. Before the service depart-
approach the delinquent customer. ment makes a call, all n ew accounts
should be referred to the credit man-
Salesmen often want to try their ha nds ager for a credit check. I n a smooth-
at collecting special pr oblem accounts ly working system, the credit mana-
and, depending upon the customer, they ger can pe rform this function in a
may do a good job. It is necessa ry to matter of minutes. Th is is anoth er
have an ef ficient accounts receivable excellent reason for assigning credit
aging report form with columns indica- management authority to an employ-
ting: current, 30 days old, 60 d ays ee with the most appropriate exper-
old, and 120 days or older. The form ience.
might also contain such information as
the accounts name, address, p hone Those contractors whose operations are
number and person to contact regarding basically confined to plan and spec
past due amounts. This information can work, and who primarily sign contracts
also be ke pt in a separate card file, drawn by ot hers, may f eel that a credit
which is more easily updated. An ag- policy and a credit manager are not
ing form indicates th e status of an necessary. However, even these firms
account at any time, a nd you should at can speed up delayed payments when
least post t he amount due on the form someone watches ca sh flow versus
under the proper aging column. billings. Accordingly, a credit manager
should be a ppointed to trace problems
Your credit manager should be on the job site that m ay be adve rsely
responsible for the following: affecting payments. This type of c redit
policy is just as effe ctive in bring ing in
1. Check each new contract on negoti- slow money as telepho ning delinquents
ated or bid and spec w ork to deter - from an aging report form. The amount
mine the terms of payment and as- of money lost because of late payment
sure that the Billing Department is larger than many contractors su spect.
abides by t he terms spelled out in Owners must be convinced that chronic
the contract, regardless of its origin - slow payments increase overall costs. If
ator. Additionally, at the time yo u cash flow can be expedited, the cost of
agree to a job quotatio n requiring a billings may be reduced by one to three
bid bond, your credit manager percent or more. Try offering your cus-
should be aware of the withholding tomers two percent for payments made
terms offered in the spe cs. You may prior to the tenth of the following month,
not want a job with ridiculous with- for example, if your billings offer net 10
holding percentages or service guar- days.
antees enforced by five percent
withheld for one or more years, etc. Outside Sources of Credit
Information
2. Check turn-key or neg otiated work
to see that those responsible fo r Another vital ingredient of credit policy is
writing your firms contr acts comply how to run credit checks on new ac-
with the firms credit policy. counts. Dun & Bradst reet is a g ood,
albeit slow, service for checking an
3. See that various departments accounts dollar volume and fina ncial
(service, etc.) do not initiate busi- statement. However, its reliability is not

always the best beca use many con- money being withheld from a contractor
tractors refuse to give D & B either after completion of a job is the construc-
adequate or current information. An tion lien. While the laws of various
alternate source of information in this states differ widely, every state in the
case would be appropriate supp liers nation has some version of a const ruc-
who may also be able to steer you to tion lien law.
other contractors who have worked with
the account and know their pa ying Construction lien laws benefit two differ-
habits. Barring this, another way of ent classes of particip ants in the con-
obtaining credit information is to p hone struction process. The first is the con-
competing contractors to see if they tractor who has contracted directly with
have had any experience with this the owner, the man or firm referred to as
accounts paying habits. Surprisin gly, the general or prime contractor. Even
many contractors are happy to share though he can choose whom he con-
this sort of information with their peers. tracts with and, accordingly, should per-
Banks and local credit bureaus are two haps be held to assume the risk of the
other excellent source s of credit in- owners credit, it is still reasonable to
formation. give him a lien on the o wners property,
which has increased in value by his
Legal and/or Professi onal Collection labor. The second class of participa nt is
Services the person who puts labor and/or mater-
ial into the construction, but has no
You can hire a lawyer t o write a collec- direct contractual relationship with the
tion letter or file a construction lien; owner. This class includes subcon-
these tasks should not take more than tractors, suppliers (material men) and
an hour. C ollection agencies not only laborers employed by either prime or
take more time, but they often charge subcontractors. Although this cla ss has
higher fees than lawyers, regardless of no privity of contract with the owner
the amount collected. Understand the (they may not even k now who h e is),
fee structure or hourly rate of any a gen- they still ad d to the value of his l and.
cy or lawye r before engaging the m for The reason for providing them a lie n on
collection services. the owners property is that, should the
entity with whom they have contracted
You can justify using a lawyer to collect with fail to pay, they o ught to have a
a large am ount if the hourly rate does legal claim against the land they have
not exceed, in total, five or 10 percent of enriched.
the amount collected, perhaps higher. It
does not make economic sense to pay The basic problem with the construction
an attorney $400 to collect $100. There lien laws o f any state rests with the
is a break-even point on larger accounts second class of participant. Often the
beyond which it pays to turn the collec- owner is u naware of the possib le lien
tion over to an attorney. On the other rights of th ese claimants. He pays his
hand, collection agencies almost always prime contractor in full only to fin d, too
charge high fees to cover the time spent late, that the contract or is either dis-
on accounts they have not been able to honest or insolvent. As a resu lt, the
collect. prime contractor does not pay the more
remote claimants. Yet, under the law,
Construction Liens they may still have lien rights, which, if
successfully exercised, will require the
A device th at you can often use to free owner to p ay twice or face losin g his
property and its improvements.

The same thing can ha ppen if the prime construction mortgage l enders get into
contractor pays his subs in full, but one the act and will not pay unless they are
of the subs fails to pay his more remote assured of a secured position ahea d of
suppliers, sub-subs or laborers. In such construction lien claimants and owner-
cases, even these re mote claimants borrowers in the event of foreclosure.
may still ha ve lien right s (though state The conflicts of interests in this a rea
laws differ widely on this issue, an d you make it impossible to solve the dile mma
should consult your counsel in questions to everyones satisfaction through statu-
of lien rights). It b ecomes a qu estion of tory enactment. Aside fr om understand-
how remote can you be and still have ing that construction lien laws can play
lien rights. Some states limit those who havoc with your cash flow, it is important
can secure a lien to the first two, three to realize that you cannot know enough
or four tiers, whereas others impose no about this facet of the law in any sta te in
limit on the remoteness of the tier. Also, which you operate. Further, no matter
in about half the states, an owner is how sophisticated you may be in getting
protected against double liability if he a construction lien, it is wise to consult
pays his prime in good faith prior to any with your attorney on filing requirements
demand for payment being made and other methods of securing your
against him by a potential lower-tier lien claims by p roper procedureor in get-
claimant. ting rid of a lien by o ne of your own
sub-contractors.
In most sta tes, an own er is subject to
the risk of either paying twice for his Be Cautious In Granting And
construction or losing his land an d its Obtaining Waivers Of Liens
improvements through no fault of his
own. As a result, knowledgeable own- As noted above, the procedures for
ers, and in some cases their mortg age obtaining payment for work performed
lenders, insist upon waivers of lien. To on a construction proje ct often conflict
further confuse the issue, several archa- with the pra ctical use of liens (the legal
ic state lien laws permi t the owner and mechanism to assure payment). As a
prime contractor to file with the state subcontractor, you sh ould attempt to
recorders office (where the construction retain the protection of a lien by giving
site is loca ted) an agreement stating the general contractor only:
that the job will be a no-lien job with no
duty to notify subcontractors, material conditional waiver of lien, that is a
men or laborers of that fact. Accordingly, waiver conditioned upon receipt of
if these persons fail to check the record- the progress payment involved (con-
ers office on every job, they often oper- ditional waivers are sometime s
ate with a false assumption that they placed in escrow with the owner or a
have lien rights. title company and rel eased upon
receipt of payment);
In short, the lien claimant or pote ntial a waiver of lien work through a
lien claimant wants his payment g uar- certain date, typically the last 30
anteed in some manne r and the o wner days; or
wants to be assured that he will n ot be a waiver of l ien for a specified dolla r
compelled to pay twice. The p rime amount. Avoid blanket waivers.
contractor is in the midd le, pressing the
owner for payment a nd the subcon- Contract documents frequently require a
tractors and others for a waiver of lien to general contractor to furnish waivers
satisfy the o wners demands. Addin g to from his subcontractors through the date
the complexity of such situations,

of the previous progress payment. You perhaps two to five years, for your
should resist any effort by a general money. Even then, you will probably get
contractor operating under such a only a parti al settlement. The burd en is
provision to require you to furnish a always on you to compel the bonding
more far-reaching waiver. company to divulge information and
admit their liability. If you have a com-
Of course, you should obtain from your pany with a good reputation and ade-
own subcontractors and material sup- quate financing for yo ur projects, you
pliers a waiver no less extensive than can probably obtain a completion bond
the waiver that you intend to furnish to for about one percent of the contract
the general contractor. price. This guarantees that the bon ding
company will complete any uncompleted
Subcontractor Credit work under your contract and/or pick up
material bills then owned in the ca se of
Finally, you should check the credit of insolvency. If you are bondable and
your subcontractors. A rule of th umb such a bon d satisfies the owner, it is a
used by many experienced mecha nical good buy.
contractors is to never have a subcon-
tractor perform a sub-contract in excess When examining a p ayment bond, be
of two or thr ee times his net worth. This certain you know whether it is a bond for
practice will at least pr otect you for the labor and materials or only for la bor or
last third of their invoicing, should they materials. The wording must be scrut-
fail to perf orm. Obviously, you should inized. Never assume coverage is
never overpay a sub. Always withhold complete for both labo r and materials
money from him until you are sure he unless it is clearly stated in the bond.
has performed to within 10 percent of
the dollar amount for which he has filed. Federal Projects
A subcontractor should be bound to you Federal and state government construc-

by an enf orceable legal contract for tion projects differ from private construc-
each job in question, and if the subcon- tion projects in the protection aff orded
tractor has no net w orth to mention subcontractors and material supp liers.
and/or you have to bond himyou Unlike private constr uction projects,
should weigh whether it is worth u sing mechanics and material mens liens are
his services in the f irst place. Re mem- not available on pub lic construction
ber that you may have t o finish the job projects to ensure that subcontractors
with your own resources, and p rying and suppliers receive payment for ma-
money loose from a bonding company is terial or services supplied. To alleviate
no easy chore. the negative effects t hat might result
from the unavailability of such liens, fed-
Payment and Performance Bonds eral and state governments have cre-
ated statutes requiring prime contractors
Bonding companies are experienced, to obtain payment bonds designed to
tough and shrewd. They insist that every provide protection commensurate with
i be dotte d and every t be cro ssed, that available from mechanics and
and they demand high standar ds of material mens lien s. These st atutes
proof before they pay any money. also typically require performance bonds
for the protection of the government.
Accordingly, if you are trying to collect
on the bon d of a cont ractor who has The federal statute, known as the Miller
failed, be prepared and able to wait, Act, requires a payment bond, by which

a surety guarantees pa yment of a prime 4. Was the contract advertised through
contractors obligations to qualified an Invitation For Bid (IFB)? (Gove rn-
subcontractors and suppliers, a nd a ment construction co ntracts are
performance bond, by which the govern- advertised.) Did the a dvertisement
ment obtains assurances that the con- specify that Miller Act bonds would
tract will be completed. This latter bond be required?
is required solely for t he protection of 5. What are the o bligations of the
the government, and provides no pro- prime contractor; i.e., is the prime
tection to subcontractors or suppliers. contractor simply a construction
manager or is the firm required to
In any case, a prudent subcontractor or perform some construction of th e
supplier should determine whether its project? The probability of a bon d
contemplated work falls within the pro- requirement increases if the prime
tection of a Miller Act bond. Although contractor is responsib le for some
there is sup port for filin g a lien against construction activities on the project.
money owed to the prime contractor by
the government, parties should no t rely The Miller Act performance bond
on such au thority. Additionally, parties only protects the government, and
should not automatically assume a therefore, failure to require this bond
Miller Act payment bond has be en post- does not a ffect the rights of a ny
ed, as the government may occasionally other party. This is n ot the case,
neglect to include the bond requirement however, with the failure to provide a
in the prime contract. payment bond, since it is for the
protection of subcontractors and
Appropriate areas of inquiry for a suppliers rather than the gover n-
subcontractor seeking to determine ment. Generally, the United States is
whether a particular project is subject to not liable fo r failing to r equire Miller
the Miller Act include the following: Act bonds. To avoid the adverse
possibilities, it is always wise to
1. Is the contract a standard form contact legal counsel.
contract (such as Standard Form 23-
A, Construction Contracts)? Use o f A Final Caveat
Standard Form 23-A i s a strong
indication the Miller Act applies. If your average net pro fit is runnin g
2. Do the terms of the con tract require two percent, reme mber that it takes
a Miller Act bond? $50,000 in new business to make up
3. What is the nature of the work to be for each $1,000 that is uncollectible
performed under the co ntract? If the at years end.
work described is primarily construc-
tion, a bond is usually required. If the
work is divisible into construction
and non-construction items, the
higher the percentage of construc-
tion work, the more likely it is a bon d
will be required.

Bulletin No. AF 3
Cash Flow
INTRODUCTION ining past and future project billings, cost,

overhead expenses, etc. The forecast can
Effective cash management can mean be prepared on a project-by-project basis,
the difference between success and failure for as well as for the company as a whole.
the mechanical contractor. A contractor ac- Additionally, a cash forecast will help iden-
tively managing its cash can produce greater tify those periods when surplus cash is avail-
profits and grow at a quicker pace as a result. able for investment. An example of a simple
The contractor that does not practice cash cash flow forecast model is included as
management has a much greater chance of Table 1 located at the end of this bulletin.
failing when the company experiences cash
flow problems or the economy turns down. Accurately forecasting cash flow can be
The skill with which you manage your com- difficult for the typical contractor because the
panys cash has a direct effect on your com- seasonal nature of the construction industry
panys health and strength. often results in periods of excess cash on
hand followed by periods of cash deficien-
CASH MANAGEMENT FUNCTIONS cies. Following the high activity months, con-
tractors generally have surplus cash on hand
Cash management is the attempt to
resulting from collections for work performed
maximize cash as an investment and as a ve-
during the peak season. Cash deficiencies
hicle to meet current obligations. An effective
generally occur during the early part of the
cash management program for every con-
busy season as the contractor gears up for
tractor should include:
its peak season. A typical relationship be-
tween sales volume and cash collections for
Forecasting Cash Flow
a contractor with very seasonal operations,
A cash flow forecast enables your com- assuming a constant 45 days age of accounts
pany to predict future cash needs by exam- receivable, is illustrated in Figure 1.
1
Figure 1. Cash Flow Projections 2. How does a contractor predict exactly

when to borrow due to cash shortages or
invest due to surplus cash?
3. How can a contractor reasonably deter-
mine which months the cash swings will
occur and in what amounts?
The best management tool a contractor
can use to answer these questions is the pre-
viously mentioned cash flow forecast.
A cash flow forecast is the most effective
tool for predicting when your company will ex-
perience deficient or excess operating cash
balances.The overall goal of forecasting cash
flows is to maintain a satisfactory cash posi-
tion while maximizing cash as an investment
vehicle. Determining cash fluctuations,
caused by the seasonal nature of the con-
As indicated in the Exhibit, this contractor may
struction industry, is not the only reason for
experience operating cash shortages during
preparing a forecast. When prepared on a
the months of January through August. During
continuous basis as part of an active cash
this period the workload is increasing and cash
management program, a cash flow projection
is needed to finance new projects. The cash
will also:
shortage forces this contractor to stretch avail-
able cash, especially if the company is at- Ensure that the cash balance will always
tempting to expand operations and increase remain above zero or a desired minimum
work volume. If cash is not available, the con- level.
tractor will have to make provisions to borrow
during this period.During the months of August Determine periods of excess cash for in-
through December when cash flow is on the vestment or acquisition of capital items.
upswing, the company must determine how to Minimize idle funds and therefore maxi-
make efficient use of the cash through invest- mize investment opportunities.
ment or acquisition of equipment.
Provide efficient use of cash by timing cash
The above scenario is typical for many con- disbursements to coincide with cash re-
tractors. In regard to the cash fluctuations ex- ceipts.
perienced each month, the same questions
arise for those contractors attempting to take a Matching maturity schedules of short term
progressive management style in operating investments with any debt funding re-
their business.Some of these questions include: quirements.
1. What impact will the seasonal nature of Highlight periods of cash deficiency so that
the company have on the companys borrowing requirements can be arranged
cash balances? or liquidation of investments can be made.
2 AF 3
Establish the ability to take trade discounts. lems, determine whether they are consistent
from month to month. Attempt to find the
Indicate the need for additional permanent
source of the problem and correct it.
working capital in the company business.
Additionally, evaluate the results of your in-
Additionally, properly predicting the tim- vestments and borrowing activity as a result
ing of the cash fluctuations, particularly cash of your cash flow forecast and attempt to de-
deficiencies, will put you in a better bargain- termine the effectiveness and efficiency of
ing position with your banker. The lender will your cash plan. Actively managing your plan
recognize that you have not haphazardly pre- on a continuous basis will result in greater
pared a loan application under a cash crisis profits and a more stable financial position.
situation but have taken the necessary steps
to avoid the cash crisis and are prepared for Accelerate Cash Receipts and Decelerate
it.Therefore, your chances of a loan being ap- Cash Disbursements
proved are increased. Additionally, cash fore-
casting demonstrates the use of sound This strategy is an attempt to create and
management tools and an awareness of any maintain as much available cash as possible
cash problems well in advance. by speeding the billing process, slowing the
disbursement process and managing bank
It is important to realize that a cash flow
float.
forecast is simply a prediction of the future and
is subject to error. When your company uses Following are suggested strategies that,
a cash flow forecast, you must take this un- when applied consistently, will help increase
certainty into account. Additionally, you must your cash flow through these and other tech-
evaluate the assumptions made about the tim- niques:
ing and amount of future cash flows. When
completed on a continuous basis, monitored, 1. Minimize the amount of cash to be
evaluated and compared to actual cash flows, swept into overnight investment accounts and
you will be able to confidently determine, maximize the cash available for higher yield-
within an expected margin of error, your cash ing investments. Overnight investment ac-
needs and availability. counts (or sweep accounts) often become a
passive cash management tool. Do not as-
If your company does not forecast cash sume that excess cash swept into an invest-
flows, you should begin re-evaluating the ment account is the best use of investable
tools you use to manage your company. If you cash.
dont, you are probably foregoing additional
income simply by not monitoring your cash 2. Request additional discounts from all
flow. Additionally, you may have lost a great of your vendors, not just the standard dis-
opportunity, the opportunity to remain in busi- counts offered by some. If you have the cash
ness when the economy is on the down- and can pay within one to five days rather than
swing. the standard ten, you may be able to obtain
an additional 1% or even 2% discount.
If your company is currently forecasting Conversely, if you cannot negotiate additional
cash flows, make the time now to evaluate the discounts either because you do not have the
accuracy of the projections. If there are prob- cash or the vendor will not negotiate, then ne-
AF 3 3
gotiate for extended payment terms. Simply chases to match cash inflow and minimize cash
moving your payables from 45 to 60 days (es- outflow when cash flow is tight.
pecially for major suppliers) can have a dra- 10. Sell under-utilized equipment to
matic effect on available cash. minimize repair, maintenance, insurance, per-
3. If necessary, use a line of credit to sonal property and handling costs. Consider
cover cash short-falls when paying vendors renting this type of equipment after an analy-
and suppliers so that you dont miss the dis- sis of all your financing and operating costs.
count period. 11. Negotiate and include in the con-
tract a provision for incentive payments for
4. If you can manage it, you should min- early completion of various phases of the con-
imize the use of your bank credit line. Today, tract or the entire contract.
many banks are requiring the payment of a
commitment fee ranging anywhere from 1/2% 12. Plan to meet payroll tax deposit re-
to 1% of the line to maintain your line. If you quirements by monitoring total payroll levels.
do not use the line, then do not pay any inter- Manage payroll levels by reducing officers
est, but if you still need it for bonding purposes, compensation and careful timing of bonus
you might want to negotiate a higher rate of in- payments.
terest to eliminate the commitment fee. 13. Manage tax liability and estimated
tax payment requirements by deferring tax-
5. Establish accounts at three or four dif- able income at the end of each quarter.
ferent banks and deposit owners or general
contractors payments into the bank on which 14. Departmentalize cash budgets and
they have drawn the check to reduce float days require department managers to manage
and to allow immediate credit to your account. their budgets.
If this does not increase your float, then look at 15. For those working on government
the cost of maintaining multiple accounts and contracts, most states now allow contractors
evaluate closing some to reduce your costs. to earn interest on the retention funds held by
the government. This allows the contractor to
6. Negotiate instant credit to your ac-
invest this money in Federal or state securi-
count at the time of deposit regardless of the
ties providing investment income and possi-
bank the check is drawn on.
bly capital gains. However, in most states this
7. Invest idle cash in certificates of de- is an active election that the contractor must
posit or commercial paper and match their pursue.Consider also negotiating this with pri-
maturity dates and amounts to future cash re- vate owners.
quirements such as debt maturities or antici- The best approach is to develop a formal
pated capital investments. cash management program that applies all the
8. Minimize inventory balances to re- appropriate cash management principles in-
duce handling, insurance and personal prop- cluding budgeting, accelerating cash receipts,
erty tax costs. decelerating cash disbursement, obtaining
credit and investing cash. Consistently apply-
9. Negotiate skip payment months for ing, monitoring and evaluating these strate-
long term debt such as financed equipment pur- gies can only help improve your cash flow.
4 AF 3
Establish a Plan to Increase Cash Flow mance, you may be able to eliminate the re-
on Every Project Before You Start tainage provisions or negotiate a lower re-
tainage based on your prior performance. If
The success of any construction project you are not successful in agreeing on a lower
can be directly related to the planning that retention, request a reduction in the re-
goes into it.The same concept applies to plan- tainage balance at an earlier stage of com-
ning cash flows on your major construction pletion. For example, request a retainage
projects. The best time to begin cash flow reduction from 10% to 5% when the job is
planning is before and during contract nego- 40% complete versus 50% complete. A lower
tiations. The payment terms agreed upon can retainage will provide you with additional
have a significant impact on the cash flow of cash earlier to finance additional operations,
the project and the company. The following prevent potential cash shortages, and mini-
points are recommendations for making the mize the need to borrow.
impact a positive one for your company.
3. Negotiate Assets to be Held in Lieu of
1. Determine the Owners Ability to Pay Retainages
Before owners enter into a contract, Occasionally, owners will agree to pay
they often require financial data from a or forego holding retainages if contractors
contractor and may require surety bonds agree to depositing funds into an account
guaranteeing payment and performance. that the owner can control. The funds con-
The owners protect themselves; is there any tinue to earn interest for the contractors.
reason contractors should not do the same? Although the total cash available is reduced,
you have the ability to increase your cash bal-
As a contractor, you want to know that ances over the long run by investing the es-
the owner has the ability to pay under the crowed funds. If retainages are held,
terms set forth in the contract. Require the contractors must often cut into their invested
owner to submit to you financial statements balances or draw on their line of credit in
audited or reviewed by a CPA. Obtain credit order to fund project mobilization or negative
reports on the owner and determine the cash flow.
owners payment history by contacting other
contractors and vendors. Your goal is to de- 4. Agree to a More Frequent Billing
termine the owners ability to pay you on a Schedule
timely basis before you sign the contract, not
Billing on a more frequent basis can im-
after. Once you are comfortable with the
prove your cash flow and reduce the likelihood
owners financial situation, it is up to you to
of bad debts. If the owner will not agree to a
perform under the terms of the contract while
more frequent time schedule, consider an
monitoring your billings and collections.
event-based billing schedule.
2. Negotiate Lower Retainage Balances With an event-based billing schedule,
you are able to control the billings by com-
If you have worked with the owner in the pleting the agreed-upon phases before you
past and they are satisfied with your perfor- bill. Then, you can concentrate on completing
AF 3 5
the agreed-upon events before incurring time procedures in the final contract discussions.
on other phases of the project. Make sure that the owner understands that
you expect them to abide by the contract. Let
5. Negotiate Incentive Payments them know that you will be more efficient and
productive if you can pay yourself, the sub-
Incentive payments can be negotiated for contractors and suppliers in a timely manner.
early completion or completion within owner- The result will be timely completion of the pro-
defined timeframes. The incentive payments ject, cash flows based on projections and a
can be for various phases of the project or for happy contractor and owner.
the overall project. To eliminate the risk of not
receiving anything, incentive payments are
more favorable to you if paid throughout the con- After Contract Negotiations
tract based on phases completed. If you agree
to incentive payments based on total comple- Once the contract has been signed and
tion of the project, the opportunity to earn the the project has started, the contractor must
incentive payment could be lost in the final pro- take an active role in enforcing the contract
ject phase. The goal is to collect the cash you terms.
have earned as early as possible. The following suggestions are steps you
can take to improve cash flow and to protect
6. Submit Unbalanced Bids your company against loss.
Another technique used to generate pos-
itive cash flow in the early part of the con-
struction project is to submit unbalanced bids. 1. Agree on What to Bill Prior to Preparing
This front-end loading procedure accelerates the Requisition
the cash collections to be generated from the
project because a larger portion of the total Today, most contractors have their
contract price is allocated to phases of the billings pre-approved by the owner and the ar-
work that will be completed in the early stages chitect before they are presented in the form
of the contract. Even though in most cases the of a monthly bill. This procedure will help to
contractor must have the lowest qualifying bid avoid having the requisitions you submit to the
to win the job, the owner may allow the con- architect or owner sent back for changes or
tractor the flexibility of assigning higher cost to with a payment that is less than the requisi-
the early phases of the contract.This gives the tion amount. Every contractor should adopt
contractor the ability to fund start-up costs this procedure.This process will allow you the
such as stored materials, shop drawings, bond opportunity to talk about any requisition
premiums and mobilization. disputes before you submit a bill. In addition,
discussing and agreeing on the percentage
of completion and the amount that can be
7. Discuss the Billing and Payment
billed before the requisition is prepared can
Procedure During the Final Contract
eliminate disputes. As always, attempt to ad-
Settlement
dress potential problems before they become
Although the procedures are outlined in real. When significant billings are involved,
the contract, address the billing and payment walk the job site with the architect or owner
6 AF 3
and come to an agreement prior to preparing chargingafinancefee,butonceyourealize that

the requisition.You can avoid disputes and, in the money owed to you could be in the bank
most cases, will receive the cash quicker. earning interest, your opinion changes quickly.
2. Challenge the Architects Changes 5. Include the Contract Payment

Provisions Clause with Second Notices
Architects will sometimes reduce requi- for Late Payments
sitions out of habit rather than due to improper
or incomplete work. Be conservative with the If necessary, follow up with a second no-
first requisition. If the architect adjusts your tice and include the payment provision clause
first requisition, you will know that he has de- from the contract to remind the owner of their
veloped a bad habit. If they do not make an contractual obligation. This will suggest to the
adjustment, you may have earned their trust owner your seriousness regarding timely pay-
in your billing process.This will certainly make ment. In addition, a follow-up telephone con-
future requisitions easier to collect. versation can be effective. When done in a
businesslike manner, you can still maintain a
Also consider involving the owner in any good relationship with the owner.
disputes. Dont simply let the architect make
the decisions.The owner usually is involved in
6. Define Contract Completion to
the construction and knows what is complete
Determine the Timing of Retainage
and what is not, so it is appropriate for him to
Releases
have an understanding of the billing process.
In some cases, you may find the owner is more Retentions are a cost to your company.
lenient than the architect and may encourage You can lose significant amounts of interest
the architect to allow the billing. income or incur substantial interest expense
for loans you had to obtain because someone
else has your money. Contractually agree on
3. Eliminate Grace Periods
the specific terms to be met before retainages
Demand payment on time. If payment is will be released. Project completion should be
due by the 25th of the month, stick to the 25th. defined in the contract. If billings are based on
Set the trend with the first billing. If the owner the completion of phases, the phases should
is made aware of this early in the process, he also be defined. Additionally, consider defin-
will understand that this is important to you ing the punchlist process in the contract. Once
and will develop a sense of urgency in pro- the project is completed as defined, take an
cessing the payments or in resolving disputes active role in enforcing the contract terms.
that may arise.
The points above stress collecting the
money that you have earned as soon as pos-
4. Consider Charging Late Fees
sible. The quicker you collect, the more you
Include the terms of your finance fees in will be able to invest, whether your invest-
the contract and on the bill. Explain your rea- ment is the next project just beginning or a
sons for the fee during your discussion at the certificate of deposit. Keep in mind that you
contract settlement. A typical fee is 1.5% per are not a bank.You do not want the owner to be
month. Some contractors do not feel right holding your money when it belongs to you.
AF 3 7
The objective is to finance your operations, not itability with both your bank and bonding
the owners operations. company which ultimately can benefit you
through increased lines of credit from both.
Each of the above functions can be per- They will recognize that you are taking the
formed exclusive of each other, however, a necessary steps to monitor a critical asset of
properly managed plan will consist of a bal- the company. Additionally, by becoming ac-
ance of all functions. tively involved with the timing of your billings,
collections and disbursements, your com-
Direct Benefits of Cash Management pany will become more profitable.
The primary goal of cash management

is to increase profitability.However, cash man- Cash Management Organization
agement can do more for your construction
company than just improve your bottom line. The cash manager in most construction
A properly managed program can do the fol- companies has more than one responsibil-
lowing for your construction company: ity. In medium and small construction com-
panies, it may be the owner, president,
Eliminate, or at least minimize, borrowing
treasurer, controller or accounting manager,
needs
each having other primary responsibilities
Indicate when cash needs will arise to pay with cash management assigned as a
income taxes, loans, vendors, payroll, and secondary responsibility. The ideal situation
any other obligations is to assign the cash management respon-
Reduce the amount of cash unnecessar- sibilities to an individual who is not involved
ily tied up in accounts receivable with the day-to-day accounting of cash
transactions. For the small contractor, this
Improve the timely investment of excess may not be possible. But for most larger
cash in safe and profitable investments construction companies, the organizational
Minimize the number of transactions to structure and staffing resources are avail-
reduce processing and administrative able to properly segregate these responsi-
costs by timing cash disbursements to bilities.
coincide with cash receipts What is important in both large and
small construction companies is to assign
Indirect Benefits of Cash Management cash management responsibilities to an in-
dividual that is part of your management
Indirectly, cash management can im- team. Cash management should become
prove relationships with your banks, surety part of that individuals job description
vendors, subcontractors, general contrac- which would describe their responsibilities
tors and owners.Your construction company including the individuals authority over
will become less of a credit risk to suppliers, cash transactions. The responsibility should
banks, your bonding company and other be defined and the method of measuring
creditors. In addition, the use of such tools as the results of the cash management pro-
cash flow forecasts can increase your cred- gram should be determined.
8 AF 3
CONCLUSION ceipts and disbursements and fixed dis-

bursements.
A cash management plan of most con- Daily cash reports for operating and in-
struction companies should include the fol- vested funds.
lowing: The above-mentioned items are neces-
sary when approaching banks in order to eval-
Project cash flow budgets on a monthly
uate lending alternatives.
basis combined to produce a company
based cash flow budget. Cash management is much more than
just investing idle funds. It is a critical compo-
Cash receipts and disbursements projec- nent of every contractors operation and
tions on a weekly or, at a minimum, should be treated as such if you wish to be
monthly basis for both project related re- successful in the long term.
AF 3 9
TABLE 1
CASH FLOW FORECAST
MONTH YEAR-TO-DATE
ESTIMATE ACTUAL ESTIMATE ACTUAL
Receipts
Cash balance beginning of period
Contract accounts receivable receipts
Retention receipts
Interest
Loans
Other cash receipts
Total Cash Available
Disbursements
Subcontractors
Trade suppliers
Payroll including burden
Indirect job costs
General & administrative expenses
Capital additions
Income taxes
Debt service
Other
Total Disbursements
Cash balance end of period
Managements minimum cash reserve
Cash Available
Balance Line of Credit
Total Cash & Credit Available
10 AF3
Bulletin No. AF 4
File: Accounting and Finance
Bulletin
Tips to Help Contractors Manage
Through an Economic Downturn
INTRODUCTION For the contractor, early recognition of an

economic downturn can make the difference
And you thought death and taxes were the between survival and demise. Managing
only sure things in life. You can add through an economic downturn and coming
economic business cycles to the list. A out whole on the other side requires
common definition of an economic business planning, savvy business decision making,
cycle is a recurring and fluctuating level of execution of a plan and, frankly, a little luck.
economic activity that an economy
experiences over a long period of time. EARLY WARNING SIGNS
There are generally five stages that make
up a business cycle: There are many recognized early warning
signs for the economy that indicate some
1. Growth (expansion) sort of business downturn is on the horizon.
2. Peak The contractor must always be aware of the
3. Recession (contraction) current business climate. What is happening
4. Trough (bottom) and to economies around the world? How are
5. Recovery housing starts, unemployment, GDP and
inflation trending, just to name a few?
A cycle tends to indicate a normal pattern.
At times in the past, business cycles may It is generally true that the construction
have been considered regular and industry lags behind economic cycles.
predictable. But today, they are quite During robust and expanding economic
variable and unpredictable. According to the times, contractors generally have plenty of
National Bureau of Economic Research, work. Owners and developers are flush with
between 1945 and 2009, there have been cash and capital budgets are healthy.
11 confirmed business cycles, with the Businesses build new facilities, expand
latest one lasting from December 2007 existing facilities, modify and improve
(peak) through June 2009 (trough). The processing equipment, and install new
average duration of the 11 business cycles technologies. Construction work is plentiful.
from peak to trough during that time frame Backlogs expand and the outlook is bright.
was 11.1 months and 68.5 months from
peak to peak.
Copyright, Mechanical Contractors Association of America, Inc., 2012. 1

When an economic downturn begins to set architecture and engineering community
in, the brightness begins to dim. Owners gets busy again.
stop spending uncommitted cash fairly
quickly, preferring to sit on the cash to see The numbers of participants on bid
how the economic cycle develops, while lists are growing. When the number of
projects that had funds already committed available projects begins to shrink, that
may still move forward, but possibly at a leaves fewer and fewer projects to feed
slower or reduced rate. the construction community. Therefore,
an early warning sign is an increase in
For developers, the effects of this beginning the number of competitors for new
downturn are different. Their project funding business.
is often based on pre-sales and venture
capital. Those sources of funds dry up The bid margins shrink. With less
quickly in the face of a downturn, and those work available and more participants
projects can stop overnight. competing for what work is out there,
the natural economic forces of supply
So while an economic business cycle may and demand will begin to drive bid
be showing signs of trending down, often margins down quickly.
contractors are still busy with work under
contract. That committed work may allow a The bank and bonding companies
contractor to work deep into an economic start tightening lending products and
recession. But without replacing that booked seeking more and more detailed
work with new work, the backlog quickly information about your current work.
runs out and the contractor is faced with Financial institutions have to manage a
making some difficult business decisions, lot of financial risk with contractors, and
even when the economy may already be when they see an economic downturn
picking back up. coming, they jump to attention and want
to make certain that their clients are in
What are some early warning signs healthy financial shape for the coming
particular to the contractor that indicate an storm.
economic slowdown or even an economic
recession is looming?
Accounts receivables start to
lengthen out. When an economic
The architect and engineering
recession is looming, owners and
community begins to slow down. In
general contractors quickly go into cash
the contracting world, the harbingers of
conservation mode. That does not bode
market trends are the architects and
well for the contractor as it starts to
engineers. For the construction market
stretch out the spend-to-collection time
to be healthy and busy, projects must be
cycle. Your average days sales
in design and development. They will
outstanding may go from 30 - 45 to 90 -
naturally flow down to the construction
180 days. Owners and general
community. However, when the volume
contractors can find lots of reasons to
of new projects flowing in to architects
hold on to the money that the contractor
and engineers begins to slow down,
has earned. Consequently, you have to
designers will be laid off and small
manage the relationship with your
shops shut their doors; the signs are
customer along with managing your
there that a slowdown in the
cash.
construction market is near.
Conversely, you will have a good feeling
that the market is coming out of a full-
fledged economic recession when the

When receivables start stretching SURVIVAL STEPS
out, so does your available cash
reserves or line of credit. During good When the economic downturn beginseven
economic times when cash flow is though you may be flush with workyou
regular and timely, funds are plentiful to you need to act early to prepare for the
finance your current work. But when difficult times ahead and position yourself
your customers start hanging on to your and your company to be successful when
money longer and longer, you are the economy recovers.
forced to dig deep into your cash
reserves to finance your work or to CASH IS KING. Cash is the lifeblood of
borrow more and more funds from your the contractor. You can have all the
bank. Your cash drops significantly and work you can stand at margins that
your bank line maxes out. You may make you smile, but if you do not have
have work that you booked during the access to the cash to finance the work,
peak of the cycle and you are working it those projects can disappear virtually
off, but you are getting strained to meet overnight. Heres how to manage your
payroll and other financial obligations cash flow:
because the flow of cash begins to slow
significantly. a. Make sure your bank is
knowledgeable about the
The number of disputes and claims construction industry and your
with your customers for extra work business. Your financial institution
increases. When cash starts to tighten should understand the construction
up in an economic downturn, you will industry and contractor business
experience more challenges from your cycles. It is sort of like insurance. In
customers about your claims for extra the good times, you do not need
work. They will find reasons to claim them much, but when times are
that was implied in your contract or tough, you need your bank more
you should have known you had to do than ever. Manage that relationship.
that or some other similar excuse to Keep your bank appraised of your
pay for the extra work performed. work in progress (WIP) and possible
awards. Let them know that you
Your suppliers and subcontractors have a plan to manage through an
start calling earlier for payment. In an economic downturn. Make sure your
economic downturn, your suppliers and line of credit is large enough to carry
subcontractors are facing the same your business deep into a recession.
economic challenges as you. Cash is
the lifeblood of the construction industry. Banks that are unfriendly to
contractors or unknowledgeable
All of the above are among several red flags about their business will tend to
that signal an economic downturn is tighten up credit and be reluctant to
starting. When it does, no one really knows lend or put covenants in place that
how deep it will go or how long it will last. will be difficult to meet. This is
But the contractor needs to be prepared for especially true when you are looking
the worst. You will need to navigate through for an increase in the middle of the
the downturn and be poised to take every storm.
advantage of the upturn when it comes (and
it will). To do so requires planning and b. Manage your accounts receivable
execution along with some good business as though it is your own personal
sense. money (and often it is). Dont get
lazy with your receivables. Work

hard to claim the money that you to use someone elses money rather
have earned. Make sure your billings than your own to finance your work.
are 100% correct and in accordance In the end, whatever you commit to,
with the requirements of your stand by your commitment. Be a
contract before you submit them. contractor of integrity.
Dont give your customer a reason to
send them back for a correction, d. Maximize your overbillings and
which only lengthens the payment minimize your underbillings.
cycle. Always, but especially in the early
stages of an economic downturn, it
Manage your customer relationship. is crucial to manage your billings.
Your customers should see you This starts with a thoughtful
more often than when you want schedule of values which allow for
payment. Let them know that for creative billing. Bottom line, you
you to continue doing the fine job need to bill for as much as possible
you were contracted for, the cash as early in the job as possible.
needs to flow in a timely fashion. Create a schedule of values that
Dont let your receivables get 30, or allows for invoicing early and often.
60, or 90 days past due before you The goal is to get way ahead of
take action. BEFORE the due date, billings versus costs. Lump sum
give your customer a friendly projects are ripe for effective cash
reminder that payment is due soon management, but you need to
and ask if there is anything you need strategize early on in the process to
to do on your end to make sure maximize this effort.
payment is timely. Be proactive, not
reactive. Conversely, large time and material
projects are difficult to manage
c. Manage your accounts payable during a downturn unless you are
like you are giving away your substantially capitalized. Those
most prized possession, which it projects require large outlays of cash
is, your cash. Work with your before you can invoice and well
vendors to achieve the most ahead of getting paid for your
advantageous payment terms. This services. Minimize those projects
is best done BEFORE an economic where you can only bill based on
downturn hits. Negotiate extended some sort of completed project
payment terms. Remember, your milestone or achievement. Bill
vendors are in competition for your ahead, early and often.
business. In addition to negotiating
on the price of commodities, you can e. Drive down the cost of
negotiate payment terms too as a commodities. Just as more bidders
part of the deal. Dont always settle compete for less work during a
for their standard 30-day payment downturn, more vendors will
terms, especially if your terms with compete for your business. Take
your customer are longer. Negotiate advantage of getting price
for 60 or 90 day terms, all the while concessions you normally would not
giving the same effort with your enjoy in a robust economy. Bid and
customers to shorten your rebid your commodity materials.
receivable days. Try to work toward Drive those prices down. Ask for
the biggest gap between shorter services you normally would not see,
receivable days and longer payable like free bundling, kitting, special
days that you can. You should prefer

deliveries and pre fabrication. Use part of the overhead. Often times,
your vendors to your advantage. contractors will send employees
packing citing that they cannot afford
f. Manage the efficiency of work on to have them stay. Sometimes we
jobsites. While efficient productivity go too deep and send some really
is normal practice for all successful good and productive personnel out
contractors, it is crucial during an the door. And as sure as death and
economic downturn. You must taxes, economic recessions will turn
squeeze every fractional percent of into economic expansions. When
efficiency out of a dollar spent. Take that happens and work becomes
a look at your crew ratios, and then available, you want to be positioned
get that crew mix down with a higher to take advantage of every
number of apprentices. Foremen opportunity. If you have cut too
need to work with their tools when much of your overhead personnel,
available. Maximize your pre- you will be faced with the quandary
fabrication efforts in a more efficient of, Do I take on work and then go
work area such as your shop. Solicit hire the people to run it, or do I go
your vendors to deliver your hire the people to run work and then
commodities to the work area, not try to get it? You also run the risk
just to the front gate. Get them to that when you let too many of your
package and prefab the equipment good employees go, they will not be
as much as possible so that you do available for rehire or, even worse,
not spend your field labor dollars on your competitors will have hired
those tasks. Maximize safety efforts them and now they are working
to minimize the amount of money, against you.
time and effort spent on workers
compensation claims. Identify your Bottom line: dont make a knee-jerk
absolute best employeesfield and reaction and unload the boat at the
administrative personneland first sign of a leak. Be mindful of
maximize their contribution to your your best folks. While you may need
projects. to spend a few unproductive dollars
during a downturn, when the
g. Manage your overhead, but do not economy recovers, you will want to
unnecessarily go too deep. In an have the resources available to jump
economic downturn, everyone goes on the available work and be ahead
into cost-cutting mode, and well they of your competition while they try to
should. When times are good and figure out how to get the work
work is plentiful, we can all enjoy the without having the people to run it.
benefits of higher overhead. But as
soon as an economic downturn hits, SUMMARY
we tend to start slashing cost and
personnel like there is no tomorrow. The Boy Scouts motto is Be Prepared and
the same motto should apply to contractors.
Downward trends in a business Have a plan for an economic slowdown.
cycle are certainly good times to get Watch for the early warning signs. Dont get
rid of unproductive and wasteful caught in the middle of one and only then
costs, whether those are processes start thinking about survival. Contracting is a
or personnel. But be sure to give risky business. Manage that risk each and
due consideration before making every day during good times and difficult
those cuts, especially on the people ones.

Bulletin No. AF 5
Bulletin
Service Mark-ups vs. Construction Mark-ups

Introduction people in your office space, who
generate a total of $200,000 per year in
By definition, a "mark-up is an amount of total "overhead" costs covering
money, stated in either dollars or a wages/fringes/taxes/rent/utilities etc. If
percentage, that is added to your cost." you bill-out a total of $1 million this year,
(http://www.merriam- your OH costs would be 20 per cent of
webster.com/dictionary/mark%20up) your sales. But, perhaps you could do
The mark-up serves several functions $2 million in sales with the same size
by providing: office and staff. Now your OH is only 10
per cent of your sales. Your DJC
funds to cover overhead costs increases in direct proportion to the
volume of work incurred, but your OH
a fair and reasonable profit
does not. The more dollar volume of
some cushion in case estimated work you do, without increasing your
costs are exceeded. This factor OH, actually drives your OH down as a
will vary based on risk percentage of your sales. However, as
your sales increase, you WILL reach a
The following describes the components point where you will have to increase
of each function and then discusses your OH and that changes the equation
potential elements of a job estimate that again.
may be considered for mark-up.
Service Contractors Overhead:
Overhead Service work normally calls for a higher
Overhead (OH) originally meant "what's percentage of OH than construction
OVER your HEAD," or in other words, work. Aside from the high DJC of labor,
YOUR ROOF or your office space. In fringes, taxes, trucks, uniforms etc., a
our industry, we have two streams of service technician requires a lot of office
cost: Direct Job Costs (DJC) and support. The costs for handling
Indirect Costs that cannot easily be customer calls, dispatch, billing,
allocated directly to any particular paperwork, callbacks and other non-
project (i.e., overhead). billable time should be considered in
determining a mark-up.
Construction Contractors Overhead:
Every contractors OH will vary Profit
depending on how their business is Profit is what remains after all the DJC's
structured and by their volume of work. are paid, the OH is paid and the revenue
For example, suppose there are five

comes in from the customer actually associated with meeting the plans and
paying your invoice. Profit is what specifications.
makes someone invest their money in a
mechanical contracting business instead Suppose the owner/CM/GC buys the
of investing in other mediums, i.e., the equipment? A contractor should
stock market, real estate, mutual funds, consider that his job-risk for this
etc. The business should provide a rate category still exists in some form and a
of return that is competitive with other mark-up associated with that risk might
investment opportunities having a still be appropriate.
similar risk. A mark-up should allow for
a reasonable rate of return on Sundries. Since the contractor usually
investment. prepares a bill of materials from his own
take-off of the job and then applies
Risk pricing, the risk of contractor error may
Every bid you produce has a certain be greater than an error would be for an
amount of risk to its profitability. Each equipment take-off. The quantity could
part of a mechanical contractors DJC be in error or the price-factors could
structure, by its very nature, has a either be wrong or could increase.
different level of risk.
Labor. Labor presents the highest
Construction Contractors: Your DJC's potential DJC risk to a contractor.
consist of four basic parts: Regardless of how sophisticated the
tools are that we use to estimate labor
Subcontractors on a job, there is no way to know
Equipment precisely the number of man-hours
needed for a job until the job is
Sundry materials, such as pipe,
completed.
valves and fittings
Labor Service Contractors: Some DJC's are
the same. However, usually the labor
Subcontractors probably have the costs are a much higher percentage of
lowest risk. A subcontractor quotes the the total DJC's. The OH structure for
job, and must perform the work at the Service is, by its nature, much higher
quoted price. The risk to you is that the than on construction work.
subcontractor will not perform, either
through disputes with the Remember that every job is different
plans/specifications, recalcitrance, and every contractor's OH cost structure
bankruptcy or other problems. But, if the is unique to that company.
subcontractor is a financially sound
company run by people who care about
an ongoing relationship with you, your
risk may be lower with a subcontractor
than with your other costs. Therefore,
the mark-up on your subcontractors may
be adjusted accordingly.
Equipment. The contractor will be

responsible for the equipment
purchased for the jobits installation,
warrantee problems, delivery and
scheduling issues, and any costs

Bulletin No. AF 6
Bulletin
Guide to Financial Statements

INTRODUCTION statements: (1) Balance Sheets; (2)
Income Statements; (3)
Understanding the elements of a basic Cash Flow Statements; and (4)
financial statement is a must for Statements of Shareholders Equity.
anyone in business. Banks, sureties,
customers and any other entity that Balance sheets state what a company
engages in business transactions with owns and how much it owes at a fixed
your company require information about point in time.
your companys financial status. At the
same time, you need to be able to read Income statements report the revenues
and understand the financial statements a company earned over a specific time
of those entities with whom you are period.
considering entering into a business
transaction. Cash flow statements show the
exchange of money between a company
This bulletin is all about basic financial and the outside world over a period of
statementsthe purpose of each time.
statement; what information they
contain; and how to understand what Statement of shareholders equity
that information is saying about a reports changes in the retained value of
company. This bulletin is designed to ownership of the companys share
take the mystery out of preparing and holders over time.
analyzing information thats essential to
your successful conduct of business for Lets look at the first three financial
your company. statements in more detail.
So, what do financial statements do? BALANCE SHEETS
ITS ALL ABOUT THE MONEY A balance sheet shows a companys

assets, liabilities and shareholders equity
A companys financial statements draw at the end of the reporting period. It does
a picture of its money in all of its forms not show the flows into and out of the
from different perspectives. They accounts during the period.
describe what the money is, its comings
and goings, and its current location. Assets are items or property that have
There are four kinds of financial value and that can be bought, sold and/or

used. Assets include land and buildings Assets are generally listed according to
as well as building contents, such as how quickly they will be converted into
office furniture and equipment, cash.
machines, vehicles and inventory.
Monetary assets are cash and Current assets are things a
investment holdings. Assets also may company expects to liquidate or
be less tangible, but still retain value, convert to cash within one year. For
such as a companys licenses, brand, example, most companies expect to
reputation, and customers good will. sell their inventory within one year.
Liabilities are debts and obligations, Noncurrent assets are things that
such as bank loans, building and would take longer than one year to
equipment rentals, invoices for supplies sell. These include fixed assets which
and materials and payroll and benefits are used to operate the business but
payouts. Liabilities also include that are not available for sale, such
obligations to customers to provide as trucks, office furniture and other
future goods or services. property.
Shareholders equity, often referred to Liabilities are generally listed based on

as capital or net worth, is the money that their due dates. Liabilities are either
would be left if a company sold all its current or long term.
assets and paid off all of its liabilities.
This leftover money belongs to the Current liabilities are obligations
shareholdersor the ownersof the that a company expects to pay off
company. within one year, such as a short-term
loan.
Construction companies typically have
several contracted projects in various Long-term liabilities are obligations
stages of completion at any given time. with payment periods spanning more
These contracts might be overbilled, than one year.
meaning that billings exceed costs and
estimated earnings on uncompleted Shareholders equity (Exhibit 2) is the
contracts, or underbilled, meaning that amount owners invested in the
costs and estimated earnings exceed companys stock plus or minus the
billings on uncompleted contracts. An companys earnings or losses since
overbilling is carried as a liability, and an inception (Also known as Retained
underbilling as an asset. Earnings). Sometimes companies
distribute earnings or dividends instead
A companys assets must equal the of retaining them.
sum of its liabilities and share-
holders equity. Multiemployer Plan Disclosure
The Financial Accounting Standards
A companys balance sheet (Exhibit 1) Board has recently adopted new
is set up like a basic accounting disclosure requirements for companies
equation. The left side lists the participating in multi-employer defined
companys assets and the right side lists benefit pension plans. These disclosure
the companys liabilities and requirements take effect for annual
shareholders equity. Balance sheets periods ending after December 15, 2011
may present this information top-down, for publically owned companies, and for
with assets at the top, then liabilities, periods after December 15, 2012 for
with shareholders equity at the bottom. privately owned companies.

Exhibit 3 is a sample page showing how number states how much the company
this disclosure could look, as a spent to produce the goods or services it
supplemental sheet to a contractors sold during the accounting period. In the
balance sheet. mechanical contracting industry, the cost
of goods sold is our direct job cost which
INCOME STATEMENTS includes field-labor costs, fringe benefits,
payroll taxes, materials, equipment and
An income statement reports a subcontractor costs.
companys revenues earned over a
period of time (usually one year or a The next line subtracts the costs of sales
portion of a year). An income statement from the revenues which becomes the
also states the costs and expenses subtotal called gross profit or gross
associated with earning that revenue. margin. The number is gross because
The literal bottom line of the statement certain expenses have not yet been
depicts the companys net earnings or deducted.
losses or how much the company
earned or lost over the period. Next are operating expenses. These
cover a companys operations for a given
Income statements also report earnings period. They include office staff salaries,
per share (or EPS). This calculation is office equipment rentals, utilities, etc.,
how much money shareholders would otherwise known as overhead costs.
receive if the company distributes all of These costs are not directly related to a
its net earnings for the period. specific job, but are essential to running
the business. In fact, the term
Income statements are like a pyramid overhead came from the idea that it
(see Exhibit 4) with total sales made was over your head. meaning,
during the accounting period at the top, your office. Operating expenses are
and at each descending level, deduct different from costs of sales, which
each cost or other operating expenses were deducted above, because operating
associated with earning the revenue. At expenses cannot be linked directly to the
the base (after deducting all of the production of products (job-costs) or
expenses) are the companys actual services being sold.
earnings or losses for the accounting
period, otherwise known as the the Depreciation is next and is also
bottom line. deducted from gross profit. Depreciation
accounts for the wear and tear of assets
At the top of the income statement is the used over a period of time, such as tools,
total amount of money generated from vehicles, welding machines and furniture.
the sale of products or services. This top Companies spread the cost of these
line is often referred to as gross assets over the period they are used,
revenues or sales. Gross means that which is called depreciation or
expenses have not yet been deducted; amortization. The charge for using
hence, the number is gross or unrefined. these assets during the period is a
fraction of the original cost of the assets.
Below the gross revenue line are
several lines for entering various Once all operating expenses are
operating expenses. Although these deducted from gross profit; the result is
expenses can be reported in any order, operating profit before interest and
the section after revenues typically income tax expenses. This is called
shows the costs of the sales. This income from operations.

Companies also need to account for enough cash to pay its operating
interest income and interest expense. expenses and other obligations. While an
Interest income is a payment by a income statement shows whether a
financial institution for the use of money company made a profit, a cash flow
deposited in interest-bearing savings statement shows whether the company
accounts, money market funds, generated cash. And, the cash flow
certificates of deposit, etc. Interest statements bottom line shows the net
expense is a fee paid for borrowing increase or decrease in cash for the
funds. Income statements may list period.
interest income and interest expense
separately or combine the two numbers. A cash flow statement also reports
The interest income and expense are changes over time rather than absolute
then added and subtracted as dollar amounts at a point in time. It uses
appropriate from the operating profit and reorders the information from a
before income tax is considered. companys balance sheet and income
statement.
After Income tax is deducted, the result
is the bottom linenet profit or net Generally, cash flow statements are
losses. (note: net profit is also called net organized in three parts or types of
income or net earnings.) This very activities: (1) operating; (2) investing; and
important number tells how much the (3) financing.
company actually earned or lost during
the accounting period. Operating Activities
A cash flow statement usually begins
Earnings per Share or EPS with an analysis of the companys cash
Most income statements include a from net income or losses. In general, the
statement of earnings per share or EPS. net income stated on the income
This number is the amount of money statement accounts for the cash the
company owners would receive for each company received from or used in its
share of their stock if all the companys operations. To make this happen, add
net income for the period was back in non-cash items (such as
distributed. depreciation expenses) and reconcile
cash from or used by other operating
To calculate EPS, the total net income is assets and liabilities.
divided by the number of outstanding
shares of the company. Investing Activities
Next, a cash flow statement reports the
Many mechanical contracting firms are cash flow from all investment activities.
closely held entities and EPS is not a These include purchases or sales of
concern. However, for those firms with long-term assets, (i.e., property, plant
a large amount of shareholders or those and equipment) as well as investment
that are publicly traded, EPS is a securities. If a company buys a new
required calculation. welding machine, the purchase would
appear on a cash flow statement as a
CASH FLOW STATEMENTS cash outflow from investing activities
because the purchase involved cash. If
Cash flow statements (Exhibit 5) report the company decided to sell some
the flow of cash into and out of a investments, the sales proceeds would
company. A company must have appear as cash inflow from investing
activities.

Financing Activities This is where management tells investors
The third part of a cash flow statement how it perceives the financial
shows the cash flow from all financing performance and condition of the
activities. These include cash raised company. MD&A also tells investors what
from the sale of stocks and bonds or the financial statements show and do not
from bank loans. And, buying stocks show, as well as important trends and
and bonds or paying back a bank loan risks that have shaped past performance
would appear as a cash outflow. or may shape the companys future.
FOONOTES The Securities and Exchange

Commissions (SEC) rules governing
Footnotes to financial statements MD&A require that companies disclose
provide a treasure trove of valuable and trends, events or uncertainties that
important information, so be sure to management knows would have a
read them. For example: material impact on the reported financial
information. It is information that the
First, companies must report the companys management believes is
accounting policies that have the necessary for investors to understand
greatest effect on the companys about the companys financial condition,
financial condition and bottom-line. changes in financial condition and results
These are the management teams of operations. In effect, the MD&A
subjective judgments that guide a completes the picture of the companys
companys strategies and operations. finances by providing context for the
financial statements and information
Next, footnotes contain detailed about the companys earnings and cash
information about the companys current flows.
and deferred income taxes at all levels,
including foreign tax obligations and FINANCIAL STATEMENT RATIOS
payments, and its tax rate at all levels. AND CALCULATIONS
Also included in footnotes is information You may have seen the terms P/E ratio,
about the companys retirement current ratio and operating margin, but
program and specific plans, the costs of they do not appear in financial
these programs and their funding status. statements. They are, in fact, used to
evaluate the information that is reported
Officer and employee stock options on financial statements.
also appear in footnotes, including how
the company accounts for stock-based Exhibit 6 lists some of the many ratios
salaries and the impact of that that investors calculate from information
accounting on reported results. on financial statements. Banks and
bonding companies look closely at
WHY MD&As ARE IMPORTANT certain ratios and may have covenants in
TOO! loan documents requiring minimum ratios
to be maintained. As a general rule,
A narrative explanation of a companys desirable ratios vary by industry.
financial performance makes up ONE
section of the quarterly or annual report Debt-to-equity ratio compares a
entitled, Managements Discussion and companys total debt to shareholders
Analysis of Financial Condition and equity. Both numbers may be included in
Results of Operations or the MD&A. a companys balance sheet.

To calculate debt-to-equity ratio, divide Working capital is the money remaining
a companys total liabilities by its if a company paid its current liabilities
shareholder equity. In other words, a (that is, its debts due within one-year of
company with a debt-to-equity ratio of 2 the date of the balance sheet) from its
to 1 has two dollars of debt to every one current assets.
dollar that shareholders invest in the
company. Or, the company is taking on BRINGING IT ALL TOGETHER
debt at twice the rate that its owners are
investing in the company. Although this bulletin discusses each
financial statement separately, keep in
Operating margin compares a mind that they are all related. The
companys operating income to net changes in assets and liabilities that
revenues. Both numbers are on a appear on the Balance Sheet are also
companys income statement. reflected in the revenues and expenses
that are on the Income Statement, which
To calculate operating margin, divide a result in the companys gains or losses.
companys income from operations Cash flows provide more information
(before interest and income tax about cash assets listed on a Balance
expenses) by its net revenues. The Sheet and are related, but not equivalent,
operating margin is usually expressed to net income shown on the Income
as a percentage. It shows, for each Statement.
dollar of sales, what percentage was
profit. No one financial statement tells the
complete story, but combined, they
P/E ratio compares a companys provide very powerful information for
common stock price with its earnings owners, banks, bonding companies and
per share. To reach that ratio, divide the stockholders!
companys stock price by its earnings
per share. If a companys stock sells at
$20 per share and the company is
earning $2 per share, then the
companys P/E ratio is 10 to 1. The
companys stock is selling at 10 times its
earnings.

Exhibit 1
ABC Mechanical, Inc.

Balance Sheet
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 266,444.60
Accounts receivable 5,222,576.50
Cost and estimated earnings in excess of

billings on uncompleted contracts 525,000.00
Prepaid expenses 653.71
TOTAL CURRENT ASSETS $6,014,674.81
Property and equipment, including

transportation, field and office equipment $1,588,109.29
Less: Accumulated depreciation 1,187,804.11
Net property and equipment $ 400,305.18
TOTAL ASSETS $6,414,979.99

Exhibit 2
Balance Sheet
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable trade $2,087,157.38

Pension payable 61,954.00
Payroll costs payable 39,177.09
Billings in excess of costs and estimated
earnings on uncompleted contracts 675,000.00
Sales tax payable 3,045.78
Accrued expenses 246,640.00
Loans payable 44,573.59
TOTAL LIABILITIES $3,157,547.84
STOCKHOLDERS EQUITY
Common stock $ 100,000.00

Retained earnings 3,283.869.06
TOTAL STOCKHOLDERS EQUITY $3,383,869.06
TOTAL LIABILITIES AND

STOCKHOLDERS EQUITY $6,541416.90
Exhibit 3

Multiemployer Pension Plan Disclosure
Pension Protection Act FIP/RP Status Exp. Date of

Pension EIN/Pension Plan Zone Status Pending/ Contributions of Entity A Surcharge Coll. Barg.
Fund Number 20X0 20X0 Implemented 20X0 20X9 20X8 Imposed Agreement
Red as of Yellow as of
ABC Fund 34 32-1899999 9/30 9/30 Yes $ 1,883,000 $2,309,000 $2,226,000 Yes 12/31
ABC Fund 37 52-5599999 002 Green Yellow No 3,342,000 3,609,000 3,586,000 No 12/31
ABC Fund 40 92-3499999 Yellow Yellow No 5,796,000 6,435,000 6,374,000 No 12/31
ABC Fund 43 82-4299999 Red Red Pending 3,539,000 3,234,000 3,218,000 Yes 12/31
ABC Fund 46 82-6899999 Green Green No 778,000 816,000 833,000 No 12/31
ABC Fund 49 52-6199999 Yellow Yellow No 534,000 547,000 491,000 No 12/31
ABC Fund 52 72-8599999 001 Red Green Implemented 1,349,000 1,134,000 1,050,000 No 12/31
ABC Fund 55 82-2999999 Green Green No 1,224,000 1,946,000 1,151,000 No 12/31
Plans for which plan financial information is not publicly available outside Entity As financial statements
ABC Fund 61 N/A N/A N/A N/A 418,000 482,000 491,000 N/A 12/31
ABC Fund 73 N/A N/A N/A N/A 1,872,000 1,764,000 1,693,000 N/A 12/31
Other Funds 147,000 160,000 169,000

Total contributions $20,884,000 $21,536,000 $21,282,000
Exhibit 4
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE PERIOD ENDING JUNE 30
Period
Ending 06/30
Contracts billed $10,000,000.00

Costs and estimated earnings in excess
of billings on uncompleted contracts 525,000.00
Billings in excess of costs and estimated

earnings on uncompleted contracts (675,000.00)
Contracts completed 9,850,000.00
Direct costs 8,212,657.11
Gross profit 1,637,342.89
General and administrative

expenses 1,206,640.39
Net operating income (loss) 430,702.50
Other income (expenses:

Interest income 458.60
Other 22,546.67
23,005.27
Net income (loss 453,707.77
Retained earnings (previous year-end) 3,080,161.29
Less: Dividends (S-Corp. Distributions) (250,000.00)
RETAINED EARNINGS $3,283,869.06

Exhibit 5
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDING JUNE 30
Cash Flows from Operating Activities
New income/(loss) $ 453,707.77
Adjustments to reconcile net income

to net cash provided by operating activities:
Depreciation 58,234.42
Change in assets and liabilities:
(Increase)\decrease in accounts receivable 2,707,306.80

(Increase)\decrease in work in progress (198,932.00)
(Increase)\in prepaid expenses 76,500.13
Increase\(decrease) in accounts payable (1,270,383.34)
Increase\(decrease) in accrued expenses (1,382,704.88)
Total adjustments ____(9,978.87)
Net cash provided by operating activities 443,728.90
Cash flows from investing activities

Purchases of property and equipment 126,693.84
Cash flows from financing activities

Distribution to stockholders 250,000.00
Net increase\(decrease) in cash and cash equivalents 67,035.06
Cash and cash equivalents at beginning of year 280,353.16
Cash and cash equivalents at 6/30 $ 347,388.22
Supplemental Disclosure:
Interest paid
$ 4,410.21
EXHIBIT 6
ABC MECHANICAL
RATIO ANALYSIS
Year beg. 1/1 Industry
ABC Mechanical Median*
Current Ratio = Current Asset = 6,014,674.81 = 1.90:1 1.39:1

Current Liabilities 3,157,547.84
Indicates the amount of liquid assets available to liquidate current debt or the companys ability
to meet its current obligations. Typically, lenders and sureties like this ratio to be 1.25:1 or greater.
Return on Total Assets = Net Income/(Loss) annualized = 912,484.90 = 14.22%:1 5.68%:1

Total Assets 6,414,979.99
Indicates how productively the company uses its assets to produce profits. The higher the ratio,
the more effective the use of assets.
Return on Equity = Net Income/(Loss) annualized = 912,484.90 = 26.97%:1 13.92%:1

Common Stockholders Equity 3.383.869.06
Total Liability to Equity = Total Liability = 3,157,547.84 = 0.93:1 1.45:1

Equity 3,383,869.06
Indicates the percentage of total liabilities to equity. Typically, sureties like this ratio to be less than 4:1 or 3:1.
Age of Receivables = Avg A/R X # days per mos = 146,660,158.35 = 89 days 65 days
Contract Revenues 1,641,667.00
Estimates the average collection period for contract receivables. Typically, lenders and sureties like
this number to be 45 days or less.
Age of Payables = Avg A/P X # days per mos = 51,517,101.30 = 38 days N/A
Contract Cost 1,368,776.00
Estimates the average number of days required for payment of contract costs.
Typically, lenders and sureties like this number to be 45 days or less.
Industry median figures per survey of 140 construction companies with annual revenue between 410 million and $25 million.
Bulletin No. AF 7
Bulletin
Other Direct Job Costs (ODJCs) and Indirect Job

Costs
INTRODUCTION SAFETY GLASSES, GRINDING
WHEELS, FAB SHOP UTILITIES
What are Indirect Job Costs? What are ISNT THE COST OF THESE ITEMS
other direct job costs? Sounds confusing, OVERHEAD?
doesnt it? Job cost is pretty straight
forward, isnt it? Labor, some material, a The mechanical construction costs we incur
couple of subcontractssimpleor is it? every day can be placed into one of three
Items like lift rental, permits, trailer rental broad categories:
might be obvious also, but what about hard
hats, fab shop expenses, drill bits, grinding 1. Selling, General and Administrative
wheels, company vehicles? Are those Costs (SGA, or overhead);
overhead expenses? Are they the same on
every project? How do you track and 2. Direct job costs; and
estimate those expenses?
3. Indirect job costs or, other direct job
These are examples of other direct job costs, if you prefer.
costs (ODJC) and a management system
that accounts for and helps you identify and Although this bulletin addresses ODJCs, we
manage these expenses is very important to must first touch on the other two categories.
a successful business. At the risk of over simplifying, lets start by
further defining these three cost categories.
Accounting and financial management
reference tools tell us that we should assign Selling, General and Administrative
account numbers to these costs, but they (SGA) Expenses
dont offer much detail beyond that general SGA expenses are those costs incurred to
advice. The problem is that there are many operate the business, even if you
types of ODJCs, and tracking them subcontracted all of the trade-related work.
individually, by project, could be very time You would need management personnel, an
consuming, require significant resources, office (rent and utilities), estimating and
and is not necessary. engineering staff, accounting staff,
computer and phone systems, outside
This bulletin is intended to help identify consultants, administrative staff, phones,
ODJCs and provide some options to assist entertainment expenses, etc.
in managing and understanding these costs.
Copyright, Mechanical Contractors Association of America, Inc., 2013 1

Direct Job Costs And, you should get reimbursed for them on
These items include: the pipe, valves, change order work.
fittings and equipment installed; the trade
labor needed to install those items; General Categories of ODJCs
CAD/BIM labor; subcontractor costs; and These include:
the project-specific supervision needed to
manage the project. Small tools that do not have a multi-
project life, such as tape measures,
Direct Job Costs can be further sorted into screw drivers, channel locks and PPE
four cost categories: items such as gloves, safety glasses,
and hard hats.
1. Labor Typically includes wages, Consumable items are materials that
taxes and insurances, and fringe are used up during construction.
benefits Examples include drill bits, rags, weld
rods, gases, flux and saw blades.
2. Material Installed materials
3. Equipment Installed equipment The MCAAs Tool and Equipment

NOT construction equipment Rental Guide includes an extensive
list of both small tools and
4. Subcontracts. consumables.
Other Direct Job Costs (ODJC)
These costs include lift rentals, permits, site Vehicle expense covers depreciation,
office expenses, drinking water, temporary lease expense, fuel, registration,
toilet facilities, drug testing, welder testing, insurance, repairs and maintenance.
etc. Some of these items are straight- Fabrication shops include rent,
forward and included in most estimates and utilities, equipment depreciation, non-
easily job-charged. But, many ODJCs are working supervision, testing/
not obviously job-specific, or easily job- certification labor and materials, and
charged and include items such as small small tools and consumables used in
hand tools, saw blades, safety glasses, the shop.
company vehicles, fabrication shop CAD and BIM infrastructure costs
overhead and depreciation of major tools include computer hardware, software
and equipment. If you believe these are job licenses, plotters, paper, ink, and
costs or overhead, consider the following: training.
Job Site Office Expenses cover trailer
1. Would you incur these costs if you rentals (office and storage), phone
subcontracted the work? systems, plotters, copy machines,
water, coffee, etc.
2. Do they vary by project type? Construction equipment should be
job charged whether owned or rented
3. Do they vary by the mix of labor, and can include items such as
subcontracts, material and equipment scaffolding, scissor lifts, cranes, and
on a project? welding machines
These ODJCs are driven by type and size of Many companies make the mistake of
project and are a cost of performing the including these items in overhead costs. It is
work. You should know exactly what you easy to understand the error if you think
are spending for them on every project. about the different nature of projects.
Copyright, Mechanical Contractors Association of America, Inc. 2013. 2

Consider these three projects: ODJCs, such as lift rental and job site office
expenses, can be easily job-charged.
A. An 18-month project with a large Previously, we talked about four cost
work force, full time project categories on any projectODJCs lead us
management and a great deal of to an additional cost category, that is 5.
welded pipe and shop fabrication. Other Job Costs.
B. A six-month project with a very high Mark-ups

percentage of the work performed by Can different mark-ups be used for various
subcontractors. projects to cover ODJCs?
C. A three-man job lasting five days There are problems with using different
and performed by a mobile work mark-ups on different types of projects.
force in company trucks. Even if you have a good handle on ODJCs,
varying mark-ups is not the preferred
Consider the ODJCs identified previously method to recover these costs. Instead,
and then how these costs will vary by developing a system to job-cost ODJCs
project type. Are vehicle, fabrication and provides many benefits. Most important is
CAD expenses the same for all projects? that more people in your company see and
These projects will incur very different understand the costs. Focusing attention on
ODJCs. ODJCs are a direct result of the these costs will improve their management,
work and driven by the type and nature of and estimators and project managers will
the work; they are job specific. make better financial decisions.
Charging OJDCs The classic example is the break-even

It is efficient to be able to buy and inventory project, the one which the project manager
many small tools and consumables and (PM) points to and says, It may be a 0%
dispense them as needed. However, gross margin, but at least we didnt lose
charging each one to a project is not money. That break-even project has very
practical. Likewise, you cannot charge each different consequences if it is a subcontract-
kilowatt of electricity used in the shop to a heavy job or one that uses a great deal of
specific project. But, we can use job CAD and fabrication. Gross margin goals
numbers or general ledger accounts (the do not capture the true cost of the work as
benefits of using annual job numbers are effectively as job-cost details that are
numerous) to track and budget costs for supported by solid accounting. Think of that
these items. top project manager who watches every
dollar; is he really as focused on a target
For example, job number 13pipeshop gross margin as he is on the vehicle charge
might have cost codes for 2013 hitting the job because every mechanic has
depreciation, shop tools, utilities and even a truck?
rent. The total cost of this 2013 job number
would equal your shop burden a topic Additionally, if you are involved with cost-
tackled in other MCAA materials. Likewise, reimbursable work or have the misfortune of
job numbers for vehicles, consumables, ending up in a claim, you will benefit from a
safety training and personal protective job cost methodology that is proven and
equipment and CAD can easily be used to includes as many job costs recorded at the
budget and track these ODJCs. Later in this project level as possible.
bulletin, well discuss how to associate, or
allocate, these costs to specific projects.

The Importance of Detailed Cost Data costs otherwise known as burden or
ODJCs have a material impact on your allocated overhead can easily be job-
bottom line. An impact that can sneak up on charged based on hours worked. This
a company happens when it does not have process can be expanded to create various
a process to measure and manage these hourly costs (burden or allocated overhead)
costs. For example, assume your cost for for different types of work. For example, say
small tools and consumable items is 3.0% all of your shop labor is charged to a cost
of labor. Assume that on average, labor code beginning with a 5 and, at year-end,
costs account for 40% of your project selling these cost codes total 20,000 hours. If the
price and, at year-end, your net profit is shop overhead job-cost totaled $200,000,
2.5% of revenue. In this real life example, we can allocate a $10 per hour cost to every
your cost for drill bits and hard hats is hour charged against a cost code beginning
50% of your annual net profit that is a with a 5.
significant cost that should be tracked and
aggressively managed. How closely do you The following chart shows the levels of
track these costs? allocation used at one company and
demonstrates the flexibility of hourly burden
Do you believe 3% of labor is high for small to accurately cost your projects:
tools and consumables? Lets think of it in
terms of a man-year. What is the cost to Hourly Allocated
Cost Codes
outfit one trades person with a fall protection Overhead (Burden)
harness, hard hat, safety glasses, gloves, $2.25 (small tools
reflective vest, hand tools, grinding wheels, All Trades
/consumables)
tape measures, ladders, welding gases, Add $8.00 = $10.25
flux, etc.? And, how many times during the Pipe Shop
/hr
year will you replace those gloves and hand Add $14.00 =
tools? A union pipefitter with an hourly cost Sheet Metal Shop
$16.25/hr
of $70/hour who works 1800 hours carries a Mobile work force Add $13.50 =
total annual cost of $126,000. Three percent (vehicles) $15.25/hr
of that annual expense is only $3,780, or Add $9.00 = $11.25
$73 a week. Can you outfit a trades person BAS techs
/hr
with all of the required PPE, small tools, and Engineering Staff $8.50/hr
consumables required for $73 per week? CAD Group $13.50/hr
Can you recover those costs on additional
or change order work? Detailed job-cost Each of these hourly costs is associated
strategies help manage, reduce and recover with an overhead job and a project
these types of costs. manager, and they are updated quarterly as
those forecasted costs AND the company
Managing and Job Charging ODJCs man-hours change. Each quarter, the
Using job numbers and cost codes to collect forecasted pipe shop costs are divided by
ODJC data is very effective and even allows the forecasted shop hours which produce
you to assign a PM to those jobs. This an updated hourly shop burden. Todays
approach provides an excellent way to not estimating, accounting and job-cost
only carefully manage costsconsumable software packages make these tasks very
expenses, shop expenses, etc.but also simple.
allows project managers to understand the
true cost of the work. An option preferred by some companies is
to allocate some ODJCs on a dollar of cost
Job-cost data can then be compared to (versus hourly) basis. For example, they
annual hours worked to calculate hourly may add 7.5% of every dollar of material
cost rates for these ODJCs. These hourly

purchased to recover the cost of
consumables such as weld rod, gases,
grinding wheels etc., but the principle
remains the same. This approach creates a
sixth and final job-cost category; 6. Burden
/Allocated Overhead.
CONCLUSION
The true and accurate cost of the work
includes many items that vary by type
of work and are difficult to job-charge.
These costs can be significant and
should be accurately measured and
managed.
Grouping these costs, budgeting and
charging them to one job number that
is actively managed helps to control
costs.
These costs, divided by forecasted
hours, creates an easy-to-use and
easy-to-manage system for identifying
and managing costs.
Applying hourly burdens to job-
charged hours is an easy and effective
way to allocate many ODJCs directly
to projects. By job-charging these
expenses, you increase exposure and
attention to actual costs and, as a
result, will inevitably reduce ODJCs.
Project Costs are best separated into
6 categories:
1. Labor Direct project labor and

project specific supervision
2. Material Installed materials
3. Equipment Installed
equipment
4. Subcontracts
5. Other Direct Job Costs large
ODJCs that are easily posted to
a project such as equipment
rentals and permits
6. Burden, or Allocated
Overhead ODJCs most
efficiently managed through
costs applied to each hour of
labor, or dollar of project cost,
such as small tools,
consumables and fab shop
burdens.

Bulletin No. BF 1
File: Business Forms
Bulletin
Business Forms
Foreword
Please be reminded that the use of any form which includes elements of a competitive
nature, such as price, credit terms or warranty terms, must be adopted on the basis of
individual decisions. It is a violation of the antitrust laws for firms to agree to use certain
provisions concerning such matters, by way agreeing to use certain forms or otherwise.
This section of the Man agement Meth- modify to better meet your individual
ods Manual was developed to assist our requirements. It is also recomme nded
members in locating a particular type of that you ha ve your own legal cou nsel
form or forms that may be used for their review each form prior t o use to ensure
own company. Some of the forms found that it contains all the terms and proper
in this se ction are duplicated in other language necessary under applicable
sections of this manual or in other local laws.
MCAA publications. Under this heading,
you will find several alternatives for each By providing sample forms to its
type of form. This provides you the members, MCAA does not inten d to
opportunity to select th e one that best promote the use of any particular form
fits your companys needs. or of any of the terms set forth in any
particular form. Certain terms in the
Feel free to add your company name/ sample forms ma y be subject to nego-
address to the forms and use as is or tiation.

PURCHASE ORDER
Your Purchase Order Is Hereby Acknowledged and Accepted,

including terms and conditions slated on the face and reverse
side hereof.
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Bulletin No. BF 2
File: Business Forms
Forms for Temporary Heat or Cooling
Foreword
Frequent cause for concern is based on architect or general contractors use of installed
equipment on a job not yet accepted by the owner; commonly referred to as temporary heat
or cooling. Have a prepared agreement for this type of operation. The following forms are sam-
ples that may help you. Remember: you should modify them for use in your area. Consult your
accountant or attorney.
1
REQUEST FOR TEMPORARY OPERATION OF MECHANICAL SYSTEM
Chicago, Illinois, ________________________________
Date
TO: __________________________________
Mechani cal Contractor
In the building at_________________________________________, where you have the contract to furn ish and
install___________________________________________________, we wish to have the privilege of t he use of th e
______________________________________ system prior to final completion. W e authorize you to provide
necessary labor to operate and maintain said system.
We will provide necessary fuel, oil, electricity and all other consumable items required for operation.
For the furnishing of this labor for opera tion and maintenance, we will pay you in acc ordance with the foll owing
schedule:
a) Where labor is provided beyond a period of seven consecutive days, at the rate of $_______per day
including Saturdays and Sundays, excepting holidays, provided further, that not less than two full
time shifts of eight hours each in e ach twenty-four hour day are furnished. W here labor is thus
provided on legal holidays (New Years Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day) it will be furnished at the rate of $____________ per day.
b) Where labor is provided for a period of less than seven consecutive days, at the rate o f $_________
Mondays, $_________ per da y, Tuesdays through Fridays, $__________ Saturdays, and $________
per day for Sundays and legal holidays.
c) The operation and main tenance will be furnished without charge to us during the hours you have
mechanics regularly employed in the ful fillment of your contract, and the daily rates for all other
times will then be as follows:
For a p eriod beyond seven days, $__________ per da y, Mondays through Fridays, $_________
on Saturdays and Sundays, and $____________ on legal holidays;
For a period of less than seven days, $___________ Mondays, $___________ per day, Tuesdays
through Fridays, $_____________on Saturdays, and $_____________Sundays and legal holidays.
This authorization may be cancelled (1) by our acceptance of the installation, (2) prior to tha t time by utilizing our
own regular operating force at such time as we are permitted by you to do so, or (3) at o ur discretion, provided we
authorize you to place the plant in such condition that it will not be subject to damage due to non-use at rates set
forth in (b) above.
It is understood that you will not be liable f or ordinary wear, tear, or deterioration of the system occasioned by its
temporary use.
It is fur ther understood that all warranties or guaran tees which you assume under your contract shall remain in
force, but the period of such shall commence as of the date of this temporary operation, and likewise provisions, if
any, contained in any contract between you and the General Contractor shall be modified accordingly.
_____________________________________
By___________________________________
Title
APPROVED:
_________________________________________
Contractor
By ______________________________________
Title
It is agreed that the guarantee and warranty provisions contained in the contract between _____________________
_____________________________ and ________________________________, dated __________________________,
are hereby modified as stipulated above.
_________________________________________
Genera l Contractor
By_______________________________________
Title
BF 2 2
3 BF 2
Bulletin No. CO 1 Revised
(Replaces 1976, 1987 and 2005 versions)
File: Change Orders
Bulletin
How to Identify and Manage Change Orders

Introduction disputes. These approaches also apply
Changes on a construction project to changes between general contractors
should be anticipated and can have a and subcontractors, as well as owner-
significant effect on a contractors caused changes that flow down to
performance, productivity, and subcontractors. For brevity, most of the
profitability. Although changes are narrative is in the context of a project
common, misunderstanding and owner and general contractor, but most
disagreement can occur when it comes of the same principles apply to contracts
to identifying whether a change has between general contractors and
occurred, pricing a change, and subcontractors. References to
determining the time impact of a contractor apply to general contractors
change. Detailed documentation of and specialty trade subcontractors.
events related to changes can General guidance is provided related to
significantly reduce disputes and overall common change order circumstances,
project risks. Changes also may result in however, specific contract laws, working
a claim under the contracts disputes conditions, and practices can vary
clause if the owner and contractor, or among jurisdictions and geographic
the general contractor and locations. Contractors and owners are
subcontractor, do not agree as to encouraged to seek advice from their in-
entitlement to and/or the dollar amount house contracts manager and/or legal
of the change. However, a significant counsel as to their respective rights and
number of claims and disputes can be obligations associated with the contracts
avoided by following the changes they sign, including change orders
provisions, or changes clauses, in the which are contract modifications.
contract; preparing detailed Construction professionals such as
documentation during the course of the other in-house personnel, construction
project; and maintaining active consultants, and legal counsel with cost
communication among the various and time impact experience may be
parties involved in a capital project. helpful in evaluating the cost and time
impacts associated with change orders.
This bulletin suggests approaches to the
effective management of change orders Types of Events Leading to a Change
with the objective of increasing A variety of events may result in
contemporaneous agreements changes to a contractors actual work
between owners and contractors that from what was planned and set forth in
resolve the price and time associated the contract documents, regardless of
with a change and avoid change order the project delivery methods used.
Copyright, Mechanical Contractors Association of America, Inc., Revised 2011 1

Some of the issues and events involve a change in the construction
that may cause changes include: sequence or schedule. Owners typically
have the contractual right to initiate any
Owner-driven scope changes that change. Owner changes often impact
cause an increase or decrease in the contractors scope of work.
the amount of work from the scope However, changes in a projects size,
of work outlined in the original configuration, or space requirements
contract; also can create a schedule impact
and/or change the sequence of work,
Changes in the methods of thus impacting the productivity of the
performance or the materials or base contract work.
equipment to be installed;
In contrast, constructive changes occur
Changes that modify the planned from any events that are not owner
sequence in which the work was to directed or that have the effect of
be performed; implicitly requiring the contractor to
modify the scope set forth in the original
Differing site conditions not contract. Constructive changes are often
anticipated in the original contract more difficult to identify because they
price; are actions or inactions of an owner
without the explicit acknowledgment
Constructability issues; of any change by an owner. Whether
the contract in question is a private or a
Changes in performance government contract, verbal
specifications; communication among owner, general
contractor, and subcontractors can
Changes to correct errors, sometimes be viewed as a change.
omissions, or inconsistencies in the Contractors are encouraged to follow
specifications or drawings; up in writing if they believe a
constructive change has occurred.
Some of the common types of
Changes in the time for
constructive changes are:
performance;
Defective contract documents;
Changes resulting from
extraordinary, unexpected natural
events; and Over-inspection;
Changes due to the actions or Changes in methods of

inactions of other trades working on performance;
the project.
Changes in construction sequence;
The changes described above fall within
two general categories: directed Misinterpretation of specifications;
changes and constructive changes.
Directed changes are usually easier to Incomplete owner or architect/
recognize and resolve. In this kind of engineer responses to contractor
change, the owner specifically directs information requests; and
the contractor to make a change. A
directed change can add to or reduce Differing site conditions.
the contract price and it also may

Defective specifications are often cited contract documents or when there are
as a cause of constructive changes. The inconsistencies among the construction
term defective specifications covers a drawings associated with different
multitude of latent change-causing trades.
circumstances that result from
inaccurate or incomplete specifications. Latent conditions. This term refers to
Examples of defective specifications existing differing site or subsurface
are discussed in the following conditions, unknown at the time of
paragraphs: bidding, that affect the contractors
performance. Change orders for latent
Incomplete specifications. Incomplete conditions usually result from either
specifications exist when the contract subsurface soil conditions or conditions
documents do not provide adequate within the existing site or facility that are
information necessary to execute the materially different from what was
work as planned. These types of shown on the contract documents or
changes often occur when the plans and materially differ from conditions that are
specifications fail to coordinate clearly evident and observable.
construction details between different
design disciplines, such as architectural Nondisclosure. Nondisclosure can be
and mechanical, resulting in conflicts either intentional or unintentional. In
that require resolution. either case, a change occurs when the
contractor is not given all of the critical
Facility space constraints. Conflicts design or construction information
occur when the project design provides necessary to facilitate proper project
insufficient space for all of the elements performance.
in an area. For mechanical work, there
can be conflicts in shaft and in-wall Changes required by regulatory
installation, with above-ceiling agencies/using agency. The owners
mechanical, and with structural, design team normally has the
electrical, and plumbing elements that responsibility to ensure that the project
require resolution. Some of these design meets all applicable building
conflicts can be resolved during the code and regulatory requirements.
coordination process; others may Added work or changes required to
be so significant as to require a re- meet code or regulatory requirements
routing of work or an adjustment in the should result in a change order.
size of the space in order to properly
install the work. Value engineering. In what is
sometimes referred to as value
Design discrepancies. Design engineering, a contractor may point out
discrepancies occur due to differences changes when superior methods or
between the plans and specifications, materials become apparent, or when the
differences between details, same design result can be achieved at a
dimensional errors, or differences lower cost. Contracts frequently allow
between planned equipment details and for shared savings associated with such
actual equipment cut sheets. A design improvement, however the cost of
discrepancy may also be found when reengineering can offset any savings
the same item is specified in different while potentially delaying progress.
sections of the contract documents with When improved methods or materials
different requirements in each section. are necessary to overcome an owner-
Additionally, a design discrepancy can caused problem, such as to mitigate a
occur when details are omitted from the delay impact, the contractor should be

compensated for such changes. reference in the subcontract. For
example, the notice provision in
Tools to mitigate or avoid changes. the changes clause of the
Use of tools that can be utilized to ConsensusDocs 200 form contract
mitigate or avoid costly change between owner and contractor states
conditions in the field is becoming more that except for certain delay
widespread. For example, tools such as circumstances covered in a different
4D Building Information Modeling (BIM) contract provision, the contractor shall
and Integrated Project Delivery (IPD) give the owner written notice within
processes help coordinate the fourteen (14) days after the occurrence
development of design drawings, and giving rise to the claim or within fourteen
can reduce the number of instances of (14) days after the contractor first
conflicts in drawings and incomplete recognizes the condition giving rise to
specifications. With 4D BIM, the claim, whichever is later. This
the Critical Path Method (CPM) provision continues that the contractor
schedule is integrated into a 3D model shall submit notice before proceeding
of the drawings so that the project can with the work, except in the case of an
be visualized from both a emergency, and shall have twenty-one
constructability sense and a project (21) days after giving notice to submit
execution perspective before the project claim documentation, and then the
is started. Updates are provided owner must provide a written
throughout construction to reflect as- acceptance or denial within fourteen
built conditions as a reference point for (14) days after receipt of the contractors
planning and analyzing the work still to documentation.
be completed. The time and costs
associated with implementing tools such When a change is identified, detailed
as BIM on a specific project can be documentation of the change should be
tracked and treated as a direct cost of prepared. Typical documentation
the work in both the initial contract and includes a description of the reason for
any changes. the change or description of events
causing the need for a change order.
What To Do When a Change is Documentation should also include a
Identified narrative description of the schedule
When a change is identified, one of the impacts after completing a time impact
first things a contractor should do is analysis of the work scope that has
provide notice to the owner. Notice changed.
provisions are common contract
provisions and the parties should follow Since constructive changes do not
the applicable contract guidelines for emanate from a directed owner change,
providing change notices. For it is particularly important for contractors
mechanical contractors and other to identify that a change has occurred,
subcontractors, not only is notification to document the details of the changed
the general contractor important, but condition(s), and notify the owner of the
knowledge of any flowdown provisions changed condition in a timely manner.
from the owner to the general contractor Some contract forms do not include
and, in turn, to the subcontractors are provisions for constructive changes, so
important. Subcontractors should be a contractor needs to be clear with the
aware of any notice requirements that owner about proceeding with any work
may be part of such flowdown related to a constructive change and
provisions that are incorporated by documenting such work in a written
change order. If a contractor is directed

to proceed with the work before a Schedule time impact analysis
change order is agreed to and signed, arising from change orders. Each
the contractor needs to carefully change order should be carefully
document the costs and time associated evaluated to determine whether an
with the change and take the following extension of time is warranted. The
steps to facilitate the resolution of the bulletin entitled Time Impact Analysis
change with the owner: Measuring Project Delay (CO 3)
contains a detailed description of the
Research the contract documents manner in which a time extension
thoroughly to confirm that a changed analysis should be performed using the
condition exists. contemporaneous project schedules
and procedures set forth therein. This
Prepare and submit a change order bulletin should be consulted whenever
request proposal, giving the owner a the contractor identifies an impact that
clear and detailed description of the could affect any aspect of the schedule.
change. As noted in bulletin CO 3, the contractor
should pay particular attention to the
Be alert to any notice requirements contract requirements for submitting
and respond properly. requests for extensions of time, as well
as the scheduling requirements for the
Issue notice of intent to file a claim if project. Failure to adhere to these
the change order is denied. requirements could affect the
contractors ability to obtain a time
Inform the owner of any applicable extension.
schedule impacts.
Separate cost coding. The contractor
If the change is not resolved, follow should determine whether it is practical
the dispute resolution procedures in to document the costs of a change using
the contract. separate project job cost coding. In
some instances, it may not be possible
While the owner-directed change is to separately track impacted costs or
easiest to identify, the contractor must costs associated with an individual
consider schedule and productivity changed condition contemporaneously
impacts in the analysis and pricing of as the impacted work progresses. This
the change. Time and productivity could occur if the impacted work is an
impacts often are not the subject of integral part of the base contract work,
initial negotiations regarding the scope, such that the base contract work is more
but these topics should be incorporated difficult to perform and/or takes longer.
into the negotiation process. Failure to In other situations it may be feasible to
consider these impacts at the time of the separately track the costs associated
change can result in a waiver of a with a change via separate cost coding
contractors ability to recover additional from the base contract cost coding in
time and money. Contractors should the contractors job cost reporting
consider their need to reserve rights system. When it is impractical to
associated with impacts if they are not separately track costs associated with
quantified and included in a change the change due to effects on the base
order price at the time of each change contract scope and/or cumulative
order negotiation. impacts associated with multiple
changes, it is helpful to document the
impacts and costs through additional
contemporaneous notes in the daily

project logs, timesheets, or other daily 3. Other considerations that may
reports so that the portions of the work affect productivity. Other conditions
that are impacted can be more clearly and circumstances should be
identified in the absence of separate considered when evaluating the cost of
cost coding. However, when possible, it performing changed work. These
is recommended that contractors use circumstances could include things such
separate job cost coding to track as:
changed work.
Excessive heat, cold, precipitation,
Impacts Arising From Change or other forms of severe weather
OrdersLosses Of Productivity (especially unexpected intermittent
In addition to the direct costs associated changes)
with a change, the contractor should be
Performing work in a different
aware of various factors that can have
season, i.e., summer work shifted to
an adverse effect on labor productivity,
winter work
both in the performance of the changed
work and as an impact on the base
contract scope of work, depending on Contaminated air
the scope of the change and depending
on the activities being performed. In Constructability problems with plans
order to recover such costs, a contractor and specifications
must establish the cause and effect
between the event and a quantified loss Unusual and unplanned changes in
of productivity. Some causes include the the sequencing of the work
following:
Unplanned protection of existing
1. Worker overtime. Unscheduled facilities, completed portions of
overtime may lower both work output construction, furniture, fixtures,
and efficiency, depending on the machinery, stock, or finished
amount of overtime being incurred and surfaces
the duration of the overtime. Evaluating
the extent to which a loss of productivity Unplanned daily clean-up of tools
has occurred resulting from sustained and work area
overtime, along with the premium costs,
is a factor that contractors should Unexpected interference by owners,
consider when pricing change orders. employees, or other trades
2. Manpower availability to perform Accessibility to material stores,

the changed work. High volume of changes in laydown areas or tool
construction activity in a concentrated lockers
geographic area may create a shortage
of skilled workers which, in turn, can Unexpected poor lighting
affect labor costs depending on the type
of skilled work that is required and the Work in tight spaces with unsure
level of worker training. The additional footing, interfering tie wires, piping,
costs of such labor, such as hourly or ducts, hangers, etc. not originally
daily premiums to attract skilled workers planned
from other locations, including the cost
of travel and lodging, should be
considered in change order pricing.

Frequent repair work from trade costs at completion to the total contract
damage budget. The contractors fee should be
subtracted from the overall contract
Acceleration budget when analyzing underruns and
overruns on a cost-to-cost basis.
Consideration of the above factors Analysis of budget variances can be
should enable the contractor to more used effectively to evaluate the impact
discretely price and explain any added of changed work. For example,
costs of performing changed work when analyzing the amount of planned versus
preparing change order requests. actual labor overtime on a project and
then isolating when the overtime was
Pricing Change Orders incurred and what caused the overtime
It is important to identify whether the to be incurred can provide very useful
pricing of a change is to be developed information when evaluating the impact
on a forward pricing lump-sum estimate of changed conditions. The usefulness
or if the pricing should be partially or of budget variance analyses are
completely based on actual costs plus dependent on the quality and level of
applicable mark-ups. In the situation detail in the original estimate.
of forward pricing change orders, Contractors are advised to maintain
estimating the amount of the change good documentation of how budgets are
order typically is conducted in the same derived and to prepare budgets in
way that a contractor prepares other sufficient detail, along with the
lump sum estimates. However, the corresponding job cost coding work
manhours required to complete a breakdown structure, so that variances
change order may be similar to or can be used to effectively quantify
different from the productivity and project impacts.
manhours incurred under normal
unimpacted conditions. Adjustments In government contracting, costs must
must be considered for abnormal or also be reasonable, allocable, and
less-than-optimal conditions at the allowable. Although an exhaustive
jobsite. Some additional factors to be analysis of change order pricing on
considered are whether the schedule government contracts is beyond the
has been or will be delayed, or if scope of this publication, briefly, as
schedule acceleration efforts are stated in Federal Acquisition Regulation
underway, for example. These factors (FAR) 31.201-3, A cost is reasonable if,
may call for consideration of labor in its nature and amount, it does not
productivity impacts when pricing a exceed that which would be incurred by
change. a prudent person in the conduct of a
competitive business. Factors to
A common step when evaluating the consider when evaluating the
impact of changed work and evaluating reasonableness of costs include:
the planned versus actual financial whether the costs are ordinary and
performance of a contract, is to analyze customary, whether the costs are based
cost underruns and overruns by on an arms-length transaction rather
comparing the actual costs to the project than a related-party transaction, and
budget. Budget variances can be whether the costs reflect what a prudent
analyzed by comparing the actual costs person would be expected to incur. FAR
to-date to the current contract budget 31.201-4 states, A cost is allocable if it
adjusted for the percent complete on the is assignable or chargeable to one or
project, or by comparing the forecasted more cost objectives on the basis of
relative benefits received or other

equitable relationship. This FAR identifiable to specific tasks and are
provision further states that a cost is generally treated as direct costs.
allocable if it, (A) Is incurred specifically However, some costs may appear to be
for the contract; (b) Benefits both indirect because they are allocable to
the contract and other work, and can be multiple activities, but are still direct
distributed to them in reasonable costs related to the performance of the
proportion to the benefits received; or base work or changed work. For
(C) Is necessary to the overall operation example, fuel, oil, and grease are
of the business, although a direct necessary to support the use of
relationship to any particular cost equipment to perform direct construction
objective cannot be shown. FAR activities, but seldom would these types
31.201-2 states in part, The factors to of costs be separately tracked and
be considered in determining whether a coded to individual work tasks or job
cost is allowable include the following: cost codes. It is common for fuel, oil,
(1) Reasonableness. (2) Allocability. (3) and grease to be accumulated in one
Standards promulgated by the CAS code, even though they support multiple
Board, if applicable; otherwise generally work activities on a project, or even
accepted accounting principles and across multiple projects or contracts.
practices appropriate to the particular Small tools, consumables, QA/QC
circumstances. (4) Terms of the activities, localized labor supervision,
contract. (5) Any limitations set forth in detailing, BIM, and scheduling activities
this subpart. Contractors must be very are all examples of direct costs when
careful when preparing a change order contractors track them to a particular
involving a government contract to avoid project. These types of costs are
myriad pitfalls. Pricing data, per the frequently tracked in general conditions,
FAR, must be current, accurate and but sometimes are tracked in one
complete as of the date of the consolidated direct job cost code and
agreement on price. Contractors and sometimes are allocated to jobs as a
owners are encouraged to reach percentage of labor or some other
advance agreements on items of cost allocation basis. These examples
and mark-ups that will be allowable in demonstrate that some direct costs
change orders and specify these like trade labor are almost universally
agreements in detail in the contract accepted and defined as a direct cost,
documents. For example, labor rates to but some costs can be coded as either a
be used for change order pricing can be direct or indirect cost and need to be
established at the time of negotiating analyzed to determine their proper
and signing the contract rather than categorization. Although general
treating labor as a cost reimbursable conditions costs are sometimes also
item which can be the subject of costly referred to as field overhead, which
auditing and disagreement. For a may imply an indirect nature to this cost
summary guide to the allowable versus grouping, in reality, these costs are
unallowable costs described in FAR direct costs of the work. General
31.205, please refer to Exhibit 18 at the conditions costs support various aspects
end of this bulletin. of the project and therefore are often
allocated at the project level in a change
Direct Costs Arising From Change order situation, or treated as a daily cost
Orders. Direct costs are any costs that in a delay or suspension situation, but
support one cost objective, meaning that the costs are still directly related to a
they are directly related to a specific, given contract. Such definition and
identifiable task. Materials, equipment, categorization can also be important
and subcontract costs are usually when it comes to drafting contracts so

that the pricing terms are clearly defined include:
for the benefit of the parties and to avoid
costly disputes after the contract is 1. Labor, including:
signed. For example, there can be
challenges with determining the actual a. Wages
cost of using owned equipment so
frequently owners and contractors will b. Overtime premium pay
agree on stipulated rates for the use of
equipment in the contract. c. Union health and welfare
benefits
Common Categories of Change
Order Pricing Elements d. Apprenticeship training
The common categories of construction e. Journeyman training fund
and change order pricing elements are:
f. Retirement fund
Direct and indirect job costs,
g. Vacation
General and administrative
overhead, and h. Jury duty, sick pay, or other
leave allowances
Profit.
i. Per diem allowances
Direct and Indirect Job Costs
The elements of direct and indirect job j. Travel expenses
costs vary depending on the type of
building construction and can also vary k. Workers compensation
depending on the size of the contractor.
Care must be taken to treat projects l. Payroll taxes
consistently within a contractors
m. Other agreed-upon payments
organization so that certain cost areas
similar to those above
(e.g., superintendents, yard costs,
machine shops, etc.) are treated as
n. On-site Supervision
either direct or indirect and not subject
to double charging. This is especially
2. Small Tools and Consumables
true for contracts being performed in the
federal government contracting arena. 3. Permanent Materials
Direct costs are the costs of labor,
materials, supplies, equipment, and 4. Project Equipment and Systems
subcontracted work that go into, and incorporated into the project
which can be clearly identified with, a (elevators, HVAC systems, etc.)
particular segment, phase, or unit of a
project. Indirect costs are those costs 5. Construction Equipment
that cannot be attributed to a single item
or unit of a project. Indirect costs are 6. Subcontractor Costs
generally divided into two categories
jobsite overhead and general and 7. Other Project Costs, such as:
administrative overhead. General
conditions is another term commonly a. Job insurance
used to describe jobsite overhead.
Examples of direct and indirect costs b. Equipment rental

c. Job supplies and facilities (ice x. Shop drawings, blueprints,
water, ice, portable toilets, etc.) reprographics, and photography
d. Cell phones and radios y. Mobilization and demobilization
e. On-site office equipment z. Temporary heating and

(telephones, computers, copiers, temporary weather protection
fax machines, etc.)
General and Administrative
f. Sales taxes Overhead
General and administrative (G&A) costs,
g. Construction and performance
sometimes called home office overhead,
bonds
are not charged directly to a job cost
report; they are corporate indirect costs
h. Permits
that typically support more than one
i. Temporary services and facilities contract at a time. G&A costs commonly
contain essential functions that are
j. Miscellaneous costs (instruction necessary for a company to conduct
manuals, tags, move on/move operations, fulfill specific contract
off expenses, certification, etc.) obligations, and even perform change
order work. Sometimes the allowable
k. Safety percentage for G&A is stipulated in the
contract documents. It is often a useful
l. Costs of developing a change practice to negotiate a G&A overhead
order rate for change orders at the beginning
of a project and incorporate the rate in
m. Drug testing the contract. In the context of federal
government contracts, FAR Part 31
n. Material handling and re- provides guidance on the types of G&A
stocking costs costs that are allowable in a change
order.
o. Clean-up, dumpsters, and
garbage hauling Profit
Profit should be applied as a separate
p. Surveying and layout percentage figure. It should be applied
after all costs are included, with the
q. QA/QC appropriate addition for G&A overhead.
Sometimes the percentage for profit is
r. Crane and hoisting equipment stipulated in the contract documents.
Like G&A, disputes can be avoided by
s. Scheduling stipulating a profit rate for change orders
in the contract. In other instances, a
t. Document control clerk fee percentage is specified which is
intended to cover both home office
u. Expeditors
overhead and profit.
v. Site security
Other Considerations in the
w. Temporary jobsite Pricing of Change Orders
electricity/lighting Additions and/or deductions:

1. Where additions only are involved, Comparison of contract forms and
the contractor is entitled to an change order provisions: Multiple
addition to the contract sum in the references are made in this bulletin to
amount of direct and indirect job change order provisions in the contracts
costs, plus home office overhead governing the work. Much of the specific
and profit. If requested, the change order pricing approach and
contractor may be obligated to contractor submittal process is
provide a detailed breakdown to determined by the change order
verify the quotation or, depending on provisions in a subject contract. There
the contract provisions, the are several commonly used form
contractor may be subject to an contracts that frequently serve as the
audit. basis or starting point for negotiating
contracts between owners and
2. Where deductions only are involved, contractors. An overview of the
the contractor should calculate the similarities and differences among the
reduction to the contract sum only in change order provisions in these
the amount of the reduction in direct commonly used contracts is provided in
and indirect job costs unless other, this bulletin. The contract forms that are
more specific guidelines are compared in this bulletin are the
provided in the contract. ConsensusDocs, which is endorsed by
MCAA and other trade contractors
3. When both additions and deductions among others; the American Institute of
are involved, each should be Architects (AIA) 2007 form contracts;
calculated as separate change the Engineers Joint Contract Documents
orders in accordance with 1 and 2 Committee (EJCDC) forms; and the
above. If both omitted work and Construction Management Association
added work is involved in the same of America (CMAA) forms. All of these
change order, the total amount of form contracts are similar in that they
the change order will be equal to the provide for a change to be initiated by
difference between the additions and the owner in the form of a directed
the deductions in accordance with 1 change or identified by the contractor by
and 2 above, unless more specific notifying the owner. However, each of
guidance is provided in the contract. these form contracts have nuances as
Sometimes the contract stipulates to the prescribed approach for
that overhead and profit, especially determining the price and time
when it is a fixed-fee project, will not associated with the change. The
be reduced for deductive changes; following paragraphs address the pricing
this should be considered when methodologies among these contracts,
pricing a combination of additive and but do not address all of the procedural
deductive changes. differences. The parties to the contract
are strongly encouraged to read and
Unaccepted change orders: If the understand all contract and change
schedule and associated pricing of an order language before signing these
owner-initiated change order is not documents and to seek professional
accepted and authorized, the contractor legal assistance when necessary. For
may wish to seek reimbursement for all example, the ConsensusDocs, AIA,
costs incurred in the preparation of the EJCDC, and CMAA forms all include
quote. The contractor should have a notice provisions, however the number
prior understanding in the contract with of specific days varies from contract to
the owner regarding the reimbursement contract, as do the specified days for
and allowability of such costs. submittal of changes and owner

response times. The following table AIA2 Article 7. This form contract
provides a summary comparison of the does not provide detailed guidance on
pricing provisions in these four different the determination of cost, overhead, or
form contracts, with further discussion profit when pricing is based on cost of
about the pricing provisions in the the work plus a fee, but rather leaves
paragraphs that follow. the determination of these pricing
elements to the negotiating parties,
Change Order Pricing Alternatives except when agreement cannot be
reached, in which case Article 7.3.7
Unit Mutual Cost provides guidance on the elements of
Prices Acceptance of the cost and guidelines for the
Work determination of overhead and profit. If
of a
Plus unit pricing is used, and the quantity or
Lump Sum
a Fee unit items are so different from the
ConsensusDocs x x x original unit prices to cause substantial
200 (Article 8) inequity to owner or contractor, the unit
AIA (A201 x x x prices are to be equitably adjusted.
2007)
EJCDC (Articles x x x EJCDC3 Articles 1012. This form of
10 - 12) contract provides detailed guidance on
CMAA (General x x x the determination of cost, overhead, and
Conditions profit and provides guidance on unit
Article 11) price determinations in the event owner
and contractor are unable to reach
agreement as to the change order price.
ConsensusDocs1 Article 8. The Parties using this form of contract are
ConsensusDocs call for expeditious encouraged to consult the specified
negotiation of time and price when the provisions in Articles 1012.
owner issues an interim directed
change. This form contract does not CMAA4 Article 11.When the cost-
provide detailed guidance on the plus-fee method of change order pricing
determination of cost, overhead, or profit is used, the CMAA change order pricing
when pricing is based on cost of the provisions provide distinct definitions for
work plus a fee, but rather leaves the cost of the work with additional
determination of these pricing elements guidance for the quantification of labor,
to the negotiating parties. In the event materials, subcontractors, and several
the parties cannot reach agreement, this other types of costs. The CMAA change
contract generally provides for pricing to order provisions also provide guidance
be determined based on reasonable on the quantification of the contractors
and actual expenses and savings. If fee, which consists of overhead and
unit pricing is used, and the quantity or profit. The change provisions state that
unit items are so different from the the contractor shall be entitled to a
original unit prices to cause substantial mutually acceptable fixed-fee amount. If
inequity to owner or contractor, the unit that amount cannot be agreed upon,
prices are to be equitably adjusted Also, then the fee shall be 15 percent of
in the event of a directed change, when payroll and materials plus 5 percent on
pricing cannot be agreed upon, the subcontractor change work, subject to
contract provides that 50 percent of the other detailed exceptions and
estimated cost of the work shall be paid procedures specified in the contract.
on an interim basis.

Change Order Procedures and specified in a contract, the time
Forms limitation for acceptance of a change
Authorization procedures. It is order should be stipulated by the
incumbent on the contractor to ascertain contractor in a change request. If not
in writing, either from a review of the accepted within the stipulated time, it
contract documents or through a written should be stated that the quoted price
may be subject to escalation.
request to the owner, the specific
individuals who have the authority to
Full accord and satisfaction
accept and implement change orders.
language. Contractors should be alert
Often a contract will identify the
to any change order they are requested
authorized representatives for both the
to execute that includes full accord and
contractor and owner. When negotiating
satisfaction language. Such language is
the cost, time, and any specific terms
designed to make the written change
and conditions associated with a change
order a full and final agreement on the
order, it is recommended that the
applicable cost and time associated with
authorized representatives for both the
the subject change. A bilateral signing of
contractor and owner thoroughly review
a change order with this language could
the documentation associated with the
bar the recovery of any additional costs
change before signing the change order.
associated with the change order, such
Otherwise, the owner may contend that
as loss of productivity, delay-related
the individual who authorized the
costs, and/or cumulative impacts. The
alleged changed work did not have
actual wording will vary, but is likely to
authority to issue a change. If the
be similar in substance to the following:
contractor believes that the actions of a
party within the owners control, such as
The execution of this Change Order
the architect/engineer, took action that
represents the Contractors total and
constitutes a constructive change to its
final costs for all impacts, both direct
work, the contractor should give timely
and indirect, arising from this Change
written notice to the owner that it
Order. A time extension (if any) granted
considers such action a constructive
with this Change Order represents the
change directive, and will perform the
total impact of all delays, both direct and
work as a change order and provide a
indirect, to the project schedule.
cost accounting of the change when the
work is complete. An example of such a Courts and boards have found that such
written notice of change is: language may bar the contractor from
additional recovery. If there is concern
Contractor has received the Engineers
that productivity impacts, cumulative
Response to Request for Information
impacts of multiple changes, and delay-
(RFI) 213, which has rerouted the piping
related costs cannot be quantified for
from that shown on Drawing M.402. We
individual changes, the contractor
have assigned Proposed Change Order
should consider reserving its rights to
5000 to this item. We will be charging
make a claim for such impacts separate
costs for labor, material, services, and
from individual change orders. An
equipment to this change order cost
example of such reservation language
code and will provide you with a
follows:
complete accounting in a formal change
order request when the work is The execution of this Change Order
complete. represents the Contractors estimate of
direct costs only. The Contractor
Time for acceptance. Except as
expressly reserves the right to submit, at

a later date, added costs, applicable Lump-sum pricing is frequently used
mark-ups and time extensions attendant when pricing changes before the
to this change order arising from, but not changed work has commenced,
limited to: extended field and home meaning that the change is forward
office overhead, labor inefficiency, priced. Contractors bear the risk of
disruptions, impacts to the critical path, overruns and receive the benefit of
schedule re-sequencing and/or underruns.
acceleration.
In time-and-materials changes, such
Again, legal counsel should be risks are eliminated and both the
consulted before signing a change order contractor and the owner get a clear
that contains either accord and picture of the profit that will be earned
satisfaction language or reservation of by the contractor. Time-and-materials
rights language. changes require accurate tracking of all
expenditures to allow verification of
Dispute resolution. In the event that a reimbursable costs. These costs may be
change order cannot be mutually agreed invoiced periodically as the work
upon with a bilateral signing, some commences, or, on shorter-duration
changed work may still proceed with a changes, invoiced on completion of the
directed change or a unilaterally issued work.
change order. In the event that the
parties have exhausted all possible Unit-price contracts specify the unit
remedies under the changes provisions prices associated with various types of
of a contract, they may need to turn to work. In some instances, the parties
the dispute resolution provisions of the may agree that, on changes above a
contract. Occasionally, change orders specified percentage of the base work
ultimately become resolved through the (for example, 25 percent), the contractor
dispute resolution provisions of the has the ability to charge on a time-and-
contract. It is beyond the scope of this materials basis. In these instances, the
bulletin to discuss the details of contractor may be allowed to charge
resolving claims outside of the change actual costs rather than being limited to
order clauses in contracts. charging the unit prices that were
established in the contract. Unit prices,
Change Order Forms in most instances, include direct costs,
Having outlined a variety of indirect costs, G&A, and profit.
considerations when faced with
changed work, the following forms are The forms and procedures (Exhibits 1
recommended for use in estimating and through 18) are tools for documenting
for tracking the costs of such changes. and tracking costs, determining time
There are three typical types of change impacts, and pricing change orders.
order pricing:
Part 1 deals with lump-sum changes
Lump sum, and Part 2 is for cost-plus changes.
Included in Part 2 is a Field-Authorized
Time-and-material, and Change Order Form. Designed primarily
for field use, it provides a means not
Unit price. only for tracking costs but also for
obtaining written authorization for
In a lump-sum change, the contractors additional work, when necessary. Before
original estimate for the change must adopting the procedures presented
include all items needed to do the work. here, evaluate them carefully and revise

them as necessary to meet the 3. Exhibit 3 is a Change Proposal Cost
requirements of local conditions and Summary Sheet. The sheet is used
your companys operating procedures. to summarize all estimated costs
from the detailed cost estimate
Part 1: Lump-sum (fixed amount) sheets in Exhibits 4 through 13.
changes. Lump-sum changes are Keep a copy of all change order
advantageous to the contractor for two pricing sheets and related
reasons: (1.) they allow the contractor to documentation readily available for
estimate all costs and mark-ups before review with the approving authority
work begins. If the contractor includes should questions arise.
all items necessary for the work as well
as applicable and contractually allowed 4. Itemize estimated equipment and
mark-ups, the probability of making a materials costs on an Equipment
reasonable profit is enhanced. (2.) they Cost Estimate Sheet (Exhibit 4) and
require far less tracking and paperwork a Materials Cost Estimate Sheet
in the field than time-and-material (Exhibit 5). Because changes
changes. Despite these advantages, usually involve relatively small
lump-sum changes must be handled amounts of materials, and therefore
properly to ensure that all cost and time do not qualify for large volume
impacts are properly estimated and discounts, it is suggested that all
included. The following procedures and materials be estimated using
forms will help make that handling standard over-the-counter discount
accurate and efficient. prices. Restocking charges should
be considered where credits might
Recommended Procedures be involved. Be sure to estimate
1. The key document in controlling required quantities of all items and to
change order activity is the Change calculate the materials cost subtotal
Order Status Sheet (Exhibit 1). The using the figures in the total cost
project manager should record any columns. Also consider lead times
potential change on the Change required for ordering materials and
Order Status Sheet as soon as the equipment and the potential need for
possibility of a change is identified. expediting materials and equipment,
Formal changes should be which may involve additional costs.
numbered sequentially and recorded Add to subtotals all additional costs,
on the Change Order Status Sheet. such as sales taxes, drayage
charges, warranties, start-ups, etc.
2. Prepare a Change Order Proposal
(Exhibit 2) and use it as a cover 5. Estimate all miscellaneous direct job
letter when submitting your change costs on an Other Direct Job Costs
order cost estimate to the project Estimate Sheet (Exhibit 6). Once
owner or general contractor. Be sure computed, the labor cost estimates
the proposal letter states that you on this form should be transferred to
reserve the right to modify your the Labor Summary Sheet (Exhibit
estimate if additional work not 9) and the materials costs to the
covered by the proposal is required. Change Proposal Cost Summary
Also state a time limit for the owners Sheet (Exhibit 3).
or general contractors acceptance
of the proposal if there are no time 6. Complete an Equipment and Tool
limits already specified in the Rental Estimate Sheet (Exhibit 7).
contract.
7. Complete a Vehicle Operating Cost

Estimate Sheet (Exhibit 8), including contractors use effectively. Good
all gasoline and oil costs anticipated documentation of the events leading
for each vehicle. to and supporting a contractors
contention that a change has
8. Itemize all labor costs on the Labor occurred can mean the difference
Summary Sheet (Exhibit 9). Rates, between settling a change order and
fringe benefits, payroll taxes, filing a claim. As a guide to proper
insurance, travel allowances, etc. for documentation, a contractor should,
the various labor categories should at a minimum, include the following
be shown in the matrix at the top of information on every change:
Sheet #1 of the Labor Summary
Sheets. Use items 1322 (Exhibit 9) 1. Date of discovery
and 2340 (Exhibit 10) to indicate
any applicable increases or 2. Person and/or company making
decreases to the labor estimate due discovery
to factors affecting productivity.
Once you have itemized the various 3. Detailed description of changed
labor factors, calculate and total the conditions
estimated labor costs using items
4152 on Exhibit 10. 4. Documents supporting assertion
that a change exists
9. List all subcontractors and
subcontract quotes and total the 5. Notification to owner (date and
estimated cost of subcontracts on a person)
Subcontracts Summary Form
(Exhibit 11). 6. Pertinent records and
documents, such as:
10. On an Extended Overhead Cost
Sheet (Exhibit 12), compute all Affected plans or sketches
overhead costs not included on the Daily reports
other estimate forms. Meeting minutes
Letters, notes, memos, and
11. Use the Special Inclusions and telephone
Exclusions Form (Exhibit 13) to list logs
any additional items that should be Payroll records
part of the change order, as well as Equipment reports
specific items that should be Material invoices
excluded from the change order Photographs
pricing. Be sure that items listed on Subcontractor/supplier cost
this form are referenced in either the and
Change Order Proposal Form
schedule impacts
(Exhibit 2) or a special cover letter to
Impacted schedules
the proper project authority.
12. The key to effective change order 7. Notification to subcontractors/

management is documentation. suppliers
While contractors have been
reacting to the present litigious 8. Notification to bonding company
atmosphere in construction with (if required)
more attention to documentation, it
is still not a tool that most

By using the above procedures and the procedures to ensure that your
exhibit forms, a contractors estimate for personnel follow those procedures.
a lump-sum change order should cover 4. Exhibit 17 provides a checklist of
all the necessary items and maximize FAR allowability of costs to be used
the contractors ability to recover a when pricing time-and-material
reasonable profit while at the same time change orders.
avoiding a loss in the performance of 5. Exhibit 18 provides a template for
the additional work. In addition, the the pricing of unit-price change
completed estimate forms provide a orders.
thorough and complete set of
documentation to present to the
1
contractor and/or owner during change From ConsensusDocs 200 Standard
order review and negotiations. Agreement and General Conditions
Between Owner & Contractor 2007.
Part 2: Time and Material Change 2
From AIA A201 2007 General Conditions
Orders. A time-and-material change
of the Contract for Construction 2007.
order requires that the contractor
carefully track all expenditures on a 3
From EJCDC C-700 Standard General
change while doing the work. This Conditions of the Construction Contract
requires the field personnel to keep 2007.
accurate records. The following steps
4
can help to enhance accurate From CMAA Form CMAR-3 General
recordkeeping: Conditions of the Construction Contract
Between Construction Manager and
1. Use a Field-Authorized Change Contractor 2005.
Order Form (Exhibit 14) and Work
Authorization Form (Exhibit 15) for Prepared by Paul Ficca, CPA, CMA, CFE,
all time-and-material changes to CFF of FTI Consulting, with contributions
ensure that change work is properly from Louie Wu, CPA, CFF, also of FTI
authorized and costs are tracked. Consulting. Peer review performed by:
Robert Beck, Executive Vice President of
2. Incorporate the Sample Instructions John W. Danforth Company; Michael R.
for Field-Authorized Changes Cables, Executive Vice President of
(Exhibit 16) into your companys Kinetics Systems Inc.; James Durant,
operations, modifying them as President and CEO of Trautman &
necessary. Shreve; Richard Freeman,Executive Vice
President of Stromberg Metal Works;
3. Educate on-site supervisory William Goodrum, CFO of John J. Kirlin,
personnel about time-and-material LLC; Matthew Hahr, Senior Vice President
change orders and the proper use of of John J. Kirlin, LLC; Michael Loulakis,
the Field-Authorized Change Order Esq., President/ CEO of Capital Project
Form. In particular, emphasis must Strategies; Michael Mack, Vice Chairman
be placed on the importance of of John J. Kirlin, LLC and Adam Snavely,
controlling and recording all President and CEO of The Poole & Kent
expenditures, and accountability for Corporation.
performing this task properly. There
is no reason to lose money on time-
and-material changes if your
company has established policies for
managing such changes and

(Replaces 1973 Bulletin No. 32
and 2005 versions)
File: Change Orders
Bulletin
How to Organize and Submit a Claim

Introduction Disputes Act of 1978 until certified2 as
What is a construction claim? This term required by the Act.
is widely used to describe anything from
a request for equitable adjustment (or Beyond these formal definitions, the
change order request) to a formal term claim has taken on a meaning
lawsuit demanding relief from some based on its common use in the
court or governmental agency. construction industry. According to this
However, claim has recognized meaning, a claim is a demand for relief,
definitions in our industry: usually as to cost and/or time, by a
contractor to another party, such as a
According to the American Institute of general contractor or owner. In this
Architects Glossary of Construction sense, a claim is filed only after
Industry Terms: negotiations for a fixed-price change
order fail, or after the reviewing party
A demand or assertion by one of the has formally denied the change order
parties seeking, as a matter of right, request. Thus, in the vernacular, a claim
adjustment or interpretation of Contract is equated to a dispute between the
terms, payment of money, extension of parties that remains after negotiations to
time or other relief with respect to terms modify the contract have failed. When
of the Contract (Ref: AIA Document an issue is resolved by a change order
A201.)1 to the contract, usually no claim results.
As defined by the Federal Acquisition Most change order requests do not

Regulation (FAR) Subpart 2.1, 2,101 require formal certification. However,
(b)(2): claims of over $100,000 on federal
government projects must include a
Claim, means a written demand or certification signed by the claimant with
written assertionseeking, as a matter language consistent with the
of right, the payment of money in a sum requirements of the Contract Disputes
certain, the adjustment or interpretation Act. Thus, for projects contracted under
of contract terms, or other relief arising the FAR, a claim of over $100,000 is
under or relating to the contract. differentiated from a change order
However, a written demand or written request by the required certification. The
assertion by the contractor seeking the issue of claim certification requires
payment of money exceeding $100,000 careful review and consideration by the
is not a claim under the Contract claimants upper management and
construction counsel and is not the
subject of this chapter.
As noted above, a claim typically is filed Steps to Preserve the Contractors
when negotiations to execute a change Right to File a Claim
order to the contract have not been If a contractor determines that claims
fruitful. Many contract documents will inevitably be filed on a project, due
contain critical timing clauses that set perhaps to the exceptionally poor quality
forth the time frame within which a of the construction documents or the
contractor must give formal written general contractors or owners improper
notice of a claim and further deadlines scheduling or project management,
as to when a claim must be filed in order certain steps should be considered to
to be considered by the reviewing party, preserve the contractors right to file a
such as a government agency. claim.
Contractors should pay close attention
to timing deadlines and content 1) Many change order forms used by
requirements. If they do not, claims may general contractors and owners
be dismissed or rejected out of hand by contain broad accord and
the reviewing party for failure to file the satisfaction language that seeks to
claim in a timely fashion or with the bar the contractor from recovering
proper information and in the proper time and/or costs for a change in
form. scope over and above the remedies
specifically prescribed within the
The content of a mechanical change order itself. Such language
contractors claim typically will be has been strictly interpreted and as
dictated by the terms and conditions of such, the contractor executing a
the contract or by governing regulations, change order with broad accord and
such as the FAR. The claimant should satisfaction language may be held to
carefully review all submission the bargain defined by change order
requirements in the contract to ensure scope and pricing. In the event the
that the timing and content of the claim contractor is faced with such
are in conformance with the contract language on the change order
terms. forms, the appropriate course of
action should be formulated by
Many mechanical contractors have the upper management aided by
philosophy that claims must be avoided construction counsel.
at all cost. While it is certainly desirable 2) Monthly payment applications often
to avoid distracting and time-consuming contain broad waiver language that
disputes or costly litigation, the failure of seeks to bar contractors from
a contractor to file a claim in a timely recovering unsettled claims that are
fashion may forever bar the contractor not expressly listed as exceptions on
from relief (i.e., costs and/or time the payment application form itself.
extensions) to which the contractor is Frequently, these forms are not
otherwise entitled. Before a mechanical processed by the contractors field
contractor makes a decision to delay or management and thus they are
to avoid filing a claim, the companys unaware of this waiver language. All
upper management should evaluate outstanding claims and unapproved
upper management should evaluate change orders should be expressly
thoroughly the potential risks and listed within the exceptions section
liabilities that would result from this of the payment application form
decision. every month. In the event the owner
or general contractor do not provide
an exceptions section on the

payment applications form, the preparation of a claim. The timing and
mechanical contractor should insert content of notice letters and claim
its exceptions on the form prior to documents are often provided for in the
submitting it for payment. contract and the claimant should refer to
3) In the event the project is nearing the contract prior to submitting either a
completion with claims still notice or a claim document to ensure
outstanding, the claimant should not proper content and timing.
accept final payment for the project
or execute final releases until all Typically, a claim is a demand for
claims are fully settled. specific relief or remedy and is filed after
the impacting event has occurred so
Differentiating a Notice from a that its effects are known; and after
Claim change order negotiations have failed to
A notice of an event involving a claim is provide for an equitable adjustment.
not, in and of itself, a claim. Notices and Since a formal claim document usually
claims are typically two different follows the quantification of the impact,
documents with varying content. Notice one component of a claim should be
refers to the transmission by a specificitya number of days of
contractor to another party (i.e., the extended contract performance time, an
general contractor or owner) of a amount of money for direct costs, an
document that asserts that a delay and/ amount of money for indirect costs, and
or added costs may be, or have been, other components of contract changes
encountered on a construction project. A that are being requested by the
notice is designed to alert the general claimant. If the claim does not contain
contractor or owner to a condition that specific requests for contract
requires remediation or special modification, the claim may be denied
attention. Most notice letters are written based on a lack of specificity.
when the details of the impacting event
are not fully known and the outcome in The Components of a Claim
terms of delay and added costs, if any, Proof of entitlement and quantum
is uncertain. Most contracts include normally lies with the contractor making
provisions outlining the required the claim (the claimant), meaning it is
components of a proper filing of notice. the contractors obligation to prove the
These requirements may include elements of its claim. There are several
specific description(s) of the thing or common components in a contractors
things causing the time and/or cost claim. These may include, depending on
impact, estimates of the time and/or cost the nature of the claim:
impacts, and other specific requirements A Critical Path Method (CPM)
that may be set forth in the contract. schedule impact analysis. Such
analyses can include fragnets, or
Notice letters do not typically contain the time impact analyses (TIA), a
same elements that are included in a windows analysis, and/or as planned
claim for relief. While a notice letter sets versus as-built schedule analysis to
forth a set of conditions that have support any claim for a time
occurred or may occur, usually giving extension.
the other party an opportunity to remedy Craft-level analyses showing as-
or mitigate the adverse effects of the planned versus as-built craft curves.
condition, a claim letter usually includes Inefficiency studies identifying and
the time and cost impacts of the events. quantifying losses in labor
The notice letter generally precedes the productivity.

An accounting of the direct costs contract. Contractual time limits for
arising from the claimed conditions. providing notice and for submission of a
claim are important elements to
An accounting of the indirect costs consider. The contract must be fully
arising from the claimed conditions. reviewed to ensure that a claim is in
compliance with the contract terms or, if
A narrative of the cause and effect not, why the particulars of the contract
nexus that can include a written may not apply to the claim being filed.
description of the events,
photographs, contract documents A thorough review of the contract terms,
such as letters and electronic results of the schedule and labor
correspondence, requests for productivity analyses, and damages
information (RFI), change directives, calculations should be performed before
and other proofs that demonstrate finalizing the entitlement and damages
the changed nature of the work, the portion of the claim narrative. The
resulting damage, and a summary of contract and applicable regulations
the desired relief. should be carefully reviewed in order to
ensure that the form of the claim is
The exact content and format of the consistent with the requirements set
claim should be thoroughly reviewed by forth therein, including timing,
the claimants senior management and, addressee, contents, and certification.
if appropriate, by the firms legal counsel Generally, the claim package should be
and the chief financial officer or outside transmitted to the reviewing party or
accountant. As noted, the timing, form, agency by registered mail or by other
and content of a claim can be critical means that result in a signed and dated
elements in the claims acceptance or proof of receipt.
rejection by the reviewing party.
Content and Order of the Claim
Read the Contract Before Filing a It is true that, to some extent, how
Claim seriously the claim is viewed by the
As noted above, various contract party receiving it can be determined by
documents may contain language that the professional appearance and
seeks to limit a contractors right to completeness of the claim document
recover delay time and the costs arising and its supporting exhibits. If the claim is
from delay and inefficiency. Important poorly organized, incomplete, or
time- and cost-related issues such as contains a narrative that is vague or
labor and material escalation, force confusing and lacking in compelling
majeure events such as unanticipated facts to connect cause and effect, the
adverse weather, unanticipated added claim has a greater chance of being
impacts arising from previously dismissed out of hand. However, if the
executed change orders, and other claim package is compelling in its
important concepts are frequently narrative and comprehensive in its
discussed in the contract terms. Other supporting documentation, then the
important factors such as waiver chances of an equitable settlement are
language on payment applications, full increased significantly.
accord and satisfaction language
regarding change orders, and no The content and order of the claim
damages for delay3 clauses that should be designed to compel the
attempt to limit time-related cost impacts reader, by the weight of the facts, to
for delays may be included in the adopt the claimants position and to

issue an equitable adjustment to the narrative: a chronological and sequential
contract. Thus, the claimant should presentation of the events; and
include in the claim package a addressing the questions of who, what,
comprehensive and comprehensible where, when, why, how, and how much,
narrative that sets forth the bases of the as appropriate. Specificity is key to a
requests for remedy that can include properly constructed claim document.
both an extension of time and added
costs. If the reader cannot reasonably The damages portion of a claim may
navigate through the claim or include such components as:
understand the basis of the demand, a
rejection of the claim can be expected. Days of delay and the attendant time
extension request;
Addressing the claim to a specific
person and/or entity may be of vital Costs for added performance time
importance depending on the jurisdiction due to delays (field and home office
in which the claim is submitted. This overhead costs)4;
consideration is in addition to the time
restrictions for filing a claim that may be Direct acceleration costs (payroll
contained in the contract or other differential costs for overtime, shift
governing regulations. For instance, work, or added supervision and
public works contracts in some equipment attendant to an increased
jurisdictions require that, in order for a crew size);
claim to be validly served, it must be
addressed to a specific individual, within Indirect labor inefficiency costs such
a specific department, within a specific as overtime inefficiency, crew
time frame. Copies of the claim also disruption, stacking of trades, or
may be sent to other project-related other labor productivity factors;
individuals, such as the project manager
or resident engineer, but to be valid, the Labor wage rate escalation;
claim must be transmitted to the
specific, named party listed in the Material cost escalation;
contract documents. When a contractor
is contemplating a claim, in addition to Extended warranties;
attention to the content of the claim
itself, careful attention must be paid to
Equipment inefficiency;
the contractual and regulatory
requirements of filing a valid claim.
Added detailing or drafting/building
information modeling (BIM) and
Typically, a summary stating the basis
schedule update costs;
of the claim is essential. This summary,
or claim narrative, should lay out the
contractual foundation for making the Supervision or management added
claim and for the resulting damage. It to mitigate labor inefficiencies or to
should directly connect the basis of the process a large quantity of scope
claim to the resulting damagesthis is changes;
called the cause and effect nexus. A
citation to contract and/or schedule Subcontractors claimed amounts;
requirements is usually appropriate in
the summary or narrative. It is important Finance charges;
to consider two general concepts when
preparing the summary or claim Bond costs; and

Overhead (unless claimed delays are excusable only, meaning that
separately) and profit. the claimant is relieved from liquidated
damages but receives no compensation
Once the particulars of the issues have for the delay. Some delay may be a
been introduced in a comprehensive combination of nonexcusable,
and compelling manner so that that the excusable, and compensable time.
reviewer is prepared to assimilate the
facts, then the documentation and A compensable schedule analysis is
calculations can be presented to support normally considerably more complex
the claim narrative. than a schedule analysis focusing only
upon excusable delay. For an excusable
Sample Claim Narrative Summary delay analysis, the claimant must prove
A claim narrative can be provided in that it was not the sole cause of critical
summary form, as shown on the next path delay. For example, if the claimant
page, as long as the summary denotes caused the project to finish late by 30
each major category of impact. The days through its own fault, and another
documentation supporting each party (e.g., the owner or the prime
category can be provided in contractor) independently caused the
accompanying exhibits. However, a project to finish 30 days later than
more exhaustive and comprehensive allowed by the contract, the claimant
written claim narrative is usually would still be entitled to a 30-day
presented. A comprehensive claim excusable, non-compensable delay.
narrative can provide a chronologically-
ordered description of the impacting However, in order for a compensatory
events with citations to the drawings, analysis to prevail, the claimant must
specifications, the contract or other demonstrate through a CPM scheduling
pertinent documents such as letters, analysis that its own delays, if any, were
purchase orders, or site photographs. A not controlling critical path delays and
well-written, comprehensive claim as such, did not independently or
narrative can lead the way for expanded concurrently cause the project to finish
understanding of the claimants position late. A compensable delay can have
by the reviewer and can also result in an many facets that must be analyzed and
equitable adjustment to the contract. It is explained and is frequently a very
much more economical for the complex analysis best assigned to
contractor to expend appropriate scheduling experts. The contract terms,
resources in the preparation of its claim accepted practice in the industry,
narrative and supporting documentation combined with a technically competent
than to later become involved in costly CPM schedule analysis generally
litigation because the claim was denied determine whether project delay is
due to lack of supporting compensable, excusable, or in some
documentation. cases, non-excusable.
Also note from the sample on the next In addition to the claim narrative,
page that the claim contains elements of supporting documentation can be
compensable delay and loss of labor provided as exhibits to assist the
productivity. A compensable delay is reviewer in reaching the desired
one that entitles the claimant to conclusion. If a schedule analysis has
compensation for each day of extended been performed to support a claim for
general condition costs. All delays are an excusable and/or compensable time
not necessarily compensable. Some extension,5 summaries of this analysis

can be included in the claim, as shown inefficiency is difficult. In computing a
above. labor inefficiency claim, exactness is not
a requirement. However, connecting the
If the claimant has included a causes with the effects is generally a
component of damages arising from necessary element in any claim
labor inefficiencies caused by the submission for loss of labor productivity.
impacting event, the computations for There are indicia of labor inefficiencies
this component can be added as an that many experts look for when
exhibit to the claim. There are several preparing a labor inefficiency claim.
methods of quantifying a contractors These indicia can include: unexpectedly
loss of labor productivity. These include high crew sizes, fluctuations in crew
the: total cost or modified total cost sizes, disruption in the productive flow of
method; measured mile method; and crews, a high percentage of scope
industry study method, such as by the changes as a ratio of changes to base
use of the MCAA labor inefficiency contact labor hours, unanticipated
factors. An example of an inefficiency stacking of trades, unreasonable
exhibit supporting the claimants loss of limitations to site access, and many
labor productivity component may other categories of impacts. Once the
appear as on page 9. causes are established, then the
claimant must estimate or calculate the
It is well acknowledged in the resulting damages in terms of lost labor
construction industry that proving labor hours.
Field labor is not the only type of labor ensure that this component of
that may be susceptible to inefficiencies. construction is not improperly omitted
The productivity of coordination, or the from a delay and/or inefficiency claim.
BIM6 process, can also be adversely
affected by events on the project. Claims for loss of labor productivity can
Coordination, or BIM labor, can become be quantified by several means as
inefficient if the plans and specifications described above. A more exhaustive
are defective, leading to excessive clash discussion regarding the identification
identification and remediation. Often, the and quantification of loss of labor
coordination process is adversely productivity claims can be found in the
affected by an excessive number of chapter detailing How to Use the MCAA
requests for information that slows the Labor Factors.
progress of the BIM activities and
makes such activities inefficient though Furthermore, many contractors
the effects of piece-mealing of the recognize a phenomenon sometimes
coordination work and other disruptions. called equipment inefficiency.
Coordination labor should be carefully Equipment, in and of itself, is not
analyzed by the claimant in order to inefficient.7 The labor to use the
equipment may be made inefficient by a
host of causes. Presumably, the labor
required to operate a piece of
equipment would be evaluated in a
typical labor inefficiency claim. However,
due to labor inefficiencies, the time
required to use a piece of equipment
may become elongated on the project. If
it can be shown the a piece of
equipment (either rented or owned by
the claimant) was required to be on site
longer than planned, or if equipment had
to be added to the project due solely to
the inefficiencies claimed for the labor
portion of the project, the attendant
costs can be recovered in the claim.
It is therefore important to record

planned and actual equipment usage on
1) The excusable delay period
the project to determine if inefficient
represents a suspension of the work,
conditions have caused an unplanned
not just an elongation of the duration
increase in the cost of equipment.
of work activities, effectively placing
the claimant in a stand-by mode;
Damages calculations are an important
component of a claim. As noted, the 2) The stand-by period is of an
claim should contain a sum certain (i.e., uncertain duration; and
a specific dollar amount for damages)
that is being sought by the clamant as a 3) The claimant can demonstrate that it
result of the impact event(s) described did not obtain, and could not have
in the narrative. Damages calculations reasonably obtained, new work to
must conform to accepted accounting absorb the home office overhead not
practices and to the governing being absorbed by the project on
authorities such as the contract or the which the claim is being filed due to
FAR, as applicable.8 The damages the suspension of work.
portion of a claim also may be the
subject of a review by the contractors The use of allocation-related formulae,
counsel and its chief financial officer or such as the Eichleay9 formula, is
accountant, particularly if a component common in computing a contractors
for extended home office overhead is home office overhead for the purposes
included. The claimant should anticipate of including those costs in a delay claim.
that a claim will be the subject of a full The Eichleay formula allocates a
audit and should prepare accordingly. contractors corporate home office
overhead to a particular project and then
Home office overhead as a component computes the daily home office
of a delay claim may or may not be overhead allocable to that project. The
recoverable as a matter of contract daily home office allocated rate times
provisions, or as a matter of the current the number of days of compensable
trends in reported cases. At the time of delay equals the home office overhead
this writing, the ability to recover component of compensable delay claim.
unabsorbed home office overhead is
limited to those situations where the Other methods of computing home
contractor can demonstrate that: office overhead have been utilized by

contractors with varying degrees of carefully review the bases for denial and
success. The recovery of home office make a determination as to any
overhead is challenging due to the corrections that may be needed to the
limitations currently imposed by the original claim submission. It is possible
courts and boards and the decision by that the reviewer may find disallowed
the contractor whether or not to seek costs or raise questions as to
recovery of home office overhead costs entitlement or the factual events
should be aided by the advice of the described in the claim. The claimant
contractors counsel and accountant. should timely and constructively
respond to those issues with corrections
On public contracts, expect to be or explanations as to the issues raised
audited once the claim is submitted. by the reviewer. If a constructive
Audits can be performed by such dialogue can be established between
agencies as the Inspector Generals the claimant and the reviewing party, the
Office, the Defense Contract Audit potential of an equitable settlement of
Agency, or other audit groups affiliated the claim increases.
with the governmental department with
which the contract was executed. A In some cases, a reviewer will dismiss
public contract audit of a contractors the claim out of hand and without any
claim is not a mere technicality. Many reasoned basis for the rejection.
audits probe the contractors financial Further, the rejection may not be
and accounting records for possible accompanied by a written or oral
discrepancies between the claimed rejoinder or rebuttal; simply the other
amounts and the entries shown in the partys deafening silence. The
contractors books and records. While contractor should take written exception
simple entry or arithmetic errors can be to this sort of constructive denial and,
corrected or explained, audits can have where appropriate, file an appeal in the
serious ramifications to the claimant manner prescribed by the contract.
should the audit uncover apparent When a claim is formally denied, it
improprieties in the claimants books would be prudent to have the claim and
and records as they are compared with its denial reviewed by a construction
the claimed damages. Apart from an attorney to ensure that the form of the
audit of the claimants monetary original claim was correct (if this step
damages, an audit can challenge was omitted prior to the original
methodologies utilized by the claimant in submission of the claim) and to prepare
the preparation of the claim. Audits can the appeal of the denial.
be far reaching and have significant
impact on how the claim is processed or A deemed or constructive denial of a
if the claim is simply denied in its claim occurs when the party receiving
entirety for lack of support or proper the claim does not respond to the claim
record keeping. in any fashion, or in the prescribed or
reasonable amount of time. As noted, in
Actual or Deemed (Constructive) some cases the recipient of the claim
Denial of a Claim may have no response at all. It is
Regardless of how well a claim is usually appropriate to expect a
prepared, some claims will be denied. response within 30 to 90 calendar days
When a claim is denied with a written or of the date of submission of the claim. If,
oral evaluation or rebuttal, it is after a reasonable period, or the
incumbent upon the claimant to contractually prescribed period, of time
has elapsed without a response to the
claim, a second demand letter should be

transmitted requesting a response to the only suitable resolution available is that
claim within a reasonable (i.e., 30 days) prescribed in the contract documents. If
period of time. If no response is the contractor has made a decision not
received, the claimant, aided by to file a claim in accordance with the
counsel, may decide to file a notice of terms of the contract, its rights and
deemed or constructive denial of the remedies may have been irretrievably
claim. In this fashion, the claimant has waived and thus, its ability to be
documented its reasonable assumption equitably compensated may have
that the reviewing party has passed by.
constructively denied the claim. If this
course of action is taken, it may trigger The proper and timely preparation and
contract terms and other issues may submission of a claim can be viewed
arise, such as having to constructively simply as prudent management. A claim
accelerate the work to overcome any is an avenue to receive a remedy that is
claimed excusable delay. provided for in most contracts. The filing
of a claim is not, on its face, an
The concept of a deemed denial of a adversarial act. It is a business decision
contractors claim is principally a matter that is recognized as the contractors
of federal contracts, such those right under most contracts. It may, in
executed by the General Services fact, be a business obligation to ensure
Administration or the U.S. Army Corps fair and equitable payment for work
of Engineers. That does not mean that if performed over and above the base
a non-federal owner or prime contractor contract scope of work or work
refuses to acknowledge a contractors performed in a most costly and
claim, the general concept of unanticipated manner.
constructive denial does not apply.
1
However, the issue of deemed denial The Architects Handbook of Professional
can be a complex legal issue and may Practice Volume 3, AIA Press.
be based on the terms and conditions of 2
the contract, thus this matter is the The issue of claim certification is not the
subject of this chapter and is a topic that
subject of careful consideration by
should be addressed by the claimants
experienced construction counsel. construction counsel.
Conclusions 3
Contact language that attempts to limit a
A mechanical contractor should carefully contractors right to make a claim for a
assess all options when considering certain element of cost or time impact may
whether or not to file a claim. However, not be applicable in all circumstances. By
way of example, in some cases a no
the time restrictions contained in many
damages for delay clause may not have its
public and private contracts do not allow intended efficacy, given actual
the contractor significant latitude as to circumstances on a project. However, such
when a claim can be filed, thus the clauses cannot be ignored by the claimant
contractor is normally forced to make and must be carefully considered when a
this decision promptly. Often, a claim is prepared. Review of the contract, in
contractor decides not to file a claim conjunction with the claim, by the
believing that, somehow, disputes will contractors counsel is advised in order to
simply resolve themselves by working ensure harmony between the requirements
out the differences on the jobsite. This of the contract and the claim being
submitted.
can lead to unanticipated results when
the contractor comes to realize that the 4
The components of a compensable delay
claim (i.e., extended field office overhead)

are frequently large in number and can CFCC of FTI Consulting with peer review
include the daily costs of on-site project performed by: Robert Beck, Executive
management and supervision, the daily Vice President of John W. Danforth
costs of office and storage trailers and Company; Michael R. Cables, Executive Vice
warehouses, trucks, fuel, telephones, and President of Kinetics Systems, Inc.;
other time-related costs. In certain James Durant, President and CEO of
instances, home office overhead may be Trautman & Shreve; Richard Freeman,
recoverable. What may or may not be Executive Vice President of Stromberg
claimed as to delay costs is frequently Metal Works; Matthew Hahr, Senior Vice
prescribed in the contract, the FAR,
President of John J. Kirlin, LLC; Michael
generally accepted accounting procedures,
Loulakis, Esq., President/CEO of Capital
or in other related documents. Refer to How
to Identify and Manage Change Orders for Project Strategies; Michael Mack, Vice
more specific information on damages Chairman of John J. Kirlin, LLC and Adam
calculations. Snavely, President and CEO of The Poole
& Kent Corporation.
5
For a more detailed review of the methods
of schedule impact analysis, refer to the
chapter on Time Impact Analysis
Measuring Project Delay.
6
Building Information Modeling, usually a
three dimensional model of the project
showing the elements of the work by the
various trade contractors. The BIM process
generally occurs at the early stages of the
project and labor overruns may be not be
properly included in an inefficiency analysis.
The claimant should be careful to assess
BIM labor overruns to determine if such
overruns were occasioned by inefficiencies
caused by defective plans and specifications
or other non-contractor caused impacts.
7
It may be argued that a newer and more
fully featured piece of equipment is more
efficient or cost effective when compared
with an older or less robust model of the
same item. However, as it is used herein,
efficiency is a function of output over input
for a given piece of equipment.
8
For a more detailed review of the methods
of quantifying impacts, refer to the chapters
on Time Impact AnalysisMeasuring
Project Delay, How to Identify and Manage
Change Orders, and How to Use the
MCAA Labor Factors. The pricing format for
a change order request and a claim are
essentially identical.
9
Reference Appeal of Eichleay Corporation,
ASBCA No.5183, 60-2 BCA 2688 (1960).
Prepared by Paul Stynchcomb, CCM, PSP,

CFCC and Charles Choyce, PSP, PMP,

(Replaces 2005 version)
File: Change Orders
Bulletin
Time Impact Analysis

Measuring Project Delay
Introduction specifications carefully before any work
Schedule delays are a frequent is performed on the project. It is not
occurrence on many construction unusual to find terms and conditions
projects and can have immense cost such as:
consequences. Without the remedy of a
time extension, mechanical contractors Contractors failure to submit its time
are often forced to work overtime and impact analysis, with all supporting
may be required to increase crews and documentation and within the time
supervision to mitigate delays, even period provided for in this contract,
when caused by others. Mechanical will constitute a full and final waiver
contractors may also be assessed of the contractors right to an
liquidated damages for delay, along with extension of time arising from the
possibly having to defend against delay alleged changed condition. Absent
claims from the prime contractor or the timely and complete submission
other trades. In some instances, a of the contractors time impact
mechanical contractor is not made analysis as required by this contract,
aware of delaying events until it is too it is mutually agreed that the alleged
late to remedy the delay without changed condition has no effect on
incurring added costs that can be the critical path of the project
substantial. schedule.
The purpose of this bulletin is to alert The method of delay impact analysis
mechanical contractors to several of the described in this bulletin is known as the
key elements of schedule usage and the contemporaneous windows method of
development of time impact analyses to analysis. The windows method
identify and quantify project delays. An measures delay at specific time
important first step in this process is the windows throughout the project. The
mechanical contractors thorough review contemporaneous windows in time used
of the contract documents. The for this type of analysis are usually the
specifications generally contain the dates of the monthly update of the
scheduling requirements for the project. project schedule. While there are other
Within this section of the specifications methods of construction delay analysis,
is often found the provisions governing such as the impacted as-planned, the
timely notice and the requirements for a as-built, or the collapsed as-built
schedule impact analysis. Read the methodologies, none offer the ability to
general conditions of your contract evaluate the project at specific windows

of time throughout the duration of the activities are analyzed to determine how
work. Moreover, some methodologies, each interrelates to other activities on
including the impacted as-planned the overall project with regard to
technique, have been generally performance dates. Logic restraints are
discredited or strongly critiqued by created between the activities to create
courts and boards in reported cases. the CPM schedule network, which is the
Many modern contract specifications graphic representation of the overall
require the contemporaneous windows schedule showing the activities and the
method of delay impact analysis. This interconnecting logic restraints. The
bulletin will describe this method of CPM schedule should demonstrate the
analysis using the terms employed by most efficient and profitable means of
contract specifications that are completing the project within the
encountered on many public and private performance time set forth in the
construction projects. contract.
Terms and Concepts Used in Critical Paththe longest connected

Delay Analysis chain (or chains, in the case of multiple
Activitythe basic unit of work in a critical paths) of activities in a CPM
construction schedule. The activity is the schedule that, if delayed, will have an
unit of work1 into which the overall equivalent impact on the end date of the
project is divided for the purposes of project.
tracking and managing time and labor
during the construction process. The Total Floatthe number of days an
overall project is divided into activities activity can be delayed from its earliest
during the job planning phase. Each start date, or its earliest finish date,
activity is defined by specific geographic without causing delay to the completion
or contract boundaries such as phase, of the project. Activities on the critical
building, floor, and sectors; and by other path have zero (0) total float.2 Total float
designations, such as column lines, is a computation that is derived from the
systems, rooms, crew codes, or other CPM schedule network and is
definitions that will allow specific dependent on the duration of the
identification of the work on the contract activities and the logic restraints that are
drawings. Each activity is given an input by the scheduler. Total float can
estimated duration and is linked to other change with each progress update or
activities in the schedule by the use of modification made to the original
logic restraints. Logic restraints (i.e., schedule.
finish to start, start to start, finish to
finish, and start to finish) define the Most contract specifications contain a
relationship between activities in a shared total float clause. Such clauses
construction schedule and are input by state that total float is a commodity to be
the scheduler to develop the overall shared between the parties to the
Schedule Network. contract. In the case of a delaying event,
a time extension will be granted only to
Change Orders Critical Path Method the extent that the delay first consumes
(CPM) Schedulinga formalized, and the entire available total float and,
usually computerized, method of thereafter, causes a delay to the critical
construction scheduling. This dynamic path. Impact events, which only
construction management tool requires consume positive float when analyzed in
the development of activities and the CPM schedule, will usually not result
interconnecting logic restraints. The in the granting of a time extension.

Time Impact Analysis (TIA)a series schedule should not pose a problem.
of activities and logic restraints that The prime mechanical contractor is
define what is known about a changed usually tasked with the same type of
condition,3 such as work added by a overall scheduling responsibilities as
scope change or work occasioned by a would a typical general trades contractor
differing site condition. As the conditions or construction manager. In such cases,
change, or as more information is the prime mechanical contractor will be
known about the potential delay, the TIA fully aware of the requirements of the
must be modified (evolved). The TIA project schedule and will know when
has become a term of art in the industry TIAs are required to be developed and
and is referenced in many contract input into the overall project schedule.
specifications regarding project
scheduling, notice, and delay analysis. The majority of mechanical contractors,
TIAs are input into the CPM schedule as however, are in the role of subcontractor
soon as the changed condition is to a prime contractor or construction
recognized and are inserted into the manager. In such cases, the mechanical
CPM schedule update with a status, or subcontractor may not have unfettered
data date, closest in time to the date of access to the prime contractors
the initiation or discovery of the potential schedule. When that is the case, the
impact event. mechanical subcontractor must take
some affirmative steps regarding
Fragnetanother term of art in the participation in the scheduling process.
construction industry having the same It is recommended that the following
definition as the TIA. The fragnet is a minimum steps be followed on every
fragmentary portion of an overall project project:
CPM schedule network that depicts the
activities and logic associated with a Request the opportunity to
potential schedule impact. The gapless participate in the development of
evolving fragnet is a term of art that the project schedule.
describes a process of identifying,
defining, and developing over time, the It is essential that the mechanical
discrete activities that form a potential subcontractor request that it be given a
impact to the project schedule. full and complete opportunity to
Maintaining contemporaneous participate in the development of the
documentation supporting the details of overall project schedule prepared by the
each delay activity is important in prime contractor or construction
developing and supporting the TIA, or manager. Furthermore, the mechanical
gapless evolving fragnet. The terms subcontractor may, from time to time, be
TIA and fragnet will be used asked by the prime contractor to review,
interchangeably herein. or to provide input into, the overall
project schedule. The mechanical
The Project Schedule contractor should respond competently,
While this bulletin does not cover the comprehensively, and in a timely
means and methods of CPM schedule fashion to such requests.
development, updating, and
maintenance, some commentary Request electronic copies of the
concerning the scheduling process is project schedule and all updates.
useful. If the mechanical contractor is
also the prime contractor on the project, It is often difficult, if not impossible, to
the development and control of the conduct a meaningful schedule review
using only a paper copy of the project

schedule or updates thereto. Thus, the of the CPM schedule. The absence of
mechanical subcontractor should these vital logic restraints can create
request in writing a magnetic media false float5 which, in the event of a
copy4 of the prime contractors baseline delay, may improperly consume the
schedule and each progress update impacts when a TIA is inserted into the
thereto. The mechanical subcontractor project schedule. When mechanical
is then able to perform a much more crew and equipment restraints are
detailed and thorough review of the missing, a delay impact may show no
prime contractors schedule. On public delay computation in the project
projects, when requests for the schedule due to false float. In fact,
electronic scheduling files are denied by because of the lack of crew and
the owner, construction manager, or equipment restraints, the mechanical
prime contractor, such files can subcontractors activities may become
sometimes be obtained through a improperly stacked in the schedule in a
Freedom of Information Act (FOIA) or manner that was totally unanticipated, in
public information act request filed by turn, leading to unplanned increases in
counsel. crew or equipment requirements and
their associated inefficiency and
Timely submit any TIAs in financial impact to the mechanical
accordance with the contract subcontractor.
documents.
Contractual Obligations to
With or without the prime contractors Submit the TIA
assistance and cooperation, the Most current contract specifications
mechanical subcontractor must submit contain requirements that the
its TIAs in accordance with the contractors submit a TIA, or fragnet
requirements of the specifications. The analysis, in order to demonstrate the
fact that a prime contractor may not impact of changes or delays to the
utilize the TIA, or properly insert the TIA project schedule. Since most prime
into the overall project schedule, does contractors include flow down
not relieve the mechanical subcontractor provisions6 in their subcontracts with
from fulfilling, to the fullest extent mechanical subcontractors, the
possible, its contractual obligations, if so mechanical subcontractor bears the
specified, to develop and submit TIAs same, or even a greater,7 burden as
for events affecting the work of the does the prime contractor in order to
mechanical contractor. demonstrate the impact of changes,
delays, and other disruptions to its work.
Utilize crew and equipment An illustrative example of the clauses
restraints to avoid False Float that typically appear in many contract
and possible stacking of trades or specifications is the following:
crew size inefficiencies.
Contractor shall submit its time
False float is an important concept to impact analysis within seven (7)
grasp for the mechanical contractor calendar days after the initiation of
because the presence of false float may the event that causes the alleged
result in understated time impact delay. The seven calendar day period
analysis. Many contractors do not take shall begin at the point in time when
into consideration the limitations of the delaying event was known, or
available crews or equipment items, should have been known, to the
such as cranes, and fail to insert crew contractor. The contractor shall
and equipment restraints into the logic

submit its time impact analysis in the Contract conditions, payment
form of a CPM schedule fragnet applications, and change orders
analysis that will be inserted into the should be reviewed by the
approved schedule update closest to contractor and/or its legal counsel
the initiation of the delaying event. to avoid waiving valuable rights.
Failure of the contractor to submit its
time impact analysis within the time With more and more contract
limits set forth herein will result in a specifications being written with strict
waiver by the contractor of any waiver clauses regarding notice and
entitlement to an extension of time to TIAs, it is a wise and prudent investment
the contract. By failing to submit its for the mechanical contractor and/or its
time impact analysis in the format construction counsel to review carefully
and within the time requirements the contract general conditions,
described herein, the contractor payment application forms, and change
agrees that no time extension is order forms.8 Such a review at the
required by the alleged change in outset of the project is critical to alerting
scope or event and forevermore the project management team as to its
waives its rights to claim for such responsibilities and obligations
delay or impact of any sort or type. regarding these crucial issues.
Notice requirements for TIAs Development of the TIA

should be strictly followed. As described herein, many contract
documents (usually a section in the
The time element imposed by the scheduling specifications within the
contract is dependent upon the specific general conditions) require that fragnets,
projectsome specifications allow as or TIAs, be inserted into the project
little as three (3) calendar days, some schedule as delay events are known.
as much as thirty (30) calendar days or These TIAs are to be placed into the
more. Notwithstanding the relatively update of the schedule closest in time to
short period allowed by many the notice to proceed of the changed
specifications to provide written notice condition, or in the update closest to the
and a TIA, such clauses may be start of the impact of the changed
enforceable under the controlling laws condition. Since most TIAs are prepared
and, thus, cannot be taken lightly by the and submitted before all of the
mechanical subcontractor. To vault the potentially delaying events are known,
dual hurdles of delay identification and the TIA must be evolved from update to
timely notice is a formidable task for the update. The steps to prepare an
mechanical contractor. It is foolhardy to evolving TIA are generally as follows:
rely upon assurances from the prime
contractor or construction managers Draw out the TIA logic, in detail,
employees that such requirements will to include all discrete activities
not be enforced or that issues of delay that are known at the time the
and associated costs will be dealt with potential impact is identified, or
at the end of the job. In order to can be reasonably predicted as a
accommodate the rigid requirements of result of the impact event.
many current specifications, the
mechanical subcontractor must strictly Such information may include the
adhere to the CPM scheduling issuance of an RFI, the waiting period
techniques described in the contract for a response, the analysis and pricing
specifications. of the response and a forecast of

change order processing time, The existing base contract
procurement of any materials and activity(ies) that are, or may be,
equipment required by the impact event, affected by the TIA must be
and the actual work to address the identified. The TIA is then
event. Each of these items should be logically tied to the affected
designated as a separate activity in the activity(ies) in the CPM schedule
TIA. to determine what, if any, impact
has been caused by the event.
Ensure that there are no
unidentified gaps in time within The mathematical analysis of the
the fragnet. schedule update can be rerun and the
scheduler can determine if the fragnet
From the start date of the fragnet event has changed the critical path by
until it finishes, or is forecast to finish, comparing the pre-impacted schedule
every significant period in time must be with the impacted version.
identified as an activity within the TIA.
For instance, if the contractor must wait Each succeeding month after the
for five (5) weeks for the owners first update into which the TIA has
response to an RFI, then the five (5) been inserted, the TIA can be
week period would be identified as an evolved with information as it
activity, such as Contractor Waiting for becomes available regarding the
Owners Response to RFI No. 50. The scope and timing of the TIA
TIA must be gaplessevery day must Activities.
be accounted for by an activity
describing the events of each time Although the step of forecasting
period, whether waiting for a response, activities in the evolving TIA (also known
negotiating the change documents, or as the gapless evolving fragnet) may
actually performing the changed work be somewhat subjective, it is essential
scope. in meeting many of the specification
requirements now being included in
The actual start and finish dates contracts. Contemporaneously,
for historical portions of the TIA maintaining notations or other records
(those activities that have been that support these forecasts of future
completed) should be verified events that are depicted in the TIA can
against the project records and provide an important historical record. In
the source of all actual dates and addition, including the latest information
durations should be noted for regarding the TIA in the most current
future reference. schedule update allows the mechanical
contractor to manage the work to
Starting with the first update in mitigate the impact of the delay.
which the impact of the fragnet is
identified, the TIA should include As the contractor looks forward in
those portions of the fragnet that the CPM schedule to the point at
are known at the time of that which the potential delay event
update as historical data. All will affect the base contract work,
forecasted information (activities it is important to tie the ending
not yet accomplished that are part activity of the TIA into the earliest
of the TIA) should be entered into base contract activity which could
the schedule update as new be affected by the TIA logic.
activities.
This tie point from the TIA into the base

contract schedule is extremely important base contract work as well.9 This loss of
and should be established with care. productivity will be manifested in either
With regard to new scopes of work added labor to overcome the effects of
arising from the TIA that must be the inefficiencies, overtime, or longer
defined as activities, it is essential that activity durations that can result from
these new activities be sequenced inefficiency.
within the existing logic of the schedule
so as to maintain the contractors For example, if a base contract activity
planned crew restraints. of 18 planned work days for the
installation of piping branches is
With each update, the scheduler expected to sustain a loss of productivity
can note the effects of the various of 20 percent caused by stacking of
TIAs on the overall Critical Path of trades because it will be performed in a
the project schedule. different working environment resulting
from the time slippage demonstrated by
The Critical Path impacts, if any, will a TIA, the duration of the activity can be
evolve along with the input and updating increased to 22 work days (18 x 1.2). By
of the TIA data. In fact, the impact of the including this consideration, where
TIA on the Critical Path may change possible, in the overall TIA, the
from month to month as other job mechanical contractor may be more fully
conditions also change. compensated for impacts arising from
changes in scope. How to Use the
If the impacts of the TIA are MCAA Labor Factors explains how the
expected to include labor estimated durations of schedule
inefficiencies, these estimated activities can be impacted using the
inefficiencies can be forward inefficiency factors contained in Factors
priced using Factors Affecting Affecting Labor Productivity.
Labor Productivity and
How to Use the MCAA Labor If a change order is executed
Factors. regarding an evolving TIA (i.e., is
executed before the delay impacts
To the extent that the mechanical are actualized), the contractor
contractor must, or desires to, include all should reserve its rights as to any
of the potential impacts in a forward future impacts of the evolving
looking TIA, the contractor must delay events.
consider if the TIA will impact the
productivity of the base contract work. If Assuming that the delay event is
the contractor will be required to bring in recognized as a change in scope to the
new workers that may be unfamiliar with mechanical contractors contract, a
the project, work overtime, or work in an formal change order may be executed.
unanticipated manner concurrently with The change order form may contain full
other trades, the scope change work accord and satisfaction language that is
and the base contract work could be designed to bar the contractor from
adversely affected in terms of labor receiving any further compensation
productivity. In such cases, the (time and/or money) arising from the
mechanical contractor should reference change. If the mechanical contractor is
the bulletins on Factors Affecting Labor required, or decides, to execute such
Productivity and How to Use the change order forms before the full effect
MCAA Labor Factors to estimate the of the TIA is known, it is essential that
potential loss of labor productivity to the the estimates for future impacts of the
scope change work and possibly to the

TIA to the schedule be very carefully Note that this example contains
assessed.10 Once the mechanical properly developed CPM schedule
contractor executes a full and final activities that describe discrete
change order, it may be difficult or scopes of work within a definable
impossible for the contractor to later geographic area of the project. The
make a claim for added costs arising ability to identify the limits of a
from the change, such as longer than schedule activity by referring to the
anticipated procurement times or for contract drawings is essential in the
inefficiencies arising from a disruption to proper assignment of potential
the crews performing the work. The impacts arising from the insertion of
aforementioned steps that describe the the TIA. Unless the scope of work in
TIA process are graphically depicted in the schedule activities is known, it
this bulletin and they are as follows: will be difficult to identify where, in
the CPM schedule logic, a potential
Step 1: The process starts with a impact event restrains specific base
properly developed CPM schedule contract activities.
(one which includes a reasonable
level of detail, mechanical crew, and Step 2: In this example, assume that
equipment restraints). A faulty CPM the mechanical contractor discovers
schedule11 will serve little purpose in a differing condition or design
managing the project or in analyzing deficiency. By way of example,
the effects of changes as they occur. assume that structural elements of
The graphic in step 1 shows a the building conflict with the physical
portion of the base contract work in location of major mechanical
a mechanical equipment room equipment in a mechanical room.
depicted in a CPM schedule format. The mechanical contractor prepares

and submits an RFI upon piping.
discovering this condition and must
await the owners response. Note Step 4: The TIA has been
that, in the example shown in Step evolved to the extent that the
2, the contractor has prepared a TIA mechanical contractor can tie the
starting with an activity that TIA logic into the base contract
describes the submittal of the RFI, activity(ies) in the master CPM
the period awaiting a response, and schedule. In Step 4, the TIA
the date on which the response was activity for equipment relocation
received; all of which are historical for 10 days will be performed by
dates in this example. However, a separate rigging crew and thus
from this point forward, the can begin as soon as the change
contractor may not know the scope order is approved. However, the
of the change nor does the additional 10 days of work
contractor have authority to proceed associated with relocation of the
with a modified scope of work. branch piping will be performed
Therefore, in this TIA example, the by the mechanical contractors
contractor has estimated a period of existing piping crew. Therefore,
20 work days for the owner to define the TIA activity that describes
the scope of the changed condition the added work for CHWS/R
and agree upon a cost for the added branch piping must be inserted
work. Having complete and detailed within the existing crew flow12
information concerning all of the for the piping work.
elements of a TIA is not a condition
precedent to the development of an In this manner, the schedule will
evolving TIA. maintain the planned flow of the
crews and will not depict added
Step 3: Within the next update crews that the contractor did not
period, the TIA is evolved by the anticipate. The failure to
mechanical contractor. By integrate TIA activities into the
schedule update No. 2, as existing logic with regard to crew
shown on the graphic, the flow may result in false float and
mechanical contractor and no impact, or incorrectly
owner have defined the modified attenuated impact, to the CPM
scope of work and the contractor schedule.
has received a notice to proceed
to perform the scope change. By inserting the TIA activity that
The new activities are added to is to be performed by the base
the TIA and now sufficient contract crew (in this graphic
information is available for the example, the added work for
mechanical contractor to relocation of the CHWS/R
understand what work must be branch piping) within the existing
accomplished in the field to carry crew flow, the dependent activity
out the scope change. As such, of CHWS/R piping drops to the
the contractor has added the chillers and pumps is impacted
forecast for the required by 10 work days. To the extent
equipment relocation for 10 days that this base contract work was
and has identified 10 days of on the critical path of the CPM
work that must be added to the schedule, the mechanical
base contract work for the contractor would be entitled to a
relocation of CHWS/R branch time extension of 10 work days,

or 14 calendar days. This time some cases this means that the
extension could be both mechanical contractor may have to
excusable and compensable. prepare its TIAs without the assistance
or cooperation of the prime contractor.
Conclusion That notwithstanding, in todays litigious
While it would be desirable for all of the environment, the mechanical contractor
impact events to become historical cannot afford to ignore any of the
(actualized) before a change order is requirements contained within the
initiated to cover the effects (costs and general conditions of the contract and
time) of a delay impact, the current must take every reasonable step to
specifications in wide use today attempt preserve its right to be fairly
to provide a means for scope changes compensated for impacts and delays.
to be fully executed early in the life of a 1
time impact so that all of the time and A unit of work includes all elements of
field installation as well as submittal
cost impacts are included in the change
preparation, engineers submittal review,
order. This goal, if achieved, can reduce and prefabrication.
the incidence of after-the-fact claims
that are submitted at the conclusion of 2
It is possible for the most critical path to
the project. If properly and cooperatively have positive float, a concept which is not
implemented, real time TIA analyses discussed herein.
that lead to the settlement of delay
3
events, such as changes in scope, can TIAs are generally created at the outset of
mutually benefit the contracting a potential delay and, as such, will not
community and owners. Unfortunately, contain a complete delay analysis because
the entire scope of the TIA will not be
the contemporaneous settlement of real
apparent. Therefore, the TIA must be
time TIAs is the exception, not the rule, evolved from month to month to show the
in the construction industry. development of the potential delay. This
evolution requires the addition of new
In order for this potential benefit of real activities to the TIA, such as responses to
time impact settlements to be realized RFIs, approval of a change order, direction
however, the subcontractors, prime to proceed, and definition of the actual work
contractor, and construction involved in the change.
managers/owners must make the CPM 4
schedule a mutually shared commodity. All scheduling software systems, such as

Primavera ,allow the electronic schedule
If the prime contractor holds the
files to be written onto transferable media
scheduling information under lock and such as compact discs. The electronic
key and does not encourage, or allow, scheduling files can also be easily
the mechanical contractor to participate transmitted by e-mail.
in the development of the baseline
5
schedule and in the maintenance and False Float is relative float (relative to the
updating of the schedule as the project float on the controlling critical path) that is
moves forward, the goal of obtaining improperly shown in a CPM schedule,
real time impact settlements will usually arising from the absence of proper
remain elusive. crew and equipment restraints. In many
cases, False Float incorrectly absorbs the
time impacts of fragnets inserted into the
In most instances, the terms and schedule, resulting in no measurable
conditions of the contract will dictate delaying effect on the project end date.
what the mechanical contractor must do False float can deprive a contractor of its
with regard to development and entitlement to an otherwise excusable delay
submission of TIAs. Unfortunately, in event.

6
A flow down provision contains language orders before delay impacts are actualized
that places the same requirements and by, among other things, the threat of non-
obligations on the subcontractor as the payment for the change work, it is prudent
prime contractor has with the owner or for the contractor to consult with legal
construction manager. counsel as to options that may limit or
qualify the full accord language.
7
In many subcontracts, the mechanical
11
subcontractor is required to provide its If the mechanical contractor has reason to
notice of delay, or TIA, in such a manner believe that the prime contractors CPM
that the prime contractor can meet its timing schedule is defective, written notice of this
obligations for notice and quantification with determination should be transmitted to the
the owner in its contract. Essentially, this prime contractor with regard to the baseline
requirement means that the mechanical (original as-planned schedule) and each
contractor must submit its TIA or notice in successive update thereto.
less time than the prime contractor is
12
provided in its contract with the owner or This operation assumes that the
construction manager to submit its TIA or mechanical contractor plans to execute the
notice. scope change work with the crews already
on site. In the event that the contractor
8
The regular monthly payment application mobilizes new or separate crews to perform
form provided to the mechanical contractor scope change work, it may not be necessary
by the prime contractor, construction to consider the disruption of the TIA
manager, or owner may contain waiver Activities to the existing crew flow.
language that must be addressed with each
and every monthly payment application in Prepared by Paul Stynchcomb, CCM, PSP,
order to preserve the contractors rights for CFCC of FTI Consulting, with peer review
compensation for such things as unsettled performed by: Ronald Pearson,
change orders and impact events that are President/CEO of The NewMech
known, but not covered, by a formal change Companies; Matthew Hahr, V.P. of John
in scope. Some prime contractors monthly J. Kirlin, Inc.; Richard Freeman, Exec.
payment application forms contain full or V.P. of Stromberg Metal Works, Inc.;
partial release language that attempts to bar
Robert Cox, Esq. of Watt, Tieder, Hoffar &
the subcontractors recovery of unexecuted
Fitzgerald; and Roger Jones, Esq. of
changes in scope or delay and impact
claims. Similarly, the change order form Huddles & Jones, P.C.
used on the project may contain full accord
and satisfaction language that may severely
limit or restrict the contractors rights to seek
additional relief beyond what is explicitly set
forth in the change order.
9
The concept of impacts of multiple
changes to the base contract work is known
as a cumulative impact claim and care
must be taken to price comprehensively the
effects of changes to the base contract
hours. The contractor should provide
exculpatory language on the change
proposal in the event that comprehensive
pricing is not possible. It is recommended
that How to Use the MCAA Labor Factors
be consulted for a more detailed explanation
of this condition.
10
If the mechanical contractor is required to
execute full accord and satisfaction change

Bulletin No. CT 1
File: Contracts
Construction Contract Proposal for Cost

of Work Plus a Fee
This Bulletin has been developed to serve as a guide.
Please Note:
This contract proposal form is designed to inform you of the subjects that should be cov-
ered in negotiating a contractits use, of course, is not required. You must determine
each term without consultation with any competitor because agreeing on any term or
condition of sale constitutes a violation of the Federal antitrust laws.
Article I The Contract Documents Article II The Work

1.1 The Contract Documents consist 2.1 The Project:
of this Agreement, the Conditions of the
2.2 Location of Work:
Contract (General, Supplemental and
other Conditions), the Drawings, the 2.3 The Owner:
Specifications, all Addenda issued prior to 2.4 The Architect/Engineer:
and all Modifications issued after execution of
this Agreement.These form the Contract, and
Article III The Contractors Duties,
all are as fully a part of the Contract as if at-
Obligation and Warranty
tached to the Agreement or repeated herein.
An enumeration of the Contract Documents 3.1 The Contractor accepts the rela-
appears in Article XVII. If anything in the tionships of trust and confidence established
Contract Documents is inconsistent with this between him and the Owner by this
Agreement, the Agreement shall govern. Agreement. He covenants with the Owner to
(Note: Numbering and wording of this furnish his best skill and judgment and to co-
Agreement parallels AIA Document A111.) operate with the Architect/Engineer and other
1
Contracts
Contractors in furthering the interests of the detention or delay caused by accidents,

Owner. He agrees to furnish efficient busi- strikes, lockouts, weather, or by any other
ness administration and superintendence cause which is unavoidable or beyond the
and to use his best efforts to furnish at all Contractors control.
times an adequate supply of workmen and
materials, and to perform the Work in the best 3.5 Unless specifically agreed ahead
way and in the most expeditious and eco- of time, the selection of personnel and man-
nomical manner consistent with the interests ning the project shall be the responsibility of
of the Owner. the Contractor.
3.2 LIMITED WARRANTY: All materi-

Article IV Time of Acceptance,
als, equipment and workmanship furnished
Commencement and Substantial
under this Contract shall be guaranteed by the
Completion
Contractor against defects and Contractor
agrees to replace or repair any defective ma- 4.1 This Proposal is subject to accep-
terial or equipment, and any defective work- tance within _ days from the date hereof by
manship not caused by ordinary wear and tear the Owner, otherwise at the Contractors op-
or to improper use of maintenance within tion it becomes null and void. This proposal is
__________ from date of substantial com- also subject to change, without notice, before
pletion of the Contract. In no event shall actual receipt of acceptance.
Contractor be liable for consequential dam-
ages. This Warranty shall apply to the cost of 4.2 The Work to be performed
materials only. Unless specifically agreed under this Contract shall be commenced
elsewhere in this Contract that a service re- __________ and, subject to authorized ad-
serve or labor warranty be included, the cost justments, Substantial Completion shall be
of labor shall be paid for by the Owner per the achieved not later than __________.
other conditions of this contract.
Article V Cost of Work and Guaranteed
3.3 The Work to be completed under
Maximum Cost
this Contract shall be guaranteed by the
Contractor to produce capacities, meet de- 5.1 The Owner agrees to reimburse
sign limitations and to function (1) As called the Contractor for the Cost of Work as defined
for in the Plans, Specifications and Addenda, in Article VIII. Such reimbursement shall be in
(2) As hereof set forth or (3) As published by addition to the Contractors Fee stipulated in
the manufacturer for the equipment involved. Article VI.
In the event the foregoing requirements are
not met, the Contractors liability shall be lim- 5.2 The maximum cost to the Owner,
ited to remedying any deficiencies without ex- including the cost of the Work and the
pense to the Owner. This guarantee shall not Contractors Fee, is guaranteed not to ex-
apply in any case in which the Owner speci- ceed the sum of __________ Dollars
fies the type of equipment to be used. ($__________). Such Guaranteed Maxi-
mum Cost shall be increased or decreased
3.4 The Contractor shall not be held for Changes in the Work as provided in
responsible or liable for any loss, damage, Article VII.
2 CT 1
Contracts
Article VI Contractors Fee 7.2 The Contractors Fee for Changes

in the Work shall be as set forth in Paragraph
6.1 In consideration of the perfor-
6.2, or in the absence of specific provisions
mance of the Work, the Owner agrees to pay
therein shall be adjusted by negotiation on the
the Contractor a Fee to cover overhead and
basis of the Fee established for the original
profit.
Work.
6.1.1 TIME AND MATERIAL OPTION:
7.3 All Changes, alterations or omis-
The Contractor will receive a Fee of
sions to be made in the Work as specified,
__________% of the Cost of the Work as
shall be performed in accordance with a writ-
herein defined.
ten agreement between the Owner and the
6.1.2 FIXED FEE OPTION: The Contractor executed prior to the the perfor-
Contractor will receive a Fixed Fee of mance of those changes, alterations or omis-
$__________ in consideration of the perfor- sions. The written Change Order shall define
mance of the Work. the amount of any increase or credit in price
adjustment.
6.2.1 For Changes in the Work under
the Time and Material Option, the Contractors 7.4 Neither party to this Contract shall
Fee shall equally apply to changes in the assign the Contract or monies due hereunder
Work that both increase and decrease the without the prior written consent of the other.
Guaranteed Maximum Cost of the Work.
7.5 Unless otherwise specifically
6.2.2 For Changes in the Work under agreed, the Work shall be performed during
the Fixed Fee Option, the Fee will only be ad- regular working days consisting of eight
justed upward. If Changes in the Work, when hours per day and five days per week. Should
all totalled, increase the Guaranteed the Owner request overtime, then the
Maximum Cost of the Work more than Contract shall be increased to compensate
__________%, then the Fixed Fee will be infor that additional overtime wage expense,
creased the same percentile amount that the including Labor Burden, and the loss of effi-
Cost of the Work was increased. ciency. (Refer to MCAAs Overtime and
Productivity sections.)
6.3 The Contractor shall be paid
__________% of the proportional amount of
his Fee with each progess payment, and the Article VIII Costs to be Reimbursed
balance of the Fee shall be paid at the time of 8.1 The term Cost of the Work shall
final payment. mean costs necessarily incurred in the proper
performance of the work and paid by the
Article VII Changes in the Work Contractor. Such costs shall be at rates not
higher than the standard paid in the locality of
7.1 The Owner may make changes in
the Work, except with prior consent of the
the Work in accordance with the other provi-
Owner, and shall include the items set forth
sions of this Agreement. The Contractor shall
below in this Article VIII.
be reimbursed for Changes in the Work on the
Basis of the Cost of the Work as defined else- 8.1.1 Wages and travel pay paid for
where in this Contract. labor in the direct employ of the Contractor in
CT 1 3
Contracts
the performance of the Work under applica- 8.1.4 The portion of reasonable travel
ble collective bargaining agreements, or and subsistence expenses of the Contractor
under a salary or wage schedule agreed upon or his officers or employees incurred while
by the Owner and Contractor, and including traveling in discharge of duties connected with
such Labor Burden as herein after provided. the Work.
For informational purposes, the current col-
lective bargaining agreements provide for a 8.1.5 The cost of all materials, supplies
gross hourly wage rate as below listed and and equipment incorporated in the Work, in-
such gross wage rate is subject to Labor cluding costs of freight and delivery charges,
Burden as provided in Paragraph 8.1.3. cartage, demurrage expenses, and any stor-
age or warehouse expenses connected with
8.1.2 Salaries and travel pay of the Work. The Cost of all materials, such as
Contractors personnel when stationed at the pipe, conduit, fittings, valves, boxes, devices,
field office, in whatever capacity employed. plates, hangers, fasteners, etc. will be as-
Personnel engaged, at shops or on the road, sumed to be the net wholesale price listed in
in expediting the production or transportation standard industry pricing guides and will not
of materials or equipment, shall be considered be based on individual invoices. The Cost of
as stationed at the field office and their all items of major equipment will be based on
salaries paid for that portion of their time spent invoices from suppliers.
on this Work.
8.1.6 Payments made by the Con-
8.1.3 A sum called Labor Burden in tractor to Subcontractors for Work performed
the amount of __________% of the cost of pursuant to subcontracts under this
wages, salaries, travel pay, or other remuner- Agreement.
ation included in the cost of the Work under
Paragraph 8.1.1 and Paragraph 8.1.2 above 8.1.7 The Cost, including transporta-
to cover the cost of such items as workmans tion and maintenance, of all materials, sup-
compensation, occupational diseases and in- plies, equipment, temporary facilities and
juries and sick pay, public liability, property hand tools not owned by the workmen, which
damage, State Unemployment, Federal are consumed in the performance of the work,
Unemployment, FICA, health and welfare and costless salvage value on such items
benefits as applicable, pension and old age used but not consumed which remain the
benefits as applicable, education, appren- property of the Contractor. This includes such
ticeship, association dues, industry fund pay- items as oxygen, acetylene, LP gas, nitrogen,
ments and small tool expense. welding rod, demurrage on cylinders, etc., for
Trade Straight Time Rate Overtime Rate Effective Dates
Plumbers $ $
Steamfitters and Welders $ $
Sprinkler Fitters $ $
Sheet Metal Workers $ $
Electricians $ $
4 CT 1
Contracts
welding, soldering, testing, etc. This includes is liable imposed by any governmental au-
such items as electric power, water, gasoline, thority.
diesel fuel and oil for Contractors equipment.
8.1.11 Permit fees, royalties, damages
This also includes such items as saw blades,
for infringement of patents and costs of de-
drill bits, chisels, torch tips, fish lines, marking
fending suits therefore, and deposits lost for
devices, etc.
causes other than the Contractors negli-
8.1.8 Rental charges of all necessary gence.
machinery and equipment, exclusive of hand 8.1.12 Losses and expenses, not
tools, used in the performance of the work, compensated by insurance or otherwise, sus-
whether rented from the Contractor or others, tained by the Contractor in connection with
including installation, minor repairs and re- the Work provided that have resulted from
placements, dismantling, removal, trans- causes other than the fault or neglect of the
portation and delivery cost thereof. Rates for Contractor. Such losses shall include settle-
Contractors equipment and tools are as listed ments made with the written consent and
in Contractors Equipment Rental Rate List approval of the Owner. No such losses and
dated __________ or if not listed, but owned expenses shall be included in the Cost of
by Contractor, rates will parallel those listed Work for the purpose of determining the
in the MCAA or NECA Equipment Rental Rate Contractors Fee. If, however, such loss
Guide Manuals. Rates will be hourly, daily, requires reconstruction and the Contractor is
weekly or monthly whichever is most eco- placed in charge thereof, he shall be paid for
nomical for the Owner. Contractors vehicles his services a Fee proportionate to that stated
used primarily for transportation will be in Paragraph 6.1.
charged out at $__________ per day plus
__________ cents per mile. Trucks used on 8.1.13 Minor expenses such as
the jobsite primarily for moving material and telegrams, long distance telephone calls, tele-
equipment will be charged out as equipment phone service at the site, expressage, and
per the Equipment Rental Rate List. similar petty cash items in connection with the
Work.
8.1.9 Cost of premiums for all bonds
and special insurance which the Contractor is 8.1.14 Cost of removal of all debris.
required by this Agreement to purchase and 8.1.15 Costs incurred due to an emer-
maintain The Contractors standard insurance, gency affecting the safety of persons and
the cost of which is included in the Fee, is: property and the costs of any safety measures
required to be taken to meet compliance with
Workmens Compensation
OSHA or any other safety regulations.
Statutory
General Liability, Bodily Injury and 8.1.16 Costs of certification, testing
Property Damager and inspection expenses for any special work,
$500,000/$250,000 such as certified ASME welding, including ex-
Automobile Liability $500,000 pense of certification of necessary personnel,
Umbrella Coverage $2,000,000 such as welders.
8.1.10 Sales, use or similar taxes re- 8.1.17 Cost of all design, engineering
lated to the Work and for which the Contractor and drafting expenses, of plan approval by
CT 1 5
Contracts
applicable authorities, printing, and blue- 9.1.3 Any part of the Contractors cap-
printing expense, expense of engineers and ital expenses, including interest on the
designers incurred while performing required Contractors capital employed for the Work.
field supervision, all in proportion to that in-
9.1.4 Except as specifically provided
curred in the discharge of duties connected
for in Subparagraph 8.1.8 or in modifications
with the Work.
thereto, rental costs of machinery and equip-
8.1.18 Cost of shop and as-built draw- ment.
ings, and operation, maintenance and spare
parts manuals as may be required by the 9.1.5 Overhead or general expenses
Work. of any kind, except as may be expressly in-
cluded in Article VIII.
8.1.19 Cost of testing, balancing and
adjusting systems, tagging and labeling sys- 9.1.6 Costs due to the negligence of
tem components, and instructing Owners the Contractor, any Subcontractor, anyone
personnel in the operation of the systems and directly or indirectly employed by any of
equipment. them, or for whose acts any of them may be
liable, including, but not limited to, the cor-
8.1.20 Service reserve or warranty ex- rection of defective or non-conforming Work,
pense if specifically requested by the disposal of materials and equipment wrongly
Ownernot normally included in this type of supplied, or making good any damage to
contract.Expense of warranty on systems and property.
equipment components is included in the cost
of those systems and equipment and is for the 9.1.7 The cost of any item not specifi-
cost of those components only and does not cally and expressly included in the items de-
normally include any labor expense al- scribed in Article VIII.
lowance. 9.1.8 Costs in excess of the
8.1.21 Other costs incurred in the per- Guaranteed Maximum Cost, if any, as set
formance of the Work if and to the extent ap- forth in Article V and adjusted pursuant to
proved in advance by the Owner. Article VII.
Article IX Costs not to be Reimbursed Article X Discounts, Rebates and

Refunds
9.1 The term Cost of the Work shall not
include any of the items set forth below in this 10.1 All cash discounts shall accrue
Article IX. to the Contractor unless the Owner deposits
funds with the Contractor with which to make
9.1.1 Salaries or other compensa-
payments, in which case the cash discounts
tion of the Contractors personnel at the
shall accrue to the Owner. All trade dis-
Contractors principal office and branch of-
counts, rebates and refunds, and all returns
fices.
from sale of surplus materials and equipment
9.1.2 Expenses of the Contractors shall accrue to the Owner, and the
principal and branch offices other than the Contractor shall make provisions so that they
field office. can be secured.
6 CT 1
Contracts
Article XI Subcontracts and Other Article XIII Applications for Payment

Agreements
13.1 The Contractor shall, at least ten
11.1 All portions of the Work that the days before each payment falls due, deliver
Contractors organization does not perform to the Owner, or as may be directed, the
shall be performed under Subcontracts or by Architect/Engineer, an itemized statement,
other appropriate agreements with the notarized if required, showing in complete de-
Contractor. The Contractor shall request bids tail all monies paid out or costs incurred by
from Subcontractors and shall deliver such bids the Contractor on account of the Costs of the
to the Owner. The Owner will then determine, Work during the previous period for which the
with the advice of the Contractor and subject Contractor is to be reimbursed under Article
to the reasonable objection of the Architect/ V and the amount of the Contractors Fee due
Engineer, which bids will be accepted. as provided in Article VI, together with pay-
11.2 All Subcontracts shall conform to rolls for labor and such other data supporting
the requirements of the Contract Documents. the Contractors right to payment for
Subcontracts awarded on the basis of the cost Subcontracts or materials as the Owner or the
of such work plus a fee shall also be subject Architect/ Engineer may require.
to the provisions of this Agreement insofar as 13.2 Unless otherwise provided in this
applicable. Agreement, payments will be made on ac-
count of materials or equipment not incorpo-
Article XII Accounting Records rated in the Work, but delivered and suitably
stored at the jobsite. In the event that materi-
12.1 The Contractor shall check all als and equipment are ready for delivery, but
materials, equipment and labor entering into the Owner is unable to receive same, the
the Work and shall keep such full and detailed Contractor shall have the right to bill the Owner
accounts as may be necessary for proper fi- for the amount of this material and equipment,
nancial management under this Agreement, and in addition, the Owner agrees to pay the
and the system shall be satisfactory to the Contractor any additional costs incurred for
Owner. The Owner shall be afforded access storage, insurance, redelivery expenses and
to all the Contractors records, books, corre- other expenses to the extent that such addi-
spondence, instructions, drawings, receipts, tional expenses incurred by this problem.
vouchers, memoranda and similar data relat-
ing to this Contract, and the Contract shall pre-
serve all such records for a period of three Article XIV Payments to the Contractor
years, or for such longer period as may be re- 14.1 The Contractor will make
quired by law, after the final payment. __________ billings for work as it progresses
12.2 The Contractor will furnish, if re- and materials are suitably stored on the job-
quested, all necessary lien waivers, affidavits site or stored at some other location as agreed
and other documents required to keep the to by the parties to this Agreement.
Owners premises free from liens or claims or 14.2 The Owner, or the Architect/-
liens of all materialmen, subcontractors or la- Engineer if acting as an agent for the Owner,
borers as payments are made under this shall review the Contractors Applications for
Contract. Payment and shall promptly take appropriate
CT 1 7
Contracts
action thereon as provided in this Agreement. 14.6 A Finance Charge of ________%

Such amount as is recommended for payment per month (annual percentage rate of
shall be payable by the Owner not later than __________%) will be added to each monthly
__________ after the billing date. billing for amounts not promptly paid on pre-
vious billings per other conditions of this
14.3 In the event that the amount re- Agreement.
quested by the Contractor is not to be paid
in full, for whatever reason, the Contractor
shall be notified within the ten-day period Article XV Termination of Contract
specified in Section 13.1 as to the reason for
failing to approve the full amount requested. 15.1 The Contract may be terminated
If such failure to approve is merely because by the Contractor as provided in the Contract
of the absence of some supporting docu- Documents.
ments or data, the Contractor shall have the 15.2 If the Owner terminates the
opportunity to provide such necessary doc- Contract as provided in the Contract Doc-
uments and the payment time table, as set uments, he shall reimburse the Contractor for
forth elsewhere in this Agreement, shall not any unpaid Cost of the Work due him under
be lengthened. Article V, plus (1) the unpaid balance of the
14.4 An amount of __________% of Fee computed upon the cost of the Work to
each progress payment will be retained by the the date of termination at the rate of the per-
Owner until __________ __________ com- centage named in Article VI, or (2) if the
pletion of the Work with a maximum retention Contractors Fee be stated as a fixed sum,
on the Work of __________. At appropriate such an amount as will increase the pay-
times in the progress of the Work, the total ments on account of his Fee to a sum which
amount retained by the Owner and due to the bears the same ratio to the said fixed sum as
Contractor shall be reduced down to an the Cost of the Work at the time of termina-
amount equal to __________ of the value of tion bears to the adjusted Guaranteed
the Work left to complete. Full payment of all Maximum Cost, if any, otherwise to a rea-
amounts due to the Contractor shall be made sonable estimated Cost of the Work when
to the Contractor within __________ after completed. The Owner shall also pay to the
completion of the Work. Uncompleted minor Contractor fair compensation, either by pur-
punch list items or warranty repair items shall chase or rental at the election of the Owner,
not be grounds for delay in final payment to for any equipment retained. In case of such
the Contractor. termination of the Contract, the Owner shall
further assume and become liable for oblig-
14.5 In the event that the actual Cost ations, commitments and unsettled claims
of the Work plus the Contractors Fee is less that the Contractor has previously under-
than the Guaranteed Maximum Cost, the taken or incurred in good faith in connection
Owner will pay the Contractor __________% with said Work. The Contractor shall, as a
of the difference between the Guaranteed condition of receiving the payments referred
Maximum Cost and the actual cost, in addi- to in this Article XV, execute and deliver all
tion to the Costs as defined herein, as an such papers and take all such steps, includ-
additional incentive. ing the legal assignment of his contractual
8 CT 1
Contracts
rights, as the Owner may require for the contain the equipment in the manner and loca-
purpose of fully vesting in himself the rights tion specified in the Contract or shown on draw-
and benefits of the Contractor under such ings, and Contractor shall not be liable for any
obligations or commitment. failure, or damage resulting from such failure,
of premises, due to such structural deficiency.
Article XVI Owners Obligation and 16.5 The Owner shall provide ade-
Duties quate fire insurance to protect the interest of
the Contractor against loss or damage to
16.1 The Owner agrees to promptly equipment, materials and tools on the jobsite.
pay the Contractor all amounts due on his pay-
ment requests per the other conditions of this
Contract or, if not so promptly paid, to pay the Article XVII Special Conditions and
financing charge as outlined elsewhere in this Arbitration
Contract as additional compensation to the 17.1 This proposal, when signed and
Contractor to cover his additional financing accepted by the Owner, and approved by an
expenses. authorized representative of the Contractor,
16.2 The Owner shall be obligated to shall constitute exclusively the Contract be-
reimburse the Contractor for all expenses the tween the parties, which shall be governed
Contractor incurs while protecting the and construed according to the laws of the
Contractors rights under this Agreement.This State of __________, and all prior repre-
shall include any appropriate legal or admin- sentations or agreements, whether written or
istrative action that the Contractor must take verbal, not incorporated herein, as su-
to protect the Contractors interests, such as, perceded.
but not limited to, attorney and accounting 17.2 All claims, disputes and other
fees, court reporter fees, filing fees, the actual matters in question arising out of, or relating
cost of effecting service of papers or provid- to, this Contract or the breach thereof, shall
ing witnesses, and expenses incurred by the be decided by arbitration in accordance with
Contractor. the construction industry arbitration rules of
16.3 The Owner shall be responsible the Construction Industry Arbitration Assoc-
for identifying and disclosing to the Contractor iation then pertaining unless the parties mu-
all concealed piping, ductwork, wiring, fixtures tually agree otherwise. This agreement to
or other equipment or conditions which might arbitrate shall be specifically enforceable
be damaged, cause damage, or otherwise ef- under the prevailing arbitration law.The award
fect or be effected by the Work. In the event by the arbitrators shall be final, and judgement
of damage, or a claim of damage without dis- may be entered upon it in accordance with ap-
closure being given, the Owner shall waive plicable law in any court having jurisdiction
and hold the Contractor harmless against all thereof. Notice of the demand for arbitration
claims, suits, judgments and awards resulting shall be filed in writing within a reasonable
therefrom. time after the claim, dispute or other matter in
question has arisen, and in no event shall it
16.4 The Owner shall be responsible be made after the date when institution of legal
for the structural ability of the premises to or equitable proceedings based on such
CT 1 9
Contracts
claim, dispute or other matter in question Agreement

would be barred by the applicable statute of
Conditions of the ContractGeneral,
limitations.
Supplemental, Other
17.3 The Contract Documents, which
Drawings
constitute the entire agreement between the
Owner and the Contractor, are listed in Article Specifications
I and, except for Modifications issued after ex-
Addenda
ecution of this Agreement, are enumerated as
follows. Modifications
This Agreement executed the day and year indicated below.

Respectfully submitted,
CONTRACTOR
OWNER _______________________ NAME _____________________
BY _______________________ BY _____________________
DATE _______________________ DATE _____________________
10 CT 1
Bulletin No. CT 2
File: Contracts
Bulletin
Contract Terms and Conditions
This is a Bulletin on General Conditions which you can use regardless of the
type of contract. The provisions set forth below are only suggestions as to
format and content. You should independently of other contractors develop
your own terms that you want to offer in the marketplace by way of YOUR
CONTRACT FORM. Be sure that your attorney and accountant tailor these
general conditions to your particular needs and jurisdiction.
The following Terms and Conditions said equipment and installation thereof,
may be appropriate for inclusion in in which event the contract shall be
contracts. deemed terminated and neither party
shall have any liability whatsoever to the
1. Seller guarantees the equipment and other. In no event shall Seller be liable
workmanship of the apparatus furnished for any consequential damages.
under this contract, and will replace or
repair any defects, not due to ordinary 3. Unless otherwise agreed, it is
wear and tear, or to improper use or understood that work will be performed
maintenance, which may develop within during regular working hours. If overtime
one year from date of completion. work is mutually agreed upon and
Seller further agrees to replace any performed, the additional price, at
refrigerant lost during that period, Sellers usual rates for such work, shall
caused by defects in the installation, be added to the contract price.
and not due to improper use or
maintenance. 4. Buyer shall provide Sellers workmen
a safe place in which to work, and Seller
2. Seller shall have no liability for any shall have the right to discontinue work
defect in the design or manufacturer of when, in Sellers opinion, Buyer has
any material or equipment, whether in failed to comply with this requirement.
connection with warranty or otherwise. Seller shall not be liable for any delay,
Sellers liability with respect to the failure loss, or damage caused by delay
or malfunction of any material or resulting from discontinuance of work
equipment shall be limited to the under this provision. Buyer shall hold
cost of correcting any defects in the Seller harmless for any loss, injury
installation, as further provided herein. or other claim resulting from the Buyers
At the option of Seller, in lieu of sole or partial negligence.
correcting any defects in installation,
Seller may remove equipment installed
and refund to Buyer all money paid for

5. On delivery of equipment by Seller, or private or public sale. If the unpaid
any part thereof, to the premises of balance plus interest is not satisfied by
Buyer, Buyer shall assume risk of loss the proceeds of such sale after
or damage to such equipment and shall deducting the expenses of retaking,
cause same to be insured in all respects repairs necessary to place the
against loss or damage in an amount to equipment in saleable condition, storing,
protect interest of Seller. Cost of taxes, liens, attorneys and collection
insurance is to be paid by Buyer. agencys fees and other expenses in
connection therewith, Buyer shall pay
6. In the event that the material any deficiency as liquidated damages
incorporated in this contract is ready for for breach of this contract. Seller shall
delivery and installation, and Buyer is retain all lien rights upon premises on
unable to receive same, Seller shall which the installation is made, to the
have the right to bill Buyer for the extent of the unpaid balance, until final
amount of the material in accordance payment is made.
with the terms of the contract and also
to provide suitable storage and 10. Should Seller be delayed in
insurance at the Buyers risk and performance by reason of any default on
expense. the part of Buyer of the terms and
conditions of this contract, the entire
7. Seller shall not be held responsible or contract price, less payments
liable for any loss, damage, detention, theretofore made, shall become due,
or delay caused by accidents, strikes, and shall bear interest at the full legal
lockouts, or by any other cause which is rate from the date of billing.
unavoidable or beyond Sellers control.
11. Buyer shall be responsible for
8. Title to the equipment remains in structural capability of the premises to
Seller until payment of the entire accommodate the equipment in the
purchase price and all sums due Seller manner and location specified in the
under this contract are fully made. All contract or shown on drawings, and
equipment, whether affixed to the realty Seller shall not be liable for any failure,
or not, shall remain personal property or damage resulting from such failure,
and be deemed severable without injury of premises, due to such structural
to the freehold. Buyer shall do whatever deficiency.
may be required to maintain Sellers
title. 12. Buyer shall keep equipment free of
tax liens and other encumbrances, shall
9. In the event of default of payment of not remove said equipment from the
any installment or failure to perform any premises without written permission of
terms or conditions of this contract, or in Seller, and shall not transfer any interest
the event that a proceeding in in said equipment or in this contract
bankruptcy or insolvency be instituted without written consent of Seller until all
by or against Buyer, or if equipment is payments due hereunder have been
misused, illegally used, or imperiled, made.
then at Sellers option the entire unpaid
balance due Seller shall become 13. Any price or prices herein set forth
immediately due and payable without shall be increased in an amount or
notice or demand and in such case amounts equal to the tax or taxes which
Seller may enter the premises and may be assessed on the equipment
retake, remove and hold or resell the supplied hereunder, or which may be
equipment or any part thereof at either

due or become due from Seller, or NOTE: This provision must be
which Seller may be required to pay consistent with any more-detailed
with respect to this contract as a result warranty provisions as referenced in
of any excise, sales, use, occupation, or paragraph 2 above.
similar tax not now in effect but
hereafter imposed or made effective by 16. Buyer shall not assign this contract
the United States Government or any or any rights thereunder without Sellers
state or local government. written consent.
14. Buyer acknowledges the potential 17. This proposal, when signed and
for unforeseen material cost escalations accepted by the Buyer, and approved by
that are beyond the control of the Seller. an authorized representative of
Seller shall provide Buyer with notice of __________, shall constitute exclusively
material escalation greater than ___% the entire contract between the parties,
within ___days of occurrence. Seller and all prior representations or
shall provide Buyer a baseline of the agreements, whether written or oral,
published costs as of the proposal date not incorporated herein, are not part of
(or contract date). Buyer shall this contract and are expressly
reimburse Seller for the increased superseded.
material costs over and above the
baseline published costs. 18. This contract is not valid unless
approved by a duly authorized
15. Upon completion of the installation, representative of _______________.
Seller shall fully instruct Buyer as to the
operation and maintenance of
equipment installed. If within a period of
one year after the equipment supplied
hereunder was installed, Seller has not
received from Buyer in writing a claim
that said equipment as supplied and
installed does not fulfill the terms and
conditions of this contract, specifying in
what particulars it fails to do so, Buyer
shall be deemed as having
acknowledged that said equipment
as supplied and installed does fulfill said
terms and conditions.

Bulletin No. CT 3
File: Contracts
Payments Clause
One of the most important clauses in any payments are made by the Owner
subcontract is the Payments clause. General to the Contractor. (See Note 1 at
contractors are trying to hedge more and end of this bulletin.)
more on their obligation to pay you in a timely
manner by making your payment dependent The underscored sentence is the kind of
upon payment by the owner of the general language for which subcontractors should be
contractors entire billing. on guard.
Here is a typical Payments clause in a Many variations of the conditional pay-

general contractors form subcontract: ment language contained in the underscored
sentence can be found in subcontract agree-
The Contractor shall pay the Sub- ments proposed by general contractors, any
contractor monthly payments within of which can put you on the hook. This sort
seven (7) days of the receipt by the of language makes payment to you depen-
Contractor from the Owner of pay- dent not only upon your satisfactory accom-
ment for work performed by the plishment of the work which you have
Subcontractor. The amount of each contracted to do (often within a particular pe-
such monthly payment shall be riod of time) but also dependent in large de-
equal to the percentage of comple- gree upon the relationship between the owner
tion of the work of this subcontract and the general contractor. If the general con-
applied to the subcontract sum, plus tractor runs into difficulty, justified or unjusti-
any amounts allowed the Contractor fied, with the owner or fails to be aggressive
for materials and equipment suit- in collecting from a slow paying or defaulting
ably stored by the Subcontractor. owner, and conditional payment language is
Payment to the Subcontractor under in your subcontract, the general contractor
this Subcontract will be made to the may be able to refuse to pay you. (See Note
Subcontractor only to the degree 2.)
1
Contracts
The general rule in some states is that if dependent upon receipt of payment for such
your subcontract contains language similiar to work from the owner, the practical result is
the underscored sentence quoted above, the often the same.
general contractor need not pay you until he
has been paid. This can even lead the con- A far better alternative is to insert the
tractor to fail intentionally to collect from the following clause:
owner, particularly at the time of final pay- provided, however, these provi-
ment, if the general contractor is withholding sions shall not be applicable if pay-
a higher rate of retainage from the subcon- ment is withheld by the Owner by
tractors than the owner is retaining from his Reasons of Acts of, or nonperfor-
payments. The contractor can then profit by mance by, the Contractor or any
investing the extra retainage he is withhold- other Subcontractor.
ing from you until he has to make your final
payment after he receives his final payment. We understand that your ability to
change the form presented to you by the gen-
Some general contractors have seem- eral contractor as his form or standard sub-
ingly attempted to be more equitable and pro- contract is, to a great degree, dependent upon
vide language in the pertinent portion of the the relative bargaining power you have with
Payments clause somewhat like the following; the general contractor. In a number of in-
Except where non-payment is the stances, however, we have found that where
direct result of the fault of the there is a close relationship between the sub-
General Contractor, it is understood contractor and the contractor, the subcon-
and agreed that the Subcontractor tractor may be able to persuade the general
hereunder will be paid for work per- contractor to eliminate these types of contin-
formed only in the proportionate gent conditions over which the subcontractor
amount as the Contractor is paid by has absolutely no control.
the Owner for said work.
If you encounter difficulty getting a gen-
Such a provision as the underscored por- eral contractor to eliminate these types of con-
tion above usually proves to be meaningless ditions, suggest the use of language similar
as far as practical result is concerned.You do to that contained in the American Institute of
not have to use much imagination to under- Architects (AIA) subcontract form, which is
stand that for you to prove that the withhold- known as AIA Document A401. Here is lan-
ing of a payment by the owner is the direct guage giving the subcontractor the benefits of
result of the fault of the general contractor is Articles 11 and 12 of the 12th edition, 1987,
extremely difficult, and a lawsuit where you of A401:
need to prove this fact before you can be paid
The Contractor shall pay the
could be almost as costly as the amount you
Subcontractor each progress pay-
are owed.
ment and the final payment with-
So do not be trapped by this type of ex- in three working days of receipt
ception. Whether a provision of the kind just of payment from the Owner
discussed is contained or whether the sub- for the Subcontractors Work. If
contract simply states that your payments are the Contractor does not receive
2 CT 3
Contracts
payment for any reason which is not losses with respect to materials, equipment,
the fault of the Subcontractor, the tools, and construction equipment and ma-
Contractor shall pay the Sub- chinery, including reasonable overhead,
contractor on demand a payment profit and damages. Another clause that
calculated as below.The amount of might give you additional protection in the
each payment to the Subcontractor event of your stopping work or terminating
shall be the amount to which the the subcontract is one that specifies your
Subcontractor is entitled, reflecting right to recover all coordinated drawings,
the percentage of completion of the shop drawings, as-built drawings, and tools
Subcontractors work applied to the and materials supplied by you but not incor-
Subcontract Sum, plus materials porated into the work and not yet paid for by
and equipment which have been the contractor.
delivered and suitably stored by the
Subcontractor for subsequent in- Please refer to the AGC/ASA/ASC
corporation in the Work, plus undis- Standard Form Construction Subcontract.
puted amounts for changes in the Developed through the joint efforts of the
Work which have been executed by Associated General Contractors of America,
the Subcontractor, less withheld re- the American Subcontractors Association
tainage at a rate no higher than pro- and the Associated Specialty Contractors,
vided for in this Subcontract and at this document is intended to be generally
no greater percentage than that ac- compatible with A201, the American Institute
tually withheld by the Owner from of Architects General Conditions of the
payments to the Contractor on the Contract for Construction, 1987 Edition.
Work of the Subcontractor, less the Published in 1994, it contains 19 pages with
aggregate of previous payments to general instructions.
the Subcontractor.
Conclusion
A401 also contains auxiliary payment
provisions which should be contained in The ultimate purpose of any contract is
every subcontract. Paragraph 3.2.3 of the to assure that you get paid if you perform ac-
1987 edition permits the subcontractor to ob- cording to your contract. Carefully drafted lan-
tain directly from the architect information on guage in a Payments clause should assure
percentage of completion and amount certi- this result; and, at the least, provide you with
fied by the architect for the subcontractors as many remedies as possible if you do not
work. Paragraph 4.7.1 gives the subcon- get paid as agreed.
tractor the right to stop the work until paid in
a timely manner and recover his reasonable Notes:
costs of shutdown, delay and start-up. Under
1. Frequently, the Retention clause is mentioned at this
paragraph 7.1.1 of the 1987 version, you
point in a Payments clause. We have not included it here,
may terminate the subcontract if not paid so as not to complicate this discussion of the Payments
amounts due for 60 days or longer, and you clause.
are then entitled to recover from the con- 2. On U.S. Government construction contracts, general con-
tractor payment for work executed and for tractors are required to furnish a labor and material pay-
CT 3 3
Contracts
ments bond. These bonds are intended to assure pay- tract, if the subcontractor has performed work and fur-
ment of subcontractors for all labor expended and mate- nished materials for such contract, he can bring a Miller
rials furnished by them in performing their work under the Act suit against the general contractor for payment for
contract. These are known as Miller Act bonds (named such work performed and materials furnished, regardless
after the Congressman who sponsored the bill enacted of whether the general contractor has been paid by the
by Congress requiring such bonds to be furnished on U.S. U.S. Government. The procedure to be followed estab-
Government construction contracts). Most federal courts lishing the basis for such a claim and the method of filing
have held that regardless of the langauge of the payments suit, although not strictly a matter of contract clause, is an
clause in a subcontract between a general contractor and important issue and you should contact legal counsel for
the subcontractor on a U.S Government construction con- assistance.
4 CT 3
Bulletin No. CT 4
File: Contracts
Disputes and Arbitration Clauses
Because disputes in the performance of at the end, the victory may be of little solace
construction contracts are common, it is im- when viewed in the context of the time and
portant for subcontracts to contain a disputes money you spent to assert your claim suc-
clause or a clause providing for arbitration of cessfully.
disputes. The failure of your subcontract to in-
clude a specific clause governing the handling The mere presence in your subcontract
of disputes renders you subject to general lan- of a disputes clause and an arbitration clause
guage such as work to be performed to the to govern the settlement of disputes may not
satisfaction of the general contractor or de- be sufficient to provide any significant pro-
cisions of the architect are final, or language tection to you; they must be properly drafted
of similar import which is characteristic of and must have teeth. Clauses which simply
many general contractors subcontract forms. recite that disputes can arise during perfor-
If your subcontract does not contain a dis- mance of the work, but which fail to establish
putes and arbitration clause, your control over any specific methods or procedures for defin-
the acceptability of your work is materially di- ing and handling such disputes, can be worse
minished, since the general contractor, owner than no clause since they can foster a false
or architect has sweeping latitude to deter- sense of security.
mine what work is included in the contract and
In order to protect you adequately, the
what constitutes acceptable performance of
contractual clause governing disputes must
your contractual obligations.
provide specifically for your rights and reme-
Without a disputes and arbitration dies. From your viewpoint, it is no better to
clause, disputes which cannot be solved by have a disputes clause which does not es-
negotiations between you and the general tablish with clarity the precise types of dis-
contractor must be resolved by time consum- putes covered by the provision, or to have an
ing and expensive litigation. Even if you win arbitration clause which fails to specify with
1
Contracts
particularity the procedure to be followed in arbitrator within ten (10) days after
the resolution of such disputes, than it is to receipt of such notice, the third to be
have no disputes or arbitration provisions at chosen within ten (10) days by the
all; the likely result in either case will be pro- two thus selected. However, if within
tracted and costly litigation. the time stipulated the two arbitra-
tors appointed by the parties do not
Thus, to protect yourself, you should be
agree upon a third, or a party who
sure that your subcontract contains a disputes
has been notified of a disagreement
clause which defines what types of disputes
fails to appoint an arbitrator within
are included within the clause and an arbitra-
the aforesaid period of ten (10) days,
tion clause which clearly outlines your reme-
then a third arbitrator or an arbitra-
dies and the procedures available for
tor to represent the party in default,
establishing your claim.It is not necessary that
or both such arbitrators, upon peti-
there be two separate and distinct clauses
tion of the nondefaulting party, shall
governing disputes on the one hand and ar-
be appointed by a judge of a Court
bitration on the other. Provisions relative to
of general jurisdiction where the
disputes and arbitration often appear in the
work is being performed. The deci-
same paragraph or subparagraph of the con-
sion of a majority of said arbitrators
tract. You should be able to determine the
shall be final and binding upon both
scope of disputes covered by the disputes
parties to this Subcontract and judg-
clause by simply reading the provision.
ment thereon may be entered by any
Similarly, the procedure for resolving the dis-
Court of competent jurisdiction.
putes should be clearly and completely
Such arbitrators decision shall be
spelled out in the clause. How is notice of a
delivered to each party in writing on
demand for arbitration to be given? How are
or before thirty (30) days after the
arbitrators to be selected? What happens in
submission of the matter to them for
the event the parties are unable to agree upon
their decision. Each party shall pay
an impartial arbitrator? Is the decision of the
the cost and expense of the arbitra-
arbitrators binding and final? Who is to bear
tor it selects, but the cost and ex-
the cost of the arbitration? A comprehensive
pense of the third arbitrator and the
arbitration clause should contain the answers
remainder of the expense of the ar-
to each of these questions. Here is an exam-
bitration shall be borne equally by
ple of an arbitration and disputes clause which
the parties hereto.
has been used in some subcontracts and
specifies with reasonable particularity the
That clause answers all the questions
rights and remedies of the parties to a sub-
posed in the preceding paragraph and fur-
contract:
nishes you as the subcontractor with sufficient
In the event of any disagreement knowledge of the rights and remedies avail-
arising under this Subcontract, upon able to you in the event a dispute arises. Some
written notice by either party to the persons do not like involving the courts even
other, the Subcontract shall be sub- to the extent of naming the neutral arbitrator.
mitted to three arbitrators for deci- They prefer use of the American Arbitration
sion. Each party shall choose one Association selection mechanism as follows:
2 CT 4
Contracts
Appointment from Panel method of appointing an arbitrator,

that designation or method shall be
If the parties have not ap-
followed. The notice of appoint-
pointed an arbitrator and have not
ment, with the name and address
provided any method of appoint-
of the appointing party, shall be filed
ment, the arbitrator shall be ap-
with the AAA by the appointing
pointed in the following manner:
party. Upon the request of any such
Immediately after the filing of appointing party, the AAA shall sub-
the Demand or Submission, the mit a list of members of the Panel
AAA shall submit simultaneously from which the party may make the
to each party to the dispute an appointment.
identical list of names from the
If the agreement specifies a
Panel. Each party to the dispute
period of time within which an arbi-
shall have seven days from the
trator shall be appointed and any
mailing date in which to cross off
party fails to make such appoint-
any names to which it objects,
ment within that period, the AAA
number the remaining names to in-
shall make the appointment.
dicate the order of preference, and
return the list to the AAA. If a party If no period of time is specified
does not return the list within the in the agreement, the AAA shall no-
time specified, all persons names tify the parties to make the ap-
therein shall be deemed accept- pointment and if within seven days
able. From among the persons who mailing of such notice such arbitra-
have been approved on both lists, tor has not been so appointed, the
and in accordance with the desig- AAA shall make the appointment.
nated order of mutual preference,
the AAA shall invite the accep-
tance of an arbitrator to serve. If the Appointment of Arbitrator by
parties fail to agree upon any of the Party-Appointed Arbitrators
persons names, if acceptable arbi-
If the parties have appointed
trators are unable to act, or if for
their party-appointed arbitrators or
any other reason the appointment
if either or both of them have been
cannot be made from the submit-
appointed as stated above, and
ted lists, the AAA shall have the
have authorized such arbitrators to
owner to make the appointment
appoint an arbitrator within a spec-
from among other members of the
ified time and no appointment is
Panel without the submission of
made within that time or any agreed
any additional list.
extension thereof, the AAA shall ap-
point the arbitrator who shall act as
Direct Appointment by Parties chairperson.
If the agreement of the parties If no period of time is specified
names an arbitrator or specifies a for appointment of the third arbitra-
CT 4 3
Contracts
tor and the party-appointed arbitra- or more an hour for their servicesand these
tors do not make the appointment charges include study time before and after a
within seven days from the date of case is submitted. Under AAA procedures,
the appointment of the last party- however, the first day of each arbitrators time
appointed arbitrator, the AAA shall may be provided at no charge except for out-
appoint the arbitrator who shall act of-pocket expenses.
as chairperson.
If the parties have agreed that Second, arbitrators rarely give reasons
their party-appointed arbitrators for their ultimate findings but simply make an
shall appoint the neutral arbitrator award in money or issue a directive to the los-
from the Panel, the AAA shall fur- ing party to take specified actions. The ab-
nish to the party-appointed arbitra- sence of detailed findings is frequently
tors, in the manner prescribed frustrating to the losing party but, all in all, it
above, a list selected from the Panel contributes substantially to the rapid resolution
and the appointment of the ar- of claims. In most cases, the arbitrators award
bitrator shall be made as prescribed terminates the claim procedures. The courts
in that section. will not permit a losing party to re-try his case
if he had a fair hearing through arbitration.
Arbitration of disputes through such
mechanisms is being increasingly utilized by Finally, even though the procedures
the construction industry.The procedures are are less formal, we recommend that you use
generally less formal than court proceedings capable trial counsel in the presentation of
and disputes are resolved much more rapidly. an arbitration case. A lawyer is generally
Two notes of caution should be sounded, better equipped to present such matters
however. than is the layman and a well-coordinated
First, arbitration is not necessarily inex- presentation may determine the outcome in
pensive. Many good arbitrators charge $100 a close case.
4 CT 4
Bulletin No. CT 5
File: Contracts
AIA A201 General Conditions of the

Contract for Construction
Containing the contractual provisions on conditions prepared by the architect and

administration of the contract, relationships of owner to cover unique conditions not ade-
the various parties, and legal rights and oblig- quately covered by the standard document,
ations, the general conditions of construction and, of course, drawings and specifications.
contracts equal the drawings and specifica- AIA also publishes a short form owner-con-
tions in importance and may well determine tractor agreement, A107, that combines in a
whether or not the project is profitable. When single form the most essential parts of A101
standard documents are used, contractors, and A201. Its language on all subjects covered
subcontractors, owners, architects and their is copied from A201 and A101.
lawyers can become familiar with the lan-
guage and do not have to scrutinize every A201 and every other set of general con-
paragraph each time a project is bid or a no- ditions are as important to mechanical as to
tice is given. general contractors. Most subcontracts adopt
by reference the provisions of the general con-
Document A201, General Conditions of ditions in the prime contract. In addition, me-
the Contract for Construction, published by the chanical contractors often serve as separate
American Institute of Architects is the most prime contractors of the owner so the general
commonly used standard general conditions conditions become an intrinsic part of their
document on private and much non-federal contracts.
construction and surpasses all other AIA doc-
uments in salestotalling well over 100,000 The AIA strives to make A201 a consen-
copies annually. It is used in conjunction with sus document and consults with representa-
brief owner-contractor agreements, such as tives of various affected parties in revising the
A101 or the owners own form, supplementary document, which is now done approximately
1
Contracts
every 10 years. First published in 1911, the contract documents may subject you to
1987 edition is the 14th Edition of A201 and shared liability, especially if you start per-
was in revision for several years, as was the forming any of the work involved.
1976 version.
Although there are clauses in this as in Warranty
any document that are not everything a sub- *3.5 You warrant that your work will be
contractor or prime contractor might wish, the free from faults not inherent in the quality re-
1987 A201 is a fair and workable document quired or permitted by the specifications and
that allocates risks reasonably and should agree that unauthorized substitutions may be
help in the orderly management of construc- considered defective. A new provision re-
tion projects. Set forth below are major provi- quested by ASC excludes contractor warranty
sions of A201, some of which were not liability for damage or defect caused by abuse,
significantly changed.Their contents have modification not executed by the contractor,
been summarized for your convenience. improper or insufficient maintenance, im-
proper operation, or wear and tear in normal
Important Provisions of A201-1987 usage. (This new protection, which is also in
(Note: Numbers refer to paragraph or ar- the 1987 edition of A401, the AIA subcontract
ticle numbers of A201. Paragraphs that were agreement, is of special value to mechanical
changed substantively in 1987, or are new, contractors.)
are indicated with *.)
Codes
Copies
3.7 It is not your responsibility to de-
1.3.1 Contract documents reproduced termine that contract documents conform to
by contractors and subcontractors for use in laws and codes, but if you observe any vari-
executing the work must bear the copyright ance, notify the architect in writing and per-
notice and be used for no other purpose. form no such work without notice to the
architect and owner.
Owners Ability to Pay
*Paragraph 2.1.2 requires the owner to Approval of Submittals
furnish the information needed to perfect con- 3.12 You cannot proceed with work re-
tractors lien rights, and 2.2.1 requires evi- quiring submittal of shop drawings, product
dence that financial arrangements have been data and samples until the submittal has been
made to fulfil the owners obligations under approved by the architect, which he is to do
the contract. (You would be wise to ask the promptly, but taking sufficient time to make an
general contractor for this information before adequate review. Approval of a submittal in-
signing a subcontract agreement.) cluding a deviation from the contract docu-
ments will not relieve you of responsibility for
Contractors and Subcontractors
the deviation unless you specifically notified
Responsiblities
the architect in writing (through the general
*3.2.1 Failure to report to the architect contractor if you are a subcontractor) that the
any errors or omissions you have noted in the deviation is included.
2 CT 5
Contracts
Indemnification Arbitration
*3.18 After long effort by ASC and *4.5 If either party is unwilling to accept
ASA, the indemnification (hold harmless) the architects ruling on a dispute or claim, an
clause has been modified to the mildest form arbitration case may be filed with the
of indemnity, in which you hold others harm- American Arbitration Association.
less for damages resulting from your perfor-
This can also be done if the architect has
mance only to the extent the damage was
not rendered a decision within 45 days.
caused by negligent acts or omissions of any-
Normally you can file for arbitration up to the
one for whose acts you are liable. This should
date when legal proceedings are barred by a
result in reduction of your contractual liability
statute of limitations, but if the written decision
insurance premiums.
of the architect states his decision is final but
Contract Administration subject to arbitration, demand for which must
be made within 30 days after the architects
*4.2 Requested interpretations are to decision is received, you will forfeit your
be given by the architect within 15 days after chance to arbitrate if you do not file within the
written request by a prime contractor. Such in- deadline. (As in the case of other notices, sub-
terpretations are to be consistent with the con- contractors must act within a shorter period
tract documents and reasonably inferable to give the prime contractor time to comply
from them. with A201.) The 30-day procedure is not often
used but it can expedite settlement of disputes
Claims that threaten to delay jobs or require later de-
*4.3 This section on claims has been molition of work placed over nonconforming
completely rewritten but does not substan- work.
tially change past practices. All claims must
be submitted to the owner or prime contrac- Construction by the Owner or by
tor in writing within 21 days after occurrence Separate Contractors
of the event giving rise to the claim or after the If you sometimes hold A201 contracts as
claimant first recognizes the condition. a separate prime contractor, you need to be
(Note: Since prime contractors must give aware that Article 6 requires each separate
21 days notice to recover from claimable con- contractor to participate with the others and
ditions, it is imperative that subcontractors the owner in reviewing and changing sched-
give notice to prime contractors several days ules to fit everyones requirements. You must
before that deadline.) also report to the architect any discrepancies
or defects in the work of other contractors or
Concealed or unknown conditions giving
the owner that would make it unsuitable for
rise to claims for an increase in compensation
your follow-on work.
or time shall not be disturbed until written no-
tice by the architect, nor may any other work
Changes
for which adjustments are claimed be per-
formed without written instructions except in *Article 7 establishes a new document
emergencies. All claims must be made called a Change Directive, which replaces uni-
promptly in writing. lateral change orders for which prices have
CT 5 3
Contracts
not been agreed upon. After agreement of the and suitably stored on-site for future use and
contractor is accomplished, a Change may be made for materials stored off-site at
Directive may be converted to a Change an approved location if approved in advance
Order. As before, the contractor must perform by owner. You can initiate a request for such
as ordered whether price has been agreed owner approval through the contractor and ar-
upon or not. A Change Directive states the chitect.
owners and architects proposal for adjusting
price and time, and the contractor must tell
Certificate for Payment
the architect whether he agrees or disagrees
with the proposal.You may include undisputed 9.4 The architect is to issue a certifi-
charges for either Change Order or Change cate for payment within seven days after re-
Directive work in progress billings. ceiving the contractors application or notify
the contractor of his reasons for withholding
Payments and Completion the certificate. He does not have to notify sub-
contractors, but 9.6.3 authorizes subcontrac-
*Article 9 AIA intends in this and other
tors to request from the architect information
documents pertaining to requisitioning pro-
on what the contractor has applied for in con-
cedures, such as Division 1 and A511, Guide
nection with their part of the work and what
to Supplementary Conditions, to tighten gen-
disposition the architect and owner have
eral contractors obligations to give evidence
made of the application.
of payment of subcontractors. A201 alludes to
this in stating the payment applications are to
be supported by such data as copies of req- Subcontractor Payments
uisitions from subcontractors (which would in-
9.6.2 The contractor shall promptly pay
dicate delinquency for past periods). ASC and
each subcontractor, upon receipt of payment
ASA were successful in getting Subparagraph
from the owner, out of the amount paid to the
9.3.1.2 added; it prohibits contractors appli-
contractor on account of such subcontractors
cations for payment from including any
work, the amount to which the subcontractor
amounts the contractors do not intend to pay
is entitled, reflecting percentages actually re-
subcontractors because of disputes or other
tained from payments to the contractor on
reasons. 9.3.3 was changed also at ASC and
account of such subcontractors work.
ASAs suggestion; it now requires that the
Contractors are to require each subcontrac-
contractor warrant when applying for payment
tor to pay sub-subcontractors in the same
that all work for which payment has previously
way.
been received is free from liens or encum-
brances in favor of subcontractors. If a con-
tractor bills under this provision without having Stop Work
paid subcontractors from previous payments, 9.7.1 permits the contractor to stop work
he will be committing fraud. after certain notices if the architect does not
certify payment or the owner does not pay
Stored Materials
within seven days after the due date. In such
9.3.2 says payment shall be made on ac- event, the contract time is to be extended and
count of materials and equipment delivered the contractor paid reasonable cost for shut-
4 CT 5
Contracts
down, delay and start-up. Subcontractors orders, final payment is to be made, including
should receive their share of such damages, release of retainage, for fully completed and
of course. accepted portions. Such partial final payment
does not result in a waiver of claims by the
Substantial Completion owner as a regular final payment does.
9.8 When work is complete enough
for the owner to occupy or use it for its in- Waiver of Claims
tended purpose, the architect will issue a By accepting final payment, the contrac-
certificate of substantial completion and tor or a subcontractor waives all claims except
specify responsibilities of the owner and con- those previously made in writing and indicated
tractor for security, maintenance, heat, utili- as unsettled at the time of final payment ap-
ties, damage to the work, and insurance. plication. (As a subcontractor, you should re-
(Most such responsibilities transfer to the peat in writing all unsettled claims against
owner.) Warranties commence on the date either the owner or general contractor when
of substantial completion. As long sought by billing for final payment, repeating again be-
ASC and ASA, line item substantial com- fore the contractors application for final pay-
pletion is possible; a portion of the total ment if that occurs some time after yours.)
project can be designated substantially com-
plete if the owner has agreed to accept that
portion separately. If the contract provides Hazardous Substances
for reduction of retainage or release of most *10.1.2 Proposed by ASC, this important
retainage on the date of substantial com- new clause is timely in these days of Right-to-
pletion, this adjustment should be made for Know regulations and laws and great attention
the accepted portion. The owner, architect, to chemical hazards. Identical provisions are
contractor and subcontractor also agree on made in A401. If asbestos or PCB is reasonably
punch list items to be completed or corrected believed to be on the jobsite, the contractor is to
to complete the job in accordance with the stop work and report the condition. Work may
contract documents. not resume until the owner and contractor have
*9.9 Partial Occupany. This new agreed in writing if the material is asbestos or
clause permits the owner to occupy or use any PCB and has not been rendered harmless.The
completed or partially completed portion of contractor shall not be required to perform work
the work at any time under the same condi- relating to these hazards, and the owner shall
tions as substantial completion for that por- indemnify the contractor and others against
tion, with the owner and contractor agreeing damage from PCB or asbestos that has not
in writing to the period for correction of the been rendered harmless.
work and commencement of warranties.
Insurance and Bonds
Final Completion
*Article 11 The contractor must be cov-
9.10 If final completion is materially de- ered for workers compensation, employee
layed through no fault of the contractor after and public liability, personal injury liability,
substantial completion or because of change motor vehicle and contractual liability without
CT 5 5
Contracts
interruption from the date of commencement uments to leave it uncovered for observation.
until the date of final payment and beyond Other portions are to be uncovered at the ar-
that until termination of any coverage re- chitects request, also, but if such work is
quired to be maintained after final payment, found to be in conformance with the contract
whether policies are written on a claims- documents, the owner must pay the cost of
made or occurrence basis. The owner must uncovering and replacement. The contractor
maintain all-risk property insurance in the must pay the cost of correcting all work re-
amount of the contract plus change orders, jected by the architect for failing to comply with
including the interest of the contractor, sub- the contract documents whether rejected be-
contractors and sub-subcontractors. If the fore or after substantial completion, including
property insurance requires minimum de- the costs of additional testing and inspections
ductibles, the contractor must pay costs not and compensation for the architects services
covered because of the deductibles, but the and expenses made necessary thereby.
owner will pay for costs not covered because
of voluntary deductibles. The owner waives *12.2.2 One-Year Correction Period.
rights of action against the contractor for loss The contractor must correct nonconforming
of use of the owners property, including con- work discovered within one year after sub-
sequential losses due to fire or other haz- stantial completion. Under 1987 changes, the
ards, whether insured or not. one-year period extends from the time of per-
formance of work first performed after sub-
*11.4.2 Payment Bonds. The contrac- stantial completion of the job or a portion.This
tor is to furnish promptly to any requesting time period relates only to the contractors
subcontractor who is a potential beneficiary a obligation to correct the work and is unrelated
copy of any payment bond furnished to the to the legal obligation to comply with the con-
owner, or allow a copy to be made. (ASC and tract documents which may be enforced under
ASA were instrumental in getting this impor- statutes of limitations.
tant provision, and you should make the re-
quest immediately after, or even before, you Notices
have signed a subcontract on a bonded A201
job. Unless you have a copy in your file, giv- 13.3.1 To make sure the notices you
ing times and places to file claims, you may must give for various purposes are legally
be unable at a future time of non-payment by recognized, see to it that they are delivered in
the general contractor to make a claim on the person to the individual or a member of the firm
bond. By then the contractor may not be avail- or entity or to an officer of the corporation for
able or willing to give you the copy.) which they are intended, or send them by reg-
istered or certified mail to the last business ad-
dress known to you. Oral notices or notes to
Uncovering and Correction of the Work others, such as employees of the architect,
contractor, or owner may not hold up.
Article 12 provides that the contractor
may be required at his expense and with no
time extension to uncover work for inspection Test and Inspections
if it was covered contrary to the architects re- Under 13.5, the contractor is to notify the
quest or to requirements in the contract doc- architect when and where tests and inspec-
6 CT 5
Contracts
tions are to be made by public inspectors.The sonable overhead, profit and damages. The
contractor pays for tests and inspections re- owner may terminate the contract for persis-
quired by the contract documents, but the tent failure of the contractor to supply enough
owner pays for any which were not required properly skilled workers or materials, failure
until after bidding. When additional inspection to pay subcontractors, disregard of laws or
or tests are ordered by the architect, owner or codes, or other contract breaches.The owner
a public authority and such tests reveal fail- has the right to take possession of the site
ure of the work to conform to the contract doc- and of all materials, equipment, tools, con-
uments, the contractor must pay the cost of struction equipment and machinery owned
correcting, including repeated procedures by the contractor, accept assignment of sub-
and compensation for the architects addi- contracts, and finish the work by whatever
tional services and expenses. means the owner deems expedient. If costs
exceed the unpaid balance, the contractor
Termination or Suspension owes the balance.
of the Contract *14.3 Suspension. This new clause
Article 14 The contractor may termi- gives owners similar rights to those of gov-
nate the contract if the work is stopped for 30 ernment agencies in ordering the contractor to
days or more through no act or fault of the suspend, delay, or interrupt the work for what-
contractor or a subcontractor, including lack ever period the owner chooses. Unlike Federal
of timely payment, delays and interruptions work, however, the contractor pressing a claim
by the owner, or failure of the owner to fur- for compensation under the A201 clause may
nish evidence of its ability to finance the bal- include profit as well as adjustment for the in-
ance of the job. Upon termination, the creased cost of performance. No adjustment
contractor is entitled to payment for work shall be made if performance was or would
completed and proven losses, including rea- have been delayed by the contractor.
CT 5 7
Bulletin No. CT 6
File: Contracts
Warranty
Note: All warranty provisions must be negotiated between the individual contractor and
any other party to a particular contract. It is unlawful for contractors to agree among
themselves to employ any particular form or terms of warranty since, like prices or bids,
warranty provisions are competitively important terms of sale.
Most construction industry contract Separate letters of warranty should be

specifications include an express require- submitted to the owner or his agent, docu-
ment that the contractor provide a written menting clearly items turned over and their re-
statement of warranty for mechanical work spective warranty dates. Of course, all
that is usually in force for one year from the warranty provisions must be negotiated be-
date of acceptance by the owner or his au- tween the individual contractor and other par-
thorized representative. Of course, depend- ties in each transaction. It is unlawful for
ing on the customer, the normal period of contractors to agree among themselves to
warranty is sometimes extended for special employ any particular form of warranty since,
reasons. In some instances, it is advisable for like price, a warranty provision is a competi-
the contractors warranty period to begin as of tively important term of sale.
the date the owner or user has beneficial use
of the mechanical system, in whole or in part. Mechanical construction industry prod-
ucts and equipment usually carry written man-
In the event that a mechanical system or ufacturers warranties that are in force for a
a separate apparatus, or component is put to period of one year from the date of shipment
beneficial use by any party, other than the in- and do not cover damages in shipment or
stalling contractor, with the authorization of abuse by other trades occurring before ac-
the owner or his agent, the warranty period ceptance by the contractor. Matters such as
should commence upon the beneficial use of contract specification requirements, project
such system, equipment or component. duration and project conditions should be
1
Contracts
taken into account in negotiating terms and warranty in every transaction or contract that
possible extension of the warranty period with requires the product or goods to be reason-
suppliers of materials and equipment at the ably fit and sufficient for the purpose for which
time of bid preparation and/or order place- they are to be used.For example, when a man-
ment. When equipment is ordered early for ufacturer supplies a product which he has rec-
storage on site, the normal manufacturers ommended for a specific use or need, in
warranty will usually expire before the equip- response to performance specification, there
ment is started for testing. In that event, an ex- is an implied warranty that the product will per-
tended warranty should be negotiated or form for that purpose.When an owner requires
purchased from the manufacturer.This is gen- a contractor to build in accordance with plans
erally no problem if the manufacturer performs or specifications supplied or prepared by an
start-up service on the equipment. architect/engineer, the owner implicitly war-
rants that those plans and specifications will
Important maintenance or operation by
be sufficient to achieve the desired result, and
an owner has frequently presented problems
the contractors letter of warranty is based on
and should be excepted, in writing, in a war-
this premise.
ranty provision.
To obtain the maximum advantage of the
In this regard, the General Conditions of
implied warranty of fitness, the supplier should
the Contract for Construction prepared by the
be notified of the specific use to be made of
American Institute of Architects (AIA
the goods, and he should understand that his
Document A201, 1987 edition) expressly ex-
recommendations are being relied upon. If the
cludes remedy for damage or defect caused
buyer (owner or his agent) asks for a precise
by abuse, modifications not executed by the
item by manufacturer and model number for
Contractor, improper or insufficient mainte-
a particular brand of goods, or goods having
nance, improper operation, or normal wear
a patent, there is no implied warranty of fit-
and tear under normal usage.
ness from the contractor since the buyer is not
Unless the documents clearly state relying on the contractors judgment, but on
otherwise, there is also usually an implied the suppliers own.
2 CT 6
Bulletin No. CT 7
File: Contracts
Cautions for Contractors: Asbestos Hazards

MCAA members are cautioned to investi- abatement, encapsulation or removal
gate the possibilities of encountering asbestos of asbestos or products or materials or
before entering into contracts for retrofit or reno- equipment containing asbestos.
vation work, particularly in buildings constructed
prior to 1975. The OSHA requirements apply to 2. This clause shall supersede
any work with asbestos, regardless of the amount any conflicting or inconsistent clause
encountered or likely to be encountered. of the General Contract, general con-
It is suggested that MCAA contractors ditions of the contract, special condi-
provide themselves additional protection by tions, technical conditions, plans or
including appropriate clauses in contracts for specifications.
work where asbestos is likely to be encoun-
tered. A model wording for such clauses is 3. In the event that the contrac-
shown below. tor encounters any asbestos prod-
ucts or material in the course of
A contractor who finds asbestos at a work performing its work, the contractor
site, or has reason to believe asbestos is pre- shall have the right to discontinue its
sent, should notify the owner or owners repre- work and remove its employees from
sentative verbally immediately, and follow with the project, or that portion of the pro-
prompt notification in writing. If an asbestos ject wherein such product or materi-
clause is in the contract, the contractor should als was encountered, until such
cite pertinent provisions in the contract includ- products or materials, and any haz-
ing who has responsibility for asbestos re- ards connected therewith are abated,
moval. The building owner (or representative) encapsulated, or removed, and/or it
normally is responsible for having the job site is determined that no hazard exists;
surveyed by a firm that specializes in such work, further, contractor shall receive an ex-
and then arranging for safe removal and dis- tension of time to complete its work
posal of any asbestos encountered. and compensation for delays en-
countered and compensation for any
Asbestos Clause: change in the sequence or method of
1. The work provided for in this its work occasioned as a conse-
contract shall not include the detection, quence of said encounter.
1
Bulletin No. CT 8
File: Contracts
Bulletin
Understanding Manufacturers Warranties

Introduction
You shall warrant all materials and terms and conditions? The answer is only
workmanship for a period of not less than as good as your relationship with the
one year from the date of substantial manufacturer.
completion.
More often than not, however, the
The above is a standard clause in most manufacturer is providing its standard
subcontracts. However, when the coverage when the contractor thinks his
standard terms and conditions of most risks are covered which results in a myriad
manufacturers warranties are evaluated, of problems, depending on the situation. If
more often than not, the perceived the project is delayed past its original
coverage from the manufacturer is often completion date (due to no fault of the
lacking. contractor), than a delay claim with
applicable warranty extensions present the
The ABC Company, for example, warrants obvious path to resolution. If the owner is
its equipment for either 12 months from the source of the delay, and the general
startup or 18 months from shipment, contractor is in your corner, then life is
whichever occurs first. DEF Corporation easy.
warrants its equipment for only 12 months
from the date of shipment. When What happens when things are not so
manufacturers are asked about their clear? On one recent project, a
warranty info, most responses will lie mechanical contractor installed some large
somewhere in between these two horsepower ventilation fans in the garage
examples. One response never heard is basement of a high rise condominium
we will warrant all materials and project. Due to accessibility, the fans were
workmanship for a period of not less than installed in month 10 of a 30-month project.
one year from the date of substantial The project actually finished two months
completion. ahead of schedule, but when the contractor
turned on the power in month 26, one of
Whats a mechanical contractor to do? the 75 horsepower motors was
malfunctioned. The fan manufacturer
Issues Affecting Warranty Claims claimed the fans were out of warranty,
Obviously, negotiating warranty terms up even though the project was still
front is the answer, but how many times do incomplete. The manufacturer cited his
we feel the issue is resolved when we send standard warranty terms of 12 months from
our Purchase Order with our ironclad shipment. The contractors purchase order

was specific on the fans, but did not manufacturers will not offer extended
address warranty terms other than provide warranties after the equipment has been
standard one year warranty. The general started. At that point, the contractors risk
contractor did not support the has increased dramatically.
subcontractors request for a change order,
and the subcontractor was forced to pay Involve the General Contractor
for the repairs that he thought were Also, be sure to include the general
covered in the purchase order. The contractors in the negotiations as well.
contractors claim that the unit had never One prominent subcontractor routinely
been turned on fell on deaf ears as the includes in his proposal letter up to 90 days
manufacturer claimed the warranty was of use and maintenance after equipment
tied to the shipping date. start-up prior to the start of all warranties or
the date of substantial completion,
Another issue that could affect warranty whichever comes first. This subcontractor
start dates is early commissioning of the succeeds in have this language written into
equipment for temporary construction his contract because the general contractor
cooling. More often than not, general does not have to argue over construction
contractors have this covered in their cooling when negotiating the terms of the
contract language, but subcontractors fail contract. This assumes that the owners
to pass it on to the manufacturer. On most equipment is allowed to be used for the
projects, major equipment is started up two purposes of construction cooling. When
to six months prior to substantial the period between startup and substantial
completion. Depending on the complexity completion exceeds 90 days, which it often
and size of the project, this period could be does, the subcontractor has an easier time
longer. Yet the result is always the same; getting paid for additional costs due to
the owner and the general contractor negotiations up front.
expect their warranty to start when the
building is accepted and not before. Conclusion
Like any other insurance, make sure you
So back to the original question; whats a know the terms of the manufacturers
mechanical contractor to do? warranty for the equipment you purchase.
Negotiate Up Front Ask thorough questions up front to

The answer is to negotiate with your ensure your lowest exposure.
vendors and general contractors up front.
When equipment is purchased, specify the Include the general contractor in
delivery date and the projected dates for your negotiations and plan for
startup and substantial completion so that extensions up front because they
the vendor has this covered. These may not be available later.
matters should be discussed prior to the
original estimate so these monies can be
Hold those responsible for project
budgeted. Otherwise, the vendors will add
delays accountable for warranty
the monies when terms are discussed.
extensions. You might decide not
to pursue additional costs with a
Should the vendor not address these
general contractor when a project
matters, considering adding additional
finishes four months late only to find
costs to your bid to cover unanticipated
out 12 months later that you face a
warranty issues.
large, unexpected exposure with no
recourse.
Either way, one thing is certain. Most

Bulletin No. CT 9
File: Contracts
Bulletin
Managing Killer Contract Clauses

INTRODUCTION Before commencing a discussion on
This bulletin will identify Killer Clauses specific contract clauses, two items
commonly found in standard, preprinted must be reviewed: (1) bids, and (2)
contract forms of general contractors and incorporation by reference of other
construction managers. This is not a documents. When bidding a
discussion of scope issues, but of the project you should either have the
terms and conditions most typically found intended subcontract form available and
in boilerplate contract agreements. submit with your bid a list of exceptions
to the form or, include with your bid a
The bulletin is divided into five sections, statement similar to the following: If we
(1) The Work, (2) The Schedule, (3) are the successful bidder on this
Indemnity and Insurance, (4) Payments project, we reserve the right to negotiate
and (5) Miscellaneous. Within each of the the Subcontract so it more closely
sections mentioned above, there are reflects the AIA documents [or
examples of killer clauses. Each killer ConsensusDocs] and our normal
clause is followed by suggestions as to business practices.
how to modify this language so as to
eliminate unnecessary risk to the When you finally receive and read the
subcontractor without significantly altering GCs proposed subcontract, carefully
the general contractors risk. review the definition of the Contract
Documents. It will likely include not only
This bulletin is not published by the subcontract, but other documents
MCAA as specific legal advice; it which are incorporated by reference
should not be relied upon for that into your subcontract. This language
purpose. MCAA publishes these means that even though the referenced
documents are not physically attached
bulletins as a general discussion to your subcontract, you are
of topics of interest, and is not nonetheless bound by their additional
responsible for its content or terms and conditions. Therefore, it is
accuracy, which is the respons- your obligation to acquire the
ibility of the author. As with all incorporated documents from the GC
legal matters covered in this and and read them just as carefully as the
other MCAA bulletins, readers are subcontract itself before signing the
advised to consult with their subcontract. Most often the referenced
attorney for specific legal advice. documents include the contract between
the Owner and the GC, as well as

certain GC forms. When reviewing the YOU CAN LIVE WITH
Contract Documents, be aware of the The Work shall be performed to the
following killer clauses. satisfaction of the Owners, the Design
Professional and the GC, and the
THE WORK decision of the Owner, Design
Professional or the GC as to the
Scope of the Work construction and meaning of the
Subcontract Documents shall be final
KILLER in accordance with Contract
The Work of Subcontractor includes all Documents.
work specifically set forth in the
Subcontract, together with any and all COMMENTS
work necessary to properly complete the It is unreasonable for any of the parties
Subcontract and which is necessary to to have unilateral decision authority
have a properly functioning and totally either over approval of the project or
acceptable project for the purpose interpretation as to the intent of the
intended. documents. Regardless of the type of
project (design build or plan and spec),
YOU CAN LIVE WITH... the mechanical contractors
The work of Subcontractor includes all responsibility is to build and install the
work specifically set forth in the project in accordance with the
Subcontract, together with any and all documents.
work reasonably inferable from the
Contract Documents as being necessary Code Compliance
to properly complete the Subcontract and
which is necessary to have a properly KILLER
functioning and totally acceptable project Subcontractor will furnish all labor,
for the purpose intended. materials, supervision and items
required for the proper and complete
COMMENTS performance of the work in compliance
Be sure not to become the Owner or with all applicable local, state and
GCs design professional by signing a federal laws, codes and ordinances.
killer clause like this. Your obligation
should be limited to provide what is YOU CAN LIVE WITH...
shown in the plans and specifications Subcontractor will furnish all labor,
and anything reasonably inferable there materials supervision and items required
from. for the proper and complete
performance of the work and the
Owner, GC and Design Professional performance of its work shall be in
Decisions compliance with all applicable local,
state and federal laws, codes and
KILLER ordinances.
The Work shall be performed to the
satisfaction of the Owner, the Design COMMENTS
Professional and the GC, and the Unless you expressly agree to be a
decision of the Owner, Design design-builder, you must be careful not
Professional or the GC as to the to assume a design responsibility by
construction and meaning of the agreeing to comply with building codes,
Subcontract Documents shall be final. especially if you do not carry errors and
omissions insurance. The subcontractor
should build the work in accordance with

the Contract Documents. It is fairly safe to Work, use all means necessary to
agree that your performance, i.e. the discover any defects in such other work,
method of installation will comply with and before proceeding with the Work
applicable laws and codes like OSHA, etc. report promptly any such improper
If you become aware that the design is not conditions and defects to the Contractor
incompliance with code, you should notify in writing, and allow the Contractor a
the GC in writing and proceed with any reasonable time to have such improper
corrective measures only under the conditions and defects remedied.
change order clause. Arguably, under the
killer clause, the Subcontractor has YOU CAN LIVE WITH...
assumed the cost of the corrective action Subcontractor, prior to beginning the
to meet code. Work, shall notify Contractor of any
claimed ambiguities or errors in the
Coordination Subcontract Documents affecting its
work of which Subcontractor is or
KILLER should be aware. It shall be the
Subcontractor shall be responsible for obligation and responsibility of the
coordinating the Work included in this Subcontractor to take such reasonably
Agreement with all other trades. inspect and measure measurements so
as shall insure to verify the proper
YOU CAN LIVE WITH... Subcontractor matching and fitting of the Work with
shall be responsible for to assist the GC in contiguous work. The Subcontractor
coordinating the Work included in this shall carefully examine existing
Agreement with all other trades. conditions and the work of others to
determine whether it is fit, ready, and
COMMENTS suitable condition for the proper and
The primary responsibility for accurate performance of the Work, use
coordinating the various trades should all reasonable means necessary to
remain with the GC. However the discover any defects in such other work,
Subcontractor can assist the GCs and before proceeding with the Work
efforts. Note, refer to the joint position report promptly any such improper
statement from MCAA, SMACNA and conditions and defects to the Contractor
NECA on spatial coordination for in writing, and allow the Contractor a
further clarification. reasonable time to have such improper
conditions and defects remedied.
Inspection of Site and Preceding Work
COMMENTS
KILLER The mechanical contractor should be
Subcontractor, prior to beginning the held only to a reasonable and
Work, shall notify Contractor of any customary standard regarding
claimed ambiguities or errors in the ambiguities and errors in the contract
Subcontract Documents affecting its work. documents, or site conditions and the
It shall be the obligation and responsibility proper work of others.
of the Subcontractor to take such
measurements as shall insure the proper Trash\Debris
matching and fitting of the Work with
contiguous work. The Subcontractor shall KILLER
carefully examine existing conditions and Subcontractor will clear its trash from
the work of others to determine whether it the project site daily. If Subcontractor
is fit, ready, and suitable condition for the fails to do so, Contractor may clear
proper and accurate performance of the Subcontractors trash and charge

Subcontractor the cost of same. The mechanical contractor cannot be
held to an extended warranty where
YOU CAN LIVE WITH... Owner acceptance of the project may
Subcontractor will clear its trash from be delayed for reasons beyond the
the project site daily to a dumpster on- mechanical contractors control or for
site provided by Contractor. If general contractor caused issues.
Subcontractor fails to do so, Contractor Likewise, extensions of warranty
may after 24 hours written notice to periods for corrective warranty actions
Subcontractor, clear Subcontractors may cause indefinite warranty
trash and charge Subcontractor the periods. Beginning the warranty
reasonable cost of the same. period at substantial completion of the
mechanical contractors work is a
COMMENTS reasonable approach, especially since
Adding the language indicated will there is a strong likelihood that the
ensure you need not provide site waste equipment will be in use.
removal and can save you from those
pesky clean-up back charges. THE SCHEDULE
Warranties Accepting a Completion Schedule
KILLER KILLER
The Subcontractor shall repair, or Subcontractor shall perform the work in
remove and replace, at the a prompt and diligent manner and in
Subcontractors own expense, accordance with the schedules given
workmanship or materials which prove from time-to-time to the Subcontractor.
to be faulty or defective at any time
within one year from the date of final YOU CAN LIVE WITH...
acceptance of the Contractors work by The Contractor shall prepare the
the Owner. In the event of any such Construction Schedule with reasonable
repair or removal, this warranty period accommodation for Subcontractors
will be extended one year from the date Work. Subcontractor shall perform the
of completion of such repair or removal. work in a prompt and diligent manner
and in accordance with the reasonable
YOU CAN LIVE WITH.. schedules given from time-to-time to
The Subcontractor shall repair, or the Subcontractor, and as agreed to by
remove and replace, at the Subcontractor.
Subcontractors own expense,
workmanship or materials which prove COMMENTS
to be faulty or defective at any time Never agree to blindly accept GC/
within one year from the date of final Owners schedule. The best schedules
acceptance of the Contractors work by are mutually developed. The GC
the Owner substantial completion of the should be responsible to prepare a
Subcontractors Work. In the event of schedule establishing the sequence
any such repair or removal, this and duration of all activities and then
warranty period will be extended one refine it to include the Subcontractors
year from the date of completion of input.
such repair or removal.
No Damage for Delay
COMMENT
Clauses such as this extend the KILLER
potential warranty period unreasonably. Should Subcontractors performance of

this Agreement be delayed or disrupted by indirect cost of a delay can be ruinous.
any acts of Contractor, other Either get rid of the risk as shown in (A)
subcontractors, or Contractors suppliers, above, or, as shown in (B) above, you
or delayed or disrupted by any acts or can compromise by limiting your
causes which would entitle Contractor to recovery for Owner caused delays to the
an extension of time under the Contract amount recovered by the GC from
Documents, Subcontractor shall receive Owner on your behalf.
an equitable extension of time for the
performance of this Agreement but shall Please note that these no damage for
not be entitled to any increase in the delay clauses are widely generally
Agreement Price or to damages or enforced by the courts, however, some
additional compensation as a states do have statutes voiding these
consequence of such delays or clauses in public contracts or in some
disruptions. cases holding such clauses
unenforceable as against public policy.
YOU CAN LIVE WITH...
(A) Should Subcontractors performance of Subcontractors Delay\Liquidated
this Agreement be delayed or disrupted by Damages
any acts of Contractor, other
subcontractors, or Contractors suppliers, KILLER
or delayed or disrupted by any acts or In the event of any failure of
causes which would entitle Contractor to Subcontractor to complete his work
an extension of time under the Contract within the required time and upon the
Documents, Subcontractor shall receive dates established as provided herein,
an equitable extension of time for the the Subcontractor hereby agrees to
performance of this Agreement but shall reimburse the Contractor for any and all
not and shall be entitled to any increase in liquidated damages, if any, that may be
the Agreement Price or to damages or assessed against and collected from the
additional compensation as a Contractor by the Owner.
consequence of such delays or
disruptions. (B) Should Subcontractors YOU CAN LIVE WITH...
performance of this Agreement be delayed In the event of any failure of
or disrupted by any acts of Contractor, Subcontractor to complete his work
other Subcontractors, or acts or causes within the required time and upon the
which would entitle Contractor to an dates established as provided herein,
extension of time under the Contract the Subcontractor hereby agrees to
Documents, Subcontractor shall receive reimburse the Contractor for any and all
an equitable extension of time for the liquidated damages, if any, that may be
performance of this Agreement but shall assessed against and collected from the
not be entitled to any increase in the Contractor by the Owner, but only to the
Agreement Price or to damages or extent the delay was due to the
additional compensation as a Subcontractors wrongful failure to
consequence of such delays or comply with the agreed upon schedule.
disruptions, except the extent Owner or
other third party is liable and pays GC for COMMENTS
the cost of the delays or disruptions The GC should not be permitted to
incurred by Subcontractor. simply pass liquidated damage
assessments down to the
COMMENTS Subcontractor without first determining
Do not give up your right to delay the extent to which the Subcontractor
damages if at all possible. The direct and was responsible for the delay as

compared to other subcontractors as well performed by or for the Subcontractors
as the GC. account under this agreement or
caused or occasioned in whole or in
Also, be aware that in many cases, it is part by reason of the presence of the
better to have liquidated damages person or property of the
identified in the Contract Documents as Subcontractor, its employees, agents or
opposed to having the uncertainty of suppliers, except when such claims or
actual damages in the event you cause suits shall arise out of the sole
a delay. At least when liquidated negligence of the Contractor.
damages are identified, you know what
delay will cost. YOU CAN LIVE WITH...
To the extent of its fault or negligence,
Acceleration the Subcontractor agrees to indemnify
and save the Contractor, and Owner
KILLER and the Architect harmless from any and
In the event Subcontractor fails to all claims, suits, losses, damages or
maintain the schedule, Subcontractor expense on account of injuries to or the
shall without compensation, work such death of any and all persons
overtime as GC may direct until whomsoever, and all property damages
Subcontractor is in compliance with such arising or growing out of or in any
schedule. manner connected with the work
performed by or for the Subcontractors
YOU CAN LIVE WITH... account under this agreement or caused
In the event Subcontractor fails to or occasioned in whole or in part by
maintain the schedule, Subcontractor reason of the presence of the person or
shall without compensation, work such property of the Subcontractor, its
overtime as GC may direct until employees, agents or suppliers, except
Subcontractor is in compliance with such when such claims or suits shall arise out
schedule if said failure to maintain the of the sole negligence of the Contractor.
schedule was Subcontractors fault.
COMMENTS
COMMENTS Many GC forms contain very broad
Be careful not to give up your claim for indemnity provisions that might be
acceleration costs where the inability to considered deal breakers if not modified.
maintain the schedule was due to causes As the majority of states have statutes
beyond your fault or control. that impact the Owner/GCs ability to
shift risk to a Subcontractor via an
indemnity clause, it is recommended that
INDEMNITY AND INSURANCE you have your attorney and/or insurance
Liability Indemnity broker assist you with these clauses.
The comparative negligence language
demonstrated in the modification above
KILLER
is fair. Also, because of the design
The Subcontractor agrees to indemnify
responsibilities and duties to inspect the
and save the Contractor, Owner and the work typically held by Architects, it is
Architect harmless from any and all unwise to indemnify them.
claims, suits, losses, damages or
expense on account of injuries to or the The AIA subcontract form, as well as
death of any and all persons
others, address this issue by including
whomsoever, and any all property
language similar to the following; The
damages arising or growing out of or in
Subcontractors liability hereunder does
any manner connected with the work

not extend to the liability of the Architect Policies shall contain Waivers of
arising out of (1) the preparation of plans, Subrogation in favor of Contractor
specifications, designs, reports, surveys and Owner.
or Change Orders, or (2) the giving or
failure to give instructions by the Architect, YOU CAN LIVE
provided the such giving or failure to give Compensation and Employers Liability
is the primary cause of the injury of Policies shall contain Waivers of
damages. Subrogation in favor of Contractor and
Owner. (B) The Subcontractors and
Patent Indemnity General Contractors Workers
Compensation and Employers Liability
KILLER Policies shall Contain Waivers of
Subcontractor agrees to defend and save Subrogation in favor of Contractor and
harmless the Contractor and Owner from Owner the other.
and against liability or loss, cost or
expense on account of an infringement or COMMENTS
alleged infringement of any patent rights Most Subcontracts identify the minimum
by reason of the Subcontractors Work or insurance coverages required by the
any materials, equipment or techniques GC and/or Owner. You should review
used therein by Subcontractor. this section with your insurance agent or
broker on each job to insure
YOU CAN LIVE WITH... compliance. The above killer clause will
Subcontractor agrees to defend and save preclude your insurance company from
harmless the Contractor and Owner from getting reimbursed for payments it
and against liability or loss, cost or made to one of your injured workers, for
expense on account of an infringement or example, if the injury resulted from the
alleged infringement of any patent rights negligence of the Owner of GC. In
by reason of the Subcontractors Work or fairness, each party should remain
any materials, equipment or techniques responsible for damages and injuries
used therein by Subcontractor. However, stemming from their own fault or
this provision shall not apply to items negligence. If you cant negotiate out
specifically required by the Contract this killer clause as in (A), at least make
Documents. it mutual as shown in (B) so that you
and your insurance company are off the
COMMENTS hook for injuries to the employees of the
If the Owner has mandated a particular GC
item is to be incorporated into the
construction, the Owner should retain the PAYMENT
risk of a patent problem. On the other
hand, if the Subcontractor is given the Pay if Paid
discretion to select the item, it is fair that
the patent risk shift to the Subcontractor. KILLER
In that event, however, be sure that your Receipt of payment for Subcontractors
purchase order form passes that risk off work by GC shall be a condition
to the manufacturer. precedent to the right of Subcontractor
to receive payment from GC.
Waiver of Subrogation Subcontractor acknowledges that it
relies on the credit of Owner, not GC, for
KILLER the payment of its work.
The Subcontractors Workers
Compensation and Employers Liability YOU CAN LIVE WITH...

(A) Receipt of payment for decisions where this clause was
Subcontractors work by GC shall be a deemed invalid as a defense to the
condition precedent occur prior to the right subcontractors rights against the GCs
of Subcontractor to receive payment from bond.
GC. Subcontractor acknowledges that it
relies on the credit of Owner, not GC for A number of states also differentiate
the payment of its work. (B) Receipt of between pay if paid clauses (the Sub
payment for Subcontractors work by GC only gets paid if the GC gets paid), and
shall be a condition precedent to the right pay when paid clauses (the Sub gets
of Subcontractor to receive payment from paid when the GC gets paid). Some
GC. Subcontractor acknowledges that it pay when paid states provide for the
relies on the credit of Owner, not GC for Sub to be paid if a reasonable time for
the payment of its work. However, the GC to be paid has passed. These
notwithstanding the above, provisions are governed by state law,
Subcontractors payment shall not be specific to each state, and the case law
withheld if the Owners nonpayment is varies. Be sure to consult with legal
due to disputes between the Owner and counsel so you understand how the law
GC or GCs other subcontractors not in applies in your state.
any way related to Subcontractors
performance hereunder. Finally, if you are under a strict pay if
paid provision, be cautious of waiver of
COMMENTS lien rights provisions in the contract. It
The condition precedent language in this is generally never a good idea to waive
killer clause leaves the Subcontractor with lien rights by contract. The combination
no recourse against the GC in the event of contract provisions that include a pay
the Owner fails or refuses to pay the GC, if paid clause and waiver of lien rights
regardless of the reason for the may result in no recourse against either
nonpayment. The modification as the owner or the GC in the event of non-
indicated in (A) above is fair in that it payment.
permits the GC to wait until it receives the
payment from the Owner before being Retention
obligated to pay the Subcontractor.
However, if more than a reasonable time KILLER
passes for the Subcontractors payment, Notwithstanding any other provision of
the GC will then have to pay the this Subcontract or the Prime Contract,
Subcontractor, even if the Owner hasnt it is agreed that Contractor shall retain
yet paid the GC. Most GCs are loath to 10% of the amount due Subcontractor
delete the condition precedent language, as progress payments until final
and where the Owner is a solvent completion and acceptance of
government or other risk free owner, you Subcontractors Work by Owner.
might choose to let it go. However, if the
condition precedent language must YOU CAN LIVE WITH...
remain, at least negotiate the change Notwithstanding any other provision of
indicated in (B) above so that your money this Subcontract or the Prime Contract,
is not withheld due to the fault of others. In it is agreed that Contractor shall retain
some states, such clauses are ineffective 10% of the amount due Subcontractor
and cannot be used to relieve the GC as progress payments until final
from its obligation to pay subcontractors. completion and acceptance of
In other states, the clause cannot be used Subcontractors Work by Owner.
to defeat a subcontractors lien rights. However, in no event shall retainage
Also, there have been several court exceed that which Owner is withholding

of behalf on Subcontractors Work. Release of Liens
COMMENTS KILLER
Dont let the Subcontract deprive you of Subcontractor agrees that as a
the reduction in retention that the GC is condition precedent to receiving partial
enjoying. Also, remember that on federal payments
and most state projects, the Prompt Pay from Contractor for Work performed
Act in effect precludes the GC from pursuant to this Agreement,
withholding money received on Subcontractor shall execute and deliver
behalf of the Subcontractors work even if to Contractor with its request for partial
the subcontract terms permit the GC to do payments as above provided, a full and
so. Finally, note several state statutes complete release of all claims and
exist that limit the amount of retention an causes of action Subcontractor may
Owner may withhold. have or claim to have against
Contractor or Owner through the date
Liability for Lower Tier Liens of the execution of said release.
KILLER YOU CAN LIVE WITH...

Subcontractor shall defend indemnify and Subcontractor agrees that as a
hold Contractor and Owner harmless condition precedent to receiving partial
against all liability for claims and liens of payment from Contractor for Work
any laborers, materialmen or performed pursuant to this Agreement,
subcontractors of Subcontractor for labor Subcontractor shall execute and deliver
performed or material used or furnished to Contractor with its request for partial
by, through or under Subcontractor for the payments as above provided, a full and
Project. complete release of all claims and
causes of action Subcontractor may
YOU CAN LIVE WITH... have or claim to have against Contractor
Subcontractor shall defend indemnify and or Owner through the date of the
hold Contractor and Owner harmless execution of said release but only of the
against all liability for claims and liens of extent of amount requisitioned and paid
any laborers, materialmen or through the date of the execution of said
subcontractors of Subcontractor for labor release.
performed or material used or furnished
through or under Subcontractor for the COMMENTS
Project unless the same arises due to the Never waive your lien rights for claims,
Owners or Contractors wrongful change orders or retention that you
nonpayment. may not yet have requisitioned for or for
work not yet performed.
COMMENTS
Do not accept liability to keep the job free NOTE: Increasingly, GCs are including
of liens or claims by your subcontractors severe release language on the
and suppliers when the reason for their monthly requisition form. Carefully
actions is as result of the wrongful failure review all language on the requisition
of the Owner or GC to properly pay you form and make any adjustments
for the work performed. When the GC has necessary to protect your lien rights.
made timely payments to you, it is your
responsibility to pay your lower tier MISCELLANEOU
subcontractors and to keep their claims
and liens from affecting the GC, Owner or S Assignment
Owners property.

KILLER the bonds.
Subcontractor shall not assign this
Subcontract without the written consent Notice of Claim
of the General Contractor.
KILLER
YOU CAN LIVE WITH... Subcontractor shall give
Neither party shall Subcontractor shall Contractor written notice of all
not assign this Subcontract without the claims for any
written consent of the other General additional compensation or damages
Contractor. within three (3) working days of the
beginning of the event for which such
COMMENTS claim is made; otherwise, such claims
The GC does not want you to turn the shall be deemed waived.
Subcontract over to some unknown entity
for completion. Similarly, you should YOU CAN LIVE WITH...
protect yourself from having to perform for Subcontractor shall give Contractor
a future unknown GC. Sometimes, the written notice of all claims for any
Owners Lender requires that the Owner additional compensation or damages
and GC retain the right to transfer the within three (3) working days of the
subcontracts to the Lender. In that event, beginning of the event for which such
be sure that the GC is not released from claim is made; otherwise, such claims
liability to you for at least those events shall be deemed waived if Contractor
that took place prior to the date of the is prejudiced by such late notice.
assignment to the Lender.
COMMENTS
Bond Forms Notice provisions must be carefully
adhered to or risk losing your rights to
KILLER collect additional, deserved
Subcontractor shall pay for and furnish to compensation. To provide some
Contractor 100% performance and 100% cushion, the additional language
payment bonds on Contractors standard reflected in the modification to the killer
bond forms attached hereto. notice clause will require that the GC
show that your late notice somehow
YOU CAN LIVE WITH... impaired the GCs position to either
Subcontractor shall pay for and furnish to defend against the claim or to collect the
Contractor 100% performance and 100% damages from the Owner or other third
payment bonds on Contractors standard party.
bond forms attached hereto as modified
and agreed to by subcontractor. Attorney Fees
COMMENTS KILLER
Always review the bond forms supplied by In the event it shall be necessary for
the GC. Most often they will require some Contractor to retain legal counsel to
modification. Have your bonding agent enforce any of its rights hereunder,
review these forms as well to insure that Subcontractor agrees that it shall be
(1) the payment bond form limits the responsible for payment of all
definition of a proper claimant to one reasonable attorneys fees,
having a direct contract with you to supply expenses and costs incurred
labor or materials to the project, and (2) therewith.
both bond forms limit the time frame within
which to assert and pursue claims under YOU CAN LIVE WITH...

In the event it shall be necessary for neutral location. Note that increasingly,
either party Contractor to retain legal states are legislating these issues and
counsel to enforce any of its rights in some instances, these killer clauses
hereunder, the other party Subcontractor are voided by such legislation.
agrees that it shall be responsible for
payment of all reasonable attorneys fees, Labor Harmony
expenses and costs incurred therewith. KILLER
The Subcontractor shall procure its
COMMENTS materials from such sources, and
Sometimes it is easier just to delete this employ such labor subject to contract
provision. In most cases, silence in the terms and conditions in order to ensure
subcontract will result in each party harmonious labor relations on the site
bearing its own attorneys fees. However, and prevent strikes or disputes by its
the modification as shown above at least employees or other trade employees.
makes the ability to collect attorney fees The Subcontractor, in the event of a
mutual. labor dispute including strikes, shall take
whatever action is required in order to
Venue and Choice of Law prevent the disruption of work on the
project site.
KILLER
The validity, interpretation and YOU CAN LIVE WITH
performance of this Subcontract shall be The Subcontractor shall procure its
governed and construed in accordance materials from such sources, and
with the laws of the state where the GCs employ such labor subject to contract
home office is located and any litigation terms and conditions in order to ensure
between the parties hereto shall be reasonably: (a) provide for harmonious
conducted in and by the appropriate labor relations on the site and (b)
courts having jurisdiction where the GCs prevent reduce the potential for strikes
home office is located and the parties or disputes by its employees or other
consent to such jurisdiction. trade employees. The Subcontractor, in
the event of a labor dispute including
YOU CAN LIVE WITH... strikes, shall take whatever action is
The validity, interpretation and required all reasonable actions in order
performance of this Subcontract shall be to prevent minimize the disruption of
governed and construed in accordance work on the project site.
with the laws of the state where the
Project GCs home office is located and COMMENT
any litigation between the parties hereto The MCAA contractor cannot be put in a
shall be conducted in and by the position where contract requirements
appropriate courts having jurisdiction could be in conflict with either collective
where the Project GCs home office is bargaining agreements or any labor
located and the parties consent to such laws. The changes noted above are a
jurisdiction. fair and reasonable approach to
harmony clauses.
CONCLUSION
COMMENTS
Check these types of provisions to be
Hopefully, the above discussion will
sure they do not force you to travel to
prove helpful to you in your future
resolve a dispute and to confirm that the
contract negotiations and will put you on
law governing the agreement is of a

notice of some of the more common killer argument of fairness is hard to refute.
clauses. Remember, this is but a sampling
of the killer clauses you may encounter. _______________________
Each GC and Owner has other clauses This bulletin was originally prepared by
that may be peculiar to their company or Caryl Sandler Shuham of Shuham &
jurisdiction. Shuham, P.A. (Plantation, FL) for the
MCAA Management Methods
Be sure to read the contract documents Committee for use by MCAA members.
and try to negotiate out any language that Committee members revised and
seems particularly unfair to you. If the GC updated the bulletin to ensure its
will not budge, you may need to accept accuracy and relevance to current legal
the terms on the current project, but try to practice, standards and rules.
resolve in advance a better agreement for
the future work you will hopefully do The information in this article should
together. not be construed as legal advice from
the author. MCAA contractors should
If you are only changing a few provisions contact their legal counsel for
in a subcontract, it is easiest to get a red specific legal advice.
pen, mark up the document and sign it.
With a multitude of changes, it is better to
take the time to prepare a separate
amendment to the subcontract. When you
attach a separate amendment, be sure to
mark the subcontract signature line as
follows so that your modifications become
part of the subcontract itself:
BY: SUBCONTRACTOR Signature)*

*Subject to the attached Modifications
In any event, always give the GC a heads-

up cover letter or courtesy call to
let them know that you are modifying
their subcontract (as you indicated in
your bid).
In most cases, your proposed changes

will not be accepted flat out and you will
need to do some persuading. The GCs
representatives often lack authority to
change their forms so be sure you are
negotiating with the right person. With
each of the clauses identified above as
well as any others you may find, your
negotiating approach is simple. You are
merely asking to modify some of the terms
that are plainly unfair to the subcontractor,
and modifying other terms so they are
mutually applicable to both the
subcontractor and GC. Though you may
need to go a few rounds, your very basic

Bulletin No. CT 10
File: Contracts
Bulletin
Fixed-Price Construction Contracts,
Material Price Volatility and Contract Cost
Adjustment Clauses
Introduction adjustment clauses in fixed-price
construction contracts as a matter of
Volatility of construction material and equitable risk allocation. With volatility
equipment costs is greater now and in recent emerging as the norm in the 21st Century,
years than previously has been the case. fair contract risk allocation will more
That volatility and uncertainty in stable pricing frequently require an equitable cost
and commodity availability is likely to grow adjustment clause in fixed-price construction
worse in coming years, not stabilize. The contracts as the most specific way to
combination of raw material and natural adequately address an otherwise
resource scarcity, burgeoning infrastructure uncontrollable and unforeseeable risk factor.
demand worldwide, with concomitant
commodity and construction demand in the This bul letin i s not pu blished by
Far East and elsewhere, and unpredictability MCAA as specific legal advice; it
of world political stability (and shipping should not be relied upon for that
infrastructure too) all argue strongly for ever- purpose. M CAA publishes these
greater vigilance in commodity purchasing bulletins as a gene ral discussion
and price commitments in procurement of t opics of interest, and i s not
planning for fixed-price construction contracts. responsible for its content or
accuracy, which i s t he r espons-
Even worldwide climate change can affect ibility of t he aut hor. As with al l
commodity availability and price stability. In legal matters covered in this and
some cases, drought has led to hydro-electric other MCAA bulletins, readers
power rationing and cutbacks in mining and are adv ised t o consu lt with their
material production which has cut material attorney for specific legal advice.
availability and put upward pressure on prices
unpredictably. Specific Cost Adjustment Clauses are
Better Than More General Force
Construction Material and Equipment Majeure Clauses
Cost Volatility Will Continue to
Increase Cost adjustment escalation clauses set the
basic parameters for the foreseeable range
Given that price stability is no longer the of price fluctuation by a set baseline either
norm, sound procurement planning and actual costs, catalog prices, or common price
contracting policy call for more routine indexes and then allocate shared risk of
assessment of the benefits of including price volatility beyond that range between the

contracting parties. This approach benefits and political instability world-wide impacting
the contractor, the owner and the project as a both supply and shipping, and with the world-
whole. The shared risk approach to either wide competition for raw materials and
exceptional increases or decreases in price construction commodities heating up and
can help eliminate bid contingencies, avoid down more frequently and with greater
defaults and delays mid-project for the benefit spread of changes, the argument for
of all parties and the project as a whole. considering price adjustment clauses in
otherwise fixed-price construction contracts
Force Majeure and Contract becomes ever more prudent. In that context,
Impossibility Defenses are not increasingly material and equipment
Adequate to Address the Problem suppliers abjure long-term pricing
commitments (often no more than 30 days),
Such clauses operate in somewhat the same making a fixed-price construction contract
way as common unforeseen site conditions with longer-term material/equipment
clauses but are more immediate problem purchases a considerable gamble, with those
avoidance, risk sharing clauses. They cardinal risks and changes leaving all
allocate uncontrollable and unknown risk contract parties vulnerable and the project
equitably, rather than putting all the risk on success ultimately in jeopardy.
just one party. Unbalanced risk-shifting
subjects the owner and the project to project Below are some standard form contract
disputes based on that unbalanced risk. Cost clauses that address this issue.
adjustment clauses address material cost
volatility and unavailability in a way that is Influential Public and Private
much more specific than a standard force Contracting Policy Documents have
majeure clause. Force majeure clauses been Responsive to Price
(superior force, acts of God,), in most cases, Fluctuations and Risks
on their face, are limited to very extraordinary
extraneous events, often are subject to very ConsensusDOCS Policy
narrow interpretation by courts, and may be
limited to time extension remedies only. The primary private sector contract cost
Similarly, contract breach/non-performance adjustment clause is the ConsensusDOCS,
defenses relating to impracticability/ 200.1, Time and Price Impacted Material
impossibility of performance have been Amendment 1. It recognizes the need to
developed for uniform commercial code assess the context of price volatility as an
applications, are often subject to very narrow element of procurement planning. It
interpretation as well, and are not directly addresses both contract price volatility and
applicable to construction services contract excusable delays for material/product
cases in the first place. And, in any event, unavailability (without reliance on the force
such defenses are called on after the project majeure clause).
suffers the adverse impact; cost escalation
clauses stem the adverse impact on the The 200.1 document recites the existence of
project by spreading the risk equitably and market conditions warranting equitable
keeping the project on track. adjustments for price volatility and delays
because of product/material unavailability. It
Short-Term Price Commitments from calls for a baseline for price adjustments and
Suppliers are Becoming More Common rules out duplicative increases under other
document contingency provisions. It calls for
In recent years, with the unprecedented a 30-day notice period of claim impacts, and
economic growth and infrastructure documentation of covered changes. It
expansion in China, India and the Far East, doesnt set definite limits on the amount or

percentage of increase or decrease the stability of market or labor conditions that
permitted. The 200.1 document also provides will exist during an extended period of
that overhead and profit are not included in contract performance, and (ii) contingencies
the equitable adjustment based on changes that would otherwise be included in the
from the baseline. Increases or decreases are contract price can be identified and covered
permitted only for items purchased and separately in the contract. Price adjustments
delivered after the date of the change. The based on established prices should normally
document does not set any specific be restricted to industry-wide contingencies.
percentage change limits (as the FAR does). Price adjustments based on labor and
[NOTE: As a private-sector form document, material costs should be limited to
such percentage limits and adjustments contingencies beyond the contractors
must be left to the negotiations among the control. (FAR, Part 16-203-2.)
contracting parties.]
The FAR sets out the basic dimensions of
AIA Supplementary Conditions the price adjustment clause, as follows:
Addresses the Subject
A firm fixed-price contract with economic
The American Institute of Architects standard price adjustment provides for upward or
form general conditions (A-201, 2007 Edition) downward revision of the stated contract
does not address the subject. However, there price upon the occurrence of specified
is mention of the subject in the 2007 Edition contingencies. Economic price adjustments
of the AIA Guide for Supplementary are of three general types:
Conditions (A-503), which says:
(1) Adjustments based on established
Section 3.8 Allowances . . . . In recent years, prices. These price adjustments are
unanticipated price escalations in construction based on increases or decreases
materials after the contract is executed have from an agreed-upon level in
caused concern to owners and contractors. If published or otherwise established
the owner and architect are concerned about prices of specific items or the contract
facing such price escalations in certain end items.
materials, they should identify those materials (2) Adjustments based on actual costs
prior to the bid and provide for them in the of labor or material. These price
bidding requirements as allowances. adjustments are based on increases
or decreases in specified costs of
FAR Policy criteria The Federal labor or material cost standards or
Acquisition Regulations (FAR) now indexes that are specifically identified
recognizes that contracting officers may in the contract.
include economic price adjustments in fixed- (3) Adjustments based on cost indexes
price contracts where the Contracting Officer of labor or material. These price
determines that it is necessary either to adjustments are based on increases
protect the contractor and the Government or decreases in labor or material cost
against significant fluctuations in labor or standards or indexes that are
material costs or to provide for contract price specifically identified in the contract.
adjustments in the event of changes in the FAR, Part 16-203-1
contractors established prices. (FAR, Part
16.203-3) FAR Contract clause The FAR Economic
Price Adjustment Labor and Material
The FAR adds that a fixed-price contract with clause (Part 52-216-4) calls for notice of
[an] economic price adjustment may be used, covered increases or decreases to the
when: (i) there is serious doubt concerning contracting officer within 60 days, with
supporting data, and contains the following

significant limitations: (c) any price (4) The aggregate of the increase in any
adjustment under this clause is subject to the contract unit price under this clause
following limitations: shall not exceed 10 percent of the
original unit price. There is no
(1) Any adjustment shall be limited to the percentage limitation on the amount
effect on unit prices of the increases or of decreases that may be made
decreases in the rates of pay for labor under this clause.
(including fringe benefits) or unit prices
for the material shown in the schedule. (d) The Contracting Officer may examine the
There shall be no adjustment for Contractors books, records, and other
supporting data relevant to the cost of labor
(i) Supplies or services for which (including fringe benefits) and material during
the production cost is not all reasonable times until the end of 3 years
affected by such changes; after the date of final payment under this
(ii) Changes in rates or unit contract or the time periods specified in
prices other than those shown Subpart 4.7 of the federal acquisition
in the Schedule; or regulations (FAR), whichever is earlier.
(iii) Changes in the quantities of (FAR, Part 52-216-4). [NOTE: Contracting
labor or material used from parties should scrupulously avoid any
those shown in the schedule claims for costs not actually incurred, as
for each item. False Claims Act provisions are strictly
enforced and sanctions for violations are
(2) No upward adjustment shall apply to severe.]
supplies or services that are required
to be delivered or performed before
the effective date of the adjustment, Setting the Baseline for Change
unless the contractors failure to
deliver or perform according to the Actual costs, catalog prices or common
delivery schedule results from causes published indexes can all be used to set the
beyond the contractors control and baseline for cost adjustment clauses. ENR
without its fault or negligence, within publishes a series on common construction
the meaning of the default clause. material cost indexes. (Go to: www.enr.com).
(3) There shall be no adjustment for any Also, the U.S. Department of Labors Bureau
change in rates of pay for labor of Labor Statistics publishes a very
(including fringe benefits) or unit prices comprehensive set of Construction Material
for material which would not result in a producer price Indexes along with a
net change of at least 3 percent of the comprehensive guide on the subject,
then-current total contract price. This Escalation and Producer Price Indexes: A
limitation shall not apply, however, if, Guide for Contracting Parties. (Go to:
after final delivery of all contract line www.bls.gov/ppi/home.htm).
items, either party requests and
adjustment under paragraph (b) of this The information in this bulletin should not
clause. [Paragraph b provides for be construed as legal advice from the
submission of price adjustment claims author. MCAA contractors should contact
during the course of the contract, their legal counsel for specific legal
continuing performance during the advice and actual contract drafting or
term at agreed-upon rates, then review.
overall percentage change
adjustments at the end of the
contract.]

Bulletin No. CP 1
File: Corporate Planning
Strategic Planning
WHY PLAN? thinking, research and discussion becomes

the plan, which is the tangible evidence of
It is often said, If you dont know where thinking. Plans result from planning. Planning
you are going, any road will get you there. is a waste of time unless it results in a spe-
Thus any business entity which has a purpose cific course of action to be taken within a given
needs strategc planning. Actually, one of the time period.
most important functions of the chief execu-
tive of a corporation should be the determi- Planning for the future is not forecasting.
nation of the goals and objectives of the Forecasting is extrapolating todays trends
company. Strategic planning forces the chief and events into the future. Planning is sitting
executive to choose future opportunities in the down and determining ways to change the fu-
market place, investigate them and formulate ture to insure that results will be consistent
goals and objectives to exploit these oppor- with the goals of the corporation and value of
tunities. its management. The resulting plans must be
continually (or at least periodically) reviewed
and adjusted to coincide with changes in the
WHAT IS PLANNING? business environment and managements
Planning for a mechanical contractor values.
may simply be stated as managements defin-
ing what is to be done, when it is to be done, WHAT IS THE MOST IMPORTANT STEP?
how it is to be done and who is to do it. But,
since a business entity does not operate in a Before planning can begin, the corpora-
vacuum, it is not an easy task. tions chief executive must ask himself,
Where do we want this corporation to go? or
Planning is thinking through what is de- as many say, he must develop a strategy. To
sired and how it will be accomplished. After develop a strategy, the planner must ask, what
1
Corporate Planning
business is the company in or is it to be in and clearly labeled as such in the plan, and they
what kind of company is it, or is it to be. should be re-evaluated and updated as part
Chandler in his book, Strategy and Structure, of the continuing review process. The as-
defines strategy as a Determination of long sumptions and answers provide a basis for the
term goals and objectives for an enterprise, next step in planning: the strategy statement.
and the adoption of courses of action and the
allocation of resources necessary for carry-
STRATEGY STATEMENT
ing out these goals.
The strategy statement of a mechanical
To develop a strategy, the chief execu-
contractor should at least define the following:
tive must ask himself the following:
1. What business will the contractor be con-
1. Where will the environment allow us to
ducting, in terms of the functions that his
go?
work will perform?
2. What will our competitors allow us to do?
2. What markets he will be in, both geo-
3. What are our abilities to get there? graphical and within given geographic
segments?
4. What are our social responsibilities in get-
ting there? 3. How will he market his product? Will he
merely bid work or will he employ full-time
The mechanical contracting corporate
salesmen to obtain projects?
executive must ask himself the above ques-
tions in view of what he sees for the future in 4. How will the corporation be financed?
terms of the following:
5. What growth rate, in terms of sales and
1. Technology of the mechanical contract- earnings, does he expect?
ing industry.
6. What kind of an organization does he
2. The changing concepts in the mechani- want to have? Does he want to have com-
cal contracting industry, such as recent plete control? Will he allow employees to
trends from bid-spec projects to design- buy stock? Is it planned for the company
construct projects. to merge with another company or for the
company to go public?
3. Activities of competitors.
After the strategic statement has been
4. Financial resources.
formulated, plans can then be made as to mar-
5. Physical resources. keting activities, recruitment of personnel in
the areas of sales, estimating, project man-
6. Personal resources.
agers, accounting, executive talent, etc; phys-
7. Personal goals. ical resources in terms of buildings,
machinery and corporate facilities; and even
Obviously, the answers to many ques-
the addition of branch offices.
tions cannot be known at the start of planning.
When factual data cannot be provided, spe- Before any firm decisions can be made
cial factors can and should be assumed. as the result of planning, the chief executive
These assumptions should be listed and must sit down and determine what his strat-
2 CP 1
Corporate Planning
egy will be for the next year, two years and up as the growth of various segments in your
to and including five years. market and your chosen geographical oper-
ating area; what will the unions be doing; what
Developing a strategy and thereby get-
are your strengths; what are your weak-
ting off to a proper start in long-range plan-
nesses; what changes will you have to make
ning for your corporation will be a difficult task.
in your personnel; how much money are you
It means that you will have to consider what
going to need, where is it going to come from
it takes to win the ballgame you have chosen
and what risks will be involved?
to play. You must question the way you have
always done things. You will have to think After answering the questions, you will
about what is changing in our industry, both then have to ask yourself, Is it all really worth
on a technological and regional basis.You will it, and is it consistent with what I personally
have to determine what you can expect as far want to do?
CP 1 3
Bulletin No. CP 2
Corporate Structure:
Using Outside Advisors/Directors
Foreword
This Bulletin is for general information purposes only. Before adding outside directors or form-
ing an advisory committee, you should consult with legal counsel.
This bulletin deals with two aspects of ex- handling changing problems as you grow; and
panding the management resources of a you are interested in learning how to make
privately-held company by bringing in out- money, not how to go broke; (3) come from
siderswhat can they do for you and how backgrounds or businesses different from
should they be brought in? yours. Since no outsider can know as much
Outside advisors can help the company about your business as you do, you need peo-
in many ways: they can provide independent ple who will challenge traditional ways of doing
standards for managements performance, things and help establish the individuality of
answer specific questions on operations, your firm; (4) be sensitive to the coaching, ap-
force management to plan for the future of the praising function and be both sufficiently pa-
business (including succession), arbitrate in- tient and firm so that they can guide, counsel,
ternal differences, and keep management and teach without resentment.
alert to relevant changes in the external world. You have a choice as to the form of a
People who serve as outside advisors group of outside advisors: they can be actual
should (1) be objective and disinterested members of the board of directors or mem-
have nothing to gain personally from the bers of an advisory committee. The board is
knowledge they will pick up about your com- elected by the stockholders and appoints the
pany; (2) have experience in somewhat larger, officers. Where management and stockhold-
successful companiesyou will want help in ers are the same, it is rare to find a board not
1
Corporate Planning
dominated by stockholders or their families, cooperative, the retired Vice President of a re-
and therefore not truly independent. The tail chain, the President of a $40,000,000 chem-
board is legally responsible for the overall con- ical company, the financial Vice-President of a
duct of the company which it delegates to the real estate company, a top officer of an insur-
officers. The advisory committee is entirely a ance companys commercial loan department,
creature of managementit has no legal sta- partners in an accounting firm, and a general
tus, appoints no one, and exists exclusively to contractor. Good people will serve because
help internal management as it wants. your invitation flatters them and the experience
of helping a company grow is satisfying and fun.
Compensation for both should be about
equal, since the same service is expected from Also aim high for the subjects you want
people of the same caliber. Payment for each to cover: the type of business you want to be
meeting attended runs from $300 up. An added 35 years from now; personnel, space, finan-
inducement is to hold a meeting at a resort area cial, technical, equipment needs; ways of de-
once a year.Aside from the equity of paying busy termining whether top management is doing
people for their time, a fee makes the relation- a good job; what is likely to happen in the world
ship professional and easier to sever if some- that will affect you?
one is incompatible or incompetent. Assuming A few mechanics: hold the meetings dur-
3 outsiders at $300 a meeting, 4 meetings a ing the day (it not only dignifies them but peo-
year, your annual net after tax cost would be ple are more alert); be sure to have an agenda
about $2,000 including some expenses. (Add distributed in advance with as much back-
the time of management to prepare for the meet- ground data as possible; run the meetings
ings.) It would be hard to find a $2,000 expense tightly (for example, start at noon, stop at 3:00
which has the potential to make such dramatic p.m.); send out minutes promptly showing who
improvements in a company. is to do what by when; schedule the meetings
at least once a quarter, perhaps monthly to start;
Where do you find people who will serve tell the members that you are experimenting
on the board of directors or advisory commit- with the idea and with them individually; try to
tee of a small company? We must now com- have more outside than inside members;a com-
pare the two forms because the personal liability mittee of 5 to 7 people in total works best.
to which members of a board of directors are
Before establishing an advisory commit-
exposed is a deterrent strong enough to elimi-
tee or adding outsiders to the board of direc-
nate many good people. The inducement of
tors, you should clarify your objectives in
stock options or a chance for a direct investment
running your company and test your willingness
in the company may attract some potential di-
to submit to outside advice. If you decide to use
rectors, but this may be a high price for the cur-
outsiders you will find that an advisory commit-
rent stockholders to pay for outside help, and
tee (or having outsiders on the board) can work
the individuals would no longer, in fact, be out-
wonders in focusing managements energies
siders. The advisory committee has been suc-
on significant survival and profit problems and
cessful as a device to involve capable people
opportunities. It is a tough discipline for man-
precisely because it avoids the liability problem.
agementthe questions asked may be em-
Aim high when you look for advisory com- barrassingly gutsy. But thats the reason for the
mittee members. People who have been suc- outsiders they can and should ask tough ques-
cessful advisors include the head of a grocery tions, and then help you frame the answers.
2 CP 2
Bulletin No. CP 3
How to Get Out and Let Others In

Foreword
This bulletin has been prepared to provide an insight into the planning necessary to get out.
It is for informational purposes only and is not intended to provide legal or other advice. Proper
planning for the disposal of an ownership interest is a complex process that involves tax and
estate planning considerations, among others. This bulletin discusses only some of the alter-
natives.You should consult with your legal counsel, accountant and financial advisors to struc-
ture the plan most suitable for you and your company.
INTRODUCTION firm lies within the company. By planning now

for the continuity of the firm through expan-
Every stockholder of a mechanical con- sion of management and ownership opportu-
tracting business has to face the problem of nities, a stockholder-manager may be
disposing of his interest in his company at his protecting his own economic interest, while
death, disability, or retirement. The prospect perpetuating the organization.
is unpleasant because the causes, including
retirement in many cases, are difficult to face. Identifying the earnings assets of a me-
The inevitability of death and the probability chanical contracting business requires an an-
of retirement or disability make it important for swer to the question: What is saleable,
the stockholder-manager of a mechanical transferable, able to continue producing in-
contracting business, his family, and his com- come, or protecting the assets of the com-
pany to consider the practical alternatives and pany? Because of the nature of the industry,
arrange for the disposition of his interest dur- it seems clear that it is managerial talent that
ing his working lifetime. handles the estimating, obtaining bids, de-
signing, negotiating with customers and sub-
EVALUATING ASSETS contractors, buying material, coordinating
work, controlling labor and other costs, ar-
The best, in many cases the only, mar- ranging financing and bonds, and billing and
ket for the stock of a mechanical contracting collecting for work done. Although this list of
1
Corporate Planning
managerial functions may not be complete, it BUY-SELL AGREEMENTS

is a fair indication that the earning asset of a
It is important to be aware of the ele-
mechanical contracting business is its people.
ments of a buy-sell agreement and some of
Any plans for disposal of interest in a firm,
the techniques that will encourage new man-
therefore, must provide for management suc-
agement participation, while protecting the in-
cession. Without it, the assets will probably
terest of retiring stockholder-managers.
have to be sold or liquidated.
Assuming at least stockholders, the
Although it was never a popular method choice of parties to an agreement lies be-
of getting out, the sale of stock of a me- tween the individual stockholders or the stock-
chanical contracting firm to the public, in the holders and company. (Since the great bulk of
opinion of most investment bankers, is all mechanical contractors operate in corpo-
probably remote. The sale of a business to rate form, the special problems of a partner-
other contractorsgeneral, electrical, ma- ship are not discussed.)
sonry, or another mechanical firmis a pos-
The preferred arrangement is usually be-
sibility and may be the only alternative to
tween the stockholders and the company.
liquidation if the company cannot be main-
Corporate assets are generally greater and
tained through the development of internal
have a higher yield than personal assets.
renewal.
Security to a seller is greater when an oblig-
ation is backed by a corporation.The payment
The interest of a buyer is dominated pri-
of insurance premiums and the receipt of pro-
marily by people. If he is not in the mechani-
ceeds may be easier.
cal contracting industry, it would be a rare
purchaser who would not insist that the man- Since each company is unique and the
agement of the selling organization remain, needs of individuals and their companies are
usually tied to long-term employment con- dynamic and therefore changing, the specifics
tracts. If another mechanical contractor ac- of each buy-sell agreement must be individu-
quires a firm, he would be concerned with the ally hammered out and regularly updated.The
continuing availability of top people. following summarizes the main points that
should be considered for inclusion in a buy-
Thus, getting outwhether it is selling to sell agreement.
others, or retiring, or dying while owning an
interest in your firmrequires not only di-
Restrictions
gestible financial arrangements but clear,
tough plans for letting others in. Stockholders or their estates are usually
restricted from selling or otherwise disposing
By far the greatest market for getting out of their shares (via gifts or through a will) to
lies within the company: present and future anyone except a relative actively working in
stockholders who have or eventually will have the company, other stockholders, or the com-
the same personal interest in getting out and pany. Because the number of shareholders in
the same concern that the assets that have most mechanical contracting firms is small
been accumulated will be protected and and consists primarily of active workers, the
maintained. relationship between shareholders is more
2 CP 3
Corporate Planning
similar to a partnership in which the partners crease) between cost and appraisal as
have a say as to who their partners will be. part of the value.
Regardless of which tax accounting sys-
Options tem the company may use (which may be
the completed contract method) use per-
Who can, or must, sell or buy? On death,
centage-of-completion accounting for de-
or disability lasting more than a year, the es-
termining annual income and buy-sell
tate or disabled person must sell, provided the
values.
company can handle the total purchase (more
on this), and the company itself must buy. On In cases where there are only a few stock-
retirement, with sufficient time to provide both holders (not over four), shareholder value
new management and a financial plan, the may be simply the amount of insurance
same terms should obtain. The estate and a that the shareholders agree they want to
disabled stockholders family need to know provide for their families and that the com-
where they stand, and there is questionable pany can afford to carry.
fairness in permitting an estate or inactive
stockholder to benefit from the efforts of the
working stockholders. Terms
Price is best set annually by the stock- The desire of an estate or retiring stock-
holders, who alone best know the value of the holder to receive payment as quickly as pos-
business. The value should be placed at a fig- sible should be balanced against the goal of
ure that is agreeable to each stockholder as the companys continuing management to
either a buyer or seller. If after setting the stretch out payments as long as possible.
value, stockholders cannot in future years Usable formulas have included:
agree on a price, one suggestion is to amend Prompt payment of life insurance pro-
the last agreed-upon value by the change in ceeds as either full or down payment.
book values. Another possibility is a formula
based on the profits of the last five years, and Annual payments keyed to the net after tax
the application of an agreed-upon (or indus- salary and related fringe benefits of the de-
try average) multiplier. Book value, or a dis- parted stockholder.
count from book value, should be the Acceleration of payments based on a per-
minimum price, in case the formula equals centage of net income (for example,
less than book value. $40,000 a year or 25 percent of the cor-
Several normal price provisions should porate net income after taxes, whichever
be considered: is greater).
Date the value as of the month-end prior
to the date of death, disability or retirement Security
to avoid inclusion of life insurance pro-
Security is best left to the lawyers. Some
ceeds.
provision is almost always included when
Provide for a real estate appraisal and in- there is an extended payout. Other aspects of
clude the difference today (probably an in- security include:
CP 3 3
Corporate Planning
Making frequent payments (monthly or effect of pressure to set a low price.

quarterly rather than annually) Liquidation or sale at a lower price should not
Maintaining required working capital result in a penalty to the stockholder, whose
interest has been redeemed.
Holding the acquired stock in escrow
Obtaining personal signatures of remain- Arbitration
ing stockholders
A standard binding arbitration clause is
Taking a first or second lien on available helpful to reduce the time and expense of dis-
assets without restricting the companys putes.
operations.
If retirement takes place when the indi-
On any installment payout, Internal vidual is still young and healthy enough to be
Revenue Service regulations require at least able to remain at work, a possible advanta-
an interest factor to be applied to the out- geous arrangement is to make part of the pay-
standing balance. (Check with your CPA for ments in the form of a covenant not to compete.
current requirements.) Negotiated at arms length, the covenant can
be helpful because payments made (they must
Post-Redemption Events be specified in the agreementincluding
amount, for how long, for what restriction) are
With the best intentions to arrive at a fair
deductible to the company, when paid, and are
price, stockholder-managers may not be able
ordinary income to the recipient. Depending
to determine an objective valuation for their
upon the difference between the higher cor-
business. If the company is sold or liquidated
porate income tax rate and the lower personal
at a higher price, after a stockholders inter-
income tax rate of the retired recipient, the
est has been redeemed, some agreements
company may be able to pay more, and the re-
provide that the value of the share redeemed
tired stockholder receive more, than under a
be increased proportionately, but on a declin-
straight stock redemption plan.
ing basis as time elapses from the date of re-
demption. For example, if a 25 percent
stockholders interest were redeemed as of THE NEW MANAGEMENT
January 1st for $100,000, and 6 months later
the total company were sold or liquidated for Basic to any program to get out is a
$600,000, it is clear that the $400,000 valua- means of providing continuity of manage-
tion, used as the total January 1st valuation, mentsomeone to pay for the getting out,
was understated. Because we can sell our in- whether it be by death, disability or retirement.
terest in a company only once, it may be fair Awareness of this management need should
to adjust the redeemed stockholders interest result in a difficult act: a review of the capa-
upwards. Since values change, the agree- bilities and potential of all managers to deter-
ment could provide that participation in the in- mine who is competent to run the company
crease would decline after the first 6 months when the top people are gone. If the review
at the rate of 1/18 a month for 18 months or results in the conclusion that available candi-
1/24 a month for 24 months. This provision dates are inadequate, stockholders-man-
also reduces the possibility of collusion or the agers should take steps to attract potential or
4 CP 3
Corporate Planning
proven managers.Consideration can be given terest would cost $50,000. The preference,
to offering them the opportunity of acquiring dividend provisions, voting rights and propor-
an interest in the company. tions of the two classes of stock are infinite in
their variety. Each company requires individ-
If the company has potential but un-
ual planning.
proven managers, the current ownership
should make plans (written and discussed) Similarly, the setting-up of a separate op-
gradually to expand the managers responsi- erating company as an offshoot of an existing
bilities in ways that do not endanger either the one must be handled in the light of unique
companys survival or the growth of the indi- needs. Usually, the original company retains
viduals. This takes careful, open participative excess working capital and fixed assets,
planning and usually a change from central- which are leased to the new company. In this
ized authoritarian (however, benevolent and way, the investment required to new stock-
paternalistic) decision-making.It is sounder to holdersthe continuing management who
test likely managers while you are around than will be available to permit getting outwill
to have your widow, attorney or executor be be small enough to be digestible.
forced to do so after you are gone. The proper insurance coverage can be
Probably the best two ways to permit a backstop in providing cash for the down pay-
younger managers to invest in a company ment, or the total amount needed under a buy-
without requiring them to pay for past earn- sell agreement, in case of the death of a
ings are through: 1) recapitalization using pre- prospective owner. Review your present cov-
ferred stock and 2) setting up a new company, erage and needs. How much can you afford
capitalized with only the minimum operating in premiums? Ask your insurance agent for
assets needed to get started. terms and minimum deposit proposals.
Under tax-free recapitalization, the bulk
of the net worth is converted into preferred SUMMARY
stock (frozen in value) and the balance into
common stock to which future earnings ac- Plans for retirement should not be kept
crue. The amount of common stock is kept secret but announced to everyone concerned.
small to make it easy for new managers to in- The public announcement has the additional
vest. For example, a company with a net worth force of making it harder to delay the man-
(fair market value) of $500,000 could be re- agement change.
capitalized into $450,000 preferred stock and To summarize, plans for getting out have
$50,000 in common stock. A 10 percent in- to start while you are still working. They must
terest in the future earnings of the company include provision for management succession
could be sold for $5,000. Without recapital- and an individually designed buy-sell agree-
ization and using book value, a 10 percent in- ment.
CP 3 5
Bulletin No. CP 4
Valuing the Closely Held

Mechanical Contractor
INTRODUCTION stock) of the closely held mechanical contrac-

tor has become increasingly important.
What is the closely held mechanical con-
tractor worth in todays market? There are How does one put a value on the stock
many reasons why an owner of a mechanical of a closely held mechanical contractor when
contracting business may need to know the that stock does not trade on an exchange or
value of his or her ownership interest. These in an active over-the-counter market? The first
include: step in the valuation process involves deter-
Preparation for sale of a company mining the appropriate premise of value and
defining that premise of value.
Institution of an Employee Stock
Ownership Plan The term fair market value is generally
appropriate for most valuation situations.Fair
Execution of buy-sell agreements among market value is defined by the Internal
shareholders Revenue Service in Revenue Ruling 5960 as
Donations of stock to charitable organiza- the amount at which property would be ex-
tions pected to change hands between a willing
buyer and a willing seller, where neither party
Property settlements related to marital dis-
is under any compulsion to buy or sell and
putes
both parties have reasonable knowledge of
Estate planning considerations, among relevant facts.
others.
The business owner needs to be aware,
Given all of the above, the matter of valu- however, that other premises of value may be
ing the stock (either common stock or preferred appropriate in certain specific situations, and
1
Corporate Planning
that the definition of value is critical to the valu- illiquid nature of the investment would be rec-
ation process. As an example, the term fair ognized by a discount from the indicated value
value is a legal concept often used in dissent- as if the shares were publicly traded. Other
ing stockholder actions, and may imply a dif- adjustments might be required to recognize
ferent value than fair market value.Experienced the existence of nonoperating assets or an ex-
corporate attorneys and valuation consultants cess or deficiency in working capital.
can provide valuable assistance in determining
the appropriate premise of value.
FACTORS TO BE CONSIDERED
The second step in the valuation process
involves the selection and application of ap- Revenue Ruling 5960 outlines the ap-
propriate valuation methodology. There are proach, methods, and factors to be consid-
three traditional approaches to valuein- ered in valuing shares of closely held
come, market, and cost. Each of these ap- corporations for estate and gift tax purposes
proaches may be used to develop an and, as expressed in Revenue Ruling 65192,
indication of the fair market value of the closely is applicable to most other valuation situations
held mechanical contractor; however, the ap- as well. Revenue Ruling 5960 pronounces
propriateness of the approaches varies with the following items as fundamental in deter-
the nature of the business being valued and mining the fair market value of closely held
the intended use of the appraisal. stock:
The nature of the business and the history
The income and market approaches are
of the enterprise from its inception
generally most appropriate for profitable com-
panies because the value of such firms is The economic outlook in general, and the
more dependent on the ability to generate condition and outlook of the specific in-
earnings than on the value of assets used in dustry in particular
generating revenues. For unprofitable or mar- The book value of the stock and the fi-
ginally profitable companies, a valuation con- nancial condition of the business
sultant would consider the cost approach to a
greater degree than for profitable companies, The earning capacity of the company
but the level of earnings is still considered in The dividend-paying capacity
the valuation process.
Whether or not the enterprise has good-
The third step in the valuation process is will or other intangible value
to reconcile the value indications provided by Sales of the stock and the size of the block
the different approaches used, and make any of stock to be valued
required modifications to reflect the rights of
The market price of stocks of corporations
the stockholder. For example, a premium
engaged in the same or a similar line of
would most likely be recognized over the value
business having their stocks actively
of the shares on a minority basis when the
traded in a free and open market, either
ownership interest subject to valuation repre-
on an exchange or over-the-counter.
sents control. Where the shares represent
only a minority interest in the stock of a closely The following paragraphs present the
held company, the lack of a market and the typical analyses that should be completed and
2 CP 4
Corporate Planning
the methodologies that should be considered company is allied, and the specific niche that
in performing a valuation study. Specific ex- the subject company serves. It is important to
amples related to the valuation of the closely understand the relationship of the subject
held mechanical contractor are provided companys industry economics to the national
where possible. The valuation analyses economy as well as to complementary and
should address each of the above factors em- substitute industry economics.
phasized in Revenue Ruling 5960.
Prospective competition which has not
been a factor in prior years should be given
History and Nature of the Business careful consideration in todays construction
The history of a corporate enterprise will environment (e.g., high profits resulting from
show its past stability or instability, its growth niche markets and lack of competition often
or lack of growth, the diversity or lack of di- lead to increased competition from contractors
versity of its operations, and other relevant in relation to more competitive, less profitable
facts needed to form an opinion of the degree specialties). Exhibits 1 and 2 provide examples
of risk involved in the business. The history to of some of the factors that should be consid-
be studied should include: ered in performing an industry and competitor
analysis as part of the valuation process.
Nature of the business
Some of the key sources of information
Products and/or services concerning projections for the construction
Operating and investment assets industry include forecasts published by
Engineering News-Record and the F.W.
Capital structure Dodge Division of McGraw-Hill, Inc., the U.S.
Plant facilities Commerce Department, and Standard &
Poors, among others.
Revenue and expense trends
Management quality.
Financial Analysis of Subject Company
The analysis should place greater em-
phasis on conditions closer to the valuation It is important to know whether the sub-
date, as those conditions are of greater help ject company is more or less successful than
in predicting future events and results. Events its competitors in the same industry, and
of the past that are unlikely to recur in the fu- whether it is maintaining a stable position with
ture should be discounted, since current value respect to those competitors. This is accom-
is based upon future expectancy. plished through a detailed financial review in-
cluding a comparison to industry standards
and comparable guideline companies. This
Economic and Industry Conditions review should include an analysis of the sub-
and Outlook ject companys historical income statements,
A sound appraisal of a closely held stock balance sheets and cash flow statements. It
must consider current and prospective eco- is most important to select a period of analy-
nomic conditions as of the date of the valua- sis that will cover the companys complete
tion, including the national economy, the business cycle. Three, five, or ten years are
industry or industries with which the subject typically chosen as a period of analysis.
CP 4 3
4
EXHIBIT 1
Competitive Environment Analysis
This analysis focuses on the nature of the industry served by your firm. For each attribute, place a check by the
descriptor that best describes the environment in which you operate.
Environmental Turbulence Levels
Attributes Stable Reactive Anticipatory Initiative
Market Structure Monopoly Oligopoly Competitive Multi-Competitive

Customer Pressure None Weak Strong Very Strong
Demand Growth Slow and Increasing and Declining/Oscillating Fast/Oscillating
Rate Stable Stable
Stage in Industry Life Maturity Late Growth Early Growth Emergence
Cycle
Profitability High High Moderate Low
Product Differentiation None Low Moderate High
Product Life Cycles Long Long Short Short
Frequency of New Very Low Low Moderate High
Products
Economies of Scale High High Moderate Low
Capital Intensity High High Moderate Low
Critical Success Market Market Share and Customer Perception Anticipation of
Factors Control Production Costs and Distribution Needs and
Service Opportunities
CP 4
CP 4
EXHIBIT 2
Competitor Analysis
Please identify your four primary competitors (for your company as a whole) and circle the main focus of their
competitive advantages.
Company Competitive Advantages
Marketing Distribution Price Brand Loyalty Service Quality

Technology Performance Added Features Product Line Breadth



5
Corporate Planning
The income statements should be as 3. Activity

detailed as possible, and preferably will have
Accounts Receivable
been audited or reviewed by a public ac-
Turnover
counting firm. The appraiser will need to de-
Accounts Payable Turnover
termine trends, separate recurring from
Working Capital Turnover
nonrecurring events, distinguish between
Fixed Asset Turnover
operating income and investment income,
and ascertain the profitability or lack thereof 4. Profitability
of all business lines in which the subject
Gross Margin Percentage
company may be engaged. Often the di-
Operating Income Margin
vestiture of an underperforming business
Net Income Percentage
segment will substantially increase the value
Return on Total Assets
of the enterprise.
Return on Equity
Analysis of the balance sheets over the
selected period may reveal the acquisition of 5. Growth
additional production capabilities or sub- Net Contract Revenues
sidiary companies, improvements or deterio- Net Income
ration in financial position, and details as to Total Assets
recapitalizations and other changes in the Stockholders Equity
capital structure of the entity. Analysis of the
These ratios are then compared to in-
cash flow statements highlights the relation-
dustry standards and comparable guideline
ship of the companys working capital man-
companies. Sources of construction industry
agement to its cash flow.
standards include Robert Morris Associates
The financial statements should be ana- Annual Statement Studies, Prentice Halls
lyzed further through the use of ratio analy- Almanac of Business and Industrial Financial
sis. Financial ratios are often classified into Ratios, Construction Financial Management
one of five fundamental categories: liquidity, Associations Annual Survey, and various
leverage, activity, profitability, and growth. studies, reports, and statistics published by
Examples of relevant financial ratios in these Engineering News-Record.
categories include:
1. Liquidity Company Outlook
Current Ratio The ultimate result of the appraisers re-
Quick Ratio view of the history of the subject company and
Receivables to Payables the nature of its business, economic and in-
dustry conditions and outlook, and relevant fi-
2. Leverage
nancial statements is his/her assessment of
Total Liabilities to Total Assets the subject companys outlook. The appraiser
Total Liabilities to Equity must use this information together with his/her
Long Term Debt to Equity industry and financial market experience to
Net Assets to Equity form a reasonable judgment as to the future
Times Interest Earned prospects for the subject company.
6 CP 4
Corporate Planning
VALUATION METHODOLOGY discount and a discount for lack of marketabil-

Once the economic and industry analy- ity are required to determine closely held mi-
sis and financial analysis of the subject com- nority interest value. If the value indication
pany have been performed, the appropriate represents as-if-freely traded minority inter-
valuation approaches (income, market, est value, then only a discount for lack of mar-
and/or cost) may be applied. For each valua- ketability is appropriate to determine closely
tion approach, an exhibit providing a hypo- held minority interest value.
thetical, over-simplified valuation model is In the cost approach, the value indica-
provided. It should be noted that all multiples, tion represents control value. Successive ap-
discount rates, growth rates, etc. used in the plications of a minority interest discount and
exhibits are presented only as examples. a discount for lack of marketability would again
These variables are critical to the valuation be required to determine closely held mi-
process, and a detailed analysis much beyond nority interest value.
the scope of this publication is required to Exhibits 3 and 4 present a balance sheet
quantify the variables. (as of a December 31, 199X valuation date)
It is important to note that the value indi- EXHIBIT 3
cation resulting from the application of each
valuation approach may represent a different ABC CONTRACTORS, INC.
value level and may require further adjust- BALANCE SHEET AT DECEMBER 31, 199X
ment depending upon the ownership interest ASSETS
that is being valued. For example, the use of a
market approach by reference to the market Current Assets $4,500,000
multiples of freely traded public guideline Property and Equipment, 375,000
companies results in a value indication that at cost less accumulated
represents as-if-freely traded minority inter- depreciation
est value.This value must be adjusted upward
Other Assets 122,000
by a premium for control if the ownership in-
terest being valued represents a controlling in- Total Assets $4,997,000
terest. If the ownership interest being valued
represents a small, minority interest in the LIABILITIES AND STOCKHOLDERS
common stock of a closely held company, then EQUITY
a discount for lack of marketability may be ap-
Current Liabilities $3,260,000
propriate to determine closely held minority
interest value. Long-term Debt less 300,000
Current Maturities
In the income approach, the value indi-
cation may represent either a control value or Other Liabilities 50,000
an as-if-freely traded minority interest value, 3,610,000
depending on the assumptions that were made
in preparing the revenue and expense projec- Stockholders Equity 1,387,000
tions and on how the discount rate was de- Total Liabilities $4,997,000
rived. If the value indication represents control, and Stockholders
successive applications of a minority interest Equity
CP 4 7
8
EXHIBIT 4
ABC CONTRACTORS, INC.

COMPARATIVE INCOME STATEMENT
For Year Ended December 31, 199X 199X-1 199X-2 199X-3 199X-4
$ $ $ $ $
Revenues 13,290,000 12,192,000 11,427,000 10,284,000 9,255,600
Cost of Revenues 9,967,500 9,144,000 8,570,250 7,713,000 6,941,700
Gross Profit 3,322,500 3,048,000 2,856,750 2,571,000 2,313,900

Selling, General and
Admin. Expenses 3,056,700 2,804,160 2,628,210 2,365,320 2,128,788
Operating Income 265,800 243,840 228,540 205,680 185,112

Other Income (Expense)
Interest Income 20,000 18,000 16,000 14,000 12,000
Interest Expense (25,000) (28,000) (31,000) (34,000) (37,000)
Total Other Income (Expense) (5,000) (10,000) (15,000) (20,000) (25,000)
Earnings Before Income Taxes 260,800 233,840 213,540 185,680 160,112
Income Taxes 104,320 93,536 85,416 74,272 64,045
NET INCOME 156,480 140,304 128,124 111,408 96,067

CP 4
Corporate Planning
and five years of historical income statements Projected net cash flow is then calcu-
for ABC Contractors, Inc., the subject of our lated by projecting the various cash inflows
sample valuation. and outflows described above. The net pre-
sent value of the future net cash flows when
discounted at an appropriate required rate of
Income Approach return, provides an indication of the value of
In the income approach, value is depen- the companys stockholders equity.
dent on the present worth of future economic
benefits to be derived from ownership. In one A detailed discussion of discount rates is
form of the income approach, a discounted beyond the scope of this publication. However,
cash flow approach, value indications are de- the discount rate that is chosen must reflect the
veloped by discounting future net cash flows rate of return that would be required by a typi-
available for distribution to equity sharehold- cal investor, given the various risk attributes of
ers to their present worth at market-based the subject company. One method commonly
rates of return. used to quantify a discount rate is the built-up
method.This method begins with the risk-free
Cash flow is used because it is one of rate (for Treasury bills or bonds) and adds var-
the most important elements in the financial ious increments for equity risk, industry risk,
management of a corporation. The ability of specific subject company risk, etc. Other, more
an enterprise to create cash inflows, meet sophisticated, models used to estimate a dis-
cash requirements and provide for related fi- count rate include the Capital Asset Pricing
nancial and investing activities is an impor- Model and the Arbitrage Pricing Theory.
tant determinant in the value of that
enterprise. Cash inflows include earnings; Exhibit 5 is an example of a discounted
depreciation, amortization and deferred cash flow approach used to value the stock of
taxes (since these are non-cash expenses); ABC Contractors, Inc. Net cash flows are pro-
collection of debt principal; sales of assets; jected over some future period that is usually
and reductions of net working capital. Cash consistent with the companys business plan-
outflows include repayment of debt principal, ning period and/or is long enough to reach a
investments in fixed assets, and additions to period of stabilized earnings and growth. At
net working capital. the end of this explicit forecast period, con-
tinuing value is calculated by assuming that
A major requirement of the discounted
cash flows will continue to grow into perpetu-
cash flow approach is a forecast of income and
ity at an assumed growth rate. This assumed
cash flow.The forecast must begin a projection
growth into perpetuity calculation is one of
of revenues based on historical data, economic
several methods that are often used to calcu-
conditions, and industry conditions. Various in-
late a firms continuing value (i.e., value be-
come statement accounts are then projected
yond the explicit forecast period). Other
based on their historical relationships to rev-
methods include applying a projected price-
enues or other pertinent variables. Statutory
to-cash flow, price-to-earnings, or market
corporate income tax rates are used (assum-
value-to-book value ratio.
ing that the subject company is a C-corporation
as opposed to an S-corporation or a partner- In the example presented in Exhibit 5,
ship) to arrive at projected net income amounts. the conclusion of value represents as-if-
CP 4 9
Corporate Planning
freely traded minority interest value. As pre- pany from among the range reported by the
viously mentioned, this value must be ad- publicly traded guideline companies for each
justed upward by a premium for control if the ratio, one must consider such items as the size
ownership interest being valued represents a and diversification of the subject company, liq-
controlling interest. If the ownership interest uidity position, the degree of financial lever-
being valued represents a small minority in- age employed, historic and projected
terest in the common stock of a closely held profitability, and growth prospects.
company, then a discount for lack of mar-
Exhibit 6 summarizes the selected valu-
ketability may be appropriate to determine
ation ratios for several publicly traded com-
closely held minority interest value.
panies that were analyzed and considered to
be comparable to ABC Contractors, Inc.
Exhibit 6 also presents value indications for
Market Approach
the stock of ABC Contractors, Inc. based on
The market approach is based on the applying selected valuation ratios to the earn-
principle of substitution. This principle states ings and book value parameters of ABC.Once
that a prudent investor would pay no more for again, this value must be adjusted upward by
an asset than the cost of acquiring an equally a premium for control if the ownership inter-
desirable substitute on the open market. One est being valued represents a controlling in-
form of the market approach, the guideline terest. If the ownership interest being valued
company approach, makes use of market represents a minority interest, then a discount
price data of stocks of similar companies (the for lack of marketability may be appropriate to
guideline companies) with financial com- determine closely held minority interest
parisons to the subject company. Stocks of value.
these corporations must be actively traded in
a public, free-and-open market, either on an
exchange or over-the-counter. Although it is Cost Approach
clear no two companies are entirely alike, the In the cost or asset-based approach, the
guideline companies should be engaged in fair market value of the subject companys
the same or similar line of business and stockholders equity is developed by adjusting
should not be greatly dissimilar in terms of the companys balance sheet to reflect the fair
size. After various operating and financial market value of its assets and liabilities at the
comparisons are made, one may draw con- valuation date. The fair market value of stock-
clusions about the valuation ratios applicable holders equity is then obtained by deducting
to the subject companycompared to how in- the fair market value of the companys liabili-
vestors are appraising the stocks of the guide- ties from the fair market value of its assets.
line companies.
Adjustments to the reported book values
Three valuation ratios commonly used of inventories and tangible fixed assets (plant,
by both investors and appraisers are price-to- property and equipment) are often required
earnings multiples, price-to-cash flow multi- to reflect fair market value. In addition, off-
ples, and the ratio of market price to tangible balance sheet assets such as goodwill and
book value. In selecting the valuation ratios going-concern value must be valued and in-
applicable to the subject closely held com- cluded on the fair market value balance sheet.
10 CP 4
Corporate Planning
EXHIBIT 5

DISCOUNTED CASH FLOW VALUATION MODEL
For Year Ending December 31,
Continuing
199X+1 199X+2 199X+3 199X+4 199X+5 Period
$ $ $ $ $ $
Revenues 14,619,000 16,080,900 17,688,990 19,104,109 20,441,397
Cost of Revenues 11,110,440 12,221,484 13,443,632 14,519,123 15,535,462
GROSS PROFIT 3,508,560 3,859,416 4,245,358 4,584,986 4,905,935
Selling, G&A
Expenses 3,362,370 3,698,607 3,698,607 3,698,607 3,698,607
OPERATING INCOME 146,190 160,809 546,751 886,379 1,207,328
Other Income
(Expense) (5,000) (5,300) (5,618) (5,955) (6,312)
Earnings before
Income Taxes 141,190 155,509 541,133 880,424 1,201,016
Provision for
Income Taxes 56,476 62,204 216,453 352,170 480,406
Net Income 84,714 93,305 324,680 528,254 720,610
Add: Depreciation
and Amortization 50,000 53,000 56,180 59,551 63,124
Gross Cash Flow 134,714 146,305 380,860 587,805 783,733
Deduct: Capital
Expenditures 60,000 60,000 65,000 65,000 65,000
Required Additions
to Working Capital 132,900 146,190 160,809 141,512 133,729
NET CASH FLOW (a) (58,186) (59,885) 155,051 381,293 585,005 620,105
Calculation of Continuing
Value Divided by: Capitalization Rate (b) 19.0%
Continuing Value 3,263,710
Present Value
Interest Factor (c) 0.8944 0.7155 0.5724 0.4579 0.3664 0.3664
Discounted Net
Cash Flows (52,043) (42,850) 88,756 174,612 214,321 1,195,684
Sum of Discounted
Net Cash Flows 1,578,480
Divided by: Number
of Shares
Outstanding 10,000
As-If-Freely Traded Minority $157.85
Interest Value per Share
Rounded $158.00
(a) Net cash flow in Continuing Period is estimated at a 6% growth rate from 199X+5.
(b) Capitalization rate is calculated as the 25% discount rate less an assumed long-term growth rate of 6%.
(c) Present value interest factors are calculated using a 25% discount rate and assuming mid-period receipt of funds.
CP 4 11
12
EXHIBIT 6
Guideline Company Valuation Model
Guideline Companies
Company Company Company Company Contractors Value
1 2 3 4 Low High Average Chosen $ $
Aggregate Market
Value of Common
Equity To:
Most Recent 9.0 10.2 12.4 9.8 9.0 12.4 10.4 10.0 156,480 1,564,800
12-Month
Net Income
5-Year Average
Net Income 14.6 13.4 10.9 10.4 10.4 14.6 12.3 12.0 126,477 1,517,720
Most Recent
Reported Tangible
Book Value of
Common Stock
holders Equity(%) 121.8% 116.2% 95.2% 179.1% 95.2% 179.1% 128.1% 125.0% 1,387,000 1,733,750
Concluded 1,600,000
Value
Divided by: Number of Shares 10,000

Outstanding
As-if-Freely Traded Minority Interest Value per Share $160.00

CP 4
Corporate Planning
The book value of inventories, which typ- sulting from physical deterioration, functional
ically reflects the lower of cost or market value, obsolescence, and economic obsolescence
should be adjusted to reflect estimated net re- before reaching an indication of value.
alizable value. Net realizable value is equal to
Intangible assets of a mechanical con-
selling price less costs of disposal less a rea-
tractor include assets associated with a going
sonable profit on the selling effort.
concern, such as an assembled and trained
Tangible fixed assets are typically ap- work force, customer relationships, the name
praised using either a market approach or a and reputation of the business, goodwill, etc.
cost approach. Prices for similar property re- These assets are often valued on a composite
cently sold or offered for sale are investigated basis using an excess earnings method. Using
and comparisons are made between the mar- the excess earnings method, a normalized
ket comparative assets and the subject prop- level of earnings is reduced by fair returns on
erty, if the assets are of standard design and working capital and fixed tangible assets em-
specification and a market exists (market ap- ployed in the business. The excess earnings
proach). Such factors as the date of the sale are then capitalized, at an appropriate capital-
or offering, the location, size, shape, utilities ization rate, into an indication of value.
present, zoning, physical characteristics,
Liabilities must also be restated to fair
maintenance history, age, and present and
market value in the cost approach. If the sub-
prospective serviceability and use are consid-
ject company has a below-market rate of in-
ered in arriving at the opinion of value. If the
terest on any of its debt instruments, then the
assets are of special design or specification or
fair market value of that debt may be below its
if market data on similar property is unavail-
recorded book value.
able, estimates of the current cost new can be
obtained from various pricing sources (cost An example of a cost approach used to
approach). Current cost new is then reduced estimate the control value of ABC Company,
to recognize any applicable depreciation re- Inc. is presented in Exhibit 7.
EXHIBIT 7
FAIR MARKET VALUE BALANCE SHEET AT DECEMBER 31, 199X
As Valuation Pro
Assets Reported Adjustments Forma
Current Assets $4,500,000 $0 $4,500,000
Property and equipment, at cost
less accumulated depreciation 375,000 225,000 600,000
Other Assets 122,000 (22,000) 100,000
Intangible Assets 0 250,000 250,000
TOTAL ASSETS $4,997,000 $453,000 $5,450,000
Liabilities and Stockholders Equity
Current Liabilities $3,260,000 0 $3,260,000
Long-term Debt less Current Maturities 300,000 20,000 320,000
Other Liabilities 50,000 0 50,000
3,610,000 20,000 3,630,000
Stockholders Equity 1,387,000 433,000 1,820,000
Divided by: Number of Shares Outstanding 10,000
Control Value per Share $182.00
CP 4 13
Corporate Planning
Reconciliation of Value Conclusions cations. A summary of the value indications

In the previous example, three valuation with the value level that they represent is as
approaches were used to provide value indi- follows:
Income Market Cost

Approach Approach Approach
Control Value TBD TBD $182.00

As-If-Freely Traded
Minority Interest Value $158.00 $160.00 TBD
Closely Held Minority
Interest Value TBD TBD TBD
Additional Considerations in Valuing a tic benefits that might result from a sale of the
Controlling Interest company. These synergistic benefits may be
achieved through consolidation of marketing
The value indications provided by the
channels, purchasing systems, production fa-
discounted cash flow approach and the guide-
cilities, overhead functions, warehousing and
line company approach represent equity
transportation systems. Since a minority in-
value on an as-if-freely traded minority inter-
terest lacks these prerogatives of control and
est basis. The indication of value provided by
the ability to achieve synergistic benefits, it fol-
the asset-based approach, however, repre-
lows that the minority interest discount is the
sents value on a 100% controlling interest
transformation of the premium for control.
basis since it is not derived from discount rates
or valuation ratios that reflect the ownership The size of the premium for control, and
rights in, or the liquidity of, minority interests related minority interest discount, applicable
in publicly traded stocks. Therefore, in valuing to the subject company depends on the earn-
a controlling interest, the discounted cash flow ings streams anticipated and also on market
approach and the guideline company ap- conditions. In order to analyze market condi-
proach value indications must be adjusted for tions, one must examine merger and acquisi-
a premium for control. tion activity in the market. An experienced
A premium for control may be justified by valuation consultant can assist with research
the controlling shareholders ability to en- in this area.
hance the operating characteristics and
thereby increase the cash flows of the com- Additional Considerations in Valuing a
pany. Some of the more important preroga- Minority Interest
tives of control include electing directors and
appointing management, determining man- As discussed above, the indications of
agement compensation, declaring and pay- value resulting from application of the dis-
ing dividends, acquiring or liquidating assets counted cash flow approach and the guide-
and determining policy. A premium for control line company approach are on a minority
also is intended to reflect potential synergis- interest basis, since the discount rate (dis-
14 CP 4
Corporate Planning
counted cash flow approach) and ratios evant tax court decisions, and factors such as
(guideline company approach) used in each the size of the holding being valued, the volatil-
approach are based on minority interest trans- ity of share prices of comparable publicly
actions in public company stocks. However, traded companies, and the quality of earnings
the indication of value resulting from applica- and dividend payout ratio of the subject com-
tion of the asset-based approach is on a con- pany. Again, an experienced valuation con-
trol basis and does not yet recognize the fact sultant can assist with research in this area.
that a minority investor would not pay full con-
trol value for the assets.
VALUING PREFERRED STOCK
One method of quantifying the minority
Revenue Ruling 83120 was issued by
interest discount is based on premiums for
the Internal Revenue Service in order to am-
control that have been paid in the market.
plify Revenue Ruling 5960 and specify ad-
Minority Interest ditional factors that must be considered in
Discount = Premium for Control valuing preferred stock of a closely held com-
1+ Premium for Control pany in a recapitalization.The IRS determined
that, in general, the most important factors to
and be considered in valuing preferred stock are
dividend yield, dividend coverage, and pro-
Minority Interest = Minority Interest Discount
tection of liquidation preference.
1-Minority Interest Discount
The dividend rate of a preferred stock
Therefore, an indication of an appropri- issue must be adequate in order to support a
ate minority interest discount can be calcu- value of the preferred stock at par value.
lated following the estimation of a premium for Adequacy is measured by comparing the div-
control, as described above. idend rate of the subject preferred stock to the
dividend rate of high-grade, publicly traded
It may also be appropriate to apply a dis-
preferred stock. Dividend coverage, or the
count for lack of marketability to the as-if-
ability of the company to pay the stated divi-
freely traded minority interest value that
dends on time, is measured by various cov-
results from the discounted cash flow ap-
erage ratios such as asset coverage, earnings
proach, the guideline company approach, or
coverage, and fixed charge coverage.
the asset-based approach (after minority in-
Inadequate coverage indicates that the value
terest discount). This is because the lack of a
of preferred stock is lower than its par value.
public market for the shares of the closely held
Finally, consideration must be given to
company is a condition that would make a po-
whether the issuing company will be able to
tential minority investor offer less for the shares
pay the full liquidation preference at liquida-
than their publicly traded value, since the liq-
tion. Asset coverage ratios are calculated and
uidity of a security holding has value to an in-
compared with the ratios for high quality
vestor over and above the intrinsic value of the
preferred stock to determine adequacy of
underlying business. In quantifying the dis-
coverage.
count for lack of marketability, one must con-
sider such items as flotation costs (the costs Various other factors to be considered in
of taking a company public, if practicable), rel- valuing the preferred stock issue include the
CP 4 15
Corporate Planning
existence of voting rights, redemption privi- garded as offering a complete explanation

leges, and any covenants or provisions that and should not be used for making decisions.
could inhibit the marketability of the stock or Any suggestion should be reviewed with your
the ability of the owner to enforce dividend or attorney and valuation consultant.
liquidation rights. It is only after a careful
For additional information, contact Ernst
analysis of all of the above factors that the
& Young through John L. Heffron at 215/448-
value of a non-publicly traded preferred stock
5526, Lee C. Russell at 215/448-5099, or
can be determined.
Lawrence W. Signorelli at 410/783-3818.
SUMMARY
SUGGESTED REFERENCES
The income (discounted cash flow), mar- Uniform Standards of Professional Appraisal
ket (guideline company), and cost (asset- Practice, Appraisal Standards Board of The
based) approaches are three generally Appraisal Foundation, 1029 Vermont Avenue,
accepted valuation approaches used by ap- N.W., Suite 900, Washington, D.C. 20005.
praisers and valuation consultants to value
the stock of closely held companies in gen- Business Valuation Standards, American
eral, and that can be used to value the stock Society of Appraisers, P.O. Box 17265,
of the closely held mechanical contractor in Washington, D.C. 20041.
particular. Each approach may be appropri- Business Appraisal Standards, The Institute
ate depending on the nature of the subject of Business Appraisers, Inc., P.O. Box 1447,
companys business and the purpose of the Boynton Beach, Florida 33435.
appraisal.The use of more than one approach
requires a careful analysis to ensure that the Principles of Appraisal Practice and Code of
basis of value is consistent among the ap- Ethics, American Society of Appraisers, P.O.
proaches, and a reconciliation of the indicated Box 17265, Washington, D.C. 20041.
values. Pratt, Shannon P. Valuing a Business: The
In summary, it must be recognized that Analysis and Appraisal of Closely Held
the valuation process reflects a complex set Companies. 2nd Ed. Homewood, Ill.: Dow
of factors that cannot be captured in a sin- Jones-Irwin, 1989.
gle formula. Determining the value of the Pratt, Shannon P. Valuing Small Businesses
stock of the closely held mechanical con- and Professional Practices. 2nd Ed.
tractor involves a careful analysis of market Homewood, III.: Business One Irwin, 1993.
data and market conditions, as well as a de-
tailed investigation into the financial position, Copeland, Thomas; Koller, Tim; and Murrin,
performance and outlook for the subject Jack. Valuation: Measuring and Managing the
company. Value of Companies. New York: John Wiley &
Sons, 1989.
Ernst & Young Valuation Services Group
for use by the Mechanical Contractors Zukin, James H., and John G. Mavredakis,
Association of America, Inc. and its members. eds. Financial Valuation: Businesses and
Because the matters covered herein are com- Business Interests. New York: Maxwell
plicated, this publication should not be re- Macmillan, 1990.
16 CP 4
Corporate Planning
Mergerstat Review, Merrill Lynch, 1992. Revenue Ruling 5960, 1959-1 C.B. 237,
Internal Revenue Service.
Conducting a Valuation of a Closely Held
Business, American Institute of Certified Revenue Ruling 68609, 1968-2 C.B. 327,
Public Accountants Consulting Services Internal Revenue Service.
Practice Aid 93-3, 1993.
Revenue Ruling 83120, Internal Revenue
Valuing ESOP Shares, The ESOP Service.
Association, 1989.
IRS Valuation Guide for Income, Estate and

Gift Taxes, Internal Revenue Service, 1987.
CP 4 17
Bulletin No. CP 5
The Management Audit: Peer Group

Guidelines
Foreword
In connection with the peer reviews discussed below, it should be emphasized that the host
company and the reviewers comprising critique teams should not be in competition with one
another. Serious antitrust problems, such as price fixing and bid rigging, can emerge from the
sharing of competitively sensitive information; in particular, job selection criteria, estimating
techniques, and overhead and markup determination. If a host company desiring to conduct
a peer review finds it impractical to form a critique team comprised wholly of non-competitors,
it should consult with its legal counsel as to excluding certain types of information from the
scope of the audit. Under no circumstances may contractors agree not to compete with each
other, either generally or with respect to particular projects.
INTRODUCTION In order to survive and grow in this in-

creasingly hostile environment, mechanical
Numerous external influences are mak- contractors must become better managers
ing it more and more important for me- and business professionals. Achievement of
chanical contractors to find ways to manage success in todays environment is increas-
their businesses effectively and profession- ingly complex and requires a far greater un-
ally. Non-union competition, difficulty in ob- derstanding of the principles and best
taining sufficient bonding capacity, and the practices of running the mechanical con-
growing tendency of construction owners tracting firm.
and general contractors to prepurchase
major equipment, squeeze the margins and Where can a mechanical contractor
extend payment cycles of their subcontrac- obtain this understanding? Certainly many
tors are but a few of these negative influ- worthwhile efforts are being made by MCAA
ences. and other organizations to provide knowledge
1
Corporate Planning
and assistance in this area through publica- the management audit properly. In very brief
tions, seminars and convention programs. summary, to execute the technique properly
Universities, consulting firms and business one needs to have written descriptions of every
authors have made the continuing education aspect of his company as if he were making a
of managers into a major new market for their formal presentation to a committee of outside
services, usually at very high cost. But most professionals. Few busy mechanical contrac-
of these resources are not familiar with our tors have the discipline, the time or the man-
business and try to adapt methods used in agement skills to accomplish this difficult
completely different industries. However, all of process on their own in order to derive maxi-
these are valid approaches, but all require mum benefit from their efforts. Simply thinking
time and effort on the part of the contractor, through the details of the checklist achieves
who often has difficulty applying the lessons very little result. Most of the systems and pro-
offered for his own situation. cedures used by a company have been devel-
oped by the owner/manager or passed down
by the previous management. It is inherently
MANAGEMENT AUDITS
difficult for one to be objective in criticizing the
operation one has created or followed.
Many have turned to management con-
sultants for quick solutions. Due to the high If a contractor has an outside board of di-
cost of the consultants time, however, these rectors or board of advisorsone made up of
outsiders are forced to rush to conclusions, independent business people who neither
and often their reports and recommendations work in the company nor provide any services
either fail to grasp the particular situation com- to the companyhe has the right kind of forum
pletely and come out sounding totally to assist with a management audit.
canned, or at least they have not had time to Presentations to an outside board must be
establish credibility and gain the trust and con- well-organized and complete. However, peri-
fidence of the owner and/or managers of the odic meetings of such a board are necessar-
company. ily of brief duration and unable to handle even
a significant fraction of the large volume of de-
A similar approach to this which has tailed information prepared for a proper man-
been used successfully in recent years by agement audit, except over an extended
many businesses, including mechanical con- period of time. Experience has shown that
tractors, is the management audit.Essentially, such boards, not being familiar with mechan-
this technique involves the use of a detailed ical contracting, are not successful in advising
checklist similar to the checklist used by many management on operations. Further, boards
management consultants for their consulting consisting of employees or family members
assignments.Management audits can be self- are reluctant to suggest to the owner/manager
administered or done with outside assistance. that his systems may not be the best.
The problem with the self-administered
audit is that a busy owner/manager is unlikely PEER GROUP CRITIQUES
to spend the amount of time required to thor-
oughly plan, organize and document the ex- Another approach which can work very
tensive amount of material required to perform well is the peer review, a critique carried out
2 CP 5
Corporate Planning
by a contractors peers.Several groups of con- process. The entire group convenes at the
tractors have been informally organized to host contractors place of business for several
meet periodically and assist each other days of intense review of policies and proce-
through idea exchange to run their respective dures, discussions with both management
businesses more professionally and more and non-management personnel, study of fa-
profitably. It should be noted here that these cilities and methods, and detailed investiga-
groups are not organized, sponsored or con- tion of the contractors accounting, cost
trolled by MCAA. control, estimating, purchasing and project-
Those considering forming such a group management systems. In this process, per-
should consider the following characteristics: sonnel relations problems, heretofore
unknown to the management, will frequently
1. Geographic dispersion of group mem- surface. Care must be taken to keep knowl-
bersif there is competition in the same edge sources completely anonymous.The re-
market areas, it will be difficult to share sen- viewers are not there to identify and
sitive information. (See Note on page 1.) recommend discharge for any personnel,
2. Similarity in size/type of work done. though they may suggest investigation of any-
3. Generally from six to ten member firms one suspected of dishonesty, substance
per group. abuse or obvious lack of competence.
4. Principals of the firms generally know and The key to a successful critique is the
trust each other before joining such a thorough, complete preparation of the com-
group. pany manual and a careful review of this ma-
5. A common desire to learn from each terial by all of the visiting contractors before
other and to improve the operation of the critique.The magnitude of the preparation
their companies. task should be indicated by the following:
6. A willingness to disclose confidential in- Properly prepared materials con-
formation to fellow members such as forming to the appendix generally
statements, salaries, methods, proce- fill up a four- or five-inch, three-ring
dures, the good and the bad, is essential. binder, depending on the size and
7. Above all, an acceptance of the fact that complexity of the organization.
there are always ways to improve every While much of the content will al-
contractor. ready exist, most participants have
to spend a great deal of time and
MCAA membership becomes a good ve-
effort to update policies and proce-
hicle for forming this kind of affiliation because
dures, write operating and market-
of the exposure members gain to other mem-
ing plans, and document numerous
bers from all over the country through atten-
informal systems. Above all, this
dance at annual conventions, technical or
manual should tell it like it truly is
management seminars, and particularly
not as you wish it were. By being
through work on MCAA committees or the
completely frank and honest in this
board of directors.
preparation, the host contractor will
The critique outline, which is an Ad- know more about his company than
dendum to this bulletin, is the basis of the audit he did before the preparation.
CP 5 3
Corporate Planning
Creation of the company manual, the Strategic planning

process of organizing and writing down in a Procedure/policy manuals
presentable and understandable form the way Brochures, videos, marketing
we want our companies to work makes us tools
come to grips with many important issues.The Forms, report formats
host contractor sometimes learns from the cri- Estimating and bidding tech-
tique process that some of his systems do not niques
function at all like he thinks they do. An im- Project management, status re-
portant benefit which always results from the ports, labor scheduling and con-
critique is a great improvement in communi- trol
cations among and within most of the depart- Change order procedures
ments in the company. The associated
2. Attitude toward critique must be like a
learning process is three-fold: (1) clarifying
drunk going to AA.
ideas on how we want our companys systems
to work; (2) learning from our employees and a. Must admit you need help.
peers how they really do work; and (3) hear- b. Most companies do a few things
ing input from our peers on how they probably well, a few absolutely miserably, and
should work. the rest adequately.
c. Above all, resist the attitude they
While similar mechanical contracting firms
dont understand or their sugges-
are probably more alike than they are different,
tions might work (in every city in
there are many factors which prevent the text-
America), but they wont work in
book solution from working in all cases.
Podunk.
Different market conditions, unique skills of
some personnel, physical facilities, the goals 3. The critique format must be rigidly de-
and ambitions of the business owners, and how fined beforehand.
a company is capitalized are just some exam- a. Must not let the critique become a
ples of what often makes companies unique. brag session for the host company.
b. Preparation of the company manual
Guidelines For Peer Group Critiques
is the key.
1. Companies must have absolute open- c. Dont waste time looking at jobs.This
ness with each other. is just another form of bragging and
not productive.
a. Requires close personal relation-
ships. There is no room for false 4. Basis for critiques is the company
pride or egotism in this process. manual.
b. Exchange all company data. (See
Note on page 1.) Recommended Agenda for the
Financial statements CritiqueThree-Day Session
Salary schedules
1. Day One.
Insurance and bonding data
Bonus, profit sharing, and stock a. Critique team members arrive before
option plans noon of Day One for group luncheon:
4 CP 5
Corporate Planning
Host principal describes any Imperative the host company

problem areas on which he /she prepares its people by telling
wants group to focus. them to be absolutely candid.
Critique group plans critique and Imperative the reviewers reas-
sets priorities and agenda. sure the people that no individu-
Possibly time for tour of office, als will be put on the spot.
shop and warehouse facilities. Must get the department heads
b. Evening of Day One-cocktails/ out separately, or their subordi-
dinner: nates will not open up.
Ideally, should split the people
Host company has all key people
into groups of one to two with
there (its not a bad idea to invite
pretty much everyone except each reviewer.
field people unless the company Host company should prepare for
is too large). the review by identifying potential
Principals of host company sit problem people/departments.
separately (so employees will Each team goes to every depart-
feel free to talk). ment.
Critique team members disperse Company manual is reviewed/
themselves among host com- challenged-every form, proce-
pany employees. dure, etc.
Best to have place cards at the c. Lunch 12:001:00:
tables so you can match review-
ers to host personnel. Best to have lunch brought in
Reviewers really try to draw host (going out takes too long).
personnel out about: Exclude the host personnel from
the room so discussion can con-
Pride in the company
tinue.
Morale
Attitude toward company d. After departmental reviews finished:
leadership
Principals and department
How the company is really
heads meet with reviewers.
doing
No holds barred Q & A session.
Individual goalsis the per-
May interview principals individ-
son with the company for
ually.
the long term?
This session may last two to four
2. Day Two. hours.
a. Reviewers meet for 7:00 a.m. break-
fast/get to host company by 8:00 e. Evening of Day Two:
a.m. Key host people.
b. Split up into teams of four to five Possibly outside professionals
people: lawyer, accountant, banker, in-
The more reviewers you have, surance/bonding, outside board
the better. members, if any.
CP 5 5
Corporate Planning
Seating planned strategically to is in process; and what is rejected, wont

promote open exchange of infor- be done, and why not.
mation.
3. Day Three. Observations and Recommendations
On Agenda
a. Reviewers meet for 7:00 a.m. break-
fast: 1. Dont attempt critique until you have vis-
No host personnel present. ited all your companies:
Reviewers meet in groups as they Learn as much as you can about each
toured and form conclusions: other.
Start to develop your manuals by
Strengths
dealing with one or more topics at
Weaknesses
each of your company visits.
Recommendations
Danger spots. 2. Allow enough time:
Group appoints a reporter:
Everyone should arrive in time for
Conclusions are written out lunch the first day.
for presentation to the host No one should plan on leaving before
company. 3:00 p.m. the last day.
Reporter delivers the 3. Most host company personnel must be
groups report to the princi- properly briefed to talk openly to the in-
pal of the host company. terviewers.
Best if host principal does
not rebut the report until it 4. One-on-one contact is the key to finding
has all been presented. the problems.
Typical reaction is resentment/as- 5. Department heads must not be in their
sertion that the reviewers dont group when it is interviewed.
understand the situation.
Following this meeting, everyone 6. The critique group should meet prior to
leaves. starting the departmental reviews:
Generally it takes the host principal Questions need to be coordinated.

about two weeks to digest the criticism and to Each group asking the same questions
begin taking constructive steps to implement. becomes boring to the employees.
The reviewers should divide them-
selves up into groups (not the host):
Follow-up
By interest areas, e.g., sheet
1. Host company photocopies the report metal, accounting, etc.
and sends to all members of the group. By personality.
2. At the next meeting, the principal reports 7. The host company should solicit ques-
his actions as a result of the review. He tions from its employees (anonymous, of
should report: what has been done; what course):
6 CP 5
Corporate Planning
What areas do the employees want Give the principal a chance to chal-
probed? lenge/rebut after the report is fin-
What questions do the employees ished.
want the reviewers to investigate? Group may decide to give audio tape
of session after presentation is made.
8. The company manual should include the
companys salary schedule: 12. Time is of the essence:
Only the principals should get this in- As little time as possible should be
formation. spent traveling and on housekeep-
Send it separately from the manual. ing items.
9. Reviewers must balance war stories The principal of the host company
with questions: must act as the timekeeper and be
sure schedule is followed.
Host company people want to know
how reviewers handle situations. 13. The conclusions are not always correct
but experience has shown them to be
Reviewers are there to learn more right far more often than wrong.
than to teach.
14. The second critique is generally more
10. There may be little value in the dinner with valuable than the first.
the outside professionals:
They are not going to be critical of CONCLUSION
their clients.
Perhaps the most value is having the It is not an easy thing for an experienced,
reviewers form opinions about the successful mechanical contractor to hear his
quality of the outsiders. company criticized, sometimes severely.
Discussions may turn up opportuni- However, constructive criticism from capable
ties to reduce fees or interest rates, contemporaries as described in this bulletin
or improve services. becomes an extremely positive, beneficial ex-
11. Under no circumstances should the host perience, and one which is sure to enhance
principal be allowed to hear the discus- his companys profitability.
sion of the conclusions meeting: 1. History of company
CP 5 7
Corporate Planning
ADDENDUM
COMPANY ANALYSIS
1. History of Company
A. When founded, by whom, why, how
B. Early yearsbriefly
C. Major changes in structure, philosophy, type work, area, personnel, particularly in last
five years.
D. Last five years in some detail
1. Larger jobs (outstanding, unusual, type, areas)
2. Bid versus negotiated
3. Principal customers
4. Company share of market or rank in area
5. Company policy, philosophy and objectives
2. Biography of principal officer(s) and key people such as division managers and department
heads
A. Age, family, military service, outside interests, hobbies, clubs, directorships, civic or
professional recognition or awards
B. Education (degrees, licenses, certifications, continuation interest, seminars)
C. Professional and trade memberships, officerships
D. Work experience (company, products or type of work, position, duties, responsibilities)
E. Present duties and responsibilities
3. Organization structure (chart and work flow chart)
A. Work flow from bid to completion of job
B. Duties and responsibilities of key people
C. Brief outline on background of key people
D. Decision making, including limits
4. Bidding and estimating
A. Choosing what to and what not to bid and why
B. Getting plans (deposits, purchases)
C. Vendor lists and notices
D. Subcontract and equipment solicitation techniques
E. Scope letters, out-of-town setups, etc.
F. Take-off and pricing techniques (material, who prices)
G. Labor estimating
H. Breakdown of take-off (who, how)
I. Job overhead determination
J. Determining markup (who, how)
K. Design/build, preliminary engineering and estimating
8 CP 5
Corporate Planning
ADDENDUM (continued)
COMPANY ANALYSIS
L. Corrections or last-minute procedures

M. Samples of forms used
N. Interrelation of estimating, engineering, operations, management, purchasing, and any
other departments
O. Costing of construction equipment
P. Use of EDP, present or future
5. Purchasing
A. Equipment and subcontracts (recap sheets, policy, who buys)
B. Material (perpetual inventory, by job, segmentation, delivery schedules, surplus dis-
posal, pickups)
C. Tools (by job, stock, open order, etc.)
D. Capital equipment (who and how)
E. Confirm and/or price all orders (why or why not)
F. Limits of authority to purchase (who and how much)
G. Samples of purchase orders and subcontracts
6. Execution of work
A. Who is in charge?
B. Forms used (how, why, when)
C. Engineering review of plan and spec work (who, when, depth)
D. Design and specifications on design/build work
E. Job manning, startup, tooling, organization
F. Field control of labor
G. Field reporting (cost, progress)
H. Field transportation
I. Truck dispatching
J. Tool control techniques
K. Subcontract control
L. Drafting (planning, samples, how much)
M. Prefabrication (how, what, who plans and supervises, how costed)
N. Delivery scheduling
O. Use of GPM (bar chart, other)
P. Labor coding, short interval scheduling
Q. Capital equipment (allocation, costing, maintenance)
R. Status reports (preparation, review, frequency)
S. Labor analysis, percent complete (who, when)
T. Purchase take-off (who, breakdown, other uses)
CP 5 9
Corporate Planning
COMPANY ANALYSIS
7. Sales and public relations

A. Brochures, fliers, mailers, ads, PR efforts, letters, TV or radio, Service Department
B. Salesmen (how paid, qualifications)
C. Entertaining (limits)
D. Leads and cooperation with manufacturers suppliers
E. Cost-plus or lump-sum negotiation and why
F. Participation in charity and civic affairs (who, how much)
G. Professional and trade associations
H. Club memberships and policy
8. Service Department
A. Do you have one?
B. Billings (amount, percent of volume, profit, percent of total)
C. Overhead allocation (how)
D. Who is in charge?
E. Separate company? (location, personnel)
F. Billing procedure (who does it, when, markup on labor and material)
G. Collection procedure
H. Callbacks
I. Manpower (problems, training, commissions, trucks)
J. Inventory
9. Corporate financial structure
A. Stock (classes, preferred, bonds, capitalization)
B. Stockholders (percent each)
C. Voting trusts or other restrictions
D. Directors (who and principal occupation)
E. If outside directors, why?
F. If not outside directors, why not?
10. Accounting
A. General description
B. Type equipment
C. Personnel (number and duties)
D. Use of outside CPA
E. Type of statements (percent complete, audited)
F. Tax return (percent complete, completed contractwhich one and why)
G. Interrelations (accounting with management, estimating, purchasing, contract admin-
istration, labor analysis, status report)
H. Billing procedure
10 CP 5
Corporate Planning
COMPANY ANALYSIS
I. Payables procedure
J. Cash forecasting (short-term, long-term)
K. Employment of surplus funds (see item O)
L. Collection procedure
M. Banking and borrowing
N. Deviation from MCAA manual
O. Subcontract retainages
P. Asset management
11. Insurance program
A. Independent agent(s)? Stock company or mutual? Negotiated or bid?
B. Retrospective clause? (experience)
C. Type coverage and limits
D. Umbrella
E. Executive and director liability protection
F. Design and engineering (company indemnify PE? E&O coverage?).
G. See item C. Discuss floater, completed contract explosive and excavation in detail.
H. Group and life, including stock redemption
I. Premium pay method
J. Use of insurance company safety and other aids
K. Services by bonding agent
L. Independent consultant, Insurance Buyers Council (IBC)
12. Compensation scheme
A. Salaries
B. Bonus
C. Profit sharing and/or pension
D. Medical plans
E. Salary continuation
F. Other fringes
G. Company car
H. Expense account
I. Vacation
J. Memberships
K. Tickets
L. Use of company equipment, labor, etc.
M. Side ventures
N. Loans
O. Stock distribution or options
CP 5 11
Corporate Planning
COMPANY ANALYSIS
13. Financial history for last five years

A. Statements
B. Profit and Loss
C. Ratios (which ones are determined regularly, how do you use them, what decisions
do you make from them)
14. Areas of weakness
15. Areas of strengths
16. Future planning (one-year, two-year, five-year, volume, type, areas, personnel, financial,
training). Information on the companys personnel policy and administration, whether for-
mal or loose, recruitment plans for both field management and office managementwhere,
how, main specs (age, education, experience), training programs present and contem-
plated (in house, outside, formal, planned, informal).
17. Management information systems (present use, future plans)
18. Marketing concepts (present and future)
12 CP 5
Bulletin No. CP 6
Total Quality Management
INTRODUCTION ing about quality. We hear it in television com-

mercials; we read about it in newspapers and
Total Quality Management is a business magazines; trade and business organizations
concept that has proven very beneficial to offer seminars and courses on quality.
many companies around the world. The
Whats the big deal? Why all this em-
Mechanical Contracting Foundation in con-
phasis on quality?
junction with The Trane Company has begun
a process that will enable contractors to be- There is a quality revolution occurring in
come informed about the subject of Total the United States out of necessity. Quality is
Quality Management and adopt Total Quality vital to business survival. Foreign competitors,
Management for their businesses. especially the Japanese, have greatly in-
creased their share of the American market,
This is the first in a series of bulletins to
particularly in the areas of consumer electron-
be published by the Management Methods
ics, automobiles, steel, machine tools, and op-
Committee for the purpose of informing the
tics. Their success in these areas is due to the
mechanical contracting community about
superior quality of their products and services.
Total Quality Management.
The Japanese have been working on
Before any company can decide whether
continuous quality improvement since the
to adopt a Total Quality Management approach
1950s. Japanese management has discov-
to their business, they must first understand
ered that companies whose processes pro-
the concept.This bulletin presents an overview
duce continuously high quality products and
of Quality and Total Quality Management.
services reap a three-fold benefit:
Lower costs
QUALITY
Higher profit margins
It seems that not a day goes by when we
dont hear this word. People are always talk- Larger shares of the market.
1
Corporate Planning
As the quality of their products and ser- Note that this definition describes TQM
vices improved, customer satisfaction and ex- as continuous. It is an ongoing, never-ending
pectations increased. The result: American process that demands time, resolve, hard
consumers prefer many Japanese products work, consistency of action, and significant
and fewer American companies are able to cultural change. It requires commitment on
compete. Today, the Japanese are a very se- the part of all the people at every level of an
rious threat in any business in which they organization, whether large or small, and a
choose to compete. Perhaps the contracting well-laid-out strategy and plan to implement
industry will be in their sights next! the process.
American business finally became TQM recognizes that the quality of the
aware of the situation in the 1980s. Many pro- goods and services that any company pro-
gressive companies realized that, in order to duces is the sum of the quality of individual
compete effectively in todays marketplace, employees output. Therefore, TQM concen-
the quality of the goods and services they pro- trates a great deal of effort on defining and
vided must be second to none. While the better satisfying each employees business
Japanese have had a tremendous head start, requirements with the understanding that in-
American business has made great strides in ternal improvement leads to improvements for
the last decade and continues to rapidly close our external customers.
the quality gap with the Japanese. Some
American companies, such as Motorola, are TQM consists of four basic concepts
now the preferred supplier to Japanese com- called the four keys of quality management:
panies.
The First Key is: Quality is meeting cus-
The Japanese have attained their pre- tomer requirements. In the past, we all have
eminent status by adopting a Total Quality had our own definition of quality: Good, shiny,
Management approach. attractive, expensive . . . and the list goes on.
These definitions make it very difficult to mea-
TOTAL QUALITY MANAGEMENT (TQM) sure and manage quality. The definition used
in TQM makes quality a very specific item.
First of all, Total Quality Management is Quality is meeting our customers require-
grounded in one basic focuscustomer sat- ments. We must talk to our customers to dis-
isfaction. Satisfying our customers by meet- cuss their needs and our ability to satisfy
ing their requirements and expectations every them. The customer is the final judge of our
time is the underlying goal of Total Quality conformance to the requirements.
Management (TQM).
The Second Key is: The system for caus-
There are several definitions of TQM and
ing quality is prevention. This is a proactive
most are similar to the following:
approach that requires an organization to
A continuous, structured approach adopt a system that removes opportunities for
that ensures the creation and con- errors before they can occur. It involves study-
trol of error-free processes which ing work processes to determine where de-
consistently meet our customers fects can occur and then changing the
expectations. process to keep them from happening.
2 CP 6
Corporate Planning
Prevention of problems or defects is always Responsibility for continuous improve-

less expensive in the long run than fixing prob- ment must be passed down to the lowest
lems after the fact. possible operating levels. The role of man-
agement is to train and prepare their staff so
The Third Key is: An attitude that customer that they are able to assume responsibility
requirements will be met each and every time. and to provide guidance and encourage-
For some, this implies perfection;that mistakes ment to all in their quality improvement
or errors will never be made. This is not the efforts.
case. In the past, many businesses operated
with an attitude that embraced an acceptable The contracting industry has seen a
quality level standard. This has led individuals rapidly accelerated rate of change and busi-
to believe that errors are expected or at least ness challenges during the past few years.
acceptable to a given level. Often this attitude It is very likely that this situation will continue
is self-fulfilling. In our ever more-competitive into the foreseeable future. In todays com-
markets, it is this attitude that is unacceptable. petitive environment, those businesses that
An attitude of meeting customer requirements differentiate themselves from the competi-
is a personal performance standard that each tion through a commitment to continuous
employee must decide to adopt. It is a part of quality improvement will prosper and grow in
TQM training to assist all members of an or- the 90s.
ganization to adopt this attitude. A recent government study of 20 com-
The Fourth Key is: Measurement. It is vital panies, which were among the highest scor-
that a system of measurement be established ing applicants for the Malcolm Baldridge
because measurement plots progress toward National Quality Award, reported the follow-
targets and goals and provides the personal ing average annual percentage improve-
incentives needed by individuals contributing ments:
to quality improvement. Quality measure- 10% decrease in errors
ments can measure the output of a business
process directly and indirectly. Most impor- 11% decrease in customer complaints
tantly, measurements provide a means of de-
12% decrease in order processing time
termining progress or impressions, and they
simplify the process of documenting quality 11% improvement in product reliability
improvement results.
14% increase in market share.
These four keys of quality management
must become a part of the organizations cul- Other studies provide the following ex-
ture if true quality improvement is to occur. amples of results achieved in the construction
This will require changes in attitudes and val- industry:
ues on a company-wide basis. For this to hap- 17% savings in direct job labor costs
pen, management must want it to happen, the
20% savings from reduction in home-of-
work force must be trained to possess the
fice overhead
skills to enable it to happen, and information
on results must be freely and openly available 5% savings from reduction in subcontrac-
so that it can be seen to happen. tor costs
CP 6 3
Corporate Planning
22% increase in revenue from repeat busi- of far reaching beneficial results. Improved
ness. quality will definitely lead to higher profitabil-
These results were reported by firms that ity and growth, and work becomes a far more
have made a serious commitment to TQM. pleasant experience for all employees.
The external customer makes all of the

effort worthwhile. Ultimately, it is what the ex- CONCLUSION
ternal customer wants that drives the mech-
anism of TQM. Adopting a TQM approach to business
Customer requirements are often very will result in many benefits. However, it is very
basic. They want systems to work, they want important to realize that improvement is not
to feel they have obtained value for the money often achieved in large, quantum leaps but
spent, they want phone calls returned when rather is achieved through a series of many
promised, action when promised, knowl- small incremental improvements to an orga-
edgeable and polite service, and, yes, the job nizations business processes and activities.
finished on time. Every employee of every de- The type of business doesnt matter, be
partment has a critical part to play in the qual- it manufacturing or service, fast food or me-
ity profile of a company. chanical contracting. Quality is no longer an
TQM is not to be taken lightly. Its suc- option! It is the single most important aspect
cessful implementation demands obsessive- of business today. Those progressive firms
ness from a companys senior management which will be successful in the 1990s recog-
and involvement by all who work for the com- nize the importance of quality and the need
pany. If this is accepted, then TQM is capable to adopt a TQM approach to their businesses.
4 CP 6
Bulletin No. CP 7
Bulletin
Mechanical Contractors Guide to Crisis

Management
Development of a plan to train the project management team to
respond and effectively minimize the impact of a jobsite crisis.
OVERVIEW personnel to any injured parties. In a

binder on the jobsite, project
The project management team at a management should have a list of
mechanical contracting company deals hazardous chemicals to secure to
with a myriad of problems and issues limit further damage. If sub-
daily, from a vendor shipping incomplete contractors are directly involved with
orders to dealing with out-of-sequence the crisis, their management will
work and deciding how to keep the job have to be among the first
flowing smoothly. The purpose of this contacted. As for your company,
bulletin is to encourage the notify immediately upper
development of a plan to address crises management and the loss control
that lead to serious injury/fatality, such department. Plan to make other calls
as crane accidents, falls, natural later to the human resources
disasters or other such incidents. department, payroll, information
systems, etc. as required.
The same project management team
that deals with the day-to-day job-site PREPARE A CRISIS
problems will also necessarily be the MANAGEMENT PLAN
first to react to a crisis. It is vital that the
team is trained in reacting to the crisis to When a crisis affects either a
prevent additional death, injury or company or a jobsite, company
property damage, as well as limit officers and jobsite management
damage from incomplete or inaccurate personnel will be faced with multiple
media coverage, and deal professionally issues and demands. A plan that
and compassionately with the affected has been established,
individuals. communicated and practiced can
assist the company in managing the
Time is critical in a crisis. The company crisis. Here are some tips for an
already has a plan to evacuate the effective crisis management plan:
jobsite and assemble for accountability.
There is also a plan to summon and
guide emergency medical system

1. Separate the responsibilities of The primary immediate concern is to
crisis management from crisis secure the area. Take the steps that
communication. Assign one are already in your established crisis
person to manage the on-site issues, plan and identify any individuals who
another person to be the liaison with are injured or deceased. This could
first responders (police, fire, etc.) be someone with whom you have
and public officials (OSHA, EPA, worked for years, and/or also could
etc.), and another person to notify be a friend. Regardless of personal
family of injured personnel and to emotions, very critical steps must be
accompany any injured workers to a taken immediately:
medical facility.
1. Designate a responsible
2. Assign a media spokesperson. In person to accompany the EMS
the event of injuries or deaths, the transport of the deceased and
spokesperson should be the highest injured. These people must be
ranking company official possible. familiar with hospitals and
Those responsible for managing the effective in relaying information
crisis should report to the media back to the company.
spokesperson to ensure that
information about the crisis is 2. The project manager or project
accurate and timely. And be sure to executive should notify family
assign a back-up. members/next of kin
concerning the deceased or
3. Assign a person to monitor social injured. This is a particularly
media networks. Direct that person difficult task, and requires
to correct any false or misleading training beyond the scope of this
information immediately. bulletin.
4. Put the plan in writing, update it 3. Local and/or federal

annually, and communicate roles authorities may have to be
and responsibilities to all parties. notified. There will be case-by-
Consider staging a mock disaster case decisions to be taken on
drill at least annually to practice roles this point. For example, a large
and to be prepared. oil spill or a chemical leak must
be reported. In extreme cases,
SEQUENCE OF RESPONSE the surrounding local community
may need to be evacuated.
Crises, like accidents, are not always
predictable; by definition, they are 4. The spokesman or project
inopportune. There must be a selected manager should keep the work
group of individuals on each jobsite who force informed. Release
are trained to handle emergencies. The personnel when you can, re-
primary burden will fall on the project minding them not to speak with
manager and general foreman, but they the media. Keep sufficient work
will need the support of many others to force members on hand to per-
effectively manage a crisis. form tasks as needed. The loss
control department shall com-
Initially, the project manager will likely be municate with medical facilities
the senior company representative. If on the status of the hospitalized
the project manager is not on site, this and injured. Loss control will
duty will fall to the general foreman. update the workforce and
management.

5. After all authorized investigations 3. All information should come to
are complete, start the clean-up the crisis management team
procedures to ensure the work-site for evaluation. The media will
can return to normal operations at need to know: Who? What?,
the earliest opportunity. When?, Where?, Why?, and
How? Because of the inherent
6. As necessary, the main office will confusion in a crisis, there may
have to assist with information be conflicting reports and
gathering, historical records, payroll inconclusive testimony from
assistance for the injured or witnesses. Only information
deceased, and possibly preparation deemed accurate will be passed
of checks as required. Information on to the spokesperson.
services might have to assist the
recovery of electronically stored 4. To the greatest extent
material and telephone assistance. possible, try to be in a position
to communicate with the
DEALING WITH THE MEDIA media within 30 minutes. If not,
give the media a time frame
In the event of a crisis, the media will within which you will be able to
invariably be involved. A no comment address them. Have an agenda
strategy rarely is a good idea. The ready before the interview
media will usually find someone else to process starts. Be succinct,
talk with, and then the company loses specific and get to the point right
complete control over the story. A good away. Do not offer conclusions
media communications plan that can unless you are sure of them.
convey the facts about the incident and
explain how the company is taking 5. Keep the press informed with
positive steps to address the crisis will current information. Keep the
almost always be a better strategy. information objective by refusing
Consider the following: to speculate on answers. Inform-
ation from the jobsite, hospital,
1. Issue strict orders that neither and some historical information
company employees nor sub- about the company will need to
contractors are to speak to the be assembled and disseminated
press. All questions from third-party
sources must be directed to the 6. Never, ever lie to the media.
designated spokesperson. Be accurate. If you make a
mistake, stop and correct
2. If a job-site crisis has occurred, yourself.
prepare an area for the media. The
medias job is to find information and 7. PRnewswire.com is a possible
prepare their story. The better the way to control Internet news
company can accommodate them where the company can post its
and disseminate objective, accurate, own story.
timely information, the more
influence you will have on the RETURNING TO NORMAL
character of the reporting. The OPERATIONS
spokesperson should be trained in
dealing with the press. (see Crisis After the crisis has subsided, it is
Management and Presentation by critical to identify the cause and es-
Janine Reid. Copyrighted 2000 by tablish training throughout the
Janine L. Reid Group, Inc.). company to prevent a similar

occurrence in the future. If there was a
fatality or serious injury, care must be
taken to restore morale on the jobsite.
Outside assistance in the form of
counseling may be required.
If the crisis incident involved sub-

contractors or vendors, company
management must evaluate contractual
and business relationships to provide
continuity in business affiliations.
Legal consultation may be necessary to

protect the companys interest
throughout the crisis.
SUMMARY
Although the mechanical contracting

industry has placed its highest priority on
safe work practices on the jobsite, the
potential exists for significant crisis
incidents. Develop a company plan to
deal with the immediate situation to
prevent further harm, care for the injured
or deceased, warn the local community,
and deal with the publicity. By effectively
limiting the impact of such a crisis, you
could save your companys future.

Bulletin No. CP 8
Bulletin
Disaster Recovery
Getting Your Business Back in Operation after a Disaster
Overview standards, including ANSI NFPA1600,
Every company should have plans to deal with BS25999, HIPAA Security Rule and Sarbanes-
emergencies and disasters. Plans well Oxley guidelines that may pertain to you r
executed could save lives, minimize loss of business.
assets, and even save the entire business. A
catastrophic event to your building does not Emergency Response vs. Crisis
need to result in catastrophic losses for your Management vs. Disaster
business.
Recovery
How well you are prep ared for su ch an event This MCAA Manage ment Methods Bulletin is
will make all the difference in assuri ng business about Disaster Recovery. The differences
continuity and having peace of mind. Being
prepared means having: Normal
Last T Up & Sent
Backe
A strategy to protect or Operations
duplicate vital resources

ime In
d
Emergency Response
Trouble
A plan to respond to Interrupts
forma ffsite
emergencies Your
Crisis Management
Business
A plan for recovery from a
tion w
O
disaster, including access to Lost Information Disaster Recovery

as
vital resources
Resources to support your Time (hours, days, months)
recovery plans
between Emergency Response, Crisis
Management and Disaster Recovery are
Often, for convenience, Emergency Response
often confusing, and it is importan t for you to
and Disaster Recovery Plans are written as a
understand those diff erences. The above
single document. Ho wever your plans are
graphic depicts a timeline showing when each
written, they need to be current and thoroughly
of these plans is utilized after a significant event
familiar to managers and certain staff who will
causes an emergency, crisis, or disaster:
lead the or ganization in the reco very effort.
This MCAA Manageme nt Methods Bulletin will Starting at the left, note the dotte d line that
guide you through developing a Disaster represents times during normal operations that
Recovery plan or improving an already existing information (hard or sof t copy) critical to your
plan. business is backed u p from on e media to
another (usually disk to tape) and the backup
This bulletin corresponds well to various public copy is sent and stored off site in a safe
Copyright Mechanical Contractors Association of America, Inc., 2008 Page 1 of 13

location. Different data are backed up at Definitions
different times. When a business interruption
occurs and critical information is lost, backup For the purposes of th is bulletin, th e meanings
copies from different p oints in t ime are then of certain terms are detailed as follows:
available for use in st aging a recovery. The Emergency: an urge nt, usually unexpected
time between the last backu p and th e occurrence requiring immediate action prior to
interruption is a period during which new the decision to declare a disaster.
information may ha ve been added but is no
longer available. That data is now lost, and any Crisis: an unexpected de-stabilizin g event that
information that is not an affordable loss must may threaten an org anizations personnel,
be recovered from paper files, business revenue, reputation or ability to deliver
partners, clients, etc. customer service.
Disaster: any significant disruption that forces
Emergency Response a mission-critical business function to relocate,
at least in p art, to a lo cation different from it s
Typically, a substantia l interruption t o business normal location, on a t emporary or permanent
operations is fo llowed quickly by yo ur basis.
Emergency Response , as shown in the table
NOTE: A disaster falls into the crisis category; an
above. Steps are take n to protect employees,
emergency can develop into a crisis. Many cri ses
notify local emergency units, a ssess the are not operational, such as product failure, labor
situation and salvage physical assets where relations, adverse international events, or sudden
possible. market shift. A dis aster is always a crisis, but it is
only one type of crisis.
Crisis Management SAMPLE S CENARIO: It is mid-morning and
This is followed immediately by Crisis severe weather is predicted. Decisio ns need to
Management, which involves contactin g be made about whether employe es should be
employees and su ppliers, taking steps to sent home. This is an emergency, for which
prevent further damag e and secure facilitie s, immediate action (decision-making, preparation
and dealing with custo mers, stakeholders and for the storm and communication wit h
the press. Someti mes, a crisis is not personnel) is necessary. If the storm hits hard,
operational and does n ot affect a facility, such the facility may be da maged and workers may
as incidents related t o sudden market shift, be frightened. This is a crisis, where senior
product failure, labor relations, executive management must deal with employe e
succession, public perception, or a cash crisis. concerns and welfare, communic ation with
Each of these inciden ts requires executive clients and vendors, possible first aid, facility
intervention and serious attention a nd falls int o repair, productivity, and a host of administrative
the category of Crisis Management. issues. If some or all of the business processes
need to be moved to another facility, the
scenario becomes a disaster. It requires
Disaster Recovery logistics for workforce mobilization, notification
If the in cident is an operational interruption, of personnel, distribution of supplies to the
such as by fire or flo od, we consider this a recovery site, and allocation of technical
disaster, and Disaster Recovery protocols go resources, such as computers and telephones.
into effect, as descr ibed below. Disaster
Recovery is the subject of this bulletin. Why the Difference Matters to You
In the section below, we define the elements in Emergency Response is about people their
the chart and discuss how they relate. Later, in safety, their emotional well-being, and their
the section Why the Difference Matters to You, behaviors under pressure. (It is not about
we discuss how you would need to respond. business resumption.) It is a lso the period of
time during which the determination is made as
to the extent of the p otential impact and the

type of managemen t response that is Such a pan demic could have a serious impact
appropriate under the circumstances. on businesses, and most large corporations are
Emergencies require short term response. considering how they would respond to th e
unavailability of large p ercentages of personnel
Crisis Management is about organizational
for several weeks. Epidemiologists estimate
control during a crisis. It provides for executive,
that the U.S. workforce could be diminished by
employee, client and vendor inter-
30 to 60 percent during an H5N1 pandemic.
communications, problem resolution protocols,
common language among decision-makers, As we ha ve defined disasters as the need to
administration, and coordination of service move functionality to another location,
continuity activities. It also addresses public pandemic response do es not fit neatly into the
and customer relations immediately following a Disaster Recovery arena. However, it is not to
serious incident. It typically follows the be taken lightly, and yo u may want to consider
Emergency Response and is longer term. the matter in your Crisis Manageme nt
Planning. There are things you can do to
Disaster Recovery is about re-establishing and
mitigate the impact of a workforce outage and
sustaining the flow of mission-critical busine ss
also preventive measure s you can take to limit
processes to serve bu siness objectives at an
the spread among your employees. This is a
alternative site. With continuous process flow, a
complex, separate top ic that lies within the
business can maintain a strong fin ancial basis,
scope of Crisis Management Planning.
keep its good r eputation, comply with
regulations and the law, and serve its clients.
What You Need for Disaster
Your plans for Emergency Respo nse include
fire drills, notification of personnel during severe
Recovery
weather, dealing with medical situat ions,
suspicious activity at your office, elevato r The Disaster Recovery Process
failure, bomb threats a nd the like. Disaster To recover from a catastrophic event that
Recovery efforts typically come into play once causes a disaster, you need to know:
the emergency has been or is being handled.
How to get out (Emergency Response)
This bulletin on Disaster Recovery focuses on
business resiliency and continuity. We discuss Where to go when you do (Disaster
Emergency Response and Crisis Recovery)
Management only as they relate to Disaster What youll need when you get there
Recovery. (Disaster Recovery)
What to do after you arrive (Disaster Reco-
A Word about Pandemic Response very)
Planning What to tell employees and others (Crisis
A pandemic is a worldwide epidemic. There Management)
has been a good deal of press for t he past few In the diagram below, we focus on the Disaster
years about the potential for the H5N1 virus Recovery process. This process is represen-
(also known as Avian Flu or Bird Flu) to ted by the bar labeled Disaster Recovery in
become transmissible between humans. To
date, the virus seems to be contagious only
Disaster Recovery
from birds. Se vere pandemics occur
approximately three times per ce ntury and
generally kill millions of people. It is a serious
matter on a personal level, since the current Situation Assessment Operations Restoration
mutation has killed more than h alf of the
Mobilization
on
a ti
la r
people it ha s infected. The virulence of the sa
s te
rD
ec Business Resumption
Di
virus is like ly to di minish if it mutates to a Return Home
human-transmissible form, but it will sti ll be Time (hours, days, months)
dangerous.

the diagram on page 1. In the diag ram above, books, and human memory. It is difficult to
we show additional detail. recover the latter if people perish, but most
other information media are recoverable if you
Once the Emergency Respo nse is in plan appropriately. There is some information
progress, principally for the safety of personnel, you can reconstruct or do without and some
a team can begin to assess the situ ation. This you can obtain from outside entities
assessment may result in the declaration of a (publishers, regulators, vendors, competitors,
disaster. It is important to restrict authorization etc.), but much information critical to the
to declare to high-level executives, since the business requires pre-disaster protection from
resulting movement of function and people permanent loss.
could be an expensive proposition.
Tools to Continue Op erations: Consider
As soon a s a disaster is declared, employees the tools yo u need every day to produce the
must be mobilized to se t up functi onality at an results clients expect and that you need to run
alternative site. Th is is large ly a technical your business. Witho ut computers, trucks,
matter with assistance from your facility and and flat-bed printers, could you produce those
administrative departments. If you have results? Could you continue to operate?
subscription services from vendors who provide
Place for People to Work: Your field
recovery services, they need to be contacted to
personnel would continue operating even if
activate the services y ouve been paying for.
your headquarters were unavailable
For example, if you ha ve been subscribing to a
provided headquarters f unctionality could be
recovery site, they nee d to prepare for your
sustained and office workers cou ld continue
arrival. Your off-site data stora ge services
to support f ield operations. Theref ore, office
vendor needs to move the latest data to your
workers need a place to work. Some
recovery site.
employees might be able to work from their
At your alternative loca tion, technicians need to homes if the technolog y and controls are in
set up, conf igure, connect and test equipment, place to make that possible.
install software as needed, and prepare the site
Knowing What to Do: This is th e recovery
for use. Once the site is ready fo r use, your
plan document that tells people wh ere to go,
workers need to execute their recovery plan
what to do when the y get there, who is
roles sen ding the rig ht people a t the pre-
accountable for what, what reso urces are
planned times and knowing what to do when
available for recovery, and what in formation
they get there. Meanwhile, technolog y
you will need, such a s phone n umbers of
personnel continue to p repare for more arrivals
recovery team members, other employees,
and support the employees who ne ed special
and vendors.
help adjusting to the new environment.
Rehearsing and Maintaining the Plan:
Returning home shifts recovery steps into
Shortly after any recovery plan is declared
reverse and requires just as much care.
complete, it is out of dat e. If your b usiness is
like most, things change daily. Your plan
Strategy needs to be maintained in a form that is easily
This section summarizes six areas important in modifiable and easy t o re-distribute. Most
recovering resources t o maintain business plans are maintained online in whatever word
strength in the face of disaster: Information, processing software is used in your company.
Tools, Workspace, Proces ses, Plan Even with a current p lan, however, it isnt
Maintenance, and Funding . Following these much use if people dont know what it
summaries, we provide a level o f detail that contains and how it should be used. The best
may help you to write your Disaster Recovery way to accomplish this orientatio n to the
Plan. plan is by staging a simulated in cident for
employees to experience. The se rehearsals
Minimizing Informati on Loss: Business
are usually called Table Top Exercises.
information is stored in many forms
computer readable data, ledgers, paper files,
Funding the Recovery Effort: Insurance Tools to Continue Operations
coverage could help you financially during
and after t he often painful experience of If you have accounted for the recovery of data
recovering your business f unctionality. you cannot afford to lose by backing it up and
Moreover, having adequate coverage could storing it o ff site, you have take n the most
get you back on line quicker. important step to recovery. Howe ver, you now
must consider where you will restore that data.
The following sections detail the above strategy
areas For backup data on computer tapes, you will
probably need to load those down to disks, and
you will need computer servers to process th e
Minimizing Information Loss Data
information and make it a ccessible to
Recovery employees and possibly to client s and vendors.
Most business executives understand that there You will also need computer networks (LAN for
is some information they cannot aff ord to lose. Local Area Network and WAN for Wide Area
If that inf ormation resides on ly in certain Network where local means in office), which
peoples memories, you know i t must be consist of e quipment and telephone lines. For
documented to protect it. Even outside of a telephone lines, you wi ll need tele phones and
business disaster, people can become the centralized in-off ice equipment that run s
unavailable, and their u navailability should not those phones. Printer s and scan ners also are
be cause for the business to suffer. If the needed and must be connecte d to your
information is only in paper files and it is critical, computers, and photocopy machines that do
you may need to copy those files (electronically not require computer connections are just as
by scanning or on more paper) and store the important. These things are basic to your
copies offsite. Similarly, electronic data can be technical services that will need to be restored,
lost if it is not backed up and stored in some but tools a re not just about co mputers and
form at another location . Consider t he diagram phones.
on page 1 of this bulle tin. Working backward Do field personnel par k their business-owned
from the bu siness interruption event, note that trucks in your office parking lot? I f you lost the
the amount of data lost depends upon the last office building and t he equipment stored
time that data was backed up and sent off site. nearby, assume that you could lose tha t
There is a technique called data replication equipment. Ask your field supervisors to make
that can shorten that time-frame to subseconds, a list of essential equipment that field
so that virtually no data is ever lost because at employees need and th at are typically stored in
any given moment, the data just entered was the office or just outside. Then, have someone
immediately sent off-site over a remot e investigate how long it might take to replace this
network. Y ou may consider thi s capability for equipment. If the repla cement turnaround time
extra-critical data. is longer th an the time you would need the
Data shared with clien ts or busin ess partners equipment, you might consider having extra
may not be lost if your facility is l ost, but you equipment standing by, storing your equipment
need to en sure that your client s or partners in another place, or distributing your equipment
know of this dependency and would be ready to across multiple sites.
help you replace that data in the time you would
need it following a disaster. Like wise, if the Place for People to Work
data you cannot afford to lose inclu des books, Alternative Workspace
professional documents, selected magazine
articles, product information, and off-the-shelf Your business cannot function without people.
computer program disks, make sure you know As obvious as that sounds, even large
how to get this information in the time needed corporations forget that their peop le need a
by listing th e items you receive from vendors, place to work, and that place must be equipped
book-stores, etc. as well as co rresponding with resources that peo ple need computers,
contact information. Maintain this list off site. file cabinets, desks, phones, high-speed
networking equipment, etc. Furt hermore, if

certain groups of people need to be near other Funding the Recovery Effort
groups in order to be productive, separate hotel Insurance
rooms, for example, may not work.
You are well advised n ot to plan for enough No amount of financia l compensation after a
alternative workspace to acco mmodate all disaster will ensure that you will be able to
personnel immediately following a disaster. continue critical business functions. Only a
The more you pre-allocate, the hig her the cost. proper, viable plan with supporting resources
Consider how many people you will need in the will make t hat possible. However, insurance
first few hours, the first day, the firs t week, etc. coverage could provide financial resources that
If you are using a co mmercial recovery-site, will help yo u to fund the recovery effort and
negotiate for lower subscription fees in ease the st rain during difficult t imes. Having
exchange for higher occupancy fees at the time adequate coverage ma y help you to recover
of a disaste r. The latte r should be covered by more rapidly from a cata strophe. The following
Extra Expense Insurance. types of insurance apply to operational crises:
Extra Exp ense Insurance: Th is type of
Knowing What to Do a Documented insurance is designed to pay for expenses you
Plan would not ordinarily incur unless you had a
disaster. For example, it cover s fees to :
The most important re covery plan is the one
retrieve data from an offsite storage location,
that tells people what to do at the time of a
use a reco very site for equipment, or occupy
catastrophic event. T his plan should be a s
alternative workspace.
clear and succinct a s possible so that anyone
following the plan is not d istracted by Business Interruption Insurance: This type
unnecessary and extraneous in structions and of insurance pays only for loss of profit due to
facts. For example, when a disa ster occurs, an outage. It does not cover all revenues that
few people are concern ed about how the plan you might incur by not doing business.
was maintained or tested or who ba cked up the Furthermore, you will need to document for the
right data a nd how it was sent off site. Those insurance company exactly how much profit
elements of preparedness belong in a you would have gained had the disaster not
supporting plan. occurred.
Rehearsing and Maintaining the Plan Insurance to Cover Loss of As sets: This
type of insurance is designed to pay for the loss
A plan untested is bett er than no plan at all of assets specifically identified in the insurance
but not by much. Testing the plan at the time of policy. Typically, it does not cover consequen-
a disaster allows no room for failure. At the very tial losses. For example, if you are able to put a
least, the technology components of your plan value on certain data, b ut the loss of that data
should be t ested. Other tests are possible, causes major business disruptions that result in
including notification tests and Table Top other losses, the insurance company will pay
Exercises to give ke y employees a top le vel only for the value you assigned to the data.
view of the plan and a chance to practice it
under safe circumstances where mistakes ar e A common question: Will a re covery plan
allowed. reduce my insurance premiums? Not likely,
Plan maintenance procedures nee d to be set but you s hould speak with you r insurance
up so that the plan is updated periodically. agent. We do not reco mmend doing recovery
Names and contact information will change, planning to reduce insurance premiums.
vendors may change, and the need for recovery Taking preventive measures may help. Do
resources may increase or decrease. Revie w what your business re quires to ensure the
and update your plan at least qu arterly, and ability to survive. If other benefits follow, so
keep in mind that the more often you update the much the better.
plan, the smaller the number of updates.

The Recovery Planning Process Cover your greatest exposures first with a
simple plan not necessarily well-d ocumented
Standard Methodology and put a program in place to gradually build
upon that plan. Protecting your greatest
Large and small organizations have similar exposures is a 1-2-3 process:
needs in ar riving at a r ecovery strategy. You
need to know, for example, the kind of damage 1. Protect y our employees with training in
a disaster could do to your business. Large Emergency Response procedures.
corporations conduct a formal Business Impact 2. Protect cri tical information by having
Analysis for this purpose. In smaller firms, it is data backed up and cycled of f site
possible to do such analysis more intuitively, regularly.
but you still need to be aware of what you can
and cannot afford to lose. Corporate 3. Protect business processes by
contingency planning has evolved over the past arranging for an alternative location where
decade to employ planning tools t o achieve a your most critical pe ople can operate
specific order of objectives. The following temporarily.
diagram, formalized by Eagle Rock Allian ce, The nemesis of the simple approach is thinking
illustrates this order of objectives. that you need a full-scale recovery plan
tomorrow. Not true. As with a ny business
The Simple Approach a Quick function, you need to start somewh ere. Strive
Start for progress, not perfection. You ca n tune your
most basic program as you have time an d
The simple approach to Disaster Recovery funds.
Planning is to ensure the ability to survive.
Shortcomings of the
ANALYSIS
Simple Approach
Risk Analysis STRATEGY DEPLOYMENT SUPPORT Once you have started with
What can go
wrong?
the simple 1-2-3 app roach,
take a breather, but do not
IT stop there. As Will Rogers
Business
BUS
Test asserted, Even if you re on
ENT
Impact Analysis
Implement
We have the
It works!
the right tra ck, youll ge t run
What happens
when/if it does?
Strategy(s) capability!
Exercise over if you just sit there.
What to do
It gets
While you were developing
about it?
stronger!
the first simple, business

Drill
Recovery IT
We work! survival plan, you may have
Requirements DRP
Analysis
Decision BCP found items that you would
ERP
What must be in
place? CMP
like to have that are better
than mere survival. You may
Plan(s) want, for example, to ensure
Development
Technology We know what to Continuous the ability to posit ion your
Improvement
Assessment
do!
It stays relevant!
business for continued
profitability. When you
How does it work?
consider the issues b eyond

mere survival, some
Legend:
IT
IT Disaster Recovery Planning questions will occur for you:
DRP
IT Information Technology
BCP Business Continuity Planning
What can go wrong, and
BUS Business Units what might you lose when it
ERP Enterprise Recovery Planning
ENT Enterprise does? (See the Standard
CMP Crisis Management Planning
Methodology diagram t o the
left.) What would I ne ed to
have in pla ce to minimize disruptio n to cr itical If You Already Have a Plan
processes, and how would the recovery
technology work? Your existing recovery plan may be all that you
need. It may cover those exposures which you
The simple approach is a great start, but not the consider to be the most damagin g and most
end of the road. Ultimately, its sma rt to have a likely. You may feel that your organization can
comprehensive and well-documented plan. handle smaller risks without significant planning
or preparation. On the other han d, previous
If You Do NOT Have a Plan planning may have bee n constrained by limited
You may not have a documented plan, but even funds or insufficient time to plan, or maybe you
if you have not started with the simple thought it was enough at the time but have a
approach, you probably have the basis for a different perspective today.
strategy in mind. Most organizat ions do. For Plans are typically dyn amic and are always
example, you may have thought about the need subject to change as business circumstances
to back up critical information and store it at a n change. It is usually worthwhile to perform a
off-site location. Yo u may have actually regular review of your plans.
arranged this activity but do not consider it part
of your Disaster Reco very Plan. You may Improving Your Plan
have considered where critical personnel might
work if your primary location were t o become The first thing you need to do is t o take stock.
unavailable. Even if you have o nly thought Where is th e plan meet ing business obje ctives
about these things or are just beginning to and where is it not ? If you have a plan and
consider them based upon this Bulletin, you are resources to back it up, you are sp ending time
headed in the right direction. Consider the and money on the ab ility to recover fro m a
1-2-3 Simple Approach above to get started, disaster. Improving that plan may cost more
after which you can rest assured that youve time and money, and you need to know what
postured your company for a good chance to you are protecting so that those re sources are
survive in dire circumstances. Having not spent unnecessarily.
accomplished that feat, youve bought yourself Upon serious reflectio n, most contingency
some peace of mind and some time to take th e planners agree that their recovery plans prote ct
next step. Following are some thin gs you can high-level corporate objectives, namely to
do to ensure survival. maintain:
Fiscal strength (revenues, investments,
Beyond the Quick Start assets)
Check out free resources, such as Customer service and a positive corporate
www.ready.gov for Emergency Response. image
Assign a planner or planning team from Legal compliance (regulatory, contractual,
within or outside your firm. etc.)
Identify your greatest risks. Your business processes sup port those
objectives. Which processes are most critical in
Develop a strategy to deal with the greatest
doing so, a nd how much downtime can you
risk.
afford for each of tho se processes and still
Write a plan to document the strategy. meet corporate objectives? This is what a
Business Impact Analysis is about.
Implement the plan.
You can p erform a formal analysis or make
Socialize the plan among the stakeholders. some educated estim ations about process
downtimes. Be careful in your estimations, as
What to do next they will play an important role in where you
See the next section of this Bulletin. focus your recovery pla nning energies. A few
years ago, a large serv ice organization began

to heavily fund recovery of their billing process, chain. Will your most critical vendors be able to
assuming that it was the most critical element in provide supplies when you need them? You
generating revenues. Upon furt her analysis, might wish to check with your vendors to
they realized that loss of billing for as much a s determine how resilient they are to a regional
a month wo uld only DEFER re venues which outage.
the CFO asserted was acceptable, but that lost
customer service (their call center) could result Reviewing and Exercising Your Plan
in permanent loss of customers and a much
greater loss of revenue in the lo ng term. The Your Disaster Recovery plan is a dynamic
result of this new understanding was a shift in document that needs to be in constant synch
funding recovery of th e more critical process. with changing situation s and business needs.
The lesson learned was not to be deceived by Most plans are reviewed at least semi-annually.
what APPEARS to be obvious. A review can be as simple as an internal audit
or as complex as a full-scale recovery exercise.
Once you truly understand where to focus your
planning efforts, your next step is t o determine A good way to determine where and when your
what it would take to re cover critical processes plan needs to be imp roved is by testing it
within your estimated acceptable downtimes. regularly. Benefits of exercising your plan ru n
Given that you already have a pla n, this next the gamut from raising awareness to validating
step may involve shorin g up existing recovery the interplay of all recovery comp onents. It
resources, or you may wish to re vamp your includes notification tests, equipment
strategy entirely. If the latter, youll want to component tests, ne twork switching, data
consider the options available to you. restoration tests, and table top ( simulation)
Alternative Site and Backup Options , begin- exercises. The latter is becoming increasingly
ning on page 11, provides a list of recovery popular in exercising Emergency Response
options and what they mean. For you to select and Crisis Manageme nt as well as Disaster
judiciously from the options, you might research Recovery but usually involves some external
the field of reliable vendors, determine which skills in design and facilitation. The payoff,
viable options match your preferred strategy, however, is in co nsiderable participant
and perform a cost-benefit analysis. Costs vary understanding and bu y-in at all l evels of the
widely among vendors, so it is wise to do your organization.
research completely and negotiate!
Who Owns the Plan?
The options listed in this bullet in are of a In a small b usiness, the owner of th e business
general nature to provide basic under - is often the owner of the plan. The owner has
standing. A truly comprehensive analysis of prime responsibility, b ut usually holds other s
recovery options viable for your situation should accountable for such matters as en suring that
be performed by your technical per sonnel after backups are sent off site regularly, that the plan
your business needs are defined. Make sure documentation is kept current, th at recovery
that your te chnically oriented personnel are in procedures are tested, that vend or contracts
synch with t he business need so that they do are maintained, and th at information about th e
not over-estimate or under-estimate the plan is communicated to critical employees.
technical requirement. For exa mple, if your Often, these accounta bilities are given to on e
data-loss tolerance for a particular system is person. Industry analys ts indicate that in most
two days, real-time remote replication is small firms, Business Continuity Management
probably over-kill and needlessly expensive. reports to the CEO, anothe r high-level
Similarly, do not ignore new technologies, such executive, or the Board of Directors.
as wireless soluti ons, that enhance flexibility
greatly for little additional cost. Solutions and Costs
One final note about improving your plan: Solutions to recovery issues vary g reatly from
being recoverable in th e face of a r egional type company to company. They d epend upon
outage is more than just recovering your o wn potential impact and y our tolerance for risk.
capabilities. You need to consider your supply
The chart on page 11 contains so me options Quick Ship contract and/or special
from which you might choose for recovery site recovery equipment
and information backup. Document scanning or copying
The combination of sol utions you choose will Time and materials to disse minate
contribute to the cost, and while this cost varies information and exercise the strategy
from business to bu siness, there are rough
estimates you might consider for planning
purposes. The cost of maintaining a Business
Continuity Program is often $1,0 00 to $2,00 0
This publica tion was pr epared b y Eagle
per employee and usually less per e mployee at Rock Alliance, Ltd. (West Orange, NJ) for
the higher end due to economies of scale. It publication b y MCAAs Mana gement
includes: Methods Committee an d for the u se o f
MCAA mem bers. Th e concepts, tables
Fees to an off-site storage vendor and graphics contained in this bulletin are
2008, Eagle Rock Alliance. All rights are
Employee time to sust ain the program reserved.
and/or consulting fees
Contractual fees for Recovery Site for
equipment and/or workers
Want more?
If you search the web using keywords like small business disaster planning, you will find
a host o f sources that recommend methods and templates for Disaster Recover y
Planning. A word of c aution is advisable here. Be ware of one size fits all planning
templates and forms. Here are two webs ites you might browse to get additional
perspectives on Business Continuity Planning:
Website Site Sponsor / Owner Benefit

www.era-1.com Eagle Rock Alliance, Ltd. Browse the site to see whats generally available in
Business Continuity and Corporate Resilience; also
contains links to other sites that provide sample
plans. For samples, go to:
www.era-1.com/samplesSB.htm
www.ready.gov Department of Homeland Security Go to Downloading & Ordering All Ready
Publications to find documents that might apply to
your business.

Alternative Site and Backup Options
Data Center Equipment and Network Recovery

OPTION DATA CENTER EQUIPMENT AND NETWORK RECOVERY
1. COMPANY INTERNAL Use of existing local company facilities to re-distribute and/or deploy additional
RECIPROCAL mission-critical equipment and networks (supporting multiple business processes)
amongst them.
2. COMPANY ALTERNATIVE DATA Alternative, existing company data center outside the local area (region, state,
CENTER INTERNAL HOTSITE country) that can be used to house additional equipment designated for testing and
recovery purposes only.
3. COMMERCIAL HOTSITE Fully equipped, secured, environmentally conditioned and operationally ready data
SHARED SUBSCRIPTION center offering a variety of specific hardware platforms ready for almost immediate
use when the service provider is notified of a disaster. Facilities are pre-emptible by
another subscriber having a simultaneous requirement for hotsite services.
4. COMPANY MIRRORED OR Alternative company data center that totally replicates the primary data center.
REDUNDANT DATA CENTER
5. COMMERCIAL HOTSITE Fully equipped, secured, environmentally conditioned and operationally ready data
DEDICATED SUBSCRIPTION center offering a variety of specific hardware platforms ready for almost immediate
use when the service provider is notified of a disaster. Hotsite use is generally for
the duration of the disaster, but could be limited to 6-8 weeks by some providers.
6. COMPANY ALTERNATIVE DATA Alternative, existing company data center outside the local area (region, state,
CENTER INTERNAL COLD SITE country) that can be built-out at post-disaster time with salvaged equipment from
the disaster site, or built-out at time of disaster with acquired equipment.
7. QUICK SHIP BY THIRD-PARTY OR This strategy is essentially what its name implies, the shipment of computer and
VENDOR network equipment quickly. Most third-party leasing vendors provide this as a
recovery solution to their customers. Customers are charged a priority equipment
search fee and the normal leasing charges plus a premium once shipment is
requested.
8. COMMERCIAL COLD SITE Empty, secured, environmentally conditioned data center with office space, voice
SUBSCRIPTION and data communications lines, and electrical power, etc., ready for computer and
network equipment to be moved in. Often such equipment is provided through a
contract with an equipment leasing company, or via the third party or vendor quick
ship option. This strategy is usually coupled with a hotsite subscription, if
occupancy of the hotsite is limited to 6-8 weeks and no other options are available
to the company.
9. COMMERCIAL MOBILE/PORTA- For smaller hardware configurations or emergency office environments, there are
SITE SUBSCRIPTION mobile computer/office environments available. The difference between these two
is that mobile sites are stand-alone units on mobile trailers, whereas the porta-site
is transported to your facility and constructed upon delivery.
10. RECIPROCAL AGREEMENT Contractual agreement between two or more local (trusted non-competing)
independent companies that allows for the use of a portion or entirety of each
others data centers in the event of a disaster.
11. COMMERCIAL REAL ESTATE Acquisition of local space suitable to house a data center environment, and build-
PURCHASE, RENTAL OR LEASE out at time of disaster or post disaster.
12. DO NOTHING Do nothing! Accept risk?

Work Area and Voice Recovery
OPTION WORK AREA AND VOICE RECOVERY
1. COMMERCIAL Fully equipped (in-stages), secured, environmentally conditioned and operationally ready
RECOVERY SPACE recovery space suitable, configured and available for an office / workstation environment in the
SUBSCRIPTION event of a disaster. Access to recovered business systems is also an integral part of this
offering.
Voice recovery must be pre-arranged with the provider and their local telecommunications
carrier for types of services (PBX, wireless, ATM, DSL, 800-900, Centrex, trunk-hunt, calling
features, etc.), and the number of lines and sets required. An alternative, but limited, solution to
voice communications could be cellular phones held by key recovery personnel.
Additionally, a central point of control (command center), known as a Recovery Command
Headquarters (RCHQ), is required for recovery operations This space / room is where the
Recovery Command Team manages and communicates the progress and status of recovery
operations. This RCHQ requires all of the amenities of a work area or business recovery
facility.
Sometimes this solution is coupled with a hotsite subscription, as an additional measure for
recovery space in the event of a catastrophic situation.
2. COMPANY Alternative, existing, local company space suitable, available or pre-emptible as an office /
RECOVERY SPACE workstation environment in the event of a disaster situation. This facility is known as a
LOCAL Business Recovery Facility (BRF), and can range from fully equipped and configured to pre-
designated space only. Candidates for BRFs are existing conference rooms, testing & learning
labs, and spare offices. Other ways to accommodate this strategy is office / workstation
sharing amongst employees, and having the ability to work from home.
Voice recovery must be pre-arranged with the companys local telecommunications carrier for
the switching / translations of numbers and services from the disaster affected locations to the
BRF. In some instances, company trained staff can perform this work, if the equipment is on-
site and operable.
Additionally, a central point of control (command center), known as a Recovery Command
Headquarters (RCHQ), is required for recovery operations.
3. COMPANY Alternative, existing remote (in the region, out of state) company space suitable, available or
RECOVERY SPACE pre-emptible as an office / workstation / RCHQ environment in the event of a disaster situation.
REMOTE All other requirements as stated above apply to this solution.
4. RECIPROCAL SPACE Contractual agreement between two or more local (trusted non-competing) independent
companies that allows for the use of a portion of each others available office / workstation
environment in the event of a disaster. This solution requires that each company have the
spare space, compatible equipment, secured environment, voice and network capabilities, etc.
to accommodate a pre-specified number of seats.
5. COMMERCIAL A strategy that is identical to pre-subscribing to commercial recovery space, except no prior
RECOVERY SPACE arrangements have been made, time to recovery of personnel may be beyond acceptable
ACQUIRED ATOD downtimes, and the solution is not testable. This solution is only practical if unplanned space is
required in the aftermath of a disaster, and no existing local or remote company space is
readily available.

Data Backup and Restoration
OPTION DATA BACKUP AND RESTORATION
1. COMMERCIAL OFF- Storage of tape or disk backups to a secured, climate-controlled, fireproof media vault or room
SITE DATA BACKUP at a storage facility maintained by a commercial media storage provider. The media storage
STORAGE providers facility could be local, in the regional area, or out-of-state.
SUBSCRIPTION
2. COMPANY OFF-SITE Storage of tape or disk backups to a different physical company location. Depending on
DATA BACKUP budget and geographical risks, off-site storage could be a companys building next door or
STORAGE their branch office facility across town. A better choice is a secured, climate-controlled,
fireproof media vault or room at the companys owned/leased facility.
3. COMMERCIAL A technology that sends backup data directly from the company (subscriber) site to a service
ELECTRONIC providers remote hotsite facility. This very costly solution requires that direct access storage
VAULTING, A.K.A. devices (DASD) or a Library Storage Module (LSM) be dedicated to the subscriber, preventing
ADVANCED the service from being shared with other subscribers. Also required is a communications
RECOVERY network having proper bandwidth between the sites. Data backup and recovery is nearly
SERVICES immediate, company controlled and unrestricted.
SUBSCRIPTION
4. COMPANY A technology that sends backup data directly from a companys primary site to a companys
ELECTRONIC secondary site. This costly solution requires that direct access storage devices (DASD) or a
VAULTING Library Storage Module (LSM) be in-place at the secondary site. Also required is a
communications network having proper bandwidth between the sites. Data backup and
recovery is nearly immediate, company controlled and unrestricted.
5. DISK-TO-DISK A technology that operates at the disk volume level and is significantly less complex to set up
REMOTE COPY and administer than host-based replication. This is the most popular solution used today. The
solution benefits from capturing all application environment changes. A drawback however is
the lack of transaction knowledge and potential for data corruption in the event of a disaster.
6. MIRRORING A technology that maintains a replica of databases and/or file systems by applying changes at
a companys or commercially provided secondary / recovery site in lock step with or
synchronous to changes at a companys primary site. Due to its synchronous nature, mirroring
requires significantly greater network bandwidth than shadowing. The Maximum Acceptable
Downtime (MAD) for supported business processes is approximately 20 minutes to several
hours, while the data-loss tolerance is reduced to the loss of uncommitted work.
7. SHADOWING A technology that maintains a replica of the database and/or file systems, typically by
(REMOTE continuously capturing changes and applying them to a companys or commercially provided
JOURNALING) recovery / secondary site. Shadowing is an asynchronous process, thus requiring less network
bandwidth than synchronous mirroring. The MAD is relatively short, typically 1 to 8 hours,
while the data-loss tolerance is as up-to-date as the last receipt of any online transaction.
8. DO NOTHING It is often appropriate not to back up data that can be regenerated from electronic sources that
will become available following a disaster. For example, reports maintained on electronic
media may be regenerated from the original data once that data is restored at a hotsite.

Bulletin No. CP 9
Bulletin
Fraud Prevention
INTRODUCTION
According to the Association of Certified
Fraud is a common news story. Reports Fraud Examiners, fraud in the workplace
about trusted employees who defraud can often be traced back to insufficient
their employers, leading to severe internal controls. The most important
financial loss or the failure of a contributing factors are lack of internal
business, often become headline- controls (35.5%), override of existing
making news. internal controls (19.4%), lack of
management review (18.7%), poor
One definition of occupational fraud is ethical tone from the top (9.1%), lack of
The use of ones occupation for competent Personnel in oversight roles
personal enrichment through the (7.3%), lack of independent
deliberate misuse or misapplication of checks/audits (3.3%) or lack of
the employing organizations resources employee fraud education (2.5%).
or assets. Every company is faced with
the potential of fraud. Some are more In 2012, reported cases of fraud in the
prepared to manage the risk than construction industry occurred in billing
others. Some may have processes in (36.2%), Corruption (34.0%), Check
place that detect fraud soon after it tampering (21.3%), non-cash areas
occurs, while others are unaware of the (21.3%), payroll (19.1%), cash larceny
deception for years and are completely (17.0%), expense reimbursements
caught off-guard when it comes to light. (12.8%) and financial statements
And, many fraudulent activities go (8.5%).
undetected and are never reported.
What are some examples of fraud and
Fraudulent activities can be committed steps that contracting business owners
by a wide range of people, most of can to take to prevent fraud?
whom do not fit a typical criminal profile.
These individuals can be employees, INTERNAL JOB COSTING AND
subcontractors, suppliers and ACCOUNTING
consultants. It is prudent and fiscally
responsible to consider the sources of Project managers (PM) intentionally
fraud and establish policies and recording costs to the incorrect job.
procedures to prevent its occurrence as For example, the PM may have job A
much as practically possible. that has encountered difficulties and
projected to be below budget, and job
B is expected to narrowly meet

. 1
original margin estimates. The PM overly aggressive estimates might be
could code an invoice related to job B a sign of fraudulent activity.
to job A to make the job appear
stronger while hiding costs in the job Check fraud internal. Someone in
that is already known to be the Accounts Payable (AP) area
experiencing difficulties. Conversely, creates a bogus vendor and invoice
costs could be hidden in an over- and cuts a check payable to that
performing job to make an under- vendor then receives the check and
performing job appear closer to target cashes it for personal gain.
margins.
Expense Reports Turning in
Project managers could hold back expense reimbursements with
expenses (i.e., hiding invoices in their improper or fictitious supporting
drawer) to manipulate the timing of the documentation.
job cost posting and associated
revenue recognition. At the same Project managers manipulating job
time, accounting personnel could costs by holding them down at year
manipulate the timing of expenses to end to show a good margin on a job
achieve desired financial reporting that is actually indicating financial
results (i.e., smoothing revenue losses for the purpose of receving a
recognition). performance bonus. If all the costs
were properly accounted for, the job
Within construction companies there would not show a profit.
can exist a risk of fictitious contracts
to boost the bottom line. This could be Stealing tools Make sure that tools
evidenced by lack of an executed and equipment that are purchased for
contract, altered documentation, no a job stay on the jobsite. Ensure the
change orders, etc. tools are not shipped to another
jobsite or taken home by an employee
Risk of losses not being recognized or subcontractor for personal use.
in full on jobs in a loss osition. This
exists both as a risk of error and a risk Ghost employees on the payroll A
of fraud. Accounting personnel could foreman could set up a fictitious
manipulate the job schedule to hide employee, record their work time,
the loss estimate or intentionally avoid receive and cash the check
recognizing 100% of estimated losses with/without the help of a payroll
when losses become more likely than employee.
not for a particular contract.
Diverting lump sum costs to Time
Risk of error and fraud surrounding and Material projects Beware of
job estimates due to the high degree situations when either your own
of estimation involved with percentage company of your subcontractor has a
of completion accounting. As the job lump sum project and a T&M project
schedule at any given date should on the same jobsite. Costs originally
reflect the expected position for jobs in attributable to the lump sum project
progress, management attitudes can easily be billed through the T&M
indicative of intentionally deceiving project, causing the payer to pay for
financial statement users through the work twice.
overly conservative estimates or

Cash Payments Dealing in cash proactive steps and constant vigilance.
receipts is ripe for fraud. Anyone Provide individuals within your company
receiving cash payments for goods or with a means to report fraud and
services can easily pocket the money suspicious activity. Make sure that you
with no trace of payment. The person arrange for independent external audits
receiving the cash could pocket it periodically. On occasion, schedule
while noting it paid rathern than targeted fraud awareness training for
depositing the cash. Make sure that staff. In addition, consider the following
receipts for cash transfer are signed measures.
by two parties on the receiving end
and that cash is turned over to a third Fraud Prevention Checklist:
party so that the person receiving the
cash is not the same person who Is ongoing anti-fraud training provided
applies it. Make sure a paper trail to all employees of the organization?
accompanies all internal cash Is an effective fraud reporting
transfers. mechanism in place?
Are proactive steps taken to detect
EXTERNAL SOURCES fraud vs. being reactive to an act only
when exposed?
Check fraud. Someone obtains an Is the management climate/tone at the
accounts payable check and is able to top one of honesty and integrity?
wash out the name or amount and Are fraud risk assessments performed
change the information. For instance, to proactively identify and mitigate the
a check made out to Brand X for companys vulnerabilities to internal
$2,000.00 can easily be altered to add and external fraud?
in a 0 and it suddenly becomes a Does your internal hiring policy include
$20,000.00 check. the following (where permitted by
law)?
An outside party creates a fictitious
company and submits an invoice to Past employment verification
your company payable to the fictitious Criminal background checks
company, then deposits or takes off
with the company funds. Credit checks
Drug screening
Vendor kickbacks. In certain Education verification
situations, a vendor can quote a References check
higher price to a contractor employee
than the goods or services are worth. Positive Pay Positive pay systems
When the invoice is paid in full, the can be setup between your payroll and
vendor makes a kickback payment to AP departments and your local bank.
the employee. To combat this issue, With each check run, the mechanical
always require competitive bids for all contractor sends the bank a file with the
goods and services. Also, periodically payee name and amount. When the
review invoices for individual unit payee goes to cash the check, it is
prices to make sure they are in line referenced by the bank against the
with industry averages. positive pay list and the bank should
only accept the check if it passes the
CONCLUSION test of the payee name and/or the
amount of the check. This prevents
Fraud is preventable, but it takes check fraud.

Dual Signatures Make sure that all
checks over a certain threshold are
signed by two parties, even if one
signature is an automatic computer
signature. Also require that key
documents such as purchase orders,
original invoices and receiving reports
accompany checks to be signed. This
helps prevent unauthorized check
disbursements.
Sources:
The Most Common Types of
Construction Fraud,
Construction Business Owner
Magazine, Jim Schmid and Todd F.
Taggert, June 1, 2011.
2012 Report to the Nations on

Occupational Fraud and Abuse, 2012,
Association of Certified Fraud
Examiners, Inc.
Construction Fraud: How Does it

Happen?, Freley & Driscoll, P.C.,
Contractor newsletter

Bulletin No. ET 1
File: Education & Training
Bulletin
Business Writing for Success
INTRODUCTION The Who: Preparing an effective
message begins by thinking about the
Effective written communication is essential audience and how best to reach them,
in modern business to make inquiries, him or her. The choice of words, tone,
describe actions needed or performed, structure and delivery method all depend
convey information, summarize the terms of on who is to receive the message. You
an agreement, present a report or wont reach your audience if you dont
accomplish a variety of purposes required to think about what makes them tick (from a
conduct business. Effective business business perspective), how they think and
writing is focused, clear and aims to how they may use the information you
accomplish a purpose. send them. For example, a message
intended for the CEO of a major
This bulletin provides some basic guidelines corporation will look, read, and use a
about when and how to write effective much different format than one intended
communications for business. It is not a for the junior member of a project team.
primer on grammar and punctuation; rather,
it suggests what to consider before writing a The What: The purpose of the
message, letter, memorandum, directive or message is its heart. A message may:
other communication. Then, it offers some
common sense rules about how to prepare Inform, and/or;
and convey the communication to achieve Persuade, and/or;
the desired result. Direct.
THE BASICS OF GOOD BUSINESS Keep your purpose for the message in
WRITING mind and state it clearly at the beginning
of your message. If you cant state the
Before sitting down to write a business message purpose in one or two
communication, think about the following: sentences, then you need to revisit the
purpose again. Use the balance of your
Who is the audience, person or persons? message to provide details that lead to the
What is the communication about? accomplishment of the purpose. Organize
Why is the action necessary? your thoughts and present them logically.
What action or outcome is required or
requested? Once you finish the message, then check
Keep the message simple. to see that you did, indeed, accomplish
How will the message be delivered? the stated purpose. If not, start over.
Copyright, Mechanical Contractors Association of America, Inc., 1996; revised 2001, 2010. 1
The Why: The message may require an the information presented is on the
explanation of its backgroundwhat record. However, a question to a project
circumstances made it necessary to convey manager about an equipment purchase
the information, directive, action or may be best conveyed by e-mail to elicit
announcement. Not always indicated, the the quickest response.
why provides perspective to help the
reader understand why the message was A memorandum usually deals with internal
sent. company issues. The message may be
printed and sent through the companys
Keep It Simple! Your message will miss its internal mail system or electronically.
mark if you wrap it in a confusing cloud of
complex words and sentences. State your Whatever format you choose, always
message in simple, clear terms and make remember that what you write can make
your point. or break you. If the message addresses a
sensitive or personal issue, consider
Avoid bringing into the discussion unrelated carefully the consequences of sending the
topics and data. Support your message with message in any written form. It may be
clear, logical, substantial data, facts and best to deliver the message orally.
other information that bring the reader to the
conclusion that you intend. APPLYING THE BASICS
And, do not add unnecessary words that As noted above, most written business
divert the readers attention from the main communications are usually letters,
point. Every word should contribute to the memorandums or e-mail messages. Each
accomplishment of the purpose. No one format has issues that you should
stated it better than Strunk and White in The consider when deciding which to use for
Elements of Style: your message.
Vigorous writing is concise. A sentence Letters

should contain no unnecessary words, a A business communication intended for
paragraph no unnecessary sentences, for another company, a government agency,
the same reason that a drawing should customer, supplier or other entity is best
have no unnecessary lines and a machine conveyed in the form of a formal letter.
no unnecessary parts. This requires not The letter provides a record of the
that the writer make all his sentences short, communication and, therefore, is
or that he avoid all detail and treat his considered an official document with
subjects only in outline, but that every word respect to the issue discussed.
tell.
Business letters are written on company
Delivery: How and when you choose to stationery, and are addressed to the
deliver the message also affects its impact. intended person at his/her business
address. The letter also contains the date
For example, is the subject of the message of the letter and references the issue
best conveyed in a formal letter, addressed.
memorandum or by email? The decision
about format is driven by all the other A word about style: The keep it simple
considerations discussed above. rule applies in letters as in other forms of
communication. However, always try to
Obviously, a message sent to the CEO of a begin the letter with:
corporation about the terms of a contract is
best conveyed via formal letter to be sure
This letter concerns [whatever the issue To:
is], followed by a very brief introduction of From:
you and/or your company. For example, As Date:
you may know, I am the president of ABC Re:
Contractors, Inc., a family-owned company
with 50 employees that has served Anytown Define your audience: The subject
for 80 years. Then, follow with a positive determines to whom the memo should be
statement, such as We greatly appreciate directed. If the subject affects all
your business during the past 10 years. personnel, then the audience is staff.
The balance of the letter can then be Subjects that affect only a few personnel
devoted to the main purpose of the letter, then go to them specifically.
positive or negative. Nevertheless, expect that the memo may
end up in the hands of those not intended
Rememberyour company may have spent to receive it. Choose your words carefully.
years building its relationship with a
customer, supplier, or other entity that is to Whats your purpose? Memos generally
receive this letter. Whether the information have a definite purposeto inform, direct,
conveyed is positive or negative, always or persuade or some combination of each.
provide a reason for the action or decision In each, think about how you want to use
taken. The recipient of this letter deserves the memo to accomplish your purpose.
that consideration. Provide your contact
information at the end so the person can Informational memos provide facts,
reach you for further information. background and other essential data
about a particular subject. Its easy to
In the case of a letter to a government get into too much detail. Decide what
agency, its beginning should focus on the information is most important to
positive elements of the policy, ruling, provide. At the end of the
legislation or other matter that the letter memorandum, provide your contact
addresses before it outlines your objections. information for those who have
questions or want more information.
Memorandums Persuasive memos are also
Communications intended for company informative, but the information is
personnel are usually conveyed in the form organized to lead the reader to a
of memorandums or memos. Memos are desired conclusion.
used to explain or announce company Directives convey orders about actions
policies, personnel matters, instructions, to be taken. They are brief and very
reminders or other matters. Memos can be clear. Use this tool when you are
sent to as few or as many persons as are concerned about staff
indicated by the message. And, they are misunderstanding your intent. Choose
written for internal company audiences, not your words carefully.
for the general public or outside entities.
Consider the following before you begin to Be decisive: Begin by stating your
prepare the memo. purpose or objective for the memo and
then back it up with a logical, well-
Format: Memorandums are internal written organized presentation of the facts that
letters. Therefore, over time, a form of made it necessary to address. Dont
address has evolved that allows the author ramble. If you write a loosely organized
to easily state who the memo is intended and illogical outline of the matter, youll
for, by whom, when its sent and the lose your reader and risk irritating him or
subject: her to the point of abandoning the memo
altogether.
Be accurate: When you use facts and data and subject to scrutiny from any number
in a memo, make sure they are correct or of entities. And, your e-mail messages
you risk your own credibility and can be used in legal proceedings against
professionalism with your colleagues, you and your company. Choose your
customers and other business contacts. words carefully.
E-Mail Things to consider

The Internet has revolutionized modern
communications, particularly in business. Keep it simple: E-mails are for quick,
Electronic messaging or e-mail has allowed short messages, not long, complicated
us to instantly connect with other company dissertations. Long, rambling e-mail
personnel, customers, suppliers and other messages may be ignored, deleted or
business associates with quick messages archived for later, but usually not read
and attached, longer documents. This immediately by busy staff persons. If you
service has made business communications feel it is necessary to transmit a long
cheaper, faster, easier and more message or document, then send it as an
convenient, making e-mail our preferred attachment to a brief, introductory note.
method of communication. However, it has To draw attention to an important
also produced some new challenges. message, mark the message as urgent
before you send it.
First, the brevity of e-mail messages has
caused us to relax the rules of good writing. One message per e-mail: Your message
Messages are too often sent before the will more likely be read if it deals with only
writer checks basic grammar, punctuation one message presented briefly and
and content. Sloppy messages that make succinctly.
no sense leave just as bad an impression
as those delivered by more traditional Re-read before you send: The casual
means. nature of e-mailing tends to make us
forget about grammar and common sense
Second, e-mail invites candid expression, rules.
which is usually inappropriate and
inadvisable in a business context. Clipped, short messages are
Reconsider the content of your message acceptable, but they must make
before sending it. grammatical sense and they should be
free of obvious spelling and
Third, too often e-mail messages are sent to punctuation errors.
the wrong parties. Double check your list of
addresses to make sure they are, in fact, Messages that contain sensitive
those you intend to receive the message. information (i.e., financial data,
sales projections, legal issues, etc.)
Fourth, be careful when you send an should not be e-mailed because they
attachment. If possible and appropriate, can be hacked by outsiders or
convert the attachment to an Adobe Acrobat retrieved.
PDF before its sent to preserve its original
content and prevent unwanted modifications. Sending or forwarding messages
If PDF conversion is not possible, be sure to with sexually explicit content is not
keep the original. only unacceptable and
inappropriate in a business
Finally, always be mindful that theres environment, but illegal.
nothing private about e-mail. Once you hit Keep personalities out of e-mail.
the send button, your message is public
Unless you want your personal business A word of caution, however. As with other
and your opinions to become public, forms of electronic communication, text
keep them to yourself and off the messages can be hacked and used
Internet. against you and your company, so be
careful when and how you use this form of
Courtesy still works. It may not communication. Make sure you know the
always be appropriate to do so, but try terms of your agreement with the service
to begin a message with a considerate you use to be sure you and your
opening, such as I hope this finds you employees do not accumulate huge bills
well or Looking forward to our meeting for texting charges.
next week. It sets a positive tone for
the rest of your message and may CONCLUSION
entice the recipient to read it.
Todays business communications are
A Word About Texting substantively still the same as their
forebears, but can be transmitted in
A decade ago, SmartPhones Blackberry, mediums that can reach a customer
iPhones, Droids, etc. made hardly even a across the street and across the world in
ripple in the great consumer sea, but today, the blink of an eye.
they have crashed onto the landscape like a
tidal wave. These clever hand-held devices More than ever, think before you write,
are multi-functional telephones/camera/ reread what you write and choose your
computer with Internet capability/ delivery medium carefully. Always be
calculator/GPS finder and much more. mindful that once you put thoughts and
Communicating with these devices has ideas into words, they will become public,
presented business writers with an entirely no matter how many firewalls you build
new set of challenges. into your computer system.
Texting, the term used to describe the _____________

shorthand writers use to send messages
with their SmartPhones, is a combination of Information for this bulletin was drawn
words and acronyms for phrases, such as from Good Writing: It Begins with
BTW (by the way) or BOTEC (back of the Principles, Harvard Business School
envelope calculation), CYL (see you later) Press, Boston MA (2006) with permission
and many more. This form of messaging from the Builders Exchange of Central
evolved to accommodate users demand for Ohio.
very fast and very easy to compose
messages on very small keyboards. An
entire dictionary of online jargon is readily
available on the Internet.
More and more businesses are relying on

SmartPhones and texting to relate to
customers, associates, colleagues,
employees, suppliers and others in their
professional network. Connections are less
complicated and quick, simple messages
are easy to send.
Sample Memorandum
TO: All Foremen
FROM: John Smith
RE: Gas Cylinders
DATE: 9/8
___________________________
Please review this information with everyone on your project.
Our demurrage (cylinder rental charges) costs have risen sharply. Effective immediately, all
empty gas cylinders must be returned as soon as they are emptied to reduce these costs.
Demurrage costs are calculated on the third Friday of every month. You must make sure that
all empty cylinders are returned to the shop no later than the end of the business day on the
third Thursday of every month. For this month, it is September 17. Please schedule trucks with
Jeff accordingly.
Thank you.
Sample Letter
Mr. Paul Jones

ACE General Contracting Company
1234 Maple Street
Anytown, Any State 00036
RE: State University Dormitory
Dear Paul:
This will document our discussions in your office and with State University yesterday.
Ongoing Service and Warranty Issues
ABC Mechanical will have a plumbing service tech onsite on 5/15 to trace the hose bibb
plumbing to determine whether the hot water is infiltrating this system.
The boiler pump we looked at Monday will be re-set to run continuously. Please note
that this is contrary to manufacturers recommendation and the design of the system, but
is as requested by the owner.
Brick facia will be repaired on one or two of the rooms. Please identify which rooms
specifically.
Leonard valve kits repaired by State University staff will be returned to us. It was noted
that these would be given to our service tech onsite Tuesday. These will be returned to
the manufacturer for warranty replacements.
ABC Mechanical service personnel have been instructed in the future to report to the
physical plant office. In the event of an after-hours call they have been instructed to
contact Brian Woods on his cell for instruction.
Domestic water issues
Attached is a breakdown of our 12/4 quote. Additional valves were provided for efficient
maintenance of the system. Our cost for this work is $2,891. Our cost for work
associated with ongoing warranty related to existing water condition is $3,159, which is
the remaining balance of the 12/4 quote.
PTAC issues
ABC Mechanical will provide to State University an extended 2-year warranty on all of
the PTAC units in the dormitory for condensate water leaks into the dormitory rooms.
This warranty will extend until September 1.
ABC Mechanicalr will relocate 15 PTAC units that extend outside the building by shifting
the units into the building within the existing sleeves. Otterbein will provide any required
cosmetic touch up, painting, or trim needed to dress out these units inside the rooms.
These units are in the following room numbers:
101 (3 units) 104 106 107 108 110

116 128 131 201 210 233
320
State University will pay to ABC Mechanical the $18,083 quoted to ACE on 10/27.
$9,041.50 will be paid within 30 days, and $9,041.50 will be paid at the end of the
extended warranty period or sooner if, in the opinion of ABC Mechanical and State
University, the risk of loss to State University from condensate water leaks has proved to
be minimal.
Finally, the retainage of $88,973 will be released as the contracts are closed between ACE and
State University, and ACE and ABC Mechanical. We expect that retainage will be paid to us no
later than 45 days from this letter. Please advise immediately if this cannot happen.
Thank you for your assistance in bringing these issues to conclusion.
Sincerely yours
John Smith
President, ABC Mechanical, Inc.
Sample E-Mail Message
From: John Smith
Sent: June 02, 2:28 PM
To: Tim Clark
Subject: ABC Mechanical State University Hospital Project
Our team has a presentation scheduled with ACE, State University and Premier Architects on
Tuesday 6/8/, 10 AM at State University. The presentation will last until 11:30 AM. Are you
available to attend with us?
We will need to review some specifics of the job and the details of our current plan. If possible, I
would like to do this on Friday sometime. I need to go to Anytown tomorrow to put together the
pre-construction, schedule and technical construction presentation with our joint venture
partners.
Please let me know what your availability is. I should be here until around 3:15 today or you
can contact me on my cell later this afternoon or tomorrow
Bulletin No. ES 1
File: Estimating
Rule-of-Thumb Parameter Estimating
Developing Rule-of-Thumb estimating Many mechanical contractors have not

information is of value for several of the fol- set up a Rule-of-Thumb parameter estimat-
lowing reasons: ing system because they believe that they are
unsafe and they certainly are no substitute for
1. When reviewing the work of your
a detailed take-off and evaluation.
take-off people and estimators, a variance in
cost, both high or low, could signal the need Continual updating of your information to
for closer examination before the bid is sub- compensate for inflation will be required for
mitted. any recordkeeping of this type.
2. Improving relationships with owners It would be best to divide your record-
and general contractors who can rely upon keeping into the elements of your particular
you for reasonably accurate budgets for new markets. For example:
projects. One- to three-story office buildings
3. Provide a convincing argument for a High-rise office buildings
specification change to reduce costs on a pro- One- to three-story townhouses or apart-
ject, especially if it is over budget. ments
4. In situations where the architectural High-rise residential
drawing and outline mechanical specifica-
Hospitals
tions are the only information available, the
mechanical contractor would have to work Records may be divided into as many dif-
very closely with the people developing the ferent areas as you may feel are required.
final mechanical specifications and drawings The Form on the next page is just one
to avoid a design more costly than the para- version. If you use your own creativity, you can
meters used in the Rule-of-Thumb that was come up with a form that best suits your com-
applied. pany needs.
1
Sample
. Parameter Estimating Form
Job: Bid Date:

Location:
Type of Construction:
Sq. Ft. Floor Space Sq. Ft. of Roof Area:
Total Cooling (tons): Total Heating (MHB):
Total CFM: Total No. Roof Drains:
Total No. Plumbing Fixtures: Controls - Electric:
Average Hourly Wage Cost: Controls - Pneumatic:
1. H.V.A.C.
Total Costs (A) Total Selling Price
Costs/Ton Selling Price/Ton
Costs/Sq. Ft. Selling Price/Sq. Ft.
Costs/CFM Selling Price/CFM
Costs/MBH Selling Price/MBH
Il. PLUMBING
Total Costs (A) Total Selling Price (A)
Utility Costs (B) Utilities Selling Price (B)
Roof Drainage Costs (C) Roof Drainage Selling Price (C)
Inside Costs (A-B-C) Inside Selling Price (A-B-C)
Ill. SUBCONTRACTORS
= $ =
Sheet Metal Costs $ Isq. ft.
sq. ft. of floor space
$ =
I-I.V.A.C. Insulation Costs = $ Isq. ft.
sq. ft. of insulation
$ =
Plumbing Insulation Costs = $ /fixture
number of fixtures
Examples:
Plumbing-Inside Costs = ~05t,fixture Roof Drainage Costs

= cost/sq. ft
Number of Fixtures Sq. Ft. of Roof Area
2 ES 1
Bulletin No. ES 2
File: Estimating
Unit Pricing
Foreword
This bulletin should be used in conjunction with bulletin number CO 1 (Change Orders)
and bulletin number PD 2 (Factors Affecting Labor Productivity). The intent of this bulletin is
to discuss the Unit Price basis for pricing changes. MCAAs intent is to promote a better un-
derstanding of considerations to be given in the formulation of fair and equitable unit prices
for the consumer and the contractor and what pitfalls a contractor can expect in the imple-
mentation of a unit price change or contract.
INTRODUCTION ing procedures indicated that every respon-

dent would have fared better without unit
In an attempt to reduce the evaluation of prices. The unit price method did not offer the
changes to a simple counting of beans, many contractor the opportunity to charge for items
owners, general contractors, construction such as: tie in to existing; drain and refill; test-
managers, engineers and architects go to ing; disruption of work crews; etc.
great lengths in soliciting and implementing
The unfairness of unit prices for con-
unit price schedules. On the surface this ap-
struction work should be evident to all. If the
proach seems to be simple and equitable. In
price established is based on the worst con-
reality it is quite complex and rarely equitable.
dition that the contractor will encounter, the
The results of a recent survey conducted price is unfair to the consumer. While a price
in a major metropolitan area showed that con- based on the best jobsite condition is unfair
tractor-calculated unit prices based on the to the contractor. In actuality, the unit prices
same specification and time frame varied im- most of us will see will be the result of nego-
mensely from contractor to contractor. tiation based on average job conditions. As
Comparison pricing of a piping sketch of a 4 we all know, job conditions rarely turn out to
bypass connection and valve between two 8 be average in any specific location or instance
mains using (a) the individual contractors unit and, therefore, will result in prices that are
prices and (b) the contractors usual estimat- usually unfair to the contractor.
1
Estimating
These questions must be asked: Guidelines

1. How are unit prices established? The following guidelines should be used
in the preparation of the base unit price
2. What pitfalls can a contractor expect to
schedule.
see?
1. Estimate all costs to be encountered in
performance of each item. (See Bulletin
ESTABLISHING A FAIR UNIT PRICE
No. PD 2 Factors Affecting Labor Pro-
SCHEDULE
ductivity.)
We are all accustomed to the normal 2. Be sure to include the following:
pricing procedures we use to bid and win jobs.
We painstakingly take-off, itemize and price Office overhead
each item of equipment, each foot of pipe, Field overhead
every fitting and valve, each pound of duct, Material and labor cost escalation
taking into account countless drawing notes Added costs of processing changes
and specification comments which we think Added costs for coordination
might affect the cost of our work. After the Added costs for bonds and other spe-
take-off is complete, we apply our overhead cial insurance
and profit margins and submit our price. Safety
During the take-off, we evaluate each work sit- Warranty
uation and assign varying degrees of difficulty 3. Include fair and reasonable profit margin.
to the cost of the work in an attempt to fore-
cast the differences in jobsite conditions.
Contract Stipulations
Any attempt to account for all jobsite vari- The base price parameters should be
ances in the development of a unit price sched- clearly set out, advising all parties that only
ule would result in a huge and unmanageable the listed items (such as those shown below)
matrix of numbers and conditions. Therefore are taken into consideration when compiling
the approach taken by most contractors is to costs for each item.
develop unit prices that reflect the worst pos-
sible conditions. This usually results in severe 1. All work is assumed to take place on the
confrontation between the buyer and seller, first floor.
something no contractor needs when trying to 2. All work is to be performed during nor-
negotiate a job. The final outcome is usually a mal working hours.
schedule that favors the customer.
3. All work is to be performed no higher
A practical way to establish a unit price than 10 feet from finished floor.
schedule that is equitable to both parties is to 4. All work is to be performed in a contin-
use a Base Schedule and Correction uous manner.
Factor approach. Under this approach, the
final unit price is established by using costs 5. Unit price does not include any engi-
and procedures for normal job conditions and neering costs.
then adjusting them by applying multipliers to 6. All work is figured using manpower
reflect actual conditions. presently available at jobsite.
2 ES 2
Estimating
7. Specify that certain minimum quantities 3. Working conditions (See Bulletin PD 2):
must be applied to all prices.
a. Adverse working conditions (i.e.,
8. Specify that all prices are based on pre- weather; height from slab; interfer-
sent values and may be escalated. ence from other trades; tight spaces,
etc.)
9. Specify that your costs only include
b. Impact on schedule and size of work
your trade or trades.
force.
10. Work is not to be encumbered by other c. Overtime performance.
trades or space limitations. d. Stacking of trades.
11. Access to work areas previously cov- 4. Retesting and recertification of systems:
ered by construction is to be provided
a. Add a correction factor to piping unit
by others at no cost.
prices for retesting piping systems.
b. Add to all sheetmetal unit prices a
correction factor for rebalancing air
Correction Factors systems.
c. Add a correction factor to all unit
The following aspects of the change prices for refiling of drawings with
should be considered in establishing the building departments.
Correction Factors. d. Add a correction factor to tempera-
1. Size of change: ture control unit prices for readjust-
ing control systems.
a. If the change is severe and large e. Add a correction factor to thermal in-
quantities of similar items are being sulation unit prices for patching and
changed, a multiplier less than 1 repair to existing piping and duct in-
might be appropriate. sulation if changes are to be done
b. Conversely if the change is small, a after base job insulation has been
multiplier higher than 1 (such as 2 or completed.
3) might be appropriate.
2. Location of change within building: PITFALLS
a. All costs should be modified to re-
In the formulation and finalization of the
flect added material and equipment
unit price schedule, many pitfalls can be
distribution to floors above first floor
avoided by insisting on recognition in your
(such as 12% per floor above the
contract of factors such as those listed above.
third floor and 24% per floor above
The following are some of the common traps
the 20th floor). Refer to MCAA Labor
a contractor might encounter.
Estimating Manual for correction
factors. 1. A request for unit pricing typically reads
b. Lost time for manpower to arrive at like this: All unit prices shall include all
work stations should be included (for items that comprise a complete installa-
example: multiplying by a ratio of tion and shall be in accordance with the
paid hours/productive hours). specifications and the intent of the draw-
ES 2 3
Estimating
ings. This puts the full responsibility on the buyer the opportunity to select the
the contractor to include items of work lowest possible price after the work has
(such as offsets) even if not shown on been completed. The contractor should
drawings. This clause should be elimi- insist on a definite commitment, at the
nated during final negotiations. outset, to one pricing method.
2. The stipulation that piping unit prices 5. Changes in quantities due to coordina-
shall include all fittings is very com- tion and other unforeseen conditions
mon and will result in added cost when should be considered as adds to the orig-
encountering offset and coil hook-ups, inal quotation. The increases should be
etc. clearly identified and a revised price sub-
mitted as soon as the change is discov-
3. The contract requirement that the unit ered. Do not proceed with the work under
price schedule be used for added and the assumption that the buyer will un-
deleted work should be eliminated. derstand. Most likely, he will not.
Deleted work should be credited at the
cost used in winning the base job.There
will be considerable variance between CONCLUSIONS AND
this cost and the unit price. The vari- RECOMMENDATIONS
ance might be high when it involves lay-
Unit prices are, at best, difficult to es-
ers of sub- and subcontracting. The
tablish and even more difficult to utilize to es-
contractors and subcontractors (on all
tablish a fair and equitable price for changes
levels) should seek to retain their over-
to contract work.Any attempt to short cut com-
head and a portion of the profit on de-
prehensive estimating and evaluation of work
ducted items.
usually will be arbitrarily in the favor of the
4. The buyer should not be allowed to have buyer. Always try to resist the use of unit pric-
a choice of using the unit price schedule ing and press for evaluation of changes using
to determine an upset price and then your standard estimating procedures, etc. If
proceed on a time and material basis. the buyer insists on unit prices then make
This method of awarding changes is ex- sure guidelines such as those contained in
tremely unfair to the seller as it affords this bulletin are included in the contract.
4 ES 2
Bulletin No. FB 1
File: Fabrication
Factors to Consider in Establishing

a Piping Fabrication Shop
INTRODUCTION interested in establishing a piping fabrication

shop should visit as many existing fabrication
Prefabrication in the mechanical con-
shops as they can, using this bulletin as a
tracting industry is not new, but it is only
checklist and as a source of questions when
recently that external economic and material-
visiting other shops. Ask the operators not
handling considerations have combined to
only how they do the work now, but what
encourage more contractors to engage in pre-
would they do differently if they were to build
fabrication on a larger scale. Although larger
a new shop from scratch.
contracting firms have been the major users
of prefabrication processes to date, smaller Equipment vendors and material suppli-
companies also can use the principles of pre- ers also can be good sources of information.
fabrication to reduce field crew size (and as- Talk to more than one vendor for each piece
sociated supervision), and to reduce the time of equipment and record where they agree
required for materials handling on the jobsite. and disagree.
Other benefits of prefabrication include Finally, there are things that will only be
working in controlled conditions and minimiz- learned from experience.Keep notes on these
ing the amount of excess material to be stored ideas and share them with the other members
on the job. of MCAA.
This bulletin is not intended to be a com-
plete encyclopedia on prefabrication, but it will WHY PREFABRICATION?
serve as a guide to the procedures involved.
Time, cost, and quality requirements of
There are some lessons that can only commercial and industrial construction pro-
be learned first-hand in the field. Contractors jects are an ever-increasing challenge to
1
Fabrication
mechanical contractors today. Fabricating done in advance of a critical project such as

and assembling piping modules and other a weekend shutdown of a process line. Every
subassemblies in a fabrication shop will re- hour that the process is shut down costs the
sult in greater efficiency, higher quality customer money. Prefabricating 50 to 90 per-
craftsmanship, and a lower total cost than cent of the installation before the process is
assemblies made at the jobsite. turned off will save the customer money. This
sharpens the competitive edge that can result
Since few projects requiring capital in-
in more work for the contractor.
vestment are undertaken in this day and age
without justification, the decision to set up a
fabrication shop, which can reduce on-site PLANNING THE PREFABRICATION
labor costs by 20 to 60 percent, must be done
by considering the following factors. One great advantage of prefabrication is
that it allows the contractor to step back and
1. Speed. Work in a pipe fabrication consider the whole job and then decide on
shop is done more quickly than work done in how to proceed in a way that will allow as much
the field. Automation in machinery and the as- cost control as possible and leave as little as
sembly line process will produce layout, cuts, possible to chance.In effect, it encourages the
and welds faster than is possible in the field. contractor to plan and schedule the job in
Once a module or subassembly is assembled great detail. No matter how big or small the
and tested at the shop, it can be transported job, the contractor must approach it with one
safely and conveniently to the jobsite and question in mind:What steps need to be taken
quickly installed as a single unit. Faster in- so that material can be sent to the jobsite to
stallation improves job work flow all along the minimize field installation costs?
line.
Planning is typically done by the job fore-
2. Quality. Applications for such indus- man and the project manager, with adequate
tries as food, pharmaceutical and chemicals communication with the estimator who bid the
must not only meet the highest workmanship job. At the very least, the estimator must ad-
standards, they must also comply with strict vise how the job was conceptualized, what
government and industry guidelines. Pre-as- assumptions were made, what alternates are
sembly allows fabrication to more critical tol- included, exactly what is in the contract,
erances. Inspection and testing can be whose equipment and auxiliary accessories
performed more efficiently in the shop and any must be used, etc. After learning all there is
problems can be corrected before installation to know about the job specifications, the fore-
in the field. man and project manager will perform the fol-
lowing steps.
3. Scheduling. The fabrication shop al-
lows more people to work on a project than is 1. Fabrication Layout. Decisions are
possible at the jobsite. Instead of loading a made on what portion of the work is to be done
job-site with men working elbow-to-elbow get- in the fab shop.These decisions will be based
ting in each others way, work is done at the on many factors: pipe size, weld type, access
fabrication shop and shipped to the project to the site for finished fabrication, and how
site for installation. In addition, work can be quickly the work is needed.
2 FB 1
Fabrication
After a decision is made on what to fab- d. Piece mark indicating where the fabrica-
ricate, the foreman and a draftsman decide tion fits into the project. NOTE: All drafts-
how to fabricate the project. men should use the same format in
submitting drawings to the fab shop. It will
2. Field Measurements. The foreman reduce time if fabrication shop personnel
and draftsman will take and record field mea- do not have to learn how to read each
surements. These measurements may be the draftsmans drawings on an individual
most critical step in the fabrication process. If basis.
the measurements are wrong the fabrication
e. Other considerations:
will not fit, meaning the fabrication will need
Flange orientation
to be cut and rewelded in the field at a very
Flow arrows
high cost to the project. The most accurate
ASME/ANSI requirements
tools and instruments should be used for this
Nondestructive testing
critical step.
Weld procedure
Sandblast/painting
3. Fabrication Drawings. The drafts- Weight of spool
man prepares a spool sheet drawing based on Revision ballooning
the field measurements, equipment cuts, and End protectors
pipe dimensions. Plan view or isometric draw- Double check spool dimensions
ings are included with the spool sheets as a
reference for the shop supervisor. The draw- 4. Material Ordering. Simply stated,
ing may be of any convenient size, but the typ- someone needs to order the material.The ma-
ical drawing is on 11 17 isometric paper. terial can be supplied by the owner, or pur-
chased by the contractor. Several different
Figure 1 contains six examples of typical people may be involved in the process of or-
drawings. dering material, so it is absolutely necessary
that a process be developed to make sure that
The fabrication drawing should contain all required material is ordered on time, but
the following information: ordered only once.
a. Title block with drawing number, job Material must be ordered before draw-
name, job number, name of the drafts- ings are submitted to the fabrication shop. It
man, date prepared and any reference to is very frustrating to the shop foreman to be
plans and specifications. handed a fabrication drawing that needs to be
b. Spool sheet drawing of the fabrication built immediately and be short of material.
work indicating fittings, cut lengths of Time is wasted if a partially completed piece
pipe, valves or other specialty items and of fabrication is set to the side because one
dimensions. jitting is back ordered.
c. Bill of material listing all the components 5. Job Submission. Only after the fab-
that are shown on the spool sheet draw- rication has progressed through layout, field
ing. Type of pipe, material of pipe, type of measurements, drawings and material or-
joint and any special instructions. dering can it be submitted to the shop. The
FB 1 3
Fabrication
shop foreman needs to be told when the fin- as short as your site will allow. Also, remem-
ished fabrication is needed so the work can ber that all of the above material handling
be scheduled. steps may have to occur simultaneously, so
make sure conditions outside the walls of the
fab shop are well-planned and spacious. It is
LOCATING THE FACILITY
important to perform material handling as far
The location of the building is very im- removed from welding and cutting operations
portant to the overall efficiency of the fabrica- as possible.
tion process.There needs to be a smooth flow
of material into the shop and finished product PHYSICAL REQUIREMENTS OF THE
out of the shop. The following outside mater- FAB SHOP BUILDING
ial handling steps need to be considered in The shape of the fabrication shop build-
the planning process: ing is determined by the rule of Form Follows
Function. No single shape will be appropriate
1. Delivery of material to the fabrication
for every contractors site and fabrication
shop. The delivery trucks are typically
needs. The shape of the building will be de-
long flatbed trailers that require room to
termined by the fabrication material flow in-
maneuver.
side and outside the building as described in
2. Unloading and transfer of the material to the previous paragraph. The number of work
the storage yard and storage rooms. stations and the type of equipment the con-
Material can be moved with a fork truck tractor decides on will also contribute to the
or a deck crane, depending on size. shape of the building.
3. Transfer of material to the fabrication The fabrication shop building should be
shop. This transfer from storage is typi- a simple structure. The walls need to be of a
cally done with a fork truck. A fork truck durable material and the roof needs to shed
requires one person, whereas a deck water. The roof structure needs to be a mini-
crane will require two. mum height of 20 feet above the floor. The
4. Transfer of finished fabrication to holding structure of the roof should be designed to
boxes. A box-truck box is ideal for stor- support the type of crane the contractor has
age for larger fabrication jobs. The fin- selected. This can be an overhead rail crane
ished fabrication can be loaded into the or a simple jib crane.
box until needed for direct pick up by the Two overhead doors are an absolute
delivery truck.This will eliminate the dou- minimum for access to the shop. If possible,
ble handling of finished fabrication. it is a good idea to have several more doors.
5. Pick-up and delivery of finished fabrica- They will contribute to flexibility in moving ma-
tion to the jobsite. Since the delivery truck terial and can also be opened in good weather
will typically be a box truck or a flat bed for maximum ventilation and natural lighting.
truck, it will need room to maneuver.
The contractor must decide what kind of
Other material handling suggestions in- work stations the shop will contain and the
clude never handling material twice when equipment to be purchased for each type of
once will do and keeping the travel distances work station before the building can be de-
4 FB 1
Fabrication
signed. However, it is important to be flexible WORK STATION REQUIREMENTS

here, since market conditions change and so
The number and type of work stations
does a contractors work. A contractor who
will be determined by each contractors type
puts money into high-quality, durable, long-
and quantity of work, but the following list will
lasting fundamental resources will not be
give you an idea of the basic work stations
making a mistake, but it is important to re-
that a fab shop will use:
member that the best layout for a shop is one
that allows the layout to be shifted to meet cur-
1. Pipe Feed Rack and Conveyor. The
rent market needs.
pipe feed rack is where lengths of pipe from
Lighting for the shop area should be in the pipe storage yard are loaded to supply the
the range of 100 foot-candles.This is typically pipecutting station. It should be as close as
furnished by high pressure sodium or metal possible to the pipe storage yard and should
halide fixtures that are suspended in the roof be large enough to hold a full days work for
structure. the cutting station. A pipe feed rack that is 40
Heating and ventilation should be de- feet wide will hold enough pipe to keep a cut-
signed as integral parts of the new building ting station and a shop crew of 20 men busy
and not added after the fact.Welding and cuff- for a full day.
ing processes can emit great quantities of Figure 2 shows an example of a pipe feed
smoke and fumes, so a good exhaust system rack.
supplying fresh make-up air is absolutely
necessary. One solution to the need for both 2. Cutting Station. The primary device
heating and ventilation is a direct-fired nat- for cutting pipe is the straight-line flame cutter.
ural gas make-up air heater which will pro- A cutter that can handle up to 24-inch pipe is
vide heat and a constant supply of fresh air. typical. A conveyor loads pipe from the feed
Some shops use gas infra-red heaters rack to the torch head. The operator positions
mounted high on the support steel, using the pipe and monitors the automatic cutting
multiple speed overhead fans to exhaust procedure. The cut lengths of pipe are picked
smoke and welding byproducts. off the cutting rack with an overhead or jib crane
A substantial electrical service will be and set on pipe stands.The crane should have
needed. The size of the service will be based a minimum capacity of two tons. The pipe
on the quantity and type of equipment in- stands should be fully adjustable and on
stalled. wheels for movement from station to station
and easily positioned for welding. Quick and
A simple locker room with toilets should easy disposal of pipe offal should be planned.
be provided close to the work areas. A clean
lunch room away from the shop floor can be Figure 3 depicts a layout of a cutting sta-
in the same area. Drinking fountains on the tion.
shop floor will help keep the workers at their It is important that the shop have a cut-
stations. ting operation that produces good consistent
Of course, compliance with local building, high-quality bevels. It is not as important to
OSHA, and ADA regulations must be taken buy expensive, sophisticated equipment as
into consideration when planning the facility. it is to buy something that is accurate and
FB 1 5
Fabrication
easily maintained for the basic operations of The following list of equipment and tools
straight cutting and beveling. An accurate is very typical of the tools needed at the lay-
bevel is the beginning point for producing out station on any jobsite to complete a weld:
high-quality welds.
Arc welder Gloves
The cutter requires electrical service and Grinder Nylon chokes
will have an hydraulic power unit. Acetylene Levels Jib crane
and oxygen are needed for cutting carbon Squares Acetylene gas
steel pipe and a plasma arc torch is required Two hole line-up pins Argon gas
for stainless steel. The plasma arc torch re- Work table 75/25 argon/
quires nitrogen, compressed air and an addi- Bench vise CO2 gas
tional electrical power connection. Files Compressed air
Hammer Welding screens
A ventilation hood should be positioned
Face shield Floor fan
over the torch to capture and exhaust the ma-
Welding hood Ladder
jority of fumes from the cutting process.
A band saw will be needed for cutting 4. Welding Station. The welding sta-
anything that cannot be cut by the gas cutter, tion, typically manned by one worker, finishes
such as structural shapes, steel plate, and the work started at the layout station. As de-
stainless steel pipe.The band saw will require scribed above, as many welds as possible are
a pipe feed rack similar to the gas cutters. rolled. Position welds take longer and should
be kept to a minimum.
Figure 4 presents a typical band saw
station. The welding station typically has a MIG
welder.The welder should be a dual-head type
3. Layout Station. The layout station is that will hold two spools of wire for welding
where assembly of the fabrication starts. carbon steel and stainless steel. The same
There are typically two workers at each lay- equipment used to do MIG welding can be
out station. The cut lengths of pipe and pipe easily and inexpensively adapted to do flux
fittings are brought to the layout station where cored welding if it fits into a particular appli-
the workers position and tack-weld the pipe cation. If flux cored welding is planned, how-
and fittings together according to the fabrica- ever, the contractor must plan for the fact that
tion drawing. this kind of weld results in more slag and re-
quires more grinding and power brushing be-
A simple piece of fabrication will be at a tween welding passes and after the weld is
layout station only once. A complicated piece completed.
of fabrication may be at a layout station twice.
The first time at the layout station, only pipe Submerged arc welding is sometimes
and fittings that can be roll-welded are tack- used to fill up pipe welds that have already
welded together.When the initial roll welds are had the root pass put in by another method,
completed, the fabrication returns to layout a since root passes that will pass radiographic
second time so the complete fabrication as- inspection are hard to do with the submerged
sembly can be tack-welded together.The final arc process. Submerged arc welding is
welds are typically position welds. sometimes restricted to larger diameter pipe
6 FB 1
Fabrication
(8-inch and above) because it is not as cost- process. A typical positioner will hold 3-inch
effective to move smaller diameter pieces to 20-inch pipe. Depending on the contrac-
between operations and, in fact, it is some- tors work load, one or more of the welding
times more cost-effective to MIG weld 6-inch stations should have a positioner that will
and smaller pipe completely by hand. hold up to 36-inch pipe.This station may also
have an automatic welder, as described
Automated welding systems are some- above. Figure 5 presents a typical layout/
times used for larger bore pipe welding (8-inch welding station arrangement.
and above), since they allow a quality weld at
a reasonable cost. A typical automated sys- The following is a typical list of equipment
tem is comprised of a 600-amp power source, and tools needed on any jobsite to complete
a manipulator for x, y axis adjustment, dual a weld:
schedule wire feeder, twin welding torches Grinder Jib cane
(MIG for the root pass, submerged arc for all Files Acetylene gas
subsequent passes), all mounted on a single Hammer Argon gas
manipulator. The positioner for this system is Face shield 75/25 argon/
outfitted with a chuck that will hold pipe from Welding hood CO2 gas
2-1/2-inch to 48-inch, supplemented with a Gloves Compressed air
smaller 2-inch to 14-inch chuck that can be in- Nylon chokes Welding screens
serted quickly into the larger jaws for quicker Arc Welder
size changes. The positioner is outfitted with Floor fan
adjustable outboard turning rolls that are kept
in alignment by a track system allowing quick, 5. Module Fabrication Station. Module
easy adjustment for longer pieces. The ma- or skid fabrication is another important mar-
nipulator assembly with the power supply, ket for the fabrication shop. The module not
welding torches, wire feeders, and sub-arc only requires pipe and fitting fabrication, but
equipment are all mounted on a mobile deck may also include valves, heat exchangers,
which is, in turn, mounted on a track system pumps, meters, steam traps and just about
to allow quick movement down the length of any other device normally installed in the field.
pipe while providing for accurate alignment A steel frame is built and all the components
and spacing of the equipment as it is moved are assembled onto the frame at the fabrica-
down the track. tion shop.
Jobs requiring thin wall, high purity and A large, level layout table is needed to
sanitary welding can benefit from orbital weld- assemble the skid frame. Once the frame is
ing, but the equipment is expensive and not assembled, it is commonly painted.The frame
very versatile, therefore, a contractor needs can be sent out to be painted or a spray paint-
to consider just how much it would be used ing area can be set up at the fabrication shop.
before investing in this equipment. If a paint booth is set up in the shop, it must
comply with all local codes for ventilation and
The welding station, of course, also has
fire safety.
a positioner. It holds the fabrication in the
best position to complete the weld and ro- The completed and painted frame is then
tates the fabrication during the welding sent to the module fabrication station where
FB 1 7
Fabrication
the pipe and specialties are mounted and con- of welded and mechanical joints. A cut groov-
nected. Because the pipe on the skid can be ing machine and or a roll grooving machine is
welded or threaded, a pipe threading machine needed to groove the ends of the pipe to ac-
should be set near this work station. It should cept mechanical joints.
be capable of threading up to 4-inch pipe.
9. Storage. A neat fabrication shop will
Tools required at the module fabrication promote neat work. To promote neatness,
station include all the tools of the pipe fitters ample storage is needed for the following
trade. One very useful tool that is not typical items:
is a magnetic base drill. It is faster and more
accurate than a hand drill for the holes needed Pipe fittings Paint
on module fabrication frames to anchor the Cutting templates Extension cords
pipe and components. Small tools Chokes and chains
Some modules will require electrical Welding wire spools Ladders
wiring and/or insulation. Since the module Welding rod Anything else that
may be worked on by outside contractors, this Welding cables ends up on the
area should not interfere with the normal shop Cutting oil floor
process.
10. Final Check Station. The final
check station does not require a fixed location
6. Hydraulic Punch Station. A hydraulic
like layout or welding stations do. The final
punch is used for making holes in steel plate,
check is where the fabrication drawing is
typically for bolt holes in anchor base plates.
checked against the finished fabrication to
The hydraulic punch is more efficient than a drill
make sure it is complete and accurate. The
press when the work is repetitive. If there are
checking process must be done by a person
only one or two copies, a drill press is a better
who was not involved in the layout of the piece
choice.The hydraulic press should have the ca-
of fabrication, since more mistakes or dele-
pacity to cut a 1-1/2-inch hole through 3/4-inch
tions will be found by those taking a first and
carbon steel or stainless steel. The hydraulic
fresh look at the work. Absolutely no piece of
punch requires an electrical connection.
fabrication should leave the shop until it has
been checked.
7. Tee Pull Station. A tee puller is used
to pull a nozzle from the side of a section of
pipe.The nozzle is connected to a branch pipe GAS SERVICES
and is used in place of a tee fitting. Pulling a
Several types of gas are used in the cut-
tee saves the expense of a tee fitting and the
ting and welding process. All of these gases
labor to weld the fitting into the pipe. The tee
are supplied from high pressure tanks or lower
puller is especially economical when working
pressure liquid refrigerated tanks. The size
with stainless steel.
and type of tank will depend on the quantity
of each gas used by the fabrication shop.
8. Grooving Station. Grooved pipe with
mechanical joints is very common in the build- Gas can be supplied to the work stations
ing heating and cooling market. It is very com- by two methods. Individual high pressure
mon for pipe fabrication to be a combination tanks can be located at each work station or
8 FB 1
Fabrication
central tanks can feed into a piped distribu- the required proportions. Typically the mix-
tion system. Individual tanks are appropriate ture is 75 percent argon and 25 percent car-
for a small lab shop with only two or three work bon dioxide.
stations. Larger fabrication shops should in-
vest in central tanks, since too much time will 4. Mix Gas. Another shield gas used in
be spent moving individual tanks in and out of the welding process is a mixture of 90 percent
the work stations. helium, 7.5 percent argon and 2.5 percent car-
bon dioxide.This gas is furnished in high pres-
The gases typically used in the fabrica-
sure tanks.
tion shop are:
5. Propylene Base Gas. The gas used
1. Oxygen. The most economical way
for cutting is liquefied petroleum gas. A three-
to purchase oxygen is in a liquid refrigerated
tank manifold is typical. The manifold is con-
tank. This tank is at a lower pressure than the
nected to a pressure regulator that supplies
smaller capacity high pressure tanks. The liq-
120 psi to the fabrication shop. A flash-back
uid oxygen tank is hooked up to a pressure
arrester is used before the supply enters the
regulator set to supply approximately 60 psi
shop.
pressure to the shop. A high pressure oxygen
tank is hooked up to a different regulator that NOTE: Be sure to comply with safety and
is set to supply 50 psi. When the liquid oxy- OSHA codes for tank storage and separation.
gen tank runs out, the high pressure tank au-
tomatically maintains a continuous flow of 6. Compressed Air. Compressed air is
oxygen until the liquid oxygen tank is needed for tools and machinery throughout
changed. the fabrication shop. The size of the air com-
pressor needed will depend on the quantity
2. Argon. The most economical way to and type of tools that use compressed air. A
purchase argon is also in a liquid refrigerated 5 hp air compressor will supply the needs of
tank. The liquid argon tank is hooked up to a a 20-person fabrication shop. The cost of a
pressure regulator set to supply approxi- back-up air compressor is very small com-
mately 110 psi pressure to the shop. The high pared to the cost of ten pipefitters standing
pressure argon tank is hooked up to a differ- idle.
ent regulator that is set to supply 100 psi pres-
sure. When the liquid argon tank runs out, the
ESTABLISHING THE FABRICATION
high pressure tank automatically maintains a
PROCESS
continuous flow of argon until the liquid tank
is changed. The above discussion involves the phys-
ical components that make up a piping fabri-
3. Carbon Dioxide. Carbon dioxide is cation shop. However, the key to a successful
supplied from high pressure tanks, typically and profitable fabrication shop lies in blend-
from a three-tank manifold. The manifold is ing all the components into a process that pro-
hooked to a pressure regulator that is set to duces a continuous smooth flow of finished
supply 140 psi gas to the shop. Carbon diox- fabrication. This is an elusive concept to de-
ide is used in a mixture with argon as a shield scribe, but there are some basic steps that
gas. A gas mixer is used to supply the gas in contribute to proper fabrication flow.
FB 1 9
Fabrication
1. Scheduling. The drawings, materi- CONCLUSION

als and manpower must all be available at the A decision to set up a piping fabrication
same time. Starting and stopping an assem- shop is a major one, requiring much thought
bly process due to the lack of any one of these and commitment. Before spending the
components greatly reduces the efficiency of amount of money required, a contractor
the shop. Once an assembly is started, it should thoroughly explore local union agree-
should not stop moving until it is loaded for ments that may limit what can be fabricated
shipment. and should also try to involve crafts people in
the planning of the fabrication process, so any
2. Handling. Again, dont handle any- possible negative attitudes they may have had
thing twice when once will do. Putting an as- at the onset may be mitigated.
sembly on the floor almost guarantees that
double handling will be necessary. Keep the The values, perceptions, and attitudes of
work on wheels and roll it from one station management personnel will also have a
to the next. strong influence upon what kind and size of
fabrication shop is possible. Management de-
cisions can establish limits on a shop faster
3. One-Way Traffic. The fabrication
than anything else. If management attitudes
shop should have an IN door and an OUT
are positivethat is, if managers believe that
door, with the assembly moving from station
anything that can be measured can be di-
to station in one direction. Any backing up will
mensioned, and that anything that can be di-
provide an opportunity for interference with
mensioned can be fabricatedthen a
other assemblies.
contracting firm interested in fabrication is off
to a good start and will probably experience
4. Emergencies. It is unlikely that a good utilization of the shop.
week will go by when the shop foreman does
not get a panicky call from a jobsite in need Once labor and management are on
of an assembly right now? The emergency board, the decision to fabricate can have a
can be accommodated, but not at the ex- positive effect on the bottom line. Fabrication
pense of disrupting the entire shop flow. can be considered at the estimating and job
Before the first emergency occurs, develop planning stage and will become common-
a strategy that will allow the current fabrica- place. The ability to prefabricate, as well as
tion to flow uninterrupted while a fast track preplan the job will add to a contractors over-
fabrication process flows on the side. The all profitability.
side fabrication may not be as efficient as Note: For additional information on Shop
the normal shop procedure, but this way, the Fabrication, refer to the MCF (Mechanical
normal shop procedure is not penalized for Contracting Foundation) manual, Guideline
the emergency. This helps keep the cost For Drafting, Prefabrication and Material
where it belongs. Handling, 1994.
10 FB 1
FB 1
11
Figure 1. Typical Fabrication Drawing (Sheet 1 of 6)

12
FB 1

FB 1
13

14
FB 1

FB 1
15

16
FB 1

Figure 2. Typical Pipe Feed Rack
FB 1 17
Figure 3. Cutting Station Layout
18 FB 1
Figure 4. Band Saw Station Layout
FB 1 19
Figure 5. Layout Station/Weld Station Layout
20 FB 1
Bulletin No. HR 1 Revised
File: Human Resources
Bulletin
How to Find, Hire, and Manage Student

Interns
Introduction an approach to managing the intern to
ensure the experience benefits and
Finding good help these days is tougher fulfills everyone involved.
than ever, especially for companies in
the specialty construction business. What is a Student Intern?
Companies that are recruiting for
professional positions (i.e., project Student interns are professionals in
managers, estimators) are challenged training. They are college students
by unfavorable demographics; the baby majoring in the academic disciplines that
boomers (those born between 1945 apply to the careers or professions that
and 1965) with experience are reaching they wish to pursue. An internship
retirement age and recent college provides the student with practical
graduates with technical degrees are experience working in the profession
declining in number each year. that they hope to enter after finishing
their education. The internship should
Companies are finding that one way to augment the students book learning,
ensure that their recruiting goals are the practical application of theory. An
achieved is to plan and act ahead by internship also provides the employer
hiring summer interns. Companies in with the opportunity to evaluate the
our industry (and others) are hiring student as a potential future candidate
college students majoring in relevant for full-time employment.
academic programs for summer or
temporary jobs to fill a short-term For the mechanical construction
personnel need now AND a possible industry, interns may be majoring in
full-time professional need in the future. construction management, mechanical
engineering, mechanical-electrical
This bulletin is designed for those engineering, or architectural
companies interested in hiring student engineering. Colleges and universities
interns either as a part of a recruiting structure their academic programs
strategy for full-time professional differently, so be sure to ask about the
employees or as a way to fill a courses that the intern candidate has
temporary shortfall in project staffing. taken that pertain to the position that
Either way, this guide will acquaint you he/she is competing for.
with the concept of a student intern, help Student internships typically occur
you plan a successful strategy to recruit during the summer months (May
an intern for your company, and suggest through August) when regular classes at
Copyright, Mechanical Contractors Association of America, Inc. Revised 2015. 1

colleges and universities are in recess. want to prepare a brief description of the
However, some internships occur during position, its responsibilities, skills
the entire year; in those situations, requirements, and compensation, if
students work out a part-time appropriate, evaluation, and follow-up.
arrangement with their employer and If you are the primary contact for intern
arrange their class schedule around candidates, be sure your name,
their internship schedule. address, telephone, and e-mail address
are included with the position
When considering several applicants for information.
an intern position, it is recommended
that the students have at least one year Start Early
of college behind them and that they are Students often begin searching for
in good academic standing. You should intern positions as soon as the fall term
feel confident that the student can meet begins, so plan your search accordingly.
the challenges of the position and its If you wait until the first of the year or
responsibilities. the spring to begin your intern search,
you may miss the best candidates.
Also, be aware that some academic
programs require students to complete Target Relevant Schools
an internship as part of their education. Begin your search by targeting colleges,
In some situations, the student earns universities, and community colleges
academic credits for successful offering academic programs that are
completion of an internship. relevant to your business and, if
possible, that are close to where your
In some professions, interns are not business is located.
paid. Students work for the experience,
the exposure to a potential employer, MCAA Can Help
and to build their resume. The interns MCAA is as anxious as you to bring
that are associated with MCAA well-educated young college students
members, however, are paid. The into our industry. The following provides
association also provides a program to resources and tips to help you find the
help its members cover the cost of an right person for the job.
intern. (See section IV).
1. MCAAGreatFutures.org
Paying interns will help your company MCAA has available a website designed
stay in compliance with the Fair Labor for students who are seeking
Standards Act (FLSA). (See section IV). employment as an intern, coop or full-
time position. The website,
I. Recruiting www.MCAAGreatFutures.org, allows
students to post their photos, profiles
An intern program should be designed with contact information, skills listings
to be an important part of a companys and previous relevant experience along
overall recruiting strategy. The with a resume and a brief video
recruitment of interns should be treated highlighting their knowledge and skills.
as the first step in recruiting well-
qualified professionals. MCAA members are encouraged to
begin their search for a temporary intern
The Search Begins . . . or coop or full-time entry-level
professional by scanning this site for
The process involved in recruiting
possible recruits. The site is searchable
interns is not much different than it is for
by location, school or key words.
recruiting full-time employees. You may

2. MCAAs Careers website because their success in placing
Go to (www.mcaa.org/careers) and you graduates reflects well on the school
will find a link to a list of current MCAA and helps attract well-qualified new
student chapters. The list also provides students.
the name, address, phone, fax, and e-
mail address of the current faculty 5. Career Fairs
advisor for each chapter. Faculty When you contact and/or visit the career
advisors are usually very willing to center, inquire about the next career fair
recommend students for internships and and how to participate. Students like
to help you connect with potential career fairs as a first step in their career
candidates. If your local association development because the atmosphere
sponsors a student chapter, be sure to is casual and less intimidating than a
contact the chapters faculty advisor formal interview. Schools often
recommendations. For a more expanded schedule career fairs in the fall and the
list, check the website for the Associated spring, and individual disciplines or
Schools of Construction colleges often have their own career
(www.ascweb.org). fairs.
3. Go Back to School 6. Recruit From Within . . .

Once you have identified the schools If time and resources are limited,
you want to target for intern candidates, organize your search from within your
you may consider planning a visit to the company and among family and friends.
campuses as a key element of your
search. The visit puts a face and a Post a notice on the company bulletin
name behind a corporate image and board that lists the requirements of the
personalizes the recruiting process. position, the term of employment,
contact information, and other details as
4. Contact Career Centers you consider pertinent. Advertise the
Make the most of the campus visit by opportunity with your church,
contacting the careers center first. Ask synagogue, or membership organization
about registering your company with the to which you belong. And, if you know
center, which usually involves providing of a promising candidate from among
promotional literature and other your circle of friends, advise them of the
information. Be sure to schedule a visit position opening.
to the career office and meet the
counselors. They may be more inclined It is suggested, however, that should a
to steer good candidates to a company candidate emerge from this in-house
thats taken the time and effort to recruiting effort, the interview with that
establish a relationship with the college person should be conducted by
or university. someone other than yourself to keep the
recruiting process objective.
If a visit to campus is not possible,
The Interview
1) Call the schools career center to
request resumes from interested If your search began on campus with a
applicants; career fair, you may wish to return to
2) Search online for the schools career campus for more formal interviews with
center and request resumes by promising candidates. The career office
e-mail. can help schedule the interviews and
may have facilities especially intended
Career centers are motivated to for that purpose. Be aware of the
cooperate with prospective employers

schools schedule before you make II. Hiring
appointments; holidays, breaks, exam
periods are times to avoid.
Once you have selected a student for an
intern position, get in touch with him or
Alternatively, consider scheduling the
her as soon as possible. Students often
interview at your office when the school
consider several internship offers, and
is out of session for a recess, holiday, or
you will want to be sure your offer is
break. This is a more personal
considered. You may also want to
approach that enables the students to
choose an alternative, in case your first
focus on your company and get a feel
choice takes another offer.
for its work environment. Again, the
career office may help you arrange the
Be sure to follow-up the offer with a
visit with selected students. If you
written proposal that outlines the interns
choose this approach, be prepared to
responsibilities and requirements,
cover the student(s) travel costs.
beginning and ending dates, and salary.
Also be sure the intern knows when and
During the interview, be sure to:
who to report to on his/her first day.
Finally, be sure to contact the career
Acquaint the student with the
office about your hiring decision and the
companys history and the services it
student(s) response. Career offices
provides;
keep track of where students land jobs,
Explain the position requirements, whether they are internships or full-time
responsibilities, goal, and objectives; positions. That information helps the
Clarify the term of the internship; school recruit new students.
Explain who will supervise the intern
and make sure the intern meets his
or her prospective supervisors; and
III. Managing
Explain the interns prospective
Student interns are temporary
salary.
employees, but they are also
professionals in training. Their
Even though an intern position is
experience with your company may
temporary, you are still obligated to
influence their long-term career
conduct the interview in accordance with
development choices. Therefore, their
all applicable federal, state, and local
work assignments should be
laws. When interviewing female
meaningful, contribute to the
applicants, do not ask questions that are
accomplishment of a project or task, and
gender-biased. Do not ask questions of
ultimately benefit your company.
either sex when they are irrelevant to an
applicants ability to perform the duties
Before the intern arrives, plan an
required of the job.
assignment schedule that spans the
interns term of employment. It is
Allow some time for the student(s) to
suggested that the intern be assigned to
ask questions. Conclude by informing
a project that will expose him or her to
the student about the follow-up process,
the tasks and activities that are typically
when you will contact them about the
undertaken by either a project manager
results of the interview.
and/or an estimator. The tasks
assigned should be appropriate for the
At the conclusion of each interview, jot
interns knowledge and skill level. A
down some notes and your impressions.
rising senior will be able handle more
If you let too much time go by, you may
responsibility and more complex
forget important points that could sway
assignments than a rising sophomore.
your decision regarding a candidate.
Orientation

In planning the interns schedule, be to assess the tasks that need
sure to set aside time for the intern to accomplishing and whether the intern is
become acquainted with your company, capable of accomplishing them, based
the staff, and the protocols and on his or her skill and knowledge level.
procedures that are necessary for him Also, keep in mind that the intern will
or her to perform the tasks assigned. only be on the job for a few weeks. The
On the interns first day: intern should be able to complete the
project before his/her internship ends.
Show the intern his or her work
space, including a safe place for As you consider possible projects, keep
storage of personal items. in mind:
Review the operation of basic office Interns are using new technologies
equipment, such as the phone (i.e., the latest computers, tablets
system, the copier, the fax machine, and software, Smartphones, etc.)
and most important, the computer and are learning new techniques to
system. Make sure the intern has tackle common challenges of this
an e-mail address, voice mail industry.
greeting, and knows the standard Interns can take on tasks that will
telephone greeting for the company. allow full-time professionals to tackle
Go over your companys personnel other challenges.
policies, rules and procedures, and Interns may view a task or challenge
prohibitions as appropriate. Be sure from a different, fresh perspective
to cover rules about unacceptable and, therefore, may come up with a
behavior, attire, and other related different, workable, possibly more
matters. efficient solution than would have
Introduce the intern to your staff occurred to you or other staff.
members and set aside some time Interns have very few, if any,
for he/she to meet with the person(s) preconceived notions about how to
assigned as his/her supervisor(s). accomplish tasks, making them
Take the student out to lunch with a easier to train and teach.
couple of staff members with whom
he/she will be working most closely, Once you settle on a project for the
including his/her supervisor(s). intern, meet with the intern and his/her
Make sure the intern knows where supervisor to go over:
the staff eats lunch and takes breaks
and include him/her in those The tasks involved
activities. Deadlines and deliverables
Other staff assigned to the project
If the intern is expected to use special Who to ask questions (other than the
computer software or other tools to interns supervisor)
perform the assigned tasks, assign a
staff person to teach him/her the proper Be clear about what the project is and
operation of those tools. what is expected of the intern. Be sure
the intern understands and encourage
During the first few days of the him/her to ask questions.
internship, set aside a few minutes each
day (if possible) to meet with the intern Meetings
and discuss any issues or questions. Staff meetings, project meetings,
customer meetings are also excellent
The Project opportunities for interns to learn and
Interns want to work and to learn while make a valuable contribution to your
they work. As their employer, you need company.

Invite your intern to participate in directly engaged in interstate commerce
meetings, as appropriate, but take a and that earn annual sales of at least
couple of minutes to brief the intern on $500,000), companies that do not pay
the meetings purpose and agenda. interns must structure their programs to
If you expect the intern to actively be essentially educational in nature.
participate in the meeting discussion, Otherwise, the U.S. Department of
make sure he/she knows of your Labor (DOL) would consider your
expectations. If you expect him/her to interns to be employees who are entitled
listen and observe only, make that clear to the federal minimum wage. To be
as well. legal, your unpaid intern(s) must meet
the DOLs criteria for a leader/trainee:
Feedback
An internship is a learning experience 1. Interns may be trained using
for a professional in the making. equipment and procedures that are
Feedback on the work performed by an commonly used within the industry.
intern positive and negative is, 2. The training is for the benefit of the
therefore, welcome and encouraged. trainees or students.
Thats how the intern learns and 3. The trainees or students do not
develops his/her professional skills. How displace regular employees, but
the intern responds to feedback work under close supervision
provides you with insight on his/her 4. Interns are not guaranteed jobs at
character and potential as a the completion of their internship.
professional you may want to hire. 5. Interns are not entitled to wages
during the internship.
When the work performed is incorrect or 6. The company should derive no
not up to expectations, advise the intern immediate advantage from the
of the shortcoming and instruct them on activities of the intern.
the proper procedure.
It is recommended that employers pay
When the intern performs good or their interns, if possible. A paid
excellent work, be sure to tell them so. internship formalizes a professional
Reassurance from the boss or the relationship between the employer and
supervisor helps relieve the interns the intern and it assigns a tangible value
anxiety and builds their confidence. to the work performed by the intern.
Paying interns also increases the
employers chances of recruiting good
IV. Distinguishing Interns candidates for internships in the future.
from Employees
A suggested average salary for interns
Internship programs are very beneficial is $15 - $20 per hour. This is a range
to student interns and the companies based on salaries paid interns by
that employ them. An internship is not a recipients of MCAA student chapter
job per se and, therefore, interns work grants.
under a different set of rules governing
their compensation and entitlements. If your company pays its interns, be sure
Compensation to determine any federal and state
First, companies are not required to pay income tax requirements affecting intern
their interns. In those situations, compensation.
employers must be aware that under the
terms of the Fair Labor Standards Act MCERF Internship Grants
(FLSA) (which applies to companies MCAA members that employ interns do
with at least two employees that are pay them. MCAA has also established a

program through the Mechanical At a minimum, the intern should
Contracting Education & Research complete a brief written form that allows
Foundation (MCERF) that offers grants him/her to evaluate the experience. The
to members who employ interns to help form should be added to his/her file and
cover their salary. The foundation a copy provided to the intern. The
determines the amount of the grant schools career office may require a
each year, which is announced in copy or a separate evaluation that
January. For more information, visit should be completed before the intern
www.mcaa.org/careers or departs. Always secure the interns
www.mcerf.org. permission to disclose an evaluation.
Rights and Benefits Conclusion

Employers should also be aware that
interns, whether paid or unpaid, are
Internship programs can be highly
entitled to the same legal protections
beneficial to students and their
against discrimination and harassment
employers. Each should be motivated
as full-time employees. Interns are not,
to gain as much as possible from the
however, entitled to the same benefits
experience; students enhance their
as full-time employees (such as
knowledge and skills about the
unemployment compensation, medical
profession and industry which they have
insurance, and termination procedures),
chosen for a career and the employer
but employers may consider seriously
gets the opportunity to preview a
covering interns for workers
potential future employee.
compensation to protect the intern and
the company should the intern incur and
Remember, the intern can help promote
accident or injury while on the job.
your company back at school. If his/her
experience is positive and constructive,
V. Evaluation future prospective candidates will hear
the good feedback and seek out your
An evaluation process provides valuable company for future internships or full-
feedback to the intern and to the time employment opportunities.
employer. Throughout the interns
employment, the intern should have Resources
received feedback on his/her
performance to be sure the experience The following resources were used to
is positive, meaningful, and that the develop this bulletin:
project outcome is acceptable. T
Fair Labor Standards Act Advisor,
At the conclusion of the internship, the U.S. Department of Labor,
employer should provide an opportunity (www.dol.gov/elaws/esa/flsa/scope/
for a final evaluation of the interns er15.asp)
experience. The evaluation may be in
the form of a written survey and/or a Intern Guidebook: An Easy-to-Follow
formal exit meeting. The information Guide to Hiring Interns, Mechanical
resulting from the evaluation may help Contractors Association (Chicago, IL)
the company to improve its internship
program for future interns, and the intern Other sources:
will, hopefully, have learned new
technical and professional skills that will Recruiting and Managing Student
aid his/her professional development. Interns, Center for Leadership and
Service,

www.leadershipandservice.ufl.edu/
community/tips/managing_
student_interns
Ten Tips to Effectively Manage

Interns, LookSharp,
www.internmatch.com/guides/ten
-tips-to-effectively-manage-interns
How to Manage Interns, Inc.

www.inc.com/guides/2010/04/
managing-interns.html
Managing Interns-How to Find and

Manage Yours, Mind Tools,
www.mindtools.com/pages/article/
newTMM_48.htm

Model Internship Program
The following suggests a program for a 12-week student internship. It is designed to
provide the student with an overview of how a mechanical contracting firm operates and
a meaningful experience in performing the work of a mechanical contracting firm. Every
firm is unique in terms of its operations, policies, procedures, and management
approach to projects and administrative processes. Therefore, employers are expected
to adjust this model program to the specifics of their operations, project procedures, and
needs for a professional-in-training.
Day 1
Human Resources:
Meeting with Human Resources Director

Sign-up procedures
- Employee information forms

- Tax forms
Corporate overview
Policies/procedures orientation
Office assignment/equipment orientation
- voice mail
- computer passwords and access
- computer use guidelines, instructions
Office equipment use orientation

Staff introductions
Supervisor/Mentor
Introductions
Internship schedule
Projects orientation
Skills orientation
Team introductions/orientation
Safety Orientation
Policy orientation
Equipment demonstration
Hazard abatement procedures
Emergency procedures
Days 2 10
Estimating Process

Analysis of project:
- bid specifications
- CAD drawings
- equipment requirements
- code requirements
- labor loading
- general conditions
- other
Estimating software orientation and use

Assist with development of estimates for
- Design-Build projects
- Plan and spec
- Replacement projects
Days 11 17
Fabrication Shop Processes
Process orientation
Safety procedures
Process management instruction
Assignment
Days 18 End
Project Assignment
Purchasing procedures
Daily logs
Subcontracts
Job tracking procedures
Tool inventory
Equipment approvals
Invoicing
Accounting
Commissioning and Testing
Commissioning and testing orientation

Equipment testing
Balancing
Punch list
Last Day
Human Resources
Exit interview

Bulletin No. HR 2
Bulletin
Dos and Donts of Effective Employment

Interviews
Introduction services of a search firm and
participating in career fairs;
The job interview is a powerful tool for Develop a list of the qualifications
most organizations to use in hiring new sought in a candidate (i.e., what
employees. A candidates references and skills, education, training,
work experience provide important factual experience and credentials does the
information, and that information should position require?); and
be checked and incorporated into the Draw up a list of staff who will
candidates overall assessment for a interview the candidates and the
position. However, the interview provides topics they should cover
valuable information about a candidates
personality, demeanor and suitability for
This planning meeting and the recruiting
the position and culture in which he/she
activities that result from it will improve
will perform. Assuming that other staff will
your employee selection process.
interview the candidate, the interview
process helps other employees own the
new employee who joins your Selecting Candidates to Interview
organization.
Begin by reviewing each candidate's
resume and cover letter. When faced with
Get Organized and Plan a large number of resumes, it helps to
have techniques that allow you to select
Before you begin the actual recruiting the best candidates from the pile. Those
process, arrange a planning meeting for techniques will also help you prepare your
all of those who will be involved in finding list of questions to use during telephone
and selecting the candidates for the and personal interviews.
position(s) available.
For example, decide whats important,
Your agenda for this meeting may include whether its the candidates education
the following steps: and/or training credentials, duration of
previous employment situations,
Plan a recruiting strategy which responsibilities, etc. And, those priorities
could involve announcing the should relate to the position being filled
position in local news or national and qualifications you require for that
trade publications, retaining the position. Remember, you are searching

for a person who will best fit your needs Description of the position to be
for that position. filled; and
Questions that must be covered.
Narrow your priorities for a first run-
through of resumes and cover letters to When a candidate arrives, put him or her
reduce the pile. Then look more carefully at ease with a warm greeting, a beverage
for lesser qualifications that still add to the and an escort to the interview location. If
candidates overall suitability for the the interview process requires the
position. And, review candidates candidate to complete an employment
information with an eye to how well the application, provide a quiet, comfortable
information is presented (i.e., errors, location (a sample application is provided
grammar mistakes, overlooked details and as an attachment to this bulletin). First
good summaries, selling points). impressions count for you and your
company too.
Once you have a good selection of
candidates, contact each of them to Be careful, however, not to jump to
arrange a telephone interview. conclusions based on first impressions.
Sometimes the best employees may give
The Telephone Interview the worst first impressions. To make sure
you don't overlook these diamonds in the
The telephone interview or candidate rough, withhold judgment until you've had
screen allows you to determine if the the chance to thoroughly evaluate a
candidate's qualifications, experience, candidate's capabilities and potential.
workplace preferences and salary needs
are appropriate for the position and the The Interview
organization. Most important, is the
candidate still interested in the position The following suggestions are offered to
and available for hire? The telephone help guide you in conducting an effective
interview saves managerial time and personal employment interview:
eliminates unlikely candidates.
Begin with the job description. Start
Keep the interview time briefno more with a brief summary of the position,
than 15 minutesand focus on the most including the prime responsibilities,
important issues concerning the reporting structure, key challenges, and
candidates qualifications and suitability performance criteria. This will help the
for the position. Prepare questions prior to candidate provide relevant examples and
the interview to make the most efficient responses.
use of the time spent.
Improvise. Plan your questions, but don't
Preparing for the Personal Job feel you must ask only those you've
chosen in advance.
Interview
Prior to the scheduled in person Listen. Let the candidate do most of the
interviews, make sure the interview team talking which allows you to obtain
members have the following information: necessary information about the
candidates true competencies.
Each candidates resume and
cover letter; Take notes. While you will not want to
transcribe everything the candidate says,
write down important points, key

accomplishments, good examples, and legal repercussions. If these questions are
other information that will help you asked of a candidate who is not hired,
remember and fairly evaluate each inferences can be drawn that
candidate. An interview guide, prepared in discrimination may have occurred.
advance, will make note-taking easier and
give you a structure for capturing key For a more thorough discussion of illegal
information. interview questions, consult the U.S.
Equal Employment Opportunity
Invite candidates to ask questions. This Commission (http://www.eeoc.gov).
can be the most valuable part of the
interview. Why are they interested in this After the Interview
position or this company? Is it the
challenge of the job, advances in the Inform candidates about next steps.
industry, or something specific about your End the interview on a positive note and
company that interests them? Or is the with information about follow-up. For
candidate fixated on salary, benefits, and example, We enjoyed meeting you and
time off? If the candidate has no appreciate your interest in our company
questions, this should be a red flag, and the position. We will be conducting
especially for senior-level employees. interviews over the next week, and will
Make a note of what the candidate asks, notify you within 10 days of our intentions.
and be sure to follow up with answers to Will you be available? If the candidate is
questions you cannot provide a good fit, you may want to be more
immediately. specific and deliberative. For example,
When will you be available for a second
Questions to Avoid round of interviews? And, if the
candidate is not a good fit? Always end
It is critically important that every the interview on a positive note, but do not
interviewer at your company, from HR tell the candidate to call you if you don't
clerks to top executives, understand and mean it.
follow legal hiring guidelines. Eliminate the
potential for bias by not introducing Assess Candidates Following the Job
questions or scenarios that will elicit Interview
irrelevant information. Provide a standard format for each
interviewer to use to assess each
Questions about an applicant's age, candidate following the job interview. You
birthplace, appearance, marital status, should have several candidates who you'll
child care arrangements, ethnicity, want to ask back for a second or third
religion, financial status, etc. almost never interview.
have a specific bearing on the individual's
ability to perform a job. They should, Compare notes and reach consensus:
therefore, be strictly avoided. The post-interview evaluation is the time
to compare notes and advance the hiring
Indirect questions regarding these issues decision. Each interviewer should be
are just as improper as direct ones. For prepared to back up remarks and
example, "How many years before you recommendations with specific examples
plan to retire?" is no different than asking and notes from the interview.
the candidate's age. "What religious
holidays do you observe?" is no better
than directly asking a candidate to identify
his or her religion. Both have the same

Deepen the questions as you narrow confident response, pay close attention.
the field You may have found your next hire.
Subsequent interviews with finalists are
valuable opportunities to learn more about 3. The candidate will not admit to any
them. Consider adding "show me" flaws or weaknesses. Be wary of the
exercises such as a strategic planning candidate who does not admit to a skill or
exercise or a "walk me through what you'd work habit that could use some
do" activity involving a real business improvement.
challenge the individual would be facing.
And, watch out for candidates who are
Red Flags just the opposite, who want to confess
every flaw and are seemingly clueless
Recruiting new employees carries risk. about how to correct them.
Will the new employee live up to your
expectations that he or she will perform as Look for candidates who are willing to
well or better than promised? Here are admit flawsbut who are actively
seven warning signs that the candidate is working to correct them. For example, you
not all that he or she claims. might hear, I havent learned the finer
points of BIM yet, but I am planning to
1. The candidate is big on adjectives attend a conference next month dedicated
but cannot back them up. You ask, to practical applications of that
Whats your greatest strength? and the technology.
candidate says, Im dependable and
hard-working. Press him. Ask him if he 4. The candidate cannot identify the
works harder than his peers. Listen to the most crucial function of his/her current
way he forms his answeryou want to position. If a candidate cannot relate his
hear details of how he gets more done in or her current job to the companys overall
a day than others do, not just that he mission, that candidate may not be best
stays late at the office night after night. suited for the job, regardless of his or her
Ask for concrete proof of results, such as qualifications.
consistently brings in projects on time and
on or under budget or the candidate For example, an answer like, Well, if I
produces commendations letters from submit a flawed estimate, I could lose my
satisfied customers. If the candidate job, should throw up the biggest, reddest
cannot come up with any good, concrete flag you can find. But, a candidate who
examples, then the candidate is telling says, Client satisfaction is crucial to our
you what he or she thinks you want to success in the market. There are dozens
hear. of companies that provide similar
services. If the service we provide is not
2. Your questions take the candidate flawless and does not meet client needs,
by surprise. A well-prepared candidate well lose market share. By preparing
should anticipate most of your questions. accurate estimates, I help the company
He or she should be able to describe her retain its competitive edgenow this is a
unique strengths, and, as before, be able candidate you should snatch up and
to back up her descriptions with specific quickly.
examples of how he or she used those
qualities to create a better bottom line for 5. The interviewee says his present
his or her current employer. company doesnt offer enough room
for growth. Be very careful. This is often
If the candidate gives you an immediate, a euphemism for I want to make more

money, and they wont give me a raise. Look closely at whom the candidate offers
Ask the candidate to define precisely what as references. It is acceptable to include
kind of growth opportunities hes looking one peer, but most references should be
for. Then listen to how he describes his from persons who are in positions that are
current situation. Is he objective? Is he one or more levels above. If the candidate
concentrating on what he can do for the does not permit you to contact a current
company? Or, is he fiercely opinionated employer, that is a signal that the
and concerned only with what you can candidate is job searching secretly. Do
give him? No one appreciates my you really want to hire someone who
contributions is a bad answer. Id like to might someday leave you in the lurch?
see my contributions have a more direct
impact on the companys success is a References often require you to make a
better onebut make sure the judgment call, and then youll have to rely
interviewee has a real plan for how he will on your instincts. Obviously, if one
make a difference. reference is wildly out of step with the
others, you may just have a personality
6. The candidate really wants to work clash on your hands. But, if none of the
for your company but cannot candidates references will give you
articulate why. A candidate should not specific reasons to hire the candidate,
arrive for an interview without knowing maybe you shouldnt.
something about your company. Ideally,
the candidate should be aware of your Deciding on new hires is never an easy
competition and the other major players in task. But if you learn to listen to what the
your industry, your companys reputation, candidate saysand doesnt sayand
and what characteristics distinguish it from how he or she says it, youll have a better
others. And a good answer to, Why do chance of making hires that work out.
you want to work here? will focus on
those differences. If the candidate has Disclaimer: This information is derived
obviously not bothered to research your from a variety of sources and is provided
company or is incapable of conveying that for guidance, ideas, and assistance only.
research, he or she may be only Please seek legal advice or assistance
interested in securing a means to a better from state, federal, or international
salary. The candidate might be able to government resources to make certain
learn the ropes and perform well, but he your legal interpretation and decisions are
or she will never be a superstar. correct.
7. None of the candidates references

can offer specific details on job
performance. This is a touchy subject.
Some companies have policiesofficial or
otherwisethat prevent supervisors from
making specific comments. But, if a
supervisor or co-worker genuinely likes
the candidate, he should be able to say
something that gives you enough
confidence to make an offer. If comments
about a candidate are general and
superficial in regard to specific questions
about work performance, read between
the lines.

Bulletin No. HR 3
Bulletin
Avoiding Potential Liability from Employees

Use of Company Vehicles
Introduction
Contractors that allow employees to use There are at least four ways that your
company vehicles for business (or even company may be held liable for a
home-to-work travel) are exposed to potential vehicular accident.
liability should an accident occur involving that
vehicle. Passenger vehicles used primarily for 1. Vicarious Liability
sales calls and that do not display the companys One kind of liability occurs when an
name and/or logorather than employee causes an accident while
logo-bearing trucks, vans or service vehicles driving the company vehicle. Even though
are the main focus of this bulletin. the contractor did not cause the accident
directly, liability for the accident and all its
This bulletin describes the most common associated costs could fall to the
types of liabilities that could affect your contractor, the vehicle owner.
company should an accident or incident
occur involving a company vehicle driven In most states, the law holds employers
by an employee. The bulletin also offers liable for wrongful acts committed by their
suggestions to help you reduce the employees, if those acts were committed
resulting liability to your company. within the scope of employment,
otherwise known as the doctrine of
This bulletin is a general discussion respondeat superior liability. In other
and is not and should not be relied words, if an employee negligently caused
upon as technical legal advice. Consult an accident while driving a company
with your insurance agent and your vehicle to a jobsite (or perhaps during
attorney about steps you should take home-to-work travel), the employer could
to minimize your companys exposure be held liable for the resulting damages.
as much as possible. (1) Also the attraction of greater company
liability insurance would make the
Accidents Happen company an attractive defendant for the
Determining who is at fault for an accident plaintiffs personal injury lawyer.
establishes who is responsible for the
consequences and associated costs. But, The key to managing your companys
if the vehicle driver (who caused the liability exposure is in the phrase, "within
accident) is not the owner, the question the scope of employment." Answering a
then becomes, who pays? claim typically involves one of the
following options:

Determine whether the employee In other words, if the employee had not
committed an intentional wrong. been hired or was fired after the problem
Generally, if an employee deliberately was discovered, the accident would not
commits a wrongful act that results in have happened. (4)
an accidentsuch as running a traffic
light or a stop signit is unlikely that Make sure you can prove one or more of
he or she was acting within the scope the following:
of employment. However, that defense
may not always hold. While running a Your company performed a
stop light is an intentional wrong, if the background check on the employee.
employee did so to reach the The background check revealed no
hardware store before it closed to problem with your employee.
purchase items for work, a liability There was no way of knowing the
issue could arise. (4) employee had a problem that affected
his/her operation of a vehicle.
Establish that your company had a
policy prohibiting employees from 3. Negligent Lending of a Vehicle
committing the act that resulted in Your company could be held liable for an
the accident. This defense may be accident if the employee who caused the
your best option, but only if it was accident was allowed to drive the
established prior to the accident. A company vehicle even though it was
policy that clearly requires employees known that he/she was unfit to drive. (4)
to obey all traffic laws at all times
regardless of the circumstances
To reduce your liability from negligent
could be useful in a case where an
lending suits:
employee caused an accident by
speeding or running a traffic light. (4)
Obtain adequate insurance on all of
Enforce preexisting policies. your vehicles. Also, enroll employees
Otherwise, they are meaningless. (2) who drive company vehicles in a safe
If a suit comes up, and the plaintiff can driving program recommended by your
show you did not enforce policies in insurance agent.
the past, that defense is diminished. Make sure that employees who use
your vehicles have all the licenses
Make sure your companys vehicle and permits required to operate
insurance is adequate to cover those vehicles and proof of
damages from accidents. Accidents insurance on their vehicles. Keep
do happen while employees are using these documents filed separately from
the company vehicle on the job. other personnel records.
Adequate insurance coverage, Enforce vehicle policies when an
therefore, can help protect your employee is not fit to drive. Do not
company from a devastating financial allow an employee to drive a company
loss. (2) vehicle if you know or if the employee
tells you, that he or she unfit to drive.
2. Negligent Hiring or Retention (4)
A company could be held liable for an Establish and enforce a policy
accident involving its vehicle if it was prohibiting family members from
known that the employee who caused the using a company-owned vehicle. If
accident had a condition or a tendency a family member is involved in an
(i.e., a behavioral, medical or physical accident while driving a company-
condition) that could cause the accident. owned vehicle and is found to be at

fault, liability will attach to the vehicle A reasonable person would have
owner (the contractor) and the claim spotted and repaired a given
may escalate. The insurance condition in the vehicle that made
company will likely pay the claim, but the vehicle less safe (but not
will subrogate the costs to the party necessarily unlawful) to drive. For
that caused the accident. example, maybe a tire showed uneven
tread wear and had a small bald spot.
Enforcing such policies could prove The condition was not corrected or
challenging, but one suggestion is to repaired. The tire was not changed
have employees sign a form because it was not known that the tire
acknowledging and agreeing to the had a bald spot. Remember, it's not
policy prohibiting family members use what is known, but what a reasonable
of a company vehicle. person should have known. (5)
The condition contributed to an
4. Negligent Maintenance of a Vehicle accident causing bodily or property
A company will be liable for an accident if injury. If the tire blew out and caused
the company vehicle was unsafe to drive the employee driving the vehicle to
(i.e., faulty brakes or a bad tire) and its lose control, the company could be
condition contributed to the accident. In held liable. On the other hand, if the
this situation, the employee and anyone accident was caused by someone who
injured in the accident could sue your ran a red light, the fact that there is a
company. (5) bald spot on one tire is less relevant,
but perhaps not completely irrelevant.
This type of negligence generally is of two (It could be argued that the employee
types: would have avoided the vehicle that
ran the red light if the company vehicle
Negligence per se is when a vehicle is had been equipped with properly
driven in an unlawful condition. In other maintained tires. (5)
words, if a vehicle has faulty brakes or
brake lights, bald tires or broken window Reduce the likelihood of successful
wipers, it is unsafe or in an unlawful negligent maintenance claims by making
condition. (5) sure that your vehicles are adequately
maintained and document those actions.
In many states, once the unlawful In addition to having adequate insurance
condition of a vehicle (negligence per se) coverage on all your vehicles:
is established and that it contributed to the
accident, the vehicle owner (your Establish vehicle policies that
company) becomes automatically liable. require employees to report any
To reduce your liability, never allow your problems with your vehicles
company vehicle to be operated in an immediately, and direct them not to
unlawful condition. drive any vehicles in an unlawful or
unsafe condition. Take steps to
"Ordinary" negligence. Even if your correct the reported problems as soon
vehicle is not in a condition that makes it as possible.
unlawful to drive, it may give rise to an Conduct periodic maintenance and
"ordinary" negligent maintenance claim. safety checks on your vehicles.
All of the following must be demonstrated Even better, have a qualified third
to prove "ordinary" negligence: party such as a certified mechanic
do the checks. Keep files
documenting those inspections. (5)

Protecting Your Company Next Distinguished, Why Vicarious Liability Is
Steps Disfavored, Vicarious Liability For
Accomplices And Coconspirators -
At a minimum, here are some actions that Conclusion
you can take to minimize your companys http://law.jrank.org/pages/2255/Vicarious-
liability exposure from employees use of Liability.html#ixzz0fpnNXmoI, accessed
its vehicles. on 1/15/10.
1. Establish a vehicle use policy for 4. Liability for Employees Vehicle Use
your employees. First, check out http://www.toolkit.com/small_business_gui
MCAAs Guide to Human Resources de/sbg.aspx?nid=P04_7325
Policies. The publication not only outlines
a specific set of policies governing 5. The Business Owners Toolkit,
employees use of company vehicles, but Negligent Maintenance of a Vehicle,
also suggests reimbursement schemes for http://www.toolkit.com/small_business_gui
fuel, repairs and other associated costs. de/sbg.aspx?nid=P04_7355
2. Regularly maintain all your

company vehicles in a safe, lawful
condition. Doing so will help protect your
employees as well as your company.
Document service orders and repairs.
3. Maintain adequate insurance

coverage on all your vehicles. Consult
with your insurance agent on coverages
for repairs, medical expenses and liability.
4. Require your employees who drive

company vehicles to take a safe
driving course. Even if your employees
have been driving a while, they may
benefit from learning road safety
techniques that could help them prevent
or survive an accident.
References
1. TheFreeDictionary, http://legal-
dictionary.thefreedictionary.com/Vicarious
+Liability,Ask a Lawyer Online, accessed
on 1/14/10.
2. The Business Owners Toolkit,

http://www.toolkit.com/small_business_gui
de/sbg.aspx?nid=P04_7400, Setting
Vehicle Policies, accessed on 1/15/10.
3. Alan C. Michaels, Vicarious Liability -

Vicarious Liability And Strict Liability

Bulletin No. HR 4
MK 7
Marketing
Bulletin
Guidelines to Using Social Media in Your

Business
INTRODUCTION business or connect more closely with

employees, clients and customers.
About 10 years ago, a new form of
communication came about that made Before using social media in your
our shrinking world even smaller and business, however, it is strongly
more connected. Social media has recommended that you consult with
allowed people to easily, quickly and your companys attorney to be sure
inexpensively connect with and stay on you fully understand the legal
top of the lives of friends and family concerns and how to avoid potential
locally and around the world. Social liability. Using social media in
media has also greatly expanded employee selection or performance
opportunities for businesses to promote evaluation or disciplinary proceedings
their products and services at minimal or is fraught with legal issues and
no cost to an audience as small or as companies should proceed with
large as they wish and can reach. Its a utmost caution.
brave new world of communication!
WHAT IS SOCIAL MEDIA?
As with any new phenomena, however,
traps await the uninitiated and unaware, Social media are Internet-based services
generally resulting from the fact that that allow users to exchange personal
making available and sharing too much information, photos and videos and
information is not always a good thing. messages with other users, usually
All of the social networking services family and friends, or in a business
available grow and thrive because they situation, or with employees and
encourage users to openly promote customers.
themselves, their daily activities, social
relationships and their opinions about Facebook
people and issues. Depending on the In February 2004, a Harvard University
situation, that openness may work for or undergraduate student created a
against you. powerful new way for people to connect
and communicate socially. Facebook
This bulletin provides guidance to those became almost an overnight sensation
companies who choose to use social by offering users an easy, convenient
media services to promote their way to stay on top of each others lives

through the Internet. The service allows also requires more hands-on
users to post personal information in a maintenance to keep the message fresh
personal profile, photos and videos and engaging for the intended audience.
and exchange messages with their
group of friends. Facebook also offers If you decide to point your companys
users the option of joining common marketing strategy in the social media
interest groups, such as through work, direction, it is strongly suggested that you
school or sports teams. Today, hire an expert in this area, or an agency
Facebook has over one billion users of experts, to help you. Be aware of the
worldwide. opportunities and limitations that social
(http://en.wikipedia.org/wiki/Facebook) media offers, and have ready some ideas
about who you want to reach and what
Twitter actions you want the audience to take to
In 2006, Twitter entered the social guide the experts thinking about how
networking arena. It allows users to best to represent and promote your
send and receive brief messagesup to companys interests. Consider these
140 characterscalled tweets. Unlike simple guidelines when youre starting to
Facebook, Twitter allows unregistered plan your strategy:
users to read tweets, and registered
users can post tweets on the Twitter Define your audience: Most
website or through several cell phone users of social media tend to be
applications or apps. The service is younger (teens to 30
gaining popularity rapidly; it currently somethings), but the older
has 140,000,000 users. generation is catching on.
(http://twitter.com/about) Deciding on who you want to
reach the demographics of your
LinkedIn audienceand what actions you
LinkedIn is a social networking service want your audience to take will
for professionals; in a sense, it quickly define the options for your
transforms a persons professional marketing plan.
network into an online network. Created Do your homework: Social
in 2002, it allows users with common media is one of the places where
business interests or connections to link one size does not fit all. Different
up and stay in touch about business audiences use different sites and
issues, new job opportunities and more. different marketing strategies
Subscribers receive invitations from work differently with different
other subscribers to join their network. audiences. Once youve defined
Currently, LinkedIn has more than your audience, then investigate
150,000,000 subscribers. what kinds of content and
(http://learn.linkedin.com/what-is- presentation approaches work
linkedin/) best for them.
Care about sharing: Keep an
MARKETING IS ALL NEW AGAIN open mind about different ways to
present your message that will
When it comes to marketing a inform andyes, lets be up front
companys brand, products and about itentertain your audience.
services, the Age of Aquarius is upon Social media users like to share
us. Social media marketing is a lot intriguing informationthats why
cheaper and more nimble than print, videos of dancing cats and
radio and television advertising, but it giggling babies get a lot of
attention on morning television

talk showsbut a clever video or prepared should you receive an
a colorful graphic that shows off unfavorable comment about your
the best characteristics of your company, its offerings or its
company and/or its products and performance. Have a plan in
services will get the kind of place that clearly spells out what
attention from your current and steps who should take by
potential customers that can whenand enforce it.
build your business. The word Decide who speaks for your
will get around. company: Not every employee of
Interact with your audience: your company is best equipped to
Unlike traditional print and represent it in a social media
broadcast advertising, social advertising campaign. Decide
media ads can and do invite what qualities about your
immediate comments from company you wish to project and
users. Their interactive features who is best suited by knowledge,
are what make them so powerful experience, temperament and
as a marketing medium. other characteristics to fill the
Supposing you decided to spokesperson role. Once the
announce your companys latest decision is made, stick with it.
product or service offering. A flat That person will become the
statement may draw interest gatekeeper of what goes out
from your audience briefly, but and comes in to the companys
including a video demonstrating social media sites.
the new product or service and Fresh is best: Do not let your
inviting comments make that ad companys social media site
more engaging and interesting. and/or message become stale
Blogs are ads too: Blogs are and stagnant. Keep new ideas
online diaries authored by a and information flowing to keep
single person, usually around a your audience engaged and
theme. The best blogs invite coming back for more.
comments from viewers, which Remember what youve learned
keeps the blog interesting and about your intended audience and
provocative. If you choose this what kinds of messages and
option to promote your company approaches work best on them.
and its offerings, be prepared for Your media experts will know best
good and not so good how often to change messages or
comments. Use the good content delivery options to keep
comments as testimonials on the audience interest peaking.
quality of your offerings, and use
the criticisms to guide These are just a few basic tips to help
improvements. By welcoming you sort out what needs to be done
and acting positively and should you decide to take the plunge into
proactively on all comments, you social media to market your business. At
will build relationships and trust the end of this bulletin, several online
with your intended audience. sources are listed to provide you with
Keep your cool: You can even more information and guidance in
control the message going out, this area. For more information, go to
but you cant control the input http://www.topRankblog.com/2011/12/20-
from your audienceor who else social-media-dos-donts
they may be sharing that input
with. Know this going in and be

EMPLOYEE RECRUITING ISSUES measure prohibiting employers
from requiring such information of
Current news is replete with stories job applicants and employees,
about how employers are using social and other states are considering
media sites to vet job applicants similar proposals. Nevertheless,
personal and professional backgrounds. the privacy considerations make
Those stories become even more this an area thats best left alone.
interesting when an employer discovers DONT use false identification to
unflattering or conflicting information gain access to a candidates
about an applicant that may affect social media site.
his/her suitability for a position. DO assign another staff person to
Depending on how those background conduct the social media
searches are conducted and how the background check on the
resulting information is used, the applicant and direct him/her to
employer could face legal difficulties. report only job-related
information after the applicants
Background checks using social media qualifications for the position
sites are legal if they are job-related and have been verified.
are conducted in accordance with the DO a complete background check
provisions of the Fair Credit Reporting on the applicant using sources
Act (FCRA). If negative information other than the social media
about a job applicant is uncovered in a network.
background check using social media,
the employer must: Consult with legal counsel on any
planned use of social media for
1. Notify the applicant should recruitment, applicant screening and
he/she lose the position as a evaluation or current employee
result of that negative performance as the law is rapidly
information; and changing in those areas with respect to
2. Identify the source of that privacy and other employment policies.
negative information (i.e., For example, some employee postings
Facebook, Twitter, LinkedIn) so about the company could be construed
that the accuracy and as protected concerted activities under
completeness of the information the labor laws. Also, form responses to
may be verified by the applicant. recruiting may be considered applications
for employer recordkeeping
Other considerations when using social requirements.
media as a recruiting practice or
applicant screening or evaluation For more information, visit
device: http://www.hrmtoday.com/.
DONT require a candidate to EMPLOYEE USE/MISUSE OF

provide passwords to a social SOCIAL MEDIA
media site or friend the
employer or other company When an employee chooses to publicly
staff. The practice is not vent his or her opinions about a
currently illegal in most areas of companys products, services or
the country, but the legal business practices on a social media site,
landscape is beginning to it is not unexpected that he or she may
change. Maryland has a face disciplinary actions, especially if

such behavior is expressly prohibited in media site that disparage or
a companys human resources policies. slander other employees or
From the perspective of the employee, disclose confidential company
consider that free speech is protected in information are not protected.
the U.S., and the National Labor Think before you act. Whether
Relations Board (NLRB) is in place to you are an employer or an
investigate employment actions that employee, think about the
may impinge on an employees rights, possible consequences of acting
including when an employee speaks rashly. If you are an employee,
openly about his or her employer on a venting your frustrations with your
social media site. employer online for all the world
to see may not be protected.
The NLRB has taken an aggressive And, if you are an employer,
position when investigating these cases. terminating that employee may
See an NLRB statement issued on prove more costly than less harsh
January 25, 2012 disciplinary actions.
(http://www.nlrb.gov/news/acting-
general-counsel-issues-second-social- Below is a thoughtful article about some
media-report): related employee social media issues.
(http://jobsearch.about.com/od/onlinecare
Employer policies should not ernetworking/a/violating-company-social-
be so sweeping that they networking-policy.htm)
prohibit the kinds of activity
protected by federal labor law, EMPLOYERPROTECT THYSELF
such as the discussion of
wages or working conditions If your companys employee policies
among employees. have not been reviewed and updated
An employees comments on recently to address its use of social
social media are generally not media, now is the time to get it done.
protected if they are mere Work with an attorney who specializes in
gripes not made in relation to this area to determine whether the
group activity among policies address employee use of social
employees. media, actions that are allowed and
when, and those that will results in
Below are some considerations as you disciplinary action.
shape your companys social media
policies: If you determine that your companys
employment policies need to address
Employees free speech is social media use or they need
protectedWhen employees adjustment in this area, consider whether
complain about working too the following is addressed
many hours of overtime or being
overburdened with tasks and Employees social media
impossible deadlines, their right interaction that is subject to
to voice those complaints in the company policies;
office or on Facebook is a basic Who has responsibility for
right thats protected by our accessing social media for
Constitution recruiting actions and when;
with limitations: Employee Posting of professional references
comments posted on a social on social media sites or not;

Monitoring of employees Consult legal and insurance
electronic communications using counsel regarding the
company equipment; development and adoption of all
When or if social media access electronic communications
is allowed during working hours; policies.
When or if social media access Consult with your insurance
is allowed using company broker about coverages for
equipment; electronic and social media
Legal restrictions on use of concerns, particularly as they
social media regarding relate to unfair employment
discrimination, harassment and practices.
confidentiality of company Ensure your supervisors and
information; managers are informed about and
Investigation of claims made on trained on policies and
social media sites concerning procedures relating to employee
harassment or discrimination; use of electronic and social
Security procedures to address media.
employer-sponsored blogs;
Procedures to protect the For more information, visit the following
company logo or brand when online resources:
used on social media to promote
products and services; http://socialmediagovernance.com/
Employees authorized to
represent the company on social http://www.topRankblog.com/2011/12/20-
media sites; and social-media-dos-donts
Conduct, practices or http://jobsearch.about.com/od/employeeri
procedures used in social media ghts/a/fired-for-facebook.htm
that will result in disciplinary
action. http://getworksimple.com/blog/2011/12/0
5/social-media-the-workplace-the-dos-
donts
CONCLUSION
http://humanresources.about.com/od/car
As stated earlier, social media is a eernetworking/a/social_media.htm
powerful new communications tool that http://www.vistage.com/content-and-
allows us to share our lives and our connectivity/vistage-library/ten-dos-and-
thoughts with anyone anywhere. It has donts-of-social-media.aspx
reshaped the way we think, act and
relate to one another, but we should be http://www.sebrisbusto.com/publications/
careful how and when we do so. This is getEmploymentLawNotes.asp?employm
especially true for those in business who entlawnote_id=0512
choose to bring their company closer to
their employees and customers through
this communications medium.
Before you embark on this journey, take

some cautionary steps to protect
yourself and your company along the
way:

Bulletin No. IN 1
File: Insurance/Bonding
Insurance Punch List

INTRODUCTION be a complete list to cover every
possible situation of insurance with
Insurance is an integral part of a which contractors might be faced.
contractors business. The need is
Consult your insurance broker, attorney,
driven in part by contractual
and/or other business and insurance ad-
requirements as well as statutory
visors regarding your companys
obligations. Insurance can be costly so
specific needs. Items included on the
its important to understand how and
list, depending upon the particular
why premium dollars are spent. The
circumstance, location, or experience of
intent of this punch list is to assist
the individual contractor, may not be
mechanical contractors in indentifying
available in the insurance market at this
insurable risks supplemented with a
time.
general discussion of the types of
available insurance.
MCAA is in no way stating or
recommending that all of the clauses or
Its important to note that insurance is
provisions contained in this checklist be
merely a method to transfer the risk of
in every contractors policies. The matter
financial loss to another party in
of insurance is highly individualistic and
exchange for a premium. The overall
dependent upon the needs and desires
risk management process includes risk
faced in individual situations by
identification, analysis and control. As
individual members.
risks of loss are identified and analyzed,
various measures should be considered
We thank CNA and International Risk
and implemented in an effort to prevent
a loss from occurring. Although there Management Institute, Inc. for their
may be insurance available to fund a contributions to this bulletin.
loss, losses are disruptive to the For additional information, see the
business and can cause damage to the booklet entitled Insurance for
relationship between a contractor and Contractors by Walter T. Derk of Fred S.
customer. James Company, 1 North LaSalle
Street, Chicago, IL 60602.
The checklist at the end of this bulletin is
intended simply as a working checklist
to assist in discussions with your
companys insurance agent or
representatives. It does not purport to

INSURABLE RISKS is and is not covered by your casualty
insurance policies, there is no substitute
A contractors insurable risks generally for reviewing the policy contracts.
can be categorized as: Casualty insurance programs vary
considerably, and only the provisions of
1. Bodily injury or property damage your policies determine the scope of
to a third party arising out of the your insurance.
contractors acts, or the acts of
others for whom the contractor is Workers Compensation Insurance
responsible, i.e. subcontractors, and Employers Liability
vendors. This risk can arise from:
Workers compensation and employers
Work in progress liability insurance both apply to
Products employee injury or disease arising out of
Completed operations and in the course of employment. They
Operating mobile equipment are commonly provided under a single
Operating motor vehicles policy designed as follows:
Rigging
1. Part One. Workers Compensation
Design/engineering services
Insurance (WC)
2. Physical damage to property
Workers compensation insurance
owned or leased by the
provides for payment of statutory
contractor, including property of
benefits to employees who suffer
others in the care, custody or control
work related injury or disease.
of the contractor for example:
Benefits payable include the cost of
medical care, income, death and
Buildings
dismemberment. The insurer also
Business personal property promises to defend any claim or suit
(furniture, fixture, office against you for benefits payable
equipment, inventory) under the policy. Since payments
Contractors equipment are prescribed by law, there is no
Vehicles policy limit for workers
Installation materials and compensation.
equipment
2. Part Two. Employers Liability
3. Statutory obligations workers Insurance (EL)
compensation benefits
Employers liability applies to claims
The following are not insurable risks: brought by employees who are
excluded from state workers
Breach of contract (business compensation laws. It also applies to
risk) claims brought against you by the
Intentional acts (against public spouse of an injured employee.
policy) Under employers liability, the
insurer agrees to pay all sums you
CASUALTY INSURANCE legally must pay as damages
because of bodily injury to your
The following describes some of the employees.
major features of commercial casualty
insurance. To determine precisely what In contrast to Part One, the policy

has specific limits for employers Every state and territory exempts
liability. The standard limits are some employees from coverage
$100,000 bodily injury by accident, under its workers compensation
$100,000 per employee for disease laws. If such employees are
and a policy limit of $500,000 for injured, their sole recourse may
disease. These limits can be be to bring suit against you. To
increased for an additional premium. head off such suits you can
(Most umbrella liability underwriters make statutory benefits available
will require that the underlying to your employees who would
employers liability limit be at least not otherwise be entitled to
$1,000,000.) them, by adding a Voluntary
Compensation Coverage
3. Part Three. Other States Insurance Endorsement to your policy.
Standard WC & EL policies provide b. Longshore & Harbor Workers

insurance only in those states listed Compensation Act
in Item 3.A. of the information page
these are states with known The standard WC & EL policy
exposure. Part Three Other States excludes any federal workers
Insurance allows an employer to compensation laws or other
include coverage for states with no federal occupational disease
known exposure at the time of policy laws, so coverage for employee
issuance. These states must be injury claims made under federal
listed in Item 3.C. of the information compensation laws, such as the
page, and it is preferable that 3.C. Longshore & Harbor Workers
not list individual states. Instead, a Compensation Act, must be
blanket statement such as all states specifically endorsed to your
except North Dakota, Ohio, policy. This act can apply to
Washington, Wyoming and states almost any employee who works
listed in 3.A. is recommended. on or travels near navigable
waters. The act provides greater
Although temporary insurance is benefits than standard WC laws,
provided, you must still notify your so injured employees will likely
insurer at once if you begin to work choose to file a claim under the
in any state to which Part Three federal act rather than the state
applies. law.
4. Endorsements c. Stop Gap
The WC & EL policy can be There are several states that do

endorsed to amend the contract to fit not permit private workers
your specific needs. There are compensation insurance.
numerous endorsements available Referred to as monopolistic fund
which both extend and restrict states, they currently include
coverage. Three of the more North Dakota, Ohio, Washington
common endorsements are the and Wyoming. Employers must
following: purchase WC benefits through
the state. Employers liability is
a. Voluntary Compensation not provided by the state. If you
Endorsement are operating in any of these
states, you can add coverage via

a Stop Gap endorsement to and double time is excluded from
your WC & EL policy. If you only reportable payroll, provided that
operate in monopolistic states, you maintain records that
you can add the Stop Gap segregate the excess portion
endorsement to your general from the straight time wages.
liability policy.
b. Most workers compensation
Note Alternate Employer laws provide that a contractor
Endorsement shall be liable for WC benefits for
employees of their uninsured
This endorsement is beginning subcontractors. The contractor
to show up in customer will also be responsible for
insurance requirements and may paying premiums on the payroll
not be applicable. This of the uninsured subcontractor.
endorsement should be For that matter, if a contractor
considered when you are lending lacks proof of insurance for any
or borrowing employees. It subcontractor, the insurer can
serves to establish coverage automatically charge additional
under your policy for your premium to the contractors
employees while they are policy. Therefore it is essential
temporarily working for another that you have certificates of
employer. Conversely, if you are insurance evidencing WC
borrowing employees, you dont insurance on file before allowing
want to be liable for their WC subcontractor employees on
benefits and, therefore, should your jobsite.
be listed as an Alternate
Employer under the regular c. For contractors, payrolls are
employers policy. By example, if divided between classifications
you lease equipment to others for the various separate and
with an operator, you would add distinct construction operations,
the Alternate Employer provided you maintain payroll
endorsement to your policy. records adequate to permit such
Examples of borrowing division. Operations for which
employees include renting separate payroll records are not
equipment from others with an maintained must be assigned to
operator and hiring temporary the highest rated classification
employees from a temp agency. applicable.
In such cases, you should look
to the leasing companies to Auto Insurance
include you as an Alternate
Employer under their policies. The vast majority of commercial auto
insurance is written on the standard
5. Premium Business Auto Coverage Form. This
widely used policy has the coverage
A few comments regarding WC flexibility needed to respond to the
rating that may assist in your efforts owned and non-owned auto liability and
to minimize your WC costs. physical damage exposures of your
business. The following coverage
a. The basis of the premium is per explanations will help you tailor your
$100 of payroll. In most states auto insurance to fit your requirements.
the excess portion of overtime

1. Liability Insurance on your physical damage insurance
dollar. You should annually evaluate
Coverage is provided for sums you vehicle values in relation to your
are legally obligated to pay as a re- deductibles and physical damage
sult of an auto accident. The insur- premium. At what point you choose
ers obligation to pay is limited by a to discontinue your physical damage
combined single limit of liability for insurance depends upon how much
bodily injury and property damage, risk you care to assume for physical
subject to policy terms and damage.
conditions.
3. 3. Uninsured (UM) and Underinsured
The insurer also has the right and (UIM) Motorists
duty to defend an insured against
any claim or suit which potentially UM insurance provides you with
falls within the policy coverage. bodily injury coverage if you are in
Defense costs are paid in addition to an accident with an at-fault
the liability limit. uninsured driver. UIM insurance
responds when the at-fault driver is
Generally, a combined single limit of insured, but the liability limit is
$1,000,000 per accident is inadequate.
considered adequate and will satisfy
the underlying limit requirement of The coverage basics are relatively
most commercial umbrella policies. simple, however, the individual state
coverage variances are extremely
Consider deductible options when complex.
pricing your auto liability insurance.
You can use a property damage only UM/UIM is required in some states,
deductible, or property damage and and optional in others. Consideration
bodily injury deductible. for rejecting coverage should include
how vehicles are used (business
2. Physical Damage only or business and personal), and
the potential for duplicate coverage.
Physical damage to your vehicles is Most bodily injury claims will involve
generally provided via employees who will likely be covered
comprehensive and collision by workers compensation.
coverage. Employees may also maintain
UM/UIM under their personal auto
Collision coverage pays for loss to a insurance.
covered auto resulting from collision
with another object or the covered Ask your insurance representative
autos overturn. Comprehensive for assistance in evaluating your
coverage pays for damage to the UM/UIM exposures and state
covered auto caused by any peril requirements.
except collision, overturn, or a peril
specifically excluded. 4. No-Fault or Personal Injury
Protection (PIP)
Premium for collision and
comprehensive is based on vehicle Roughly half the states have
age and cost new. As vehicles age, enacted no-fault auto insurance laws
their actual cash value declines, which serve to compensate injured
thereby reducing the potential return

persons in auto accidents without a 6. Covered Autos
need to prove fault.
The Business Auto Policy provides a
In theory, these statutes provide great deal of flexibility in matching
benefits to injured persons without auto exposures (owned, non-owned
regard to negligence, and in and hired) and auto coverage. The
exchange, the law limits the injured flexibility results from the use of
persons right to sue. In fact, the endorsements and covered auto
extremely complex no-fault laws designation symbols.
vary greatly from state to state, as
each state adds its own unique slant The standard provisions of the
to the no-fault concept. Business Auto Policy only include li-
ability and physical damage cover-
Ask your insurance representative age. Other coverage such as UM,
for assistance in evaluating your no- no-fault, medical payments, etc.,
fault exposures and state whether mandated by state law or
requirements. voluntarily selected by the insured,
are provided by policy
5. Medical Payments (MP) endorsements.
Medical Payment insurance pays After appropriate coverage is de-

without regard to liability for medical termined, the autos which are sub-
and funeral expenses arising from ject to each coverage are identified
an auto accident. Covered expenses via the use of covered auto symbols.
must be incurred within three years. There are ten symbols, and each
symbol stands for a specific de-
The desirability of the coverage scription of autos. For example:
depends to a large extent upon the
legal status of your business Symbol 1 = Any Auto
(corporation, partnership, individual, Symbol 7 = Specifically Described
etc.) and the occupants of your Autos
vehicles. Symbol 8 = Hired Autos Only
Symbol 9 = Non-owned Autos Only
If you are an individual named Symbol 19 = Mobile Equipment
insured, MP insurance can, subject
to coverage provisions, apply to you Subject to Compulsory or
and your family members. However, Financial Responsibility or Other
if your business is a corporation or Motor Vehicle Insurance Law*
partnership, any coverage MP
provides for an individual and family Its important to note that some
has no applicability. symbols denote automatic coverage
for newly acquired vehicles, while
Your employees are specifically others require that new vehicles be
excluded from MP coverage since reported to the insurer within 30
they are covered under workers days. To the extent possible, you
compensation for auto injuries should seek the automatic coverage
arising out of their employment. MP symbols.
insurance may be desirable if
passengers are other than *Symbol 19 was added in response
employees (customers, guests, etc.). to changes in the definition of auto
under the commercial general

liability coverage form (CGL). The coverage. The occurrence policy
definition of auto was expanded to covers claims arising from injury or
include mobile equipment that is damage which occurs during the
subject to compulsory or financial policy period. Generally, the claims
responsibility laws. While the made policy covers injury or
operational use of the mobile damage that occurs after the
equipment is covered under the retroactive date and for which a
CGL, over the road use is not and claim is first made during the policy
must be scheduled under your auto period.
liability policy to avoid gaps in
coverage. The policy is basically divided into
three coverage parts, plus
7. Vehicle Classification Supplementary Payments (defense
costs):
With regard to correct premium de-
termination, make sure that your Coverage A Bodily Injury (BI) and
vehicles are properly classified. If Property Damage
your vehicles are parked at job (PD)
locations for the majority of the Coverage B Personal and
working day, service, the lowest Advertising Injury
rated truck class, is appropriate. Coverage C Medical Payment
Key elements of proper premium 1. Coverage A

development are vehicle cost new,
gross vehicle weight and vehicle ra- This coverage part is probably of
dius of operation. most interest to contractors as it
insures bodily injury and property
8. Conclusion damage to third parties arising
from:
Commercial auto insurance can be
complicated, particularly for multi- Premises and operations
state risks. Work closely with your liability
insurance agent to identify your Products and completed
optimum combination of auto operations liability
exposure, coverage and premium. Broad form property
damage liability
Commercial General Liability Policy Contractual liability
(CGL) Independent contractors
liability
The CGL policy provides broad Fire legal liability
coverage for damages you are
legally obligated to pay to third There are currently 17
parties arising from your acts or the exclusions under Coverage A
acts of others for whom you are and its important to have a
legally liable. general idea of what those
exclusions are:
There are two forms of the CGL
policy in use today, occurrence a. Expected or Intended Injury
and claims made. The major b. Contractual Liability (see
difference between the two is the below)
trigger, or means of activating

c. Liquor Liability in the monitoring, testing or
d. Workers Compensation clean up of pollutants, the
(insured under a separate standard pollution exclusion
policy) affords some limited off-premises
e. Employers Liability (insured protection for injury or damage
under a separate policy) arising from completed
f. Pollution (see below) operations, ongoing operations
g. Aircraft, Autos, and (provided you do not bring the
Watercraft (insured under pollutant or contaminant to the
separate policies) site), and accidental discharge of
h. (Transportation of) Mobile fuel or lubricants from mobile
Equipment (refer to auto equipment. There are assorted
insurance) endorsements that an insurer
i. War can use to further restrict or
j. Damage to Property (see eliminate this limited protection.
below) There are also exclusion
k. Damage to your Product endorsements specific to
l. Damage to your Work asbestos, mold, and silica. The
(applies to completed definition of pollutant and
operations; exception for contaminant under the CGL
subcontractors work) policy is very broad consider
m. Damage to Impaired the intended use of the systems
Property or Property Not you are installing or the materials
Physically Impaired and products used in your work.
n. Recall of Products, Work or If there is exposure for
Impaired Property discharge, release or escape of
o. Personal and Advertising pollutants or contaminants
Injury (refer to Coverage B) during the course of construction
p. Electronic Data or after a system is put to its
q. Distribution of Material in intended use, you may want to
Violation of Statutes consider purchasing a separate
(against public policy) contractors pollution liability
policy.
Exclusions are intended to further
define coverage and in some cases 3) Damage to Property exclusion
serve to provide limited coverage. this excludes property
Following is some additional damage for six types of
information for your consideration: property during the course of
construction:
1) Contractual liability exclusion
there is an exception for the 1. Property you own, rent or
assumption of tort liability of occupy
another party with respect to 2. Premises you sell, give
third party BI and PD. This is the away or abandon
provision applicable to indemnity 3. Property loaned to you
and hold harmless agreements 4. Personal property in your
contained in many construction care, custody or control
contracts, equipment leases, etc. 5. That particular part of real
property on which you or
2) Pollution exclusion with the any contractors or
exception of contractors involved subcontractors working

directly or indirectly on your
behalf are performing 2. Coverage B
operations
6. That particular part of any This coverage protects you from
property that must be claims arising from Personal and
restored, repaired or Advertising Injury Liability.
replaced because your Coverage is triggered by an
work was incorrectly offense committed during the
performed on it (often policy period (as compared to an
referred to as the faulty occurrence under Coverage A).
workmanship exclusion) Covered offenses include:
Generally speaking most of False arrest, detention, or

these exposures can be imprisonment
insured under builders risk, Malicious prosecution
installation floater, or other Wrongful eviction
forms of property insurance. Wrongful entry
With respect to care, custody Invasion of privacy
or control, consider adding a Libel or slander of a person,
rigging liability endorsement organization, product, or
to your CGL policy if you are service
lifting property of others you Advertising infringement
can also include rigging (including Internet ads)
liability under your installation
Copyright infringement in
floater, but it will only provide
advertisements
coverage for physical damage
Consequential bodily injury
to the property, not loss of use
arising out of any of these
which is provided under the
offenses is considered
CGL.
personal and advertising
injury
4) Professional liability the list of
exclusions noted above does not
There are currently 16 exclusions
include professional liability,
for this Coverage B. Most of the
however, it is not the intent of the
exclusions pertain to knowledge
CGL to insure damages arising
that the offense would violate the
from professional services you
rights of another. An exclusion to
may provide to others as an
note is personal and advertising
engineer, architect or surveyor,
liability assumed under contract.
or for independent professional
Bodily injury and personal injury
services you may hire for
in an insurance contract have
engineering, architectural or
distinct definitions. By comparison,
surveying services in conjunction
attorneys have a tendency to use
with your work. Accordingly,
personal injury in lieu of bodily
most contractor CGL policies
injury and this could create a gap
include an exclusionary
in coverage since personal injury
endorsement for professional
liability assumed under contract is
liability. The exclusion should
excluded under the CGL. Unless
make an exception for means
your insurer agrees to delete the
and methods. Separate policies
contractual liability exclusion for
are available for professional
personal and advertising injury,
liability.

make sure that the indemnity and Your insurer also has a duty to
hold harmless agreements you are defend an additional insured if
accepting include bodily injury, you have a contractual obligation
and not just personal injury. There to provide a defense. Subject to
is also a total pollution exclusion to policy terms and conditions, the
preclude any possibility of claims defense of an additional insured
under Coverage B. will either qualify as Supplemental
Payments or as damages.
3. Coverage C Defense costs paid as damages
are within the policy limit which
Medical Payments coverage pays serves to reduce your limit of
the medical expenses of others reliability.
sulting from bodily injury caused by
an accident on your premises or The insurers obligation to defend
arising from your operations. an additional insured and to pay
Payments are made without regard Supplemental Payments ends
to fault, which means that the when the limits of insurance have
injured party does not have to been exhausted by payment of
prove negligence. The expense judgments or settlements.
must be incurred and reported
within one year of the accident. The Limits
purpose of the coverage is to allow
an insured the opportunity to cover The following chart summarizes
medical expenses incurred by a the six policy limits under the CGL
member of the public or customer in policy, including an indication of
a timely manner. Such a gesture typical limits. There is no
could serve to avoid litigation. guideline for selecting adequate
limits of insurance, but it is
Exclusions to this coverage part common practice to purchase a
include injury to the insured, the primary commercial general
insureds employees, liability per occurrence limit of
subcontractors, persons covered by $1,000,000. In some cases,
workers compensation or similar purchasing a limit of $2,000,000
laws, and persons injured in the will result in significant savings in
course of athletic activities. your umbrella policy premium
possibly enough to recognize a
Supplementary Payments net reduction between the two
Coverage A and B policies.
In accordance with the insuring

agreements, your insurer has an
affirmative duty to defend claims
made against you for bodily
injury, property damage, and
personal and advertising injury
covered by the policy. Defense
expense is paid as
Supplementary Payments, which
means the payments are in
addition to the policy limits.

Limit Type Typical Description
Limit
General Aggregate Limit $1,000,000 This is the most the policy will pay for
the sum of medical expense, bodily
injury and property damage (other than
damages under products-completed
operations), and personal and
advertising injury.
Products-Completed $1,000,000 This is the most the policy will pay for
Operations Aggregate Limit bodily injury and property included under
products-completed operations.
Personal and Advertising $1,000,000 Subject to the general aggregate, the
Injury Limit most the policy will pay for any one
person or organization.
Each Occurrence Limit $1,000,000 Subject to the general aggregate and the
products-completed operations
aggregate, this is the most the policy will
pay for bodily injury, property damage,
and medical payments arising out of any
one occurrence.
Damage to Premises $100,000 Subject to the occurrence limit, this is
Rented to You the most the policy will pay for fire
damage to premises you rent ($100,000
is standard, can be increased).
Medical Expense Limit $5,000 Subject to the occurrence limit this is the
most the policy will pay for all medical
expenses incurred by any one person.
6. Conclusion Umbrella Liability Insurance
Commercial general liability is a An umbrella is a blanket policy used

valuable part of a contractors
insurance portfolio. Insurers to provide additional limits of liability
have many endorsements they above several underlying primary
can use to both expand and policies, and may also provide
restrict the standard CGL policy, broader coverage than what is
so its very important to work provided by the primary liability
closely with your insurance and insurance. Typical lines of
legal advisors to ensure that insurance that are scheduled under
your policy is structured properly an umbrella policy include:
to cover your operations as well
as the liabilities you are Commercial general liability
assuming under contract. Keep Automobile liability
in mind that separate policies Employers liability
may be required to cover Foreign liability
exposures involving professional
services and pollution liability. By contrast, excess liability
policies provide additional limits of

liability above a single policy. These scheduled underlying policies
excess liability policies typically do and your umbrella policy have
not provide broader coverage and the same effective dates.
merely follow the terms and Without concurrent policy dates,
conditions of the underlying policy. you may end up with gaps in
Excess liability policies are coverage.
commonly used above an umbrella
policy to achieve higher limits. 5) Premium for an umbrella policy
is generally based on a
As a matter of reference, certain percentage of the scheduled
types of policies cannot be underlying policy premiums. The
scheduled under an umbrella. umbrella premium can be a flat
Examples include professional cost or subject to audit.
liability, pollution liability, directors
and officers, and employment- 6) Conclusion
related practices liability. Generally
speaking, reasonably high limits The umbrella policy is a good
can be purchased within the way to increase your liability
individual policy. insurance protection. Selection
of limits should be based in part
There is no insurance industry on your assessment of
standard for umbrella forms no operational liabilities such as the
advisory organization dictates the nature and volume of work, how
policy wording or scope of much and what type of work you
coverage. At a minimum the scope subcontract, business conditions
of coverage under your umbrella in the states in which you
should be as broad as your operate, the size of your fleet,
scheduled primary policies. etc.
Following are some additional
considerations: Bear in mind that no casualty
insurance program is without
1) The umbrella should drop down exclusions. Umbrella coverage is
as primary insurance in the generally broad, but not all
event limits of insurance on your inclusive. In fact, umbrella
underlying policy are exhausted policies include many of the
by payment of judgments or same exclusions contained in
settlements. your scheduled primary policies,
so dont expect the umbrella to
2) Defense expense should be in fill your need for professional,
addition to the policy limit. pollution, aircraft, etc.
3) In cases where you have a loss Owner/Contractor Controlled

that is not covered by a Insurance Programs
scheduled underlying policy, but
is covered by the umbrella, you No discussion of contractor
will be responsible for a insurance can go without
deductible or self-insured mention of wrap-up type
retention, which is typically insurance plans. These plans
$10,000. are a method to provide owners
and contractors with reasonably
4) It is important that your broad protection for liabilities

arising from construction PROPERTY INSURANCE
operations on designated
projects. They are touted as an When evaluating contractor property
advantage for subcontractors but exposures it is necessary to distinguish
successful participation is between property at fixed locations as
dependent on several factors compared to property that is intended to
including: move from location to location, or is in
the course of construction. Commercial
Agreed-upon terms for property insurance is designed for fixed
insurance credits locations, which include the facilities
Understanding any obligation occupied by the contractor and the
for deductibles or self-insured contents contained within. By
retentions comparison, contractors equipment is
Coordinating provisions under insured under a floater policy, as are
your own insurance program materials and equipment intended for
to supplement deficiencies or installation. These floater policies
insolvency of insurance include coverage for the transportation
provided under wrap-up type of the equipment and materials,
plans whereas a commercial property policy
has very limited coverage for property in
Insurance typically provided transit or at another location.
under a wrap-up type plan is
workers compensation, general Commercial Property Insurance
liability and umbrella liability.
Some plans, particularly This is the form of insurance used
residential work, may only for buildings and contents. There are
provide general liability and limitations with respect to property
umbrella liability. Builders risk outside of the building, so if you
may or may not be included in have property in storage trailers or in
the wrap-up. open yards, check with your
insurance advisor to see which type
Most contractor general liability of policy best covers the risk
and umbrella liability policies commercial property, contractors
include an endorsement that equipment, or installation floater.
excludes operations and
completed operations for work 1. Perils Insured
performed under wrap-ups. It is
important to negotiate excess Property is insured against risks
and difference in conditions of direct physical loss for perils as
(DIC) exceptions into these defined in one of several causes
exclusions so that your policies of loss forms. The broadest form
can respond in the event there is is the special causes of loss
a loss that is not covered by the form, which covers most perils
wrap-up but is covered by your including theft. The perils of
insurance, or in the event the earthquake and flood are
limits of insurance under the excluded. Coverage may be
wrap-up are exhausted by available by endorsement to the
payment of claims these plans property policy or through
have a single limit that is shared purchase of difference in
by all the participants. conditions policies. The National
Flood Insurance Program is

another option for flood. is the amount of insurance that
you will need to purchase.
2. Replacement Cost and
Depreciation 3. Coinsurance
Any loss adjustment begins with Coinsurance is a common

determining the cost of replacing provision in property policies and
the damaged property. If your requires the policyholder to
coverage is written on a insure their property to a
replacement cost basis, the specified percentage of the total
policy will pay the cost to replace value, generally 80%, 90% or
your building or contents with a 100%. In the event of a partial
new building or contents of the loss, if the property is
same type. If your coverage is underinsured, there will be a
written on an actual cash value penalty in the loss recovery.
basis, the adjuster will reduce Coinsurance does not affect loss
the replacement cost by a recovery in the event of a total
reasonable allowance for loss.
physical depreciation. Note
under a replacement cost policy, 4. Ordinance or Law Coverage
if you do not replace the
damaged property, the loss will Certain building codes,
be adjusted on an actual cash particularly in large cities, require
value basis. that all new construction be of
fire resistive materials.
Do not confuse physical Construction with this type of
depreciation for insurance with material may be considerably
depreciation for tax purposes. more expensive than your
Generally speaking, property in present frame or brick building. If
active use will not depreciate your building is damaged to a
more than a maximum of 50% to certain extent, the code in your
60%; this depreciation is taken city may require you to demolish
over the reasonable life of the your entire building, and, if you
property. Tax depreciation is wish to rebuild, to rebuild with
almost always taken as fast as fire resistive materials. The
possible, and the asset may be commercial property policy
completely used up from a tax covers damage caused by the
depreciation standpoint. Using fire or other peril, but it does not
the latter depreciation can cause cover the undamaged portion
disastrous underinsurance and that must be demolished. Using
result in substantial coinsurance the Ordinance or Law
penalties. endorsement you can add a limit
of coverage for the demolition
Regardless of the valuation and a limit for the increased cost
basis, you will not be able to of construction.
collect more than the limit of
insurance. 5. Green Building Insurance
The difference in premium Some insurance companies now

between replacement cost offer coverage to rebuild a
valuation and actual cash value building to higher environmental

standards after a partial or total duplicating your records
loss. monthly and storing the
duplicate copy at another
6. Items Not Insured location.
Property policies exclude items

such as underground piping, b. Valuable Papers Insurance
land and paved surfaces that
would not usually be affected by Tax records, engineering
a loss. The value of this type of notes, estimate sheets, plans
item should be excluded from and many other records of
your building insurance information may be insured
valuation. Foundations are also by this type of insurance.
excluded. If you purchase You are insured for the cost
earthquake insurance consider of redeveloping the
endorsing your policy to include information contained on the
the building foundation. stored record, almost
regardless of the manner in
7. Valuable Papers and Records which the record was
destroyed or lost.
The commercial property policy
provides limited coverage for 8. Time Element
valuable records. It covers only
the cost of the paper, plus the When a building is damaged by a
cost of writing or typing the covered cause of loss and cannot
information on the paper. The be occupied for a period of time,
major loss, the cost of recovering the insured may suffer a loss of
or restoring the lost information, income and incur additional
is not insured. Separate expenses for setting up temporary
coverage can be purchased for facilities. These damages can be
the following: insured by adding business
income or extra expense
a. Accounts Receivable insurance to your commercial
property policy.
If your records of accounts
receivable are destroyed and Generally speaking contractors
you deal with a large number will not suffer a loss of income
of clients, you may have because operations will continue.
difficultly ascertaining the Loss of rental income may be an
amount that each client owes exposure for owned buildings with
you. Therefore, you may tenants. Otherwise, the risk of
have difficulty in collecting on loss a contractor might consider
these accounts. The amount insuring is extra expense.
you are unable to collect may
be insured under accounts 9. Cost Saving Possibilities
receivable insurance. The
cost of this coverage can be If you own more than one
materially reduced by storing location, look into multiple
your records in a special fire location rating or blanket
resistive container. The cost coverage.
may also be reduced by

A special causes of loss form of these objects are owned by
may be more insurance than you, located in your part of the
you need for certain types of building, or are maintained by
property consider you, you should consider
purchasing fewer covered equipment breakdown
perils under an alternate insurance.
causes of loss form.
Inland Marine
If you have property that you
will not replace if damaged, Inland Marine refers to forms
insure for actual cash value of insurance that cover
rather than replacement cost. property that is moving over
land. Contractors equipment,
Consider large deductibles. installation floater and
builders risk are examples of
Do not purchase insurance on inland marine insurance that
property such as glass where cover common contractor
there is little, if any, risks.
catastrophic exposure.
1. Contractors Equipment
Talk to a competent fire safety policies provide broad
engineer before constructing coverage for a
your building. contractors tools and
equipment wherever they
Equipment Breakdown Insurance may be located, including
(formerly Boiler & Machinery) in transit. The policy can
also include coverage for
Specialized coverage is rented or borrowed
necessary on boilers and other equipment.
pressure vessels, because
explosion of these vessels is ex- 2. Installation Floater
cluded under most property insures materials and
insurance policies. It is equipment while in
necessary on certain types of transit, while in temporary
compressors, motors and other storage and while
machinery because these awaiting installation at the
objects are subject to types of project site. Materials for
losses that are not included a particular project that
under the property policies. are stored at your facility
Mechanical breakdown, short can also be insured
circuit, and so on, are excluded under the installation
by property policies. Specialized floater, but may require
coverage is also necessary on an endorsement to the
this type of equipment because it policy. Coverage includes
provides for expert examination property of others in your
of these objects on a regular care, custody or control.
basis; the inspection helps to
prevent breakdowns, explosions 3. Builders risk is generally
and other losses by uncovering arranged by the owner or
problems before they result in a general contractor to
loss. Generally speaking, if any insure property in the

course of construction
and may include Crime insurance coverage
subcontractors as includes the following:
insureds under the policy.
Employee dishonesty
Confirm that you are included coverage
as a Named Insured on the Forgery or alteration
policy, and verify covered coverage
perils and deductible Money and securities
obligations. coverage
Money orders and
Builders risk policies dont counterfeit paper
generally include coverage currency coverage
for property while in transit Theft, robbery, burglary,
or in temporary storage, so or safe burglary coverage
you may still need to rely on for property other than
your installation floater for money and securities
certain coverage. Computer fraud coverage
Funds transfer fraud
Confirm that any insurance
placed by the owner or Theft of property and money
general contractor protects is probably the largest risk to
you for property after it is a contractor. Most of your
installed (prior to property is insured for theft
acceptance), as well as under contractors equipment
before it is installed. and installation floater
policies, and if you use a
Insurance on property special causes of loss form
being tested following for your commercial property
completion of construction policy, your contents are
is vague and sometimes insured for theft as well.
difficult. Discuss this Most policies exclude money
exposure with your and securities and theft by
insurance advisor and the employees, so the crime
owner. coverage of most interest will
likely be employee
If you are working in an dishonesty.
existing building and are
relying on the owners Employee dishonesty
property insurance, you coverage is written with a
must have your name limit per loss, regardless of
added to the owners the number of employees
insurance policy as a involved. Loss may be the
Named Insured, or get a result of bookkeeping
letter from the owner manipulation, forgery of
relieving you of checks, misappropriation of
responsibility for damage materials, collusion with
to the owners property. suppliers, etc. Coverage is
generally written to cover all
Crime Insurance employees, although it may

be possible to insure Checklists are also helpful to the
specified employees. agent/broker who currently has
construction accounts or is attempting to
It is important to note that produce such an account. By using
any dishonest act of an checklists to analyze and review a
employee which comes to current clients insurance program on a
the knowledge of regular basis, numerous additional
management (even one coverages can be brought to the clients
committed prior to the current attention for consideration. Using
employment) immediately checklists to properly review the
cancels employee dishonesty insurance program and offer coverage
insurance for future acts of suggestions during the initial meeting
that employee. If you want to with a prospective client would seem to
give an employee a second enhance the probability of the
chance, you must first get the agent/broker producing the account by
permission of the insurance
reinforcing the agents knowledge and
company.
professionalism. The use of checklists is
also a good quality control procedure,
Services contracts commonly
and completed checklists can provide
require that the property
valuable documentation of coverage
owner be included as a loss
payee under the contractors recommendations and the insureds
employee dishonesty decisions.
insurance. Be sure to have
Checklists also facilitate communication
your agent review such
between the risk manager/insurance
requirements as your policy
buyer and the agent/broker by providing
may require further
a common base from which these
amendment to provide
people can work in designing the
coverage at a client site.
insurance program. When using a
The following section is reprinted from checklist during the insurance review,
Construction Risk Management with use this top ten list of questions to
consider:
permission of the publisher, Interna-
tional Risk Management Institute, Inc.
Original printing, November 1984. 1. What are my exposures to loss?
2. How much risk am I willing to

CONSTRUCTION assume myself with respect to my
INSURANCE exposure?
CHECKLISTS
3. Is this coverage presently carried for
The checklists offer valuable assistance
this exposure?
to the construction risk manager/
insurance buyer in properly evaluating
the insurance program of his or her firm. 4. If this particular form of coverage is
not currently carried, should it be?
Checklists aid in identifying and
evaluating the loss exposures of the firm
and enumerate various insurance 5. If coverage is currently provided,
coverages and risk management can/should coverage be reduced or
dropped?
techniques which can be used to avoid
unintentional gaps in coverage. 6. If it is desirable to purchase this

coverage, what will be the cost?
7. Is it advisable to utilize deductibles
and, if so, what would be the effect
on cost?
8. What areas of exposure to loss
remain for which no insurance is
presently carried?
9. What alternative risk management
techniques should be used in
conjunction with those exposures?
10. Do I have the right insurance broker
and carrier who understand
contracting risk and can help answer
these questions?
While these checklists are intended to
be comprehensive, they are not all-
inclusive. There may be special forms
for coverage not listed which may have
special application to a particular
construction operation. Individual
exposures do vary, and the insured
should be careful when selecting limits,
deductibles, and the like based on the
organizations loss history and equity
position.

IRMI GENERAL LIABILITY COVERAGE CHECKLIST
To navigate between form fields, use TAB and SHIFT+TAB, only.

Please do not use the arrow keys as it may fill in a form field you have not selected.
Insured
Insurer
Policy Period
Completed by
Date
Check All That Apply Recommendations/Comments
ENTITIES/OPERATIONS INSURED
Named insured
First named insured
Other named insured(s)
Automatic insureds (list)
Additional insured(s) (list)
Blanket additional insured

endorsement
Scheduled additional insured

endorsement
Additional insured status for completed

operations
Joint ventures
LIMITS OF INSURANCE
Occurrence
General aggregate $
Aggregate per project $
Aggregate per location $
Personal/advertising injury $
Copyright 2012 International Risk Management Institute, Inc.

1 of 8
Medical payments $
Damage to premises rented to you

$
Products/completed operations
aggregate limit $
DEDUCTIBLES
Each claim bodily injury $
Each occurrence bodily injury $
Each claim property damage $
Each occurrence property damage

$
Each claim property damage/ bodily

injury combined $
Each occurrence property damage/

bodily injury combined $
COVERAGE DETAILS
Insuring Agreement
Trigger
Occurrence
Claims-made
Defense
In addition to limits
Defense of indemnitees
Coverage territory
U.S. territories and possessions,

Puerto Rico, Canada
International waters and airspace

enroute to and from
World-wide for products liability

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World-wide for business travel
World-wide for Internet liability
Owned watercraft liability
Description
Length
In rem coverage
Other insuranceexcess over policy with

additional insured status
Built into policy
By endorsement
Waiver of subrogation
Blanket coverage
Pollution liability
Standard broad form exclusion
Total pollution exclusion

endorsement
Total pollution exclusion with hostile

fire exception
Total pollution exclusionhostile fire

and building heating equipment
exception
Pollution coverage extension

endorsement
Named perils coverage
Short-term pollution event coverage
Designated pollutant coverage
Product withdrawal expense coverage
Electronic data liability coverage

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Employee benefits liability
Stop gap employers liability
Contractual liability coverage for

personal injury perils
Products/Completed Operations
Coverage for joint ventures
Current
Past
Products/completed operations redefined
Policy Exclusions
Exclusionary endorsements
Explosion, collapse, underground

property damage (X, C, U)
Personal/advertising injury
Amendment of liquor liability

exclusion
Amendment of liquor liability

exclusion with scheduled exception
Medical payments
Employment-related practices
New entities
Employees as insureds
Intercompany products suits
Restrictive definition of insured

contract
Products-completed operations
hazard
Designated work or products

4 of 8
Damage to/from subcontractors work
Mold
Silica
EIFS
Prior work
Terrorism
Exclusion of certified acts of

terrorism
Exclusion of non-certified acts of

terrorism
Coverage limitation (nuclear,

biological, chemical; aggregate
limit)
Specify
OTHER PROVISIONS
Notice of cancellation
Insurer time requirement days
Nonrenewal notice days
Material policy change notice

days
CLAIMS-MADE CONSIDERATIONS
Extended reporting period (ERP)
Automatic 5-year available
Supplemental may be purchased
Available on insured cancellation
Available on insurer cancellation
Aggregate reinstatement option

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ERP for specific accident, product,

work, location
Retroactive date
Concurrent with first claims-made

policy
Exclusion of specific accident, product,

work, location (laser beam
endorsement)
RATING/PREMIUM CONSIDERATIONS
Exposure basis
Payroll
Sales
Review intercompany sales
Cost
Units
Experience rating
Credit modifier
Debit modifier
Schedule rating
Credit
Debit
Dividend
Deductible credit
Credit(s) for coverage limitations(s)
Review A rates
Immature claims-made discount

6 of 8
Premium payment schedule
Scheduled payments
Audits
Semi-annual
Quarterly
Monthly
Retrospective rating
Loss limitation
Excess loss premium factor
Basic
Tax multiplier
LCF
ASSESS NEED FOR SEPARATE POLICIES
Automobile
Business automobile policy (BAP)
Garage liability
Garagekeepers liability
Craft
Aircraft
Watercraft
Professional liability
Professional/E&O liability
Fiduciary liability
Directors & officers liability

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Protective liability
Railroad protective liability
Owners & contractors protective

liability
Principals protective liability
Other miscellaneous liability
Bailee liability
Liquor liability
Pollution liability
Products recall
Foreign liability
Employment practices liability
Electronic data/Internet liability

8 of 8
Bulletin No. IN 2
Risk Management
FORMAL POLICY IMPORTANT basic principles of risk management in mind.

Stated simply, any risk management program
The key to establishing concrete goals should:
and formalizing a program to protect the as-
sets of your firm is a written statement of com- 1. Identify and evaluate all sources of sig-
pany policy on risk management. Depending nificant risk of loss.
on the structure of your organization, a num- 2. Eliminate or minimize such risk wherever
ber of executives may be involved in devel- possible.
oping this policy. It might, for example, be
prepared by the insurance manager, reviewed 3. Self-assume a portion of the remaining
by the chief financial officer, and approved by risk within established guidelines.
the board of directors. 4. Insure against loss only in excess of the
self-assumed amount or where required
Your risk management policy should be
by law or where insurer services are
short and uncomplicated and establish broad
needed.
principles rather than specific courses of ac-
tion. It should leave sufficient leeway for the The question of whether or not you
person who interprets it to exercise discretion, should include dollar amounts in your corpo-
use initiative and develop judgement in de- rate policy, i.e., specify maximum retention of
ciding what should be done in a particular sit- self-insurance figures, should be given seri-
uation. This will allow the individual ous consideration.As a general rule, your writ-
responsible for carrying out the program the ten statement of policy should set forth the
latitude he needs to function effectively; but at types and levels of risk to be assumed, those
the same time, establish a framework within to be formally self-insured, and those to be
which company objectives can be achieved. transferred to insurance companies.Top man-
As your company policy is written, keep the agement should establish the maximum
1
Insurance/Bonding
amount of any loss the firm is willing to ab- gram. Specific instruction for reporting
sorb without insurance.This amount may vary losses, handling claims, and submitting
depending upon the particular line of insur- other reports to the risk manager should
ance involved. If your firm is involved in oper- be included.
ations for which placing insurance coverage
2. To provide a composite reference sum-
is difficult, and maximum retention have been
marizing all of the insurance coverages
set forth in corporate policy, the risk or insur-
in force. If copies of the insurance man-
ance manager may have to request specific
ual must be distributed to a large number
authorization to exceed those established re-
of locations, you may want to modify it
tention limits. Drug manufacturers, for exam-
somewhat. In this case, a summary of
ple, have to contend with an unstable Product
coverages and reporting instructions for
Liability insurance market.They may be forced
each location could be distributed only to
to accept larger deductibles or higher rates,
the location concerned.
or both. A risk manager limited by outdated
retention amounts could be locked into an un- At first glance, compiling a manual of this
desirable insurance program. magnitude may appear to be a gargantuan
task. If you dont have one now, it obviously
ASSIGNMENT OF RESPONSIBILITY cant be put together overnight. But you can
begin with little effort. One risk manager told
An essential part of any risk manage- us, for example, that he began by simply gath-
ment policy is the assignment of responsibil- ering together existing insurance memoranda,
ities. In many firms, the overall authority for job descriptions, and field procedure directives.
risk management falls to the financial vice
One point we should emphasize here: It
president or treasurer. In fact, he may admin-
is essential that your insurance manual carry
ister the risk management program himself.
the weight of top managements endorse-
Actually, the title, and the duties of the person
ment. In many cases, the manual will be di-
responsible for risk management vary con-
rected to executives high on your firms
siderably. In many companies the insurance
organization ladder, perhaps to individuals at
manager handles all of the risk functions.
the helm of separate profit centers. The im-
portance of proper field administration of their
INSURANCE MANUAL task management responsibilities must be
Many firms find that an effective tool for made clear to them.
the implementation of their corporate policy
on risk management is an insurance man- ANNUAL REPORT
ual. In fact, the risk management policy state-
Another effective administrative tool is an
ment often becomes a part of the insurance
annual report prepared by the risk manager
manual. This manual, most effective when in
for the information of top management. This
loose-leaf form, has two basic purposes:
report should restate corporate policy, give a
1. To inform operating management how brief description of current insurance cover-
the risk management program affects age, and outline developments occurring
their operating areas and what their re- since the last report that could affect insur-
sponsibilities are for carrying out the pro- ance planning.
2 IN 2
Insurance/Bonding
In addition, the annual report should in- For example, while making a jobsite in-
clude a summary of losses for the year, a spection, using your own diagram as a sort of
comparison of current costs and exposures road map, you may see expensive material-
with prior insurance costs, projected budgets handling equipment. Later you learn that your
and plans, problem areas, such as particular company is leasing this equipment and has
products that are generating a serious num- assumed liability for damage to it, and you
ber of claims, exposures for which insurance hadnt been aware of this exposure.
has not been purchased, and any general rec-
ommendations for the use of larger de- ACCURATE LOSS INFORMATION VITAL
ductibles, consideration of self-insurance,
major loss prevention installations, etc. Of all the records for which you may be
responsible, probably none is more important
What records do you need? There are than your loss records. One function these
no hard and fast rules, but consider records records perform is to alert you to danger spots
necessary if they accomplish any of the fol- in your operations. By tracing accident pat-
lowing: terns, you may find a single source of trouble
1. Enable you to measure an exposure and for, say, a high frequency of Compensation
determine whether or not a need for in- claims within your organization. Zeroing in on
surance exists. loss prevention techniques for this problem
area could improve your experience modifi-
2. Identify the kind, amount, and term of in-
cation or retrospective rating costs.
surance coverage you buy.
Another result of properly maintained
3. Measure the effectiveness, in terms of loss records could be your decision that a cer-
losses covered and not covered, and the tain technique, such as retrospective rating or
cost of your program. use of a larger deductible would be to your ad-
4. Help you to maintain loss and accident vantage. Or perhaps your loss record would
prevention activities. indicate that you should self-insure a particu-
lar exposure. One firm, for example, had al-
REVIEW OF EXPOSURES ways carried Collision coverage on its fleet of
30 trucks without a second thought. After a re-
To list all the possible exposures to loss view of their seven-year loss history, they be-
that you firm has, of course, would be an al- came convinced they could save money by
most endless project. You may want to begin self-insuring this exposure.
with a review of the basic exposures faced by
practically all firmsautomobile losses, lia- Another benefit of having your loss
bility claims, Workmens Compensation oblig- records at your fingertips is the leverage you
ations, damage to property, etc.Your next step have in negotiating with your insurance com-
is to identify any unusual exposures. One in- pany. If your loss experience is good, its up
surance manager we talked to suggests that to you to see to it that youre getting what
you develop this information by means of a youre entitled to, and put on the pressure for
flow diagram, charting the course of your a reduction in premiums.
companys products from research and de- Along the same line, if you know the cur-
velopment to the ultimate consumer. rent status of reserves that your insurer has
IN 2 3
Insurance/Bonding
established for Compensation and Liability fully, compare amounts of paid out claims and
claims, you can question any that seem high. reserves against the data provided by your in-
Your loss experience, and premium costs, are surance company.
based on figures that include these reserve
amounts. If theyre out of line, you could be PROPERTY LOSSES
paying higher premiums than you should.
To record property losses, you will have
SCREEN RECORDS to rely more on your own resources.
Remember that the primary function of loss
Dont make the mistake of failing to main-
data is to alert you to exposures. So you will
tain adequate loss records because you feel
want to record certain losses even if not in-
the information you need is always available
sured, whether because they fall within a de-
from other sources. If you receive computer
ductible or because they are due to a
printout loss runs from your insurance com-
noninsured peril. Keeping track of all losses is
panies, hold on to them, set up your own files
impractical; so, you should establish a mini-
from these records. If loss runs are not made
mum amount for recorded losses.
available to you as a matter of course, ask
your insurance representative to provide you The minimum you set up should con-
with the loss information you need. template frequency as well as size. For ex-
ample, dont record only those losses in
On the other hand, remember that keep-
excess of a deductible. You may never learn
ing too many records may be as disastrous as
of a number of losses which, in the aggregate,
not keeping enough, being overwhelmed with
total more than your corporation expects to
superfluous loss data can detract from the es-
assume. Such knowledge could cause you to
sential information on which you should be
change your deductible.
concentrating. Unfortunately, the computer
loss runs you receive from your insurance What information should you include in
companies may be far too detailed, listing all your record of losses? Property loss data can
claims filed regardless of size. be made most effective simply by answering
these questions:
You should be concerned not only about
the nature of the loss data provided by your 1. What was the cause of the loss?
insurers, but also about its accuracy. A seem-
2. What was the amount of the loss?
ingly insignificant coding error or one extra
digit in a loss reserve could have a most ad- 3. Was the loss insured or uninsured? If it
verse affect on your premium costs. So, if you was insured, was coverage adequate to
do think it necessary to review individual satisfy company policy?
claims, you will want the data presented in a 4. Can recurring losses be eliminated?
manner that will enable persons familiar with
the cases to substantiate the entries.
HANDLING CLAIMS
Where Workers Compensation insur-
ance is involved, another source of loss infor- Be sure that divisions or branches are
mation is bureau data used to compute your advised how to report losses and potential
experience modification. Check this out care- claims.Your insurance manual should include
4 IN 2
Insurance/Bonding
specific instructions as to persons responsi- these objectives are reduced to writing. They
ble for reporting a loss, what size losses can be framed within the basic, simple princi-
should be reported, to whom the report is ples of risk management: identification, elim-
made, on what form, steps to be taken to pre- ination, minimization, self assumption and
serve property, authority to utilize local repair insurance of risk.
and salvage sources, etc.
The second step is to provide the mech-
anism that will translate these generalities into
SUMMING UP actual operation. Responsibilities should be
clearly defined. Primary to making the pro-
Handling risk, regardless of the size of
gram work, of course, is the person respon-
your company, is a demanding responsibility.
sible for its execution. His technical
We do not pretend that the operational guide-
qualifications and his ability to utilize the prin-
lines we have suggested in this bulletin en-
ciples set out in corporate policy are funda-
compass all the activities necessary for a
mental to the programs success.
successful program of risk management.
Quite the contrary, what we have not said One key to success is his ability to put the
could and has, in fact, filled dozens of books program into operation, the nuts and bolts ad-
on the subject. ministrative procedures and tools that will turn
a philosophy into a pragmatic program. This
We have not even attempted to get into
does not mean that he has to burden himself
the technical aspects of a risk management
with a lot of wheel-spinning reports and records.
program, how to evaluate the feasibility of self-
On the contrary, one of his most important con-
insurance, how to arrive at the right choice of
cerns is to reduce administrative efforts to only
deductibles, how to achieve an effective loss
the essential tools. His insurance manual, for
control program, investigating and comparing
example, should not be so weighted down with
insurance markets, how to get the best cov-
descriptions of all coverages in force that field
erage for your money, and so on. But these
personnel just ignore it. It should be brief, and
are all things that cannot be accomplished
contain only the information each branch or di-
until other, more basic steps have been taken.
vision needs to discharge its own risk man-
First of all, none of these more sophisti- agement responsibilities.
cated actions can be taken until you have es-
Finally, and for the risk manager this is
tablished what your objectives are.
most important of all, he has to get the infor-
What is your purpose in having a pro- mation he needs. Communication is vital, and
gram for risk management? As basic as it may he should have a formal program that will as-
seem, a corporate plan for protecting against sure that information flows to him from every
risk of loss can never get off the ground until department.
IN 2 5
Bulletin No. IN 3
Hold Harmless Agreement
The formal transfer of risks by contract the liability of another to pay damages to a
is an important element of risk management. third party is an insured contract. But, the con-
Risk is transferred through the use of Hold tract must be enacted prior to the loss, and
Harmless clauses. One party, the indemnitor, the liability assumed must fall within the scope
agrees to hold harmless the other party, the of CGL coverage. The CGL does exclude
indemnitee, against liability arising out of the certain contracts or agreements from
project described in the contract. coveragee.g., contracts relating to archi-
The amount of risk assumed by the in- tects, engineers and surveyors and contracts
demnitor varies in accordance with the terms relating to fire at rented premises. See your
of the contract. Ideally, the indemnitor as- CGL policy for these important contractual re-
sumes liability which arises solely from its own strictions.
acts or omissions. Too often, however, the in- Much has been said and written about
demnitor is contractually obligated for liability the potential danger in Hold Harmless clauses
arising from the acts or omissions of both the in contracts. Yet, subcontractors continue to
indemnitor and indemnitee. sign subcontracts assuming liability for just
Its the party to the contract who has the about every loss the general contractor may
superior bargaining position who usually is the face. Many subcontractors are unaware of
indemnitee.The indemnitor finds it necessary these clauses, erroneously believing they
to assume liability in order to get the work. could not be held responsible for anything
Nevertheless, you should make every effort, other than their own negligence. However,
including acquiring legal counsel, to avoid in- some courts have upheld the validity of such
equitable contract provisions. clauses despite their inequities.
Your Commercial General Liability A typical Hold Harmless clause, and one
(CGL) policy automatically provides blanket which is deceptively simple and should be
contractual liability insurance. That is, any avoided by subcontractors altogether, reads
business contract under which you assume as follows:
1
Insurance/Bonding
The subcontractor agrees to as- The Subcontractor shall indemnify

sume entire responsibility and lia- and hold harmless the Contractor and
bility for all damages or injury to all all of his agents and employees from
persons, whether employees or and against all claims, damages,
otherwise, and to all property, aris- losses and expenses, including at-
ing out of, resulting from or in any torneys fees arising out of or result-
manner connected with the execu- ing from the performance of the
tion of the work provided in this sub- Subcontractors work under this sub-
contract, and the subcontractor contract, provided that any such
agrees to indemnify and save harm- claim, damage, loss or expense is: a)
less the contractor, his agents and attributable to bodily injury, sickness,
employees, from all such claims, in- disease or death, or to injury to or de-
cluding, without limiting the gener- struction of tangible property (other
ality of the foregoing, claims for than the work itself) including the loss
which the contractor may be, or may of use resulting therefrom; and b)
be claimed to be, liable. caused in whole or in part by any neg-
ligent act or omission of the
A good illustration of the breadth and un- Subcontractor or anyone directly or
happy legal consequences for the subcontrac- indirectly employed by him or anyone
tor in the use of such a clause is provided in the for whose acts he may be liable, re-
case of Christy v. Menasha Corporation, 211 gardless of whether it is caused in part
N.W. 2d 773 (Minn., 1973). In that case an em- by a party indemnified hereunder.
ployee of the general contractor dropped a
This language is fundamentally unob-
board on the head of one of the subcontractors
jectionable, since it simply restates the liabil-
employees. As is typical, the employee could
ity that would be imposed upon the
not sue the subcontractor directly and was lim-
subcontractor by law, at least, in those situa-
ited to Workmens Compensation.However, the
tions where the loss arose from the sole neg-
employee sued the general contractor based
ligence of the subcontractor or his agents.
upon the negligence of the general contractors
However, this clause poses the question of
employee.The general contractor then sued the
whether the subcontractor should be made li-
subcontractor for indemnification pursuant to
able for the entire loss, where the loss was
the above-quoted clause.
caused in part by the negligence of the gen-
The court held that although the injury to eral contractor. This exposure can be alto-
the plaintiff was caused solely by the negli- gether eliminated by modifying the clause so
gence of the general contractor, the subcon- that it limits the subcontractors liability to
tractor was nonetheless required to indemnify losses caused solely by his negligence or that
the general contractor in accordance with the of his agents.
Hold Harmless clause in the contract. Hence, A third example of a Hold Harmless
the subcontractor was stuck with the liability clause:
that was in no way his fault and was even be-
yond his control. The Contractor and Subcontractor
agree to indemnify and save harmless
The standard A.I.A. subcontract form con- each other from and against any and
tains a Hold Harmless clause which reads: all suits, claims, actions, losses, costs,
2 IN 3
Insurance/Bonding
penalties and damages of whatso- armed with a legal opinion will place you in a
ever kind or nature, including attor- stronger position to bargain.
neys fees, arising out of, in connection With the aid of legal counsel, you may
with or incident to, each partys per- wish to design a form which could be used as
formance of his particular portion of a standard rider to contracts which you feel
this contract. The parties may agree include an objectionable Hold Harmless
to arbitration pursuant to the proce- clause.Several contractors have instituted the
dures adopted by the American following form and find it works very well.
Institute of Architects, the American
Rider to be attached to said subcontract
Arbitration Society or applicable law.
as alternate to Paragraph _____ to which
Such a clause was construed in the case exception has been taken.
of Prociw v. Baugh Construction Co., 9W Subcontractor agrees to save and
App. 750 (1973). In this case`, the evidence indemnify and keep harmless Contractor
showed that there was negligence on the part against all liability, claims, demands or
of the general contractor in failing to provide judgements for damages arising from in-
an injured employee safe scaffolding on which jury to persons or damage to property oc-
to do the work. The court also found undis- casioned by, or claimed to have been
puted evidence that the injured employee was occasioned by, the negligence of
engaged in work under the subcontract at the Subcontractor, his agents or employees,
time of the accident. Both the general con- and will defend any and all suits brought
tractor and the subcontractor argued that the against Contractor on account of any
clause quoted above required the other to such occurrences, and will pay any judge-
bear the loss. ment rendered in any such suits, and will
The Court of Appeals rejected the con- reimburse and indemnify Contractor for
tentions of both parties and construed the all expenditures or expenses, including
clause to require that the loss be shared equally court costs and reasonable fees made or
between the two parties. Subcontractors will incurred by Contractor by reason of such
note, however, that the subcontractor was re- occurrence.
quired to bear half the loss, even though there You might find it easier to convince the
was no showing of negligence on the subcon- general contractor to attach this rider to a con-
tractors part, simply because the loss occurred tract than to negotiate for elimination or re-
during the performance of the subcontractors wording of the clause.
portion of the work. The most important point to remember
Seemingly inconsequential differences is to know exactly how much obligation you
in language and factual patterns can lead to are assuming by signing a contract. Do not
drastically different legal results. Therefore, assume that a clause will be interpreted to
your own lawyer should be consulted with re- mean anything other than exactly what is writ-
spect to Hold Harmless language in any con- ten. Finally, remember that subject to exclu-
tract proposal. Any unreasonable clause sions, your CGL policy provides coverage for
should be discussed with the general con- assumed bodily injury and property damage
tractor and a request made for modification. liability, but liabilities assumed that fall outside
Your ability to have this clause modified will the CGL coverage grant are solely the in-
depend upon your bargaining power, but demnitors responsibility.
IN 3 3
Bulletin No. IN 4
How Large Should Insurance Deductibles Be?
For many years, deductibles have been A question often asked is, How large an
used by insurers to avoid the costs arising insurance deductible should I consider?That
from the handling of relatively small, nuisance determination is a matter of ascertaining the
type claims. Policyholders accept such losses size of the financial impact in the form of a
as a cost of doing business, in return for a deductible a contracting firm can sustain dur-
modest premium savings. In theory, this is as ing a given period of time. It is also a matter
it should be since neither the insurer nor the of determining the most economical de-
insured benefit from swapping dollars over ductible to take given the reduction in pre-
losses which present no financial hardship to mium the insurer will grant when the
the policyholder. deductible is used.
Determining the largest permissible fi-
With the acceptance of modern risk man- nancial hit a contractor can absorb requires
agement techniques, deductibles have in- an analysis of the firms financial position and
creased substantially in size, and they are the current phase of the construction business
more frequently applicable to lines of insur- cycle. A large assumed loss through a large
ance which are noted for loss severity, rather deductible in the downside of the construction
than loss frequency. By assuming more risk, business cycle can be devastating to a con-
policyholders receive larger premium credits, tractor who is thinly capitalized and whose job
but deductible affordability becomes a major inventory is low. The firms financial analysis
concern. Remember, without an aggregate for deductible purposes should answer such
deductible (a predetermined annual maxi- questions as: What reduction in earnings per
mum deductible amount payablee.g., ownership share can I withstand? What re-
$5,000 per claim deductible subject to a duction in a percentage of working capital
$25,000 aggregate), a policyholder may be caused by the assumption of losses through
subjected to deductible payment repeatedly. deductibles can I afford? What impairment in
1
Insurance/Bonding
the firms net worth caused by the assump- 3. Does the firm have the capability to make
tion of losses can I expect? damage repairs following a loss that falls
within the deductible? Will the cost of re-
Answers to these questions only estab-
pairs made by the contracting firm out-
lish overall guidelines in the matter of deter-
strip the deductible savings?
mining deductible amounts. They are
designed to arrive at the maximum permissi-
4. A key question is whether the assump-
ble loss a firm can sustain over time, but they
tion of loss through deductibles by the
are not indicative of the absolute amounts of
contractor is offset by appropriate pre-
loss at any specific point in time the firm
mium credits. Deductibles must either
should retain. An analysis of the firms previ-
make coverage available where it is not
ous losses is necessary to arrive at the spe-
available without them, or they must re-
cific deductible figure.
sult in premium savings. A point may be
These additional questions need to be reached where a larger deductible may
answered: not be justified because of inadequate
premium rate reduction offered by the in-
1. What has been the frequency and sever-
surer. But you should understand that in-
ity of losses within the contracting firm?
surers price deductibles in anticipation of
High-frequency, low-severity losses tend
the losses that will be avoided as a result
to be more suitable for deductibles as op-
of the deductible. So dont expect more
posed to few, but large amount losses. It
than modest savings for deductibles
is the frequency which tends to make the
which apply to high severity/low fre-
losses more predictable. For example,
quency exposuresi.e., credit is modest
smaller frequent losses of physical dam-
when likelihood of loss is slim.
age to the contractors vehicle fleet tend
to be predictable and are good candi-
Deductibles are used less in liability in-
dates for deductible treatment.
surance than in property insurance, primarily
2. Is there a geographical concentration or because liability insurance does not generate
a spread of the contractors property val- a large number of smaller, frequent losses
ues? If the contractors equipment and found in property insurance.
vehicle fleet is consistently bunched in
one or several locations, the impact of a Deductibles, when used by contractors,
per-unit deductible or even a per-location are a cost-saving device; however, their size
deductible (if there are many locations in and use should not be determined without
a geographical area) could have serious some attempt to relate them to the contrac-
financial effects on the contractor. tors financial capabilities.
2 IN 4
Bulletin No. IN 5
The Dos and Donts of Obtaining Bonding
INTRODUCTION want to briefly describe the types of surety

bonds typically available to the construction
All of us in the construction industry are industry.
familiar with surety bonds.Surety bonding is an
integral part of any contractors daily business 1. Bid Bonds guarantee that the bidder, if
strategy. The ability, or inability, to obtain a awarded the contract, will enter into the
surety bond may have a positive, or negative, contract and furnish the required perfor-
effect on a contractors chances to obtain work mance and payment bond(s).
and to meet the companys financial goals.
2. Performance Bonds:
As in any worthwhile endeavor, advance
planning and preparation are crucial in ob- a. Construction Contract Bond guar-
taining a surety bond or a surety bonding pro- antees faithful performance by the
gram for your company. It is most important contractor of its contract.
for the contractor to keep in mind that a surety b. Labor and Material Payment Bond
bond is basically an extension of a line of credit guarantees that the contractor will
to the company. As such, obtaining a surety pay all bills for labor and materials.
bond or a surety bond program is not much It may be a separate bond or a part
different from obtaining a personal or a com- of the Construction Contract Bond.
mercial loan. Putting your best foot forward to
the potential surety in the presentation of your c. Maintenance Bond guarantees that
company is essential, however, do not gild work done by the contractor will be
the lily but always make your presentation free of defective workmanship and
open, complete, and honest. materials. It may be a separate bond
or a part of the Construction
Contract Bond. If a part of the
SURETY BONDS Construction Contract Bond, it usu-
ally will only guarantee maintenance
Before we offer for your consideration a for one year after completion of the
list of dos and donts in obtaining bonding, we contract.
1
Insurance/Bonding
d. Supply Contract Bond guarantees a b. Having fully audited financial state-

contract to supply goods or materi- ments for the most recent three fis-
als. cal year-ends of your company.
Finally, it is important that the contrac- c. If fully audited statements cannot be
tor understand that a surety bond is not an afforded, obtaining a CPA review of
insurance policy.An insurance policy has only the statements.
two parties to the insurance contractthe in-
surer and the insured. A surety bond has d. Preparing an honest set of com-
three parties to the contractthe principal, ments while putting your firm in the
who is the party whose faithful performance most favorable light.
is being guaranteed; the obligee, who is the
e. Providing the nature and size of past
party for whose protection the bond is being
projects, including successes and
issued; and the surety, who together with the
failures.
principal, jointly binds itself to the obligee for
the faithful performance of the principals g. Describing your current position in
obligation. the marketplace.
The most important distinction between h. Providing an organization chart and
insurance and a surety bond is the obligation resumes of key personnel.
of the principal to indemnify the surety for any
damages it pays to the obligee which were i. Describing your estimating, sched-
caused by the principal. When obtaining a uling, project management, and
surety bond or a surety bond program, the cost control procedures.
contractors company will have to sign an in-
demnity agreement with the surety, and if the j. Providing a list of tools and equip-
contractors company does not exhibit ade- ment.
quate financial wherewithal to the surety, per- k. Describing your history with claims
sonal guarantees will probably be required. and any litigation.
DOS IN OBTAINING SURETY BONDS l. Providing details of your insurance

program.
1. Select a surety agent who is famil-
iar with surety issues and mechanical con- m. Giving a list of credit references.
tracting to represent you to the surety.
n. Providing a list of your professional
2. Try to select a surety with an A.M. advisors, such as lawyers, accoun-
Best Key Rating Guide of A. tants, and insurance agents.
3. Plan your presentation to the surety o. Providing a current backlog report,
thoroughly by: including details on open contracts.
a. Consulting with a certified pub- p. Describing your operating budget.
lic accountant who is familiar
with construction accounting q. Including a detailed list of aged re-
principles. ceivables and aged payables.
2 IN 5
Insurance/Bonding
r. Providing income tax returns which ough review of your financial information and
correspond with the financial state- are predicated on the premise that there will
ments provided. be no losses by the surety.
s. Describing outstanding loans and 4. Dont omit negative details.
details of lines of credit.
5. As you approach your companys
t. Making sure the foregoing informa- fiscal year end, dont:
tion is complete, objective, logical,
and understandable. a. Maintain a low cash balance.
4. If the surety wants personal finan- b. Allow accounts receivable to age be-
cial information, provide your own financial yond 90 days.
statement and income tax return for the year
corresponding to your companys most recent c. Make any sizable loans to stock-
fiscal year end. holders.
5. Identify terms and conditions your d. Permit your billings to fall behind.
company will not accept in contracts it is
e. Underbill.
awarded.
6. Always provide timely and accurate f. Prepay expenses, if possible.
responses to the suretys request for informa- g. Make large equipment purchases.
tion.
h. Indicate an overdependence on
short-term borrowing by increasing
DONTS IN OBTAINING SURETY BONDS
or tapping a line of credit.
1. Dont purchase a surety bond from
a company that will sell to you based on a pre- i. Permit intercompany balances, if
mium alone without having reviewed your any, to remain unpaid at fiscal years
companys financial status. end.
2. Dont forget that the surety will want j. Make large or unnecessary Sub-
interim information throughout the fiscal year. chapter S withdrawals.
3. Dont forget that surety bond under- k. Change banks or surety companies
writing decisions are made based on the thor- unnecessarily.
IN 5 3
Bulletin No. IN 6
Bulletin
Insurance for Catastrophes
INTRODUCTION consequence, thousands of companies
with expiring commercial property and
When a business suffers catastrophic business owners insurance have re-
losses, its owners first recourse is to file ceived notices that the ir policies will not
a claim wi th the companys in surer. be renewed as written.2
When several businesses suffer similar
catastrophic losses and file claims, in- Although the standard policy will still
surance companies may take ce rtain provide coverage for lo sses due to fire
measures to prevent insolvency, such and smoke, theft, wate r damage, and
as canceling policies, significantly in- general liability, insurers are either ex-
creasing premiums, or limiting ce rtain cluding coverage for losses due to
kinds of coverage. terrorist actions or str ictly limiting cov-
ered losses due to such incidents.3
In recent years, busin esses and their
insurers have experienced catastrophic If coverage is available, the price is sub-
losses resulting from incidents involving stantial. A 4 0 to 50 per cent increase in
terrorism, environmental impacts, mold, premiums for policies with terrorism
asbestos and defective workman ship. coverage included is not unusual. In
Adding to the insurance industrys finan- areas close to the site of the terr orist
cial pressures was the downturn in the attacks, premium hikes of 200 to 400
stock market which negatively affe cted percent are common. 4
one of the insurance industrys safety
nets, its investment income. The construction industry is not con-
sidered at high risk for t errorism, but is,
As a consequence, p ressure has in- nevertheless, experiencing the effects of
creased on business insurers to limit the a shakier marketplace. Lenders are re-
availability of certain coverages, sub- luctant to a pprove loans to busine sses
stantially increase the cost of ot hers, without terrorism cover-age. Customers
and reduce claims. are refusing to consider project bids
without the coverage or at levels con-
TERRORISM INSURANCE sidered adequate.5
The September 11, 2001 terrorist at- 2

tacks cost the insurance industry up to Ibid.
3
$50 billion in insurance claims1. As a Ibid.
4
Weak Foundation: Lack of Insurance
Against Terrorism Hinders Existing
1
Terrorism Insurance: Pray as You Go, Commercial Buildings and Future
Russ Banham, CFO Magazine (February 4, Construction, Newsday (9/16/02).
5
2002, http://www.cfo.com. Ibid.
Solutions 3. Assess new business terms of your
companys associated exposure to
The commercial real estate market is terrorist-related risks and your exist-
reportedly adjusting fr om the terrorist ing insurance coverage for those
attacks in New York City and Washing- exposures.
ton, D.C., and transactions are g oing
forward. 4. Continue due diligence in knowing
the background on your existing
The federal govern ment has also pro- employees and checking on new
vided the insurance industry wit h a hires.
safety net in the event of a f uture
terrorist-related catastrophic event. On 5. Create an emergency evacuation
November 26, 2002, President Bush plan and daily attendance record for
signed into law legislat ion that established your employees. Preparing your
a temporary federal ba ckstop plan for project site for unexpected emer-
terrorism insurance coverage. This law gencies can reduce liability cost s
provides financial assistance to insurers and exposure. If an incident should
when a catastrophic act of terrorism occur involving terrorism and your
causes insurers to exceed their ded uct- employees lives are lost, your work -
ibles. This will allow insurers to offer ers compensation coverage will pay
terrorism insurance to their insur eds. benefits to their families. (For further
The law does not, however, provid e a explanation of workers compensa-
reduction in the cost s of purch asing tion benefits by state/jurisdiction you
insurance, but terrorism coverag e will may visit:
not be excluded from insurance policies. http://www.dol.gov/esa/regs/complia
To learn more about the federal insur- nce/owcp/wc.htm).
ance backstop bill visit:
http://www.congress.org. ENVIRONMENTAL LIABILITY
While the market and the insura nce Insurance coverage for environme ntal
industry adjust to the new reality, busi- accidents, exposures, and liabilities is
nesses can take the following step s to an important part of a b usinesss insur-
protect themselves: ance package. Although such in cidents
are infrequent, when they occur, the
1. Review your businesss insurance financial effects can be substantial and
policy for terrorism coverage. If yo ur devastating to the principal companies
company is involved in projects that involved. Fortun ately, environme ntal
are sensitive and there fore have a insurance is readily available in a variety
high risk exposure (i.e., nationa l of packages at surpr isingly affordable
defense, utilities, hazardous sub- rates.
stances, financial services build-
ings), consider whether additiona l Contractors seeking n ew or additional
coverage is needed. Be prepared coverage will find, ho wever, that the
for possible significant costs assoc- insurance industry has yet to agree on
iated with the purchase of this addi- terminology, standards, and policy forms
tional line of coverage. for this kind of insurance.
2. If your insurer is unwilling to provide Most policies are available in the follow-
additional or any terrorism coverage, ing basic forms:
discuss options.

Environmental Impairment Liability Remediation Stop-Loss Insurance
(EIL) covers losses from active release (also known as cost cap coverage)
of pollutants, sudden and gradual, from insures remediation costs that exceed
insured locations. the projected or anticip ated costs. The
policy pays the cost overrun e xpenses
Property Transfer EIL Insurance is that exceed the deductible that the
designed to be used when property is insured incurs in completing a r eme-
bought and sold. These policies may be diation project at a specified location. To
used in pla ce of the sellers inde mnity limit a companys expo sure to environ-
for cleanup costs and t hird party claims mental risks, the company should es-
for bodily injury and p roperty damage tablish an environmental compliance
when property ownership transfers. program that may exist in the storage
and disposal of hazardo us wastes, pre-
Secured Creditors Environmental vious and present uses of property, un-
Insurance was designed to back col- derground storage tanks, and cont ract-
lateral interest lenders. The policy pays ual obligations.
if the borro wer defaults on a loan and
there is an environmental incident at the MOLD
insured location.
Mold is eve rywhere and lately, its be-
Storage Tank Insurance, required by come a major cause of claims against
federal law (Resource Conservation and contractors in severa l areas o f the
Recovery Act), owners/operators of fuel country. The proble m concerns the
or hazardous materials storage t anks appearance of mold in residential, com-
must demonstrate their financial a bility mercial and public b uildings due, in
to pay da mage costs if the tank should large part, to modern b uilding materials
leak. Insurance provides one kind of and techniques that have made these
demonstrated financial responsibility. structures air tight a nd more energy
Underground storage tank insu rance efficient, but also vuln erable to mold
covers third party liability claims for infestation.
bodily injury, property damage, offsite as
well as on site cleanup costs and legal In addition to the property damage con-
costs. cerns, an increasing n umber of recent
claims are blaming molds for ser ious
Contractors Environmental Impair- health problems, such as cough ing,
ment Liability Insurance provides congestion, shortness of breath, respir-
coverage for contract ors performing atory infections, nausea, headaches and
environmental remediation services on skin rashes. Further, there are more
contaminated sites. Ho wever, this kind serious health problems such a s cough-
of policy also in sures against environ- ing of bloo d, lung da mage, chronic fa-
mental losses of traditional contra ctors tigue, and even brain, kidney and liver
as well, and covers their operations and damage. Medical expe rts have yet to
completed operations. confirm the relationship between these
illnesses and olds, but the claims
Environmental Professional Errors persist.6
and Omissions Insurance resembles
traditional E&O policies, but sh ould The claims are not only increasing in
contain a coverage grant or the def- number, but also in awards. In Texas,
inition of lo ss for damages and clea nup the Department of Insurance re ported
and eliminate or modify the pollution
exclusion. 6
Dont be a Victim of Mold, William
Atkinson, Contractor, August 2002.
that insurers in that sta te paid $1 billion escape of:
in mold-related claims in 2000 and
2001. In a particularly onerous case, a i. vapors, fumes, acids, toxic
jury awarded a Texas homeowner $32 chemicals, toxic liquids, or toxic
million, including $12 million in p unitive gases;
damage, $8.9 million in legal fees, $6.2 ii. waste materials or other
million to replace her 22-room home and irritants, contaminants or
possessions and $5 million f or mental pollutants.
anguish.7
The standard GL policy insures ag ainst
Root causes of the mold infestations are damages caused by t he contractors
faulty installations, fau lty repairs, re- operations or by the contractors past
lease of mold spores during work or work or services performed in the past.
repairs, and improper clean-up and They will not pay for or replace poor
remediation. quality products or work. However, they
will pay for damages to other pro perty
Mold can exist where the following three and consequential damages caused
criteria are satisfied: by poor quality work products or work.
1. Temperature climate (typically above Consequential damages are defined as

70 degrees Fahrenheit). follows:
2. Existence of nutrient source such as Consequential Damages which flow

wood, paper, or other cellulose, or from the loss or harm consequential
carbon based material; and damages are of the same nature as
special damages. These damages do
3. Moisture is presen t (high humidity, not arise as a result of the wrongful act
rather than pooled or running/drip- or omission itself, but arise due to the
ping water is sufficient.) circumstances after th e loss or harm
has occurred. Special d amages include
Note: When these criteria are satisfied, out-of-pocket items that can be docu-
mold growth can begin within 48 hours. mented, such as the need to rent re-
placement property (such as a car rent-
To assume your General Liability (GL) al) or the cost of services (such a s the
Insurance policy will cover a mold claim cost to have prope rty valued or
may be a costly assumption. Coverage appraised).
of a mold claim under a GL policy de-
pends on h ow the claim is brought, the An example of consequential damages:
jurisdiction the claim was filed in and the A mechanical contractor installs a piping
specific policy languag e in the policy. system in a high rise office building. The
Insurers often cite the absolute pol- piping system ruptures as a result o f im-
lution exclusion as a basis for den ying proper installation on th e fifteenth floor.
coverage for mold-related claims. The leak floods a confe rence center on
the fourteenth floor. The building ow ner
The absolute pollutio n exclusion ex- had reserved the confe rence center for
cludes coverage for: a national convention. The meeting that
was to be held in the conference center
a. bodily injury or property damage had to be relocated to a nearby h otel.
which results in any manner from the The hotel charged the building owner
discharge, dispersal, release, or $15,000 for the rental of a conference
room and hotel coordin ation. In addition
7
to the co sts to repair th e pipe line rup-
Ibid.
ture and the damage caused by the 5. Monitor new installations. Check
water, the building owner also sustained back on new installations for leaks
consequential damages when the and evidence of moisture. If any
national convention had to be relocated occur, fix the problem, clean up the
to a nearby hotel. leak and replace th e damaged
materials as soon as possible.
Consequently, if mold in festation results
from defective or deficient contr actor 6. Review your insurance policies .
work, depending on th e circumstances See if they include th e Pollution
of the situa tion and th e nature of the Condition. Below is the definition of
claim, the policy may or may not pay the Pollution Condition as provided b y
claim. a leading pollution underwriter:
Solutions Pollution Condition means the

discharge, dispersal, release, seep-
Because mold claims a re increasing, in- age, migration, or escape of smoke,
surers are either modifying the mold vapors, soot, fumes, ...or other irri-
provisions in existing general lia bility tants, contaminants or pollutants into
policies, placing severe restriction s on or upon la nd, or stru ctures there-
those provisions, or excluding them alto- upon, the atmosphere, or any water-
gether. Some insurers are can celing course or body of wa ter including
policies completely or pricing them so groundwater.
high that affected contra ctors are at risk
of losing th eir business since state law Mold is still evolving as an issue for the
requires that they carry these policies. contracting industry. Claims and costs
will likely continue to rise because of
Contractors can take steps to pr otect mold remediation and the possible bod-
themselves by: ily injury cl aims associated with mold.
Protect your business b y reviewing your
1. Avoid errors. Double-check or even insurance coverage, and respond q uick-
exceed the code, and t ake the extra ly to complaints from customers when
steps necessary to be sure the job is water damage is involved.
right the first time.
It may be prudent to establish a busi-
2. Use high quality materials. Saving ness relationship with a restoration
a buck on materials may cost you company. In the event of a water leak,
your business later, so buy good restoration companies can pr ovide
quality up front. emergency water clean-up with the
utilization of commercial water extrac-
3. Dont duck a pro blem. If a client tion equipment and dehumidification
reports a p roblem, do the repairs devices, thus reducing the volume of
and replace any da maged materials damage and the environment for mold
as soon as possible. Talk with your growth.
client and be sure you have agree-
ment on ste ps to be ta ken and the ASBESTOS
schedule for completing them. Ig -
noring the problem may lead to far Asbestos cases are on the rise once a-
more expensive problems later. gain. Many claimants are pursuing pre-
vious employers/contractors since m any
4. Offer a warranty. If a client makes a of the manufacturers have filed for bank-
claim under warranted work, fix it ruptcy as a result of litigation and the
immediately to avoid a lawsuit. award of lawsuits. B etween January

2000 and August 2001, there we re a An insurance broker may request the
recorded 41 asbestos-related Chapter following documentation when provid-
11 bankruptcies, including eight major ing an Asbestos/Lead Abatement
firms. Liability insurance quotation:
Depending on how the claim is filed and a. Asbestos/Lead Abatement

the jurisdiction, a contractor may be lia- Liability Application.
ble for an a sbestos claim/lawsuit based b. Financial statement.
on the exp osure period. Or depe nding c. Standard operating manual.
on the jurisdiction, the claim/lawsuit can d. Contractor certification.
be filed against the last known employ- e. Employee training procedures.
er. In some jurisdictions, claims ca n be f. Listing of completed projects.
apportioned among all employers or the g. Asbestos, Lead and General Liability
claim can be isolated to just one emplo- (GL) claims information. Typically,
yer. Asbestos /Lead Abatement insur-
ance is obtained by Asbestos/Lead
The Asbestos Alliance, the coalition Abatement Contractors, Property
consisting of business interests, em- Owners and General Contractors.
ployers, insurers and plaintiffs counsel,
is lobbying Congress to change the way Solutions
asbestos-related illnesses are handled.
This organization is a dvocating legis- Since the incubation p eriod for asbes-
lation that w ould place a specific st atue tos-related illnesses ranges from 3 0-40
of limitations on the filing of asbestos- years, it is difficult to prevent cl aims
related claims, ban consolidatio ns of from arising for work p erformed years
claims that include many people that are past. For current work, steps can be
not ill, and prohibit the filing of cases in taken to prevent asbestos exposure:
jurisdictions that are n ot related to the
claims. 1. Employ an Asbestos/Lead Abate-
ment Contractor to remedy asbes-
To learn more about the Asb estos tos situations. Such specialty co n-
Alliance Coalition, visit its website at: tractors are required by law to carry
www.asbestossolution.org. specific insurance coverage for th e
performance of their work.
Asbestos Claim Coverage
Typically, asbestos cla ims are covered 2. Specialty contractors have the train-
under workers compensation coverage ing, tools a nd equipment to abate
and/or general liability coverage. the affected work ar eas without
exposing your employees.
However, contractors performing asbes-
tos and lead abatement are require d by 3. Discuss with your insurance carrie r
law to mai ntain appropriate insur ance the types of coverage which can b e
coverage for such work. In additio n to offered to p rotect against asbestos
Commercial General Liability insur ance, claims.
a contractor can purchase Asbe stos/
Lead Abatement Liability Insurance. SUMMARY
Contact your insurance broker to obtain
rates for coverage. Insurance limits can The catastrophic losses that busine sses
be set ba sed on an each-occurrence have experienced during the last few
basis. years due to terrorism, mold infestation,

environmental accidents, and asbestos
exposure have shaken the climate
under which the insuran ce industry and
its clients do busin ess. Business
insurance coverage for catastro phic
losses is more limited and much more
expensive than it was and some basic
coverages have become more s trictly
defined.
If you have not done so already, meet

with your insurance broker to re view
your current business polic y for the
adequacy of coverage for such cata-
strophic events. Dont w ait until tra-
gedy strikes before determining what
levels of l osses your policy will/will
not cover.

Bulletin No. IN 7
Bulletin
Subrogation Can Spell Trouble

caused about $300,000 in damage to
INTRODUCTION equipment belonging to Rigging, Inc.
(RI), another contractor working on the
This article addresses loss problems construction project. RI was surprised
resulting from the operation of when its adjuster asked RI to sign
subrogation clauses. If an insured papers authorizing RIs insurer to
waives its insurers subrogation rights, subrogate against ECL. At first, RI
the insured may have no coverage at refused to sign the subrogation
all. Waiver of subrogation clauses can authorization stating that they had paid
be attached to insurance policies to a premium to have their insurer pay for
eliminate the potential problems RIs losses, not to have another
stemming from subrogation. contractor pay for their loss.
Caution: Before signing any contract RIs insurer then referenced the
documents that address your firms following provision from their insurance
insurance coverage relating to a contract, American Association of
project, have your firms insurance Insurance Services (AAIS) Contractors
agent(s) review and approve the Equipment Form IM-7000 Ed 1.0:
documents. Also, before signing any
agreement to determine your firms Subrogation: If we pay for a
insurance liabilities and limitations, loss, we may require you to
carefully review (or have your legal assign to us your right of
counsel review) the general recovery against others. You
contractors contracts. must do all that is necessary to
secure our rights. We do not
The following provides a few pay for a loss if you impair this
hypothetical examples of problems that right to recover.
can occur involving a variety of
insurance coverages. Because RIs owner was a friend of the
ECLs owner, RI did not want to sign the
SUBROGRATION necessary papers authorizing the
insurer to subrogate. However, the
Electrical Contractor, LLC (ECL) was company knew that it did not have the
working at a construction site. Because resources to pay for a $300,000 loss, so
a worker improperly installed a circuit it agreed to the subrogation
breaker board, a fire ensued. The fire authorization.

ECL submitted the subrogation claim to The workers compensation insurer
its insurer, fully expecting to have replied that the subrogation waiver in
coverage for the subrogation claim. the construction contracts did not apply.
ECL was surprised when its insurer The clause from the National Council on
denied the claim. The insurer took the Compensation Insurances (NCCI) Form
position that the damaged property was WC 00 00 00 A (04/92) that was cited
in the care, custody, and control of ECL states:
and that, therefore, there was no
coverage for the subrogation claim. Recovery From Others. We
have your rights to recover our
ECL did not have any insurance or the payment from anyone liable for
money to cover the $300,000 claim. an injury covered by this
The subrogation against ECL caused insurance. You will do
the firm to file for bankruptcy. Several everything necessary to protect
months elapsed between the those rights for us and to help us
subrogation filing and ECLs filing for enforce them.
bankruptcy. After the bankruptcy filing,
even more time elapsed while the owner The workers compensation insurer then
of the construction project obtained proceeded with its subrogation claim.
another electrical contractor to finish While that occurred, the contractors
ECLs work. involved asked their insurance agents if
there was any way to preclude
Realizing that subrogation could subrogation by the workers
significantly disrupt the construction compensation insurer. The underwriter
process, the project owner had an referred them to NCCIs Form WC 00 03
addendum added to all of the contracts 13:
with the contractors for the project. The
contract addendum required that all We have the right to recover our
contractors have their insurers waive payments from anyone liable for
their subrogation rights. Once this an injury covered by this policy.
change had taken place, the project We will not enforce our right
owner did not expect any more against the person or
problems resulting from subrogation. organization named in the
Schedule. (This agreement
WORKERS COMPENSATION applies only to the extent that
SUBROGATION WAIVER you perform work under a written
contract that requires you to
Shortly after the contracts had been obtain this agreement from us.)
amended not to allow subrogation by This benefit shall not operate
the insurers of any contractor on the job, directly or indirectly to benefit
a ready-mix cement truck backed over a anyone not named in the
workers leg. Nothing happened while Schedule.
the injured workers leg was healing. As
soon as the workers compensation When using the Workers Compensation
claim was closed, a subrogation claim Waiver of Subrogation Endorsement,
was presented against the ready-mix keep several things in mind. The most
cement firm. The ready-mix cement firm important concern is that the waiver
objected saying that the construction applies only to those firms that are listed
contracts did not allow subrogation. on the schedule in the endorsement.

For example, suppose that Cement running at full speed and was under a
Forms, Inc. (CFI) is working at a full load. Because all of the oil had
construction site where every firm is to leaked out and the pistons were running
waive subrogation. Initially, the insurer in dry cylinders, the engine began to
will list all of the contractors on the knock very loudly. Even though the
insurance contract. However, as is truck driver turned off the engine as
usually the case during the course of the soon as he was aware that something
project when additional contractors will was wrong, the engine was damaged at
be working at the site, CFI wont be told a cost of $20,000.
about the additional contractors and,
therefore, they will not be added to the RMCs insurer paid for the loss and
list of contractors against whom the immediately began subrogation
subrogation rights have been waived. proceedings. Upon the instigation of the
subrogation proceedings, RMCs
A typical case might be where one of insurance agent objected, quoting the
the original contractors (Carpenter, Inc.) following from RMCs Insurance
hires a sub-contractor (Trim Finishing Services Offices (SO) Business Auto
Contractor, LLC) to help finish the work. Policy, Form CA 0001 1293:
The project owner may not be aware
that Trim Finishing Contractor is on the Transfer of the rights of recovery
job. Trim Finishing Contractor has not against others to us. If any
been added to CFIs workers person or organization to or for
compensation policy waiver of whom we make payment under
subrogation endorsement. A CFI the Coverage Form has rights to
employee is negligently injured by a recover damages from another,
Trim Finishing Contractor employee. those rights are transferred to
After paying the loss, CFIs insurer will us. That person or organization
subrogate against Trim Finishing must do everything necessary to
Contractor. secure our rights and must do
nothing after accident or loss to
Not having every contractor on the site impair them.
added to all of the construction
contractors workers compensation Upon checking the construction contract
waiver of subrogation endorsements will documents, it was determined that RMC
always be a concern. had not signed the contract addendum,
whereby the contractors signed the
COMMERCIAL AUTO subrogation waiver clauses. RMC said
SUBROGATION WAIVER that it would have no problem with
signing the subrogation waiver
Assume that both Cement Forms and immediately. After learning of this, the
Redi-Mix Cement (RMC) had signed the insurer told RMC that if it signed the
contract waiving the subrogation rights waiver after the loss, there would be no
of their insurers. One of Cement Forms coverage for its loss.
employees left some steel forms lying in
the path of an RMC truck. A wheel hit COMMERCIAL GENERAL
one of those forms. The form twisted LIABILITY COVERAGE FORM
upward and sliced the oil pan on the
large cement truck. In seconds, all of As is typical at some construction sites,
the engine oil drained out of the motor there were curious passersby (straw
and onto the ground. The motor was bosses) who would watch the

construction work. General Contractor, trucking firms were bringing just one or
Inc. (GCI) had signed the subrogation two packages of materials. Others were
waiver. At the same time that GCI was bringing very large loads. For instance,
lifting something with a large crane, a the common carrier who was delivering
truck for Lumber Yard, LLC was the heating and air conditioning
delivering lumber to the site. The truck equipment brought in two full truckloads
came too close to the crane, hitting it of equipment for the construction
and causing the crane to drop part of its project.
load. Part of the load fell outside the
fence that marked off the construction The point is that, at many construction
site. Several of the straw bosses sites, there will be one or more firms
standing outside the fence were injured that have not signed any waiver of
and brought claim against GCI. Upon subrogation form. It is because of this
paying the loss, GCIs insurer type of situation that insurers will not
proceeded to process a subrogation give a blanket waiver of subrogation.
claim against Lumber Yard. GCI This leads us to the wording on a
objected to the subrogation. Commercial General Liability (CGL)
coverage form endorsement.
Here is the clause from ISOs
Commercial General Liability Coverage Subrogation waived prior to a loss is
Form CG 0001 01 96 that the adjuster permitted by the Commercial General
quoted when explaining why they could Liability coverage form endorsement.
subrogate: Interestingly enough, there is also an
endorsement for the Commercial
Transfer of Rights of Recovery General Liability coverage form that can
Against Others to Us. If the be used to waive the subrogation
insured has rights to recover all clause. Waiver of Transfer of Rights of
or part of any payment we have Recovery Against Others to Us (Form
made under this Coverage Part, CG 2402 1093) can be added to the
those rights are transferred to commercial general liability coverage
us. The injured must do nothing form, and the wording follows:
after the loss to impair them. At
our request, the insured will We waive any right of recovery
bring suit or transfer those we may have against the person
rights to us and help us enforce or organization shown in the
them. Schedule above because of
payments we have made for
The subrogation waiver that had been injury or damage arising out of
signed applied to the contractors your ongoing operations of your
working on the job. Contractors such as work done under a contract with
electricians, mechanicals, heating and that person or organization and
air conditioning, and carpentry who were included in the products
on the site almost full-time had signed completed operations hazards.
the subrogation waiver. No one thought This waiver applies only to the
to have the suppliers also sign the person or organization shown in
subrogation waiver as well. On any the Schedule above.
given day, one or more firms delivered
items to the construction site. They had Waiver of subrogation prior to a loss is
not signed the subrogation waiver. permitted by the Commercial General
Various common carriers delivered Liability coverage form. That waiver
material to the site. Some of these depends upon a contract separate from

the CGL policy. It is possible that the with the CGLs waiver of subrogation
contract waiving the subrogation is form.
flawed in some way, thereby allowing an
insurer to subrogate despite the UNDERWRITING
contract. Attaching an endorsement,
CG 2404, to the Commercial General Although some underwriters are
Liability coverage form is a better way. reluctant to provide a waiver of
Although the subrogation waiver will still subrogation endorsement, there are
be in the construction contracts, having several reasons why providing one is
subrogation waived by attaching an not an underwriting problem. As late as
endorsement to a policy is a way of the early 1970s, subrogation was not a
reinforcing or precluding any error(s) in normal procedure in the insurance
the construction contract waiver of business. Subrogation was rarely, if
subrogation wording. ever, carried out. No underwriter
considers subrogation while
SUBROGATION WAIVER underwriting an account. Underwriters
ENDORSEMENT do not think, Any loss that this account
sustains can be subrogated so,
There are separate subrogation waiver therefore, I will not have a bad loss ratio
endorsements for workers on this account. With subrogation
compensation and commercial general clauses in operation, underwriters are
liability coverage forms. However, none just as likely to be subrogated against
of the other forms has a specific form to as they are to subrogate against
waive subrogation. While this may be someone else. Many of the coverage
very difficult to accomplish, it is forms subrogation clauses already
recommended that a specific waiver of allow subrogation rights to be waived
subrogation endorsement be attached to prior to a loss. Providing coverage by
every insurance policy for every referring to a contract other than the
contractor at the construction site. insurance policy can provide difficulties
Insurers have blank endorsements that in interpretation. Adding a subrogation
they can use to accomplish this. waiver endorsement simply puts the
identical feature directly into the
This is a partial list of the types of insurance contract. If waiver of
insurance policies that may need to be subrogation applies to all of the
endorsed with a subrogation waiver contractors at a construction site, an
endorsement: builders risk, installation underwriters exposure has not
floater, contractors equipment, workers changed.
compensation, automobile umbrella,
and commercial general liability. SUMMARY
UMBRELLA Subrogation exposures exist at

construction sites because many
If your insurer has an umbrella different firms work in close
endorsement for waiving subrogation, proximity.
by all means use it. Should your It is possible to have a
umbrella carrier not have a specific subrogation claim not be
waiver of subrogation endorsement, it is covered by insurance.
suggested that they use a blank An uncovered subrogation claim
endorsement and wording that tracks can bankrupt a contractor.
Construction can be delayed

when a contractor goes to their respective contracts.
bankrupt. It is recommended that a waiver
Many insurance policies allow of subrogation endorsement be
waiver of subrogation if the added to every policy for every
waiver is in writing prior to the insured at a construction site.
loss.
Workers compensation and
commercial liability contracts
have waiver of subrogation
endorsements that can be added
_______________________________
The Management Methods Committee gratefully acknowledges and thanks LeRoy

Utschig, CPCU, CLU. ARM for preparing this bulletin.

Bulletin No. IN 8
Bulletin
What Are the Pros and Cons of OCIPs and

CCIPs?
Introduction
A wrap-up is a centralized and While some subcontractors are
controlled insurance and loss control infrequently allowed to opt out of
program, usually for a single project, enrolling in a wrap-up, those situations
which covers the owner, general are rare and participation is usually non-
contractor (GC) and all subcontractors. negotiableif the subcontractor wants
the job, enrollment in the wrap-up is
There are two commonly-used types of mandatory.
wrap-ups. One is sponsored by the
owner, which is called an Owner Project Performance
Controlled Insurance Program (OCIP),
and the other, sponsored by the general As a subcontractor working on projects
contractor, is called a Contractor which are managed under a wrap-up,
Controlled Insurance Program (CCIP). there are considerations regarding
The majority of wrap-ups are owner- insurance coverage and contractual
sponsored (OCIP). duties to the project. Some of these
include reporting all payroll, claims on
An owner or general contractor the project, providing updated
sponsors a wrap-up because it offers certificates of insurance and post wrap-
the possibility of a significant cost up coverage. In addition, there are some
savings by combining the insurance for things to remember including review of
all parties on the project into one policy. loss runs and insurance once the project
is completed and off-site coverages.
Also, unlike non-wrap-up projects where
the stronger parties (owner/general The contract terms of most wrap-ups
contractor) contractually divert as much include necessary items for the firm and
liability as possible to subcontractors, for the sponsor. Subcontractors are
the OCIP sponsor can control the strongly advised to request and review
defense on a liability claim. This is far the wrap-up manual provided by the
more efficient than trying to compel the owner or general contractor. However,
insurance carriers of the subcontractors subcontractors may find that it is usually
to accept a claim and defense of the not very detailed which makes it difficult
owner, general contractor or both. to evaluate the policy exclusions.

Payroll must be reported to the project, Certificates of insurance for off-site
a requirement of the CIP insurance insurance should be forwarded to the
carrier, but the subcontractor should CIP sponsor. While the project is
also ensure all payroll is reported to the providing subcontractors with workers
sponsor of the wrap-up. The compensation, general liability and
subcontractor will be asked to furnish excess coverage for the project, the
the payroll estimates, by classification, contract requirement still mandates that
for the project, and then compute the subcontractors provide evidence of off-
premium that the subcontractor would site coverages that meet the terms of
have paid under its own program for the general contractor. In addition, be
doing the job. The sponsor will then sure to obtain the insurance certificate
deduct the amount of premium of the wrap-up for each year and
determined from this calculation from maintain all payroll records to the project
the subcontractors contract price. as they will be needed at a future payroll
audit to verify coverage and reporting of
The state bureau should be notified of that project payroll in lieu of reporting to
all payroll reported to the project carrier the insurance carrier.
and subsequently by the wrap-up. It is
important to report the correct All change order pricing should be
reported payroll to the bureau as it is calculated correctly, either including
calculated against the losses of the the cost for insurance if a back end true-
subcontractors company to reduce up is required, or exclusive of insurance
its EMR. The administrator of the wrap- if the change order hours will not be
up should be contacted to verify all included in the final audit calculation.
payroll has been reported. While the The sponsor will award contracts to
reporting of payroll under a wrap-up subcontractors based on the bid
may take up to 20 months to be shown documents. The sponsor will then have
by the bureau, subcontractors should the winning subcontractor and its agent
direct their agent to produce their EMR complete some forms which indicate the
worksheet to verify all payroll is reported rates on the subcontractors general
and reported under the correct class liability and workers compensation
codes. policies.
Claims under a wrap-up must be What to Watch For

reported to the sponsors insurance
carrier. While the costs of the claims While wrap-ups are good for the
are paid by the sponsors carrier, sponsors, they are not necessarily
subcontractors should ensure the claim beneficial for subcontractors.
is for its employees and not those of
another subcontractor. Be sure to Exclusions - Buyer Beware
request loss runs from the wrap-up Wrap-up liability policies increasingly
sponsor twice per year during the contain more and broader exclusions.
construction and for a couple of years Subcontractors should make every effort
after completion of the project. Proactive to determine what the policy terms will
agents will review these loss runs and be before bidding the job. In that
the losses/reserves of their client manner, the subcontractor can make a
companies as they impact the insurance complete and accurate comparison to its
underwriting of insurance renewals for corporate coverage and, thereby, a
years. complete and accurate assessment of
the risk of the present procurement.

But, making this determination is usually subcontractor could be liable for the
difficult or impossible because the entire amount of the damage, unless it
sponsor either will not divulge the has either no wrap-up exclusion or
specific policy terms or it does not have contingent wrap-up coverage on its own
the terms at bid time. It becomes a general liability policy.
buyer beware situation for
subcontractors bidding the job. Deductibles
Wrap-ups usually carry large general
It is typically impossible to get a copy of liability and workers compensation
the wrap-up general liability policy in deductibles for the sponsors, and in
advance of the bid. If the subcontractor some cases, the sponsor will make the
is not given a copy of the policy before subcontractors liable for a portion of this
or after the bid process, the sponsor amountmaybe the first $10,000. This
should allow the subcontractor to view it is more likely to occur under the general
in the sponsors offices. This liability than the workers compensation
opportunity usually will not come until policy. Before the bid, the subcontractor
after the contracts have been awarded. should determine if it might be faced
If the subcontractor is only allowed to with paying part of any general liability
view the polices, but not make copies, or workers compensation deductibles.
the subcontractor should take its agent
along for the review. Builders Risk Policies
Another area of concern is the builders
A potentially high risk factor for risk policy. This policy covers property
subcontractors in wrap-ups is that their (the work) in the course of construction
own liability policies may contain a and typically names the owner, the
complete wrap-up exclusion. Each general contractor, and subcontractors
subcontractor should consult with its at any tier as named insured.
insurance agent to determine if its
general liability policy has such an Builders risk policies on wrap-ups
exclusion. If there is a total exclusion, typically have high deductibles, often
any claim not covered by the wrap-up $50,000 or $100,000. Unlike the
policy will likewise be excluded from the deductible under an OCIP general
subcontractors policyno coverage liability claim, the entire deductible is
anywhere, an unacceptable situation. typically borne by the responsible party.
This could present a difficult financial
If the subcontractors liability policy has burden for a subcontractor if held
a total wrap-up exclusion, its agent responsible for paying the entire
should try to negotiate a modification deductible. If the subcontractor carries
that will afford contingent coverage an Installation floater as a part of its own
under the subcontractors policy. Such program, this policy should be amended
an endorsement would respond to wrap- to buy down the large builders risk
up claims if the wrap-up excludes the deductible without invoking a
loss or if the wrap-up limits have been contributing insurance clause. The
exhausted. subcontractors agent should be able to
explain in greater detail why this is
Some wrap-ups will have an exclusion critical.
for damage to the work itself (including
that which is caused by the Other liabilities not covered
subcontractors negligence). If there is Coverage is not usually provided under
not a proper mutual waiver of a wrap-up for pollution and professional
subrogation in the job contracts, the liability. Any exposure to hazards

covered by these policies should be Wrap-ups usually provide completed
carefully reviewed between the operation coverage for a specific time
subcontractor and the subcontractors after the project has been delivered.
insurance agent. Since coverage for this project is usually
excluded under your insurance, care
The subcontract agreement with the should be taken to address the legacy
general contractor must also be claims issues after the completed
scrutinized, where there are likely to be operations period.
other terms and conditions affecting the
insurance coverage. Liability for warranty work performed
after the subcontractors enrollment in
The subcontractor will still have to the wrap-up terminates is not covered
produce evidence of general liability, under the policy, which could be
auto and workers compensation problematic. If a claim later occurs due
coverage for all activities away from the to a subcontractors work, it could be
project site, such as shop fabrication difficult to determine whether it arose
work. from the original installation, or from
warranty work. Worse, if the
Lack of Coverage for Suppliers subcontractor has a total wrap-up
Another concern about the wrap-up is exclusion on its own general liability
the lack of coverage for suppliers. policy, a claim arising from warranty
Because suppliers are not considered work will not be covered under either the
contractors on site, care should be subs policy or the wrap-up.
taken to make sure that the wrap-up has
a strong contractual risk transfer. Hold All wrap-ups provide coverage for the
harmless and indemnity agreements project duration as well as for a fixed
become more important as this project number of years after the project is
is excluded from your primary program. completed. This is usually noted in the
wrap-up manual, and should be
Post Project Considerations determined at bid time, if it is not. All
available coverage afforded under the
Once the project insurance has ended wrap-up will terminate at the end of this
and delivered to the owner, any period.
additional work for punch out or
warranty should be under the Conclusion
subcontractors own insurance. All
payroll for this work must be turned into When bidding a job, know the type of
the subcontractors insurance carrier wrap-up required from all management
and all claims will be paid under the levels. Estimators, sales persons,
subcontractors insurance. controllers and risk managers should
know the type of project with regards to
Considerations regarding insurance whether it includes the cost of
coverage should include the possibility insurance, it is net of insurance or it is a
that wrap-up coverage may be combination of credits to the project
cancelled prior to completion of the wrap-up sponsor. Your insurance agent
work. An experienced insurance broker should review every bid that has a CIP
who manages wrap-ups may best program contemplated, as the cost of
provide advice and endorsements to the insurance can be the difference
subcontractors primary insurer to between losing a bid or reducing profit
ensure that optimal coverage is in place to the project if incorrectly identified.
for claims that may occur in the future.

Definitions repose. This limit is not replenished
annually.
OCIP: Owner controlled insurance
program. This is where all parties of a Builders Risk Policy: Property
project (owner, general contractor and insurance covering the project while in
subcontractors) are covered under a the course of construction. All of the
single policyone general liability policy parties in the project (owner, GC, subs
(with higher limits) and usually a at any tier) are included as named
workers compensation policy. insureds. A substantial deductible
usually applies for each loss.
CCIP: Contractor controlled insurance
program. Similar to an OCIP, except it Checklist
is sponsored by the general contractor
instead of the owner. 1. Determine the builders risk
deductible and how responsibility is
Wrap-Up: Another name for a CCIP or apportioned.
an OCIP.
2. If one subcontractor causes a loss to
OCIP or CCIP Sponsor: The entity another subcontractors work, what is
(owner or general contractor) who puts the extent of coverage and responsibility
the project insurance coverage together for deductible under the OCIP?
with their broker and insurance carrier.
3. Confirm with the sponsor that the
Contractor: Usually refers to the liability coverage provides for separation
General Contractor for the CIP. of insureds. This means that each
enrolled entity in a wrap-up will be
OCIP Broker: The insurance afforded its own separate defense in the
agent/broker who is responsible for event of a claim. This reduces the
securing and placing the insurance potential conflict of interest that could
coverage for the sponsor of the CIP. occur under a single, consolidated
defense for all parties.
Subcontractors: Subs to the GC who
are performing work at the defined work 4. The subcontractor should have its
site under the direction of the GC and agent double check its wrap-up
participating in the OCIP. enrollment form to make sure all rates,
calculations and other information is
Statute of Repose: The amount of time correct.
after which a cause of action cannot
arise. If an injury occurs after this time 5. Make every effort to eliminate a
has lapsed (5-10 years in most wrap-up exclusion from the
jurisdictions), the contractor is generally subcontractors liability policy, or to at
not held liable for claims arising from least obtain contingent coverage.
their work. In the DC area, Virginias
statute of repose is 5 years; DC and MD 6. Verify the number of years of
are 10 years. completed operations coverage
provided by the wrap-up.
Products/Completed Operations
Aggregate: This limit on the Wrap-Up 7. Notify the subcontractors insurance
is one amount of coverage to cover any carrier(s) to make sure they will deduct
and all claims which occur after the payroll for wrap-ups from their final
completion, and during the statute of audit.

The Management Methods Committee
gratefully acknowledges the assistance
of:
Michael C. Cash
Insurance Associates Agency, Inc.
Senior Account Manager
10201 Fairfax Blvd.
Fairfax, VA 22030
703-352-7333
703-352-6490
mcash@insassoc.com
http://www.insassoc.com

Bulletin No. IN 9
File: Insurance
Bulletin
Subguard/Subcontractor Default
Insurance
INTRODUCTION other options to provide protection from
subcontractor default. Under SDI, the
What do you do when the general general contractor, construction
contractor (GC) on a project you were manager or design-build firm purchases
just asked to bid calls for very detailed the policy directly from the insurance
financial information to qualify your company. The two-party agreement is
company under its Subguard policy? solely between the insurance company
Your first response may be, What is and the purchaser. In contrast to the
Subguard and why does this contractor historical surety programs, SDI is
need all of my detailed financial intended to shift a large portion of the
information? risk associated with subcontractor
default from purchaser the insurance
Subguard is a trademarked name for a company by means of the issued policy.
Subcontractor Default Insurance (SDI)
program marketed by Zurich North These programs vary between the
American Insurance Company. insurance carriers but in general are
Subguard and Subcontractor Default typically reserved for large construction
Insurance are terms that can often be companies that subcontract at least $75
used interchangeably by many in the million or more of work on an annual
insurance industry and are becoming basis. Moreover, they are used in the
more widely used in the construction private contracting world due to the
industry. federal Miller Act and various state
statutes applicable to public construction
These programs are touted by the projects. Public projects will still
insurance companies to large general typically be subject to traditional surety
contractors, at-risk construction bonding.
managers and design-build firms as an
attractive alternate to the traditional SUBGUARD VS. PERFORMANCE
surety programs. For purposes of this AND/OR PAYMENT BONDS
bulletin, however, we will refer to the
purchaser as the general contractor. Subguard policies differ significantly
from the traditional Performance and/or
The programs started around 1996 at a Payment Bonds issued by the surety
time when the surety market had companies. Under a Performance
contracted and parties were looking for and/or Payment Bond, the issuing

surety company guarantees to one or Since the general contractor has
more parties the performance or deductible liability, they are viewed as
payment of another party under a being in the best position to evaluate
construction contract. and address very quickly subcontractor
failures. Under the traditional surety
To the extent that a subcontractor or relationship, the surety is responsible for
vendor who has issued a Performance reviewing the creditworthiness of the
Bond and/or Payment Bond fails to contractor in deciding whether or not to
perform or defaults under the contract, issue a bond.
the surety company has the obligation to
complete the work under the SUBGUARD ADVANTAGES/
Performance Bond and to pay any DISADVANTAGES
outstanding invoices or payment
obligations under the Payment Bond. One key advantage to the general
The surety essentially steps into the contractor under Subguard is that it can
place of the defaulting contractor and take over for the defaulting
will either perform the work or subcontractor in a short period of time
subcontract with others to perform the with coverage provided for direct and
work. As a result of this obligation, the indirect costs resulting from the
surety will be entitled to any remaining subcontractors default. The general
payments due under the contract to contractor is not required to finance the
assist in offsetting its cost. To the completion of the job on an interim basis
extent the remaining amount left under as they would under a surety bond
the contract is insufficient to address the situation since payments made from the
completion of the project, the surety insurance company under a valid claim
company will seek to enforce the are typically made within thirty (30) days
indemnity or guaranty agreement that it of providing documentation of the loss.
received from the subcontractor for In contrast, the surety will undertake
whom the bond was issued. investigation that could add months to
the project as they will be slow to act
In contrast to a surety program, under while they perform a full investigation.
Subcontractor Default Insurance the This creates additional liability on the
coverage provided is subject to a large general contractor as they often cannot
deductible which could be $500,000 to wait for an answer and must maintain
$1,000,000 or more. Additionally, since job progress.
it is the general contractor, construction
manager or design-build firm that has SDI is advantageous to the
the obligation under the large subcontractor since it preserves the
deductible, they are the responsible subcontractors bonding line by
party to pre-qualify the subcontractors removing the need to issue a bond. As
they elect to cover under the program. a result of the last downturn in the
As a result, the general contractor, construction industry, the surety
construction manager or design build landscape further contracted and fewer
firm will implement a detailed companies are writing surety bonds
qualification process in order to screen today. Therefore, the availability of
subcontractors for coverage and bonding lines has been diminished,
ultimately the decision to accept or deny leading to more stringent requirements
them under the policy will typically be from the remaining surety companies.
theirs. In addition, bonding lines often require a
broad indemnity agreement and/or a
personal guaranty from the

shareholder(s) or owner(s) of a COSTS
contractor or some other form of
pledged collateral. Since Subguard is a The typical SDI premium can run from
policy procured by the general .4% to upwards of just over 1%,
contractor, there is no cost to the depending largely upon the selected
subcontractor nor is any personal deductible and other factors related to
guaranty or other security required to be the general contractors qualification
provided. procedures. The higher the deductible
the lower the policy cost. Under a high
However, it is important to note that the deductible policy that includes loss fund
Subguard carrier only has an obligation or retrospective premiums, the GCs can
to the insured (the general contractor) often pass through to the owner the full
and there is no independent obligation cost of the policy with a potential return
to the subcontractor. If a general of premium if no claims are made under
contractor fails financially, neither the the policy. Since the general contractor
owner nor the subcontractors will be is driving the pre-qualification process
protected or covered by the policy. and the management of the
Under such a scenario the subcontractors, if managed properly,
subcontractor would not have a claim this can often lead to additional profit on
against the insurance company while in a job for a general contractor which is a
the surety situation they would have a large reason these programs are
claim against a bond issued by the becoming more attractive.
general.
An additional attraction to the general
From the project owners viewpoint, contracting community is that Subguard
lenders typically look favorably on will cover costs of correcting defective
projects that have a Subguard policy in work, delay costs, payment to suppliers
place as there is less concern for and vendors, delay costs, liquidated
defaulting contractors and this may lead damages, extended general conditions
to quicker loan approval. Since the as well as other costs associated with a
work is funded by the insurance subcontractors default. Some of these
company, the project is able to move costs would not typically be covered
forward with less of an impact to the under the traditional surety program.
schedule.
This bulletin is not intended to be
Further, while a surety bond typically legal advice. A person should seek
provides for one year of construction local counsel for specific information
defect coverage, SDI often covers latent regarding the information found in
defects for up to 10 years. With this bulletin.
Subguard in place on a project, the
general contractor will have an easier
time securing a performance bond from
their surety if one is requested by the
owner. Moreover, since the bond and
insurance costs are passed on to the
owner through the cost of the work, the
cost for the SDI is less than buying
individual bonds from each of the
subcontractors as they are often
covered under one policy.

Bulletin No. IN 10
File: Insurance
Bulletin
Builders Risk & Installation Floater Insurance

Introduction
Imagine this scenario. incorporated into the construction site
(pipe, fixtures, HVAC equipment, etc.) or
Your contracting company is working as
materials and equipment being
a subcontractor to a General Contractor
transported to the jobsite. That property
(GC) on a commercial construction
is usually not covered by the normal
project. The project is nearing 50%
commercial insurance policys property
completion. You have installed all the
coverage.
rough-in piping and have set three of the
six rooftop units. Some of the Insurance coverage for property directly
plumbing fixtures are stored inside the involved in construction carries unique
building, and the three remaining rooftop risks due to the fact that this property
units are stored at the site away from has many different owners, including the
the building. building owner, general contractor and
sub-contractors. Ownership of the
One night, a fire breaks out in the
property is usually defined by the
uncompleted building, destroying
contracts involved and may change
everything except the rooftop units
hands during the construction process.
stored outside. Who pays for the
This is a key point! For example, it is
plumbing fixtures stored inside the
common practice that ownership of the
building? Who covers the cost of re-
material will transfer to the owner when
constructing the building to the stage it
the material is incorporated into the
was in before the fire? Is there
building (the pipe is hung in the hanger),
insurance to protect against this risk?
but every contract may assign this
A mechanical contractors general ownership differently.
property insurance will typically cover
In addition to the different parties
property owned by the contractor, such
involved, property can be stored at the
as the contractors real estate and
site, off-site or in transit. Also, risk of
personal property including tools, office
loss on a jobsite is higher than for
furniture, data processing equipment,
property that typically resides in an
fleet vehicles, etc. A more complex
office or a shop. Jobsite property in
element of property coverage relates to
incomplete structures is more
property located at the jobsite, being

susceptible to the elements. The insured and waivers of subrogation. .
insurance industry has developed two It is important that the builders risk
basic types of policies to address these policy cover the owner and all
risksbuilders risk and installation contractors working at the site, plus
floaters. potentially some material suppliers. As
an insured under the builders risk
Builders Risk policy, (you as a subcontractor), you
Builders risk policies cover the on-site cannot be subrogated for losses under
property loss exposures associated with this coverage.
construction, a structure with sub-limits Installation Floaters
for property in transit or in temporary
storage. The construction contract will An installation floater provides coverage
typically assign the responsibility for for the installation of a system or
purchasing the builders risk insurance. specific part of a construction project
The responsibility for purchase of the (e.g. plumbing, HVAC, electrical, etc.),
insurance does not necessarily follow but the coverage extends only to
the transfer of ownership. While it may specific property for a specific contractor
be customary for either the owner or GC during construction. It typically covers
to purchase builders risk insurance, it is property while in the course of
important to understand the terms of the construction that is not yet accepted by
contract so that it is clear who (if the owner until completed, tested and
anyone) is required to purchase the placed into use. The construction
policy. contract will define when these materials
or system are accepted as part of the
Usually a builders risk policy will have
building and to then be part of the
limits equal to the completed value of
builders risk. Remember the
the project. The policy would cover
ownership transfer will be established by
Special Perils previously known as All
the construction contract.
Risk (meaning loss is covered unless
specifically excluded, e.g.: 1. Loss by The installation floater is purchased by
War, 2. Nuclear Explosion, etc.) which is the mechanical contractor. It is typically
broad in scope and fairly typical. It can not required by contract, but protects the
be extended to also cover perils of contractor for loss of construction
Flood & Earthquake. The coverage property owned by the contractor at the
limits and coverage scope may also be site or in transit. The value is
dictated by the contract. determined by the contractor based on
the contractors unique set of
Builders risk policies may also carry
circumstances and may be amended
deductibles. Some contracts will restrict
due to jobsite factors. Installation
or eliminate deductibles, but some
floaters will typically carry deductibles
subcontract forms will also shift the cost
based on the contractors appetite for
of paying the deductibles to the
sharing risk.
subcontractor.
ButWhat About the Fire?
One final and important point related to
builders risk concerns who is an Regarding the above scenario, assume
the following:

1. The prime contract required the Conclusion
owner to procure and pay for a
builders risk policy covering the cost It is suggested that contractors:
of construction and insuring the GC
and all subcontractors. The owner 1. Purchase company-based
did have this insurance in effect. installation floater coverage with
2. The prime contract and the limits based on your typical
subcontract dictated that materials estimated risk of materials in transit
incorporated into the building or stored on-site awaiting
become the property of the owner. installation.
3. The mechanical contract carried an 2. Review the insurance provisions of
installation floater on all of the your contracts. Know when
workload with limits in excess of the ownership of construction material
value of the fixtures stored on site. transfers to the owner. Be sure
that the owner or GC also has the
In this case and with these assumptions, responsibility and has purchased a
the owners builders risk policy would builders risk policy. If not, the
provide proceeds for the owner to re- contract should allow you to recover
build the building to the state it was in the cost of procuring this insurance.
before the fire. This would include the 3. Obtain a copy of the builders risk
cost of the installed pipe and rooftop policy or evidence of coverage
units because ownership transferred to including deductibles.
the owner when the materials were 4. Know who is responsible for
installed. The contractors installation payment of a builders risk
floater would provide coverage to the deductible. Be cautious of a
mechanical contractor to replace the contract that shifts the risk of a
fixtures stored inside the building deductible payment to the
because this material was still owned by subcontractors and the possibility
the contractor. All proceeds would still that the deductible is large.
be subject to appropriate limits and 5. Be sure that the construction
deductibles. The situation would change contract includes a mutual waiver of
depending on any changes to the subrogation regarding the builders
assumptions and the specifics of the risk policy.
contract. 6. Discuss these issues with your
insurance agent during your annual
renewal process and whenever you
are concerned with specific jobs.
The Management Methods Committee wishes to thank Steve Federer of the Hylant
Group, Columbus, OH for his assistance in the completion of this bulletin.

Bulletin No. JM 1
File: Job Management
Bulletin
Team Management in Construction
THE TEAM ORGANIZATION involvement of the fire protection con-
tractor in the team fo r those kinds of
The team concept for building a project projects is essential.
has, in the past, been a design and
build concept. The team, as a unit, HOW TEAMS ARE FORMED
works together and accomplishes the
design and construction of the project. It is preferable to be with a selected
However, the mechanical contra ctors group for the development of a large
involvement in the project may not be as building or factory, but this is unu sual
a design fir m, but rather as the con- and, most likely, many contractors have
structor furnishing input as a contractor not gone th rough a tea m job from start
regarding costs and construction to finish.
considerations.
Most often, the mechanical contra ctor is
The usual team will minimally consist of one of several companies invited to
the owner or developer, architect, engin- present their qualifications and be inter-
eer, general contract or, mechanical viewed. The mechanical contractor may
contractor, and electrical cont ractor respond on an individual basis t o an
which will cover all of the speciali zations invitation from a general contractor who
necessary to design an d build the job. may have already been selected, o r he
Note that the owner of the job is consid- may be part of a team of contra ctors
ered a member of the team, a very im- making the sales pitch.
portant element for ef ficient and rapid
resolution of any matters requiring the Either way, the invitation usually re-
owners decision. quests certain specific information about
the mechanical contr actors company
There may be additional organizations including general information, basic
in the team that contrib ute their expert- organization, annual income, list of
ise in a certain specialization, depending projects under construction, backlog in
on the magnitude and importance of that dollar volume, financial statement,
work to the design/development effort. references, and the names of e mploy-
For instance, the structural engineer, ees planned for the job.
and possibly a structural firm, may be
involved. Another member may be a fire Other questions may relate to how the
protection contractor since fire protec- contractor would organize the job , how
tion systems must be considered for he would work with th e designers, his
particular types of build ings. The early approach to handling th e construct ion,

his cost co ntrol and labor monitoring several times as more information and
control systems, his approach to sched- actual layouts become available. The
uling and his familiarity with CPM or process continues until the time when
PERT systems. drawings and specifications are fairly
complete and definitive, and the inform-
While the mechanical contractor might ation is available for a conven tional
be involved in a team t hrough any one estimate of the project.
of a number of circumst ances, he might
form a team for a particular project or he In other cases, the fina l price of th e job
might be picked along with other con- must be set from only a plot plan a nd/or
tractors by t he owner. Most frequently, representative floor pla ns and all con-
the opportunity happens becau se a tractual information is available for a
general contractor knows or is acqu aint- conventional estimate of the project . In
ed with the mechanical contracto r or other cases, the fina l price of the job
because the GC need s a firm wit h the must be set from only a plot plan a nd/or
mechanical contractors qualifications. representative floor pla ns and all con-
tractual information must be established,
TEAM QUALIFICATIONS including a firm price or maxi mum price,
before any other infor mation is a vail-
The following four qualifications must be able. As indicated, estimating is o ne of
met for a team to handle the mechanical the most difficult, but also one of the
contracting responsibilities of a project: most important, capabilities that a mech-
anical contractor must provide to the
1. Estimating capability team.
2. Engineering capability
3. Experiences with the team concept Engineering capability is also esse ntial
4. Construction capability. to the design of HVAC and plu mbing
systems. Understanding system op-
These are not necessa rily discussed in tions, code requirements, and the
order of importance. practical considerations of the various
types of plants or syste ms that might be
Estimating capability is extremely mentioned above constitutes the e ngin-
important to determining the various eering approach to estimating the cost
costs necessary to test v arious design and degree of difficulty from a mech an-
approaches and arrivin g quickly at the ical contracting standpoint. It is an im-
right numbers for comparison. The portant capability for the team.
contractor members of the team must
have extensive background in pricing Experience with the team concept is
buildings of all types and, most import- helpful, but not ne cessary, to being a
ant, must have cost re cords from past team member. If the contractor has
work and project bids. worked successfully with other individual
team members on pr evious projects,
It is often h elpful to be able to provide a that experience can substitute for ex-
fairly realistic opinion of possible cost or perience with the tea m concept. It is
cost differences or, at least, which more important that the contractor have
choices would be the most expen sive, the essential estimating and engineering
and the magnitude of differences capabilities.
between them. In some team jobs, the
estimating requirements begin with a The team c oncept is not an inflexible,
budget derived from t he sketchiest of arbitrary way of doing things. However,
information and this est imate is refined the job req uirements and the lea ding
JM1 2
team members will most likely esta blish ment rooms and central plants and
the program to be follo wed. Therefore, information on any special usage areas,
it is important for the contractor to un- such as computer ro oms, cafeterias,
derstand the program, schedule of etc., must be establish ed. The arrange-
meetings and requirements as they ment of lease areas must be determined
pertain to the mechanical contract ors and it will h elp considerably to obtain a
responsibilities to the project and the copy of the proposed lease agreement
team. The main thing, then, is for the between the owner and his tenants.
contractor to work seriously and
diligently on the infor mation he is to 2. Preliminary Budget
have available and to be well pre pared
with the assigned work and any other At this poin t, it may be appropriat e to
information or concep ts he wants to establish a committed price on the pro-
propose. The best team members and ject. There are two ap proaches to set-
the ones most appreciated are those ting budgets that are generally used.
who have done their homework well, First, the owner and his consu ltants
and not necessarily those who can establish a budget for t he entire pr oject
boast of extensive experience. which, at that cost, makes the it finan-
cially feasible. Then, the budg et is
Construction capability is also absolutely divided into the various items it covers
essential. After all the ot her preparatory with an allowance for each element: the
work is completed, top performa nce is land and a ssociated costs; arch itects
what will cap off the effort for a suc- fees; engineering fees; general con-
cessful project. struction; and mechanical and ele ctrical.
If each part of the overa ll project is with-
THE OPERATION OF THE TEAM in its allo cation of fund s, the proje ct is
feasible. In this approach, the cost of the
1. Establish Preliminary Design and project is the beginning, and design and
Criteria planning to fit that cost are the functions
of the team.
The purpose is to d efine the type of
structure and probably the type of Another approach is f or each of the
construction needed. For instance, will team embers to propose a budget for
the building need a steel frame or the portion of the project under his
poured concrete? What are the build- responsibility by either following criteria
ings dimensions; the n umber of square for the job or initia ting criteria in the
feet, number of floors, height inf orm- explanation of the budget proposed for
ation, etc. Where will the building be each phase. The total budget is then
located and on what specific piece of compiled and tested by the owner and
property? Once the building site is his financial people to determine if the
determined, an investigation of the area project is feasible. If the budget is deter-
must be conducted for utility structures. mined to be an acceptable (under-
standing that this bu dget is act ually
The schedule for the project, from the developed prior to de sign), the t eam
beginning of conceptual planning and then works with the designers to design/
estimating through completion of w ork- develop the project to the established
ing drawings and construction, sh ould budget. During this process, factors may
be established. Decisions on de sign come up that would substantia lly in-
criteria governing HVAC systems and crease the project cost s, requiring that
plumbing must be mad e, at lea st on a the team e ither postpone or aban don
preliminary basis. The location of e quip- the project, or repeat the process.
JM1 3
3. Feasibility Analysis erated. It is desirable at that poin t to
receive a fixed price con tract for the job.
The first factor involved in the fea sibility This will also provide the owner with a
analysis is the pro for ma. This is the guaranteed cost.
developed estimate of the owners total
costs, as compared to the revenue he There are also job s where the guar-
anticipates making for determining anteed maximum is est ablished with a
whether or not the proposed project will fixed fee and usually with a share of
produce a cceptable profit. The f easi- savings. The optimum team work occurs
bility analysis also con siders the avail- when an incentive type contract is
ability of financing, which is clo sely used where the own er shares any
linked interlocked with pro forma. savings that might be generated.
It is normally not the duty of the mech- 7. Schedule

anical contractor to work the pro forma,
but he might be involved in some o f the Jobs run o n a team basis should be
estimates of tenant finish or unit cost for carefully scheduled un der the su per-
various tenant work or p ossibly in main- vision of th e general contractor fo r the
tenance and operating costs. best results.
4. Construction Start Before 8. Construction

Completion of Working Drawings
The team s pirit can prevail throughout
Usually a job on the team basis will start the entire project and all of the team
as soon as the owner is satisfied that his members benefit from the ma ximum
project is feasible and that the costs are cooperation.
correct. The final commitment on financ-
ing and av ailability of funds is also a ADVANTAGES OF THE TEAM
determining factor. Construction can be APPROACH
started as soon as foun dation drawings
are being p repared. This will result in 1. Before t he expensive detail work is
the building being completed and pro- undertaken, the team checks out the
ducing income well ahead of a pr oject job for a realistic balance between
which is contracted under the bid the technical considerations and the
system. necessary economical con sidera-
tions. Thus, the owner or developer
5. Working Drawing Preparation can determine whether his project is
feasible on a cost-to-income basis.
Team members work in close cooper-
ation to control the costs as the con- 2. Financing can be arranged based on
struction documents are being prepared. a firm committed price instead of
budget figures that might ultimately
6. Final Price and Contract prove to be inaccurate.
Except in the case wher e a firm price is 3. Early project completion is possible
negotiated on the first preliminary draw- because construction can begin and
ings, the final firm price is estimated material can be procured while final
from the completed working drawin gs to construction documents are bein g
determine that the job is designed within completed.
the budget originally established or pos-
sibly to see if savings have been gen- 4. The cont racting side of the team will
JM1 4
have a voic e in controlling construc- 3. If other team members are based in
tion details and tech niques to pro - other cities, many out-of-town trips
duce more building for less money in may be necessary. If all pre-contract
less time. There are many exa mples expenses are not reimbursable, the
where choice of materia ls or choice mechanical contractor may end u p
of job configuration or other changes with a low p rofit job, even though he
which arise in the design/ develop- is part of a successful team.
ment process substan tially reduce
job costs. It can b e shown that th e 4. The paper work on a large cost -plus
team concept and an incentive project of t his type is staggering .
type construction contract afford the Unless all of the accounting and
owner many benefits in these areas billing time is reimb ursable, the
over bidding of jobs. mechanical contractor could have a
large hidden expense. This applies
5. Under the team system of con- to your controllers time when audits
struction, all possible advantages are required.
are extended to the client to the end
that the lowest possib le project cost 5. Many owners and general contract-
can be ach ieved. It ca n be readily ors feel that a negotiated job should
shown that this program and a n carry a low fee. This is not reason-
incentive type construction contract able because of the expertise re-
afford the client the maximum ben- quired of the mechanical contracto r,
efit of competitive buying, the maxi- as outlined above, and the fact that
mum control of th e equipment and the contractor must su pply his best
materials to be used in his bu ilding, project engineers and supervision to
the maximum assurance of on-time the job because of the team relation-
and on-budget delivery, and the best ship. If the mechanical contractor
possible conditions for top efficiency cannot get a reasonable return from
and performance of all individu als the job, he may be bett er off pursu -
and firms involved in the project. ing other types of contracts.
DISADVANTAGES OF THE TEAM 6. On large projects, the changes may

APPROACH come so fast that th e mechanical
engineer cannot handle them. At this
1. To participate fully in the team, the point, the mechanical contractor may
mechanical contractor must have a have to get involved in drafting an d
staff of highly competent people that layout to keep the job moving. Make
are immediately available to the pro- sure that you have these personnel
ject. Many times the q uality of th e available and that their costs ar e
mechanical contractor is judged by reimbursable.
his proposal and his representatives.
7. When the project is going to be fixed
2. If the mechanical contractor attempts price or cost-plus with a maximum,
to participate in every project that he the contractor has to use great skill
hears about, he will soon find that when pricing the jo b, especially
many of th ese are blue sky and when using less-t han-complete
that he has spent a lot of time, mon- working drawings. If he is too
ey, and tra vel expense for nothing. conservative, the job will not go. If
Be selective! he is too low, he will have a problem
later.
JM1 5
SUMMARY
The team c oncept has been used for

many years in several of its various
forms and names. In t his bulletin, the
term team concept refers to the pro-
jects where all team members are
involved from the start, and especially
before any working plans and speci-
fications are developed. Contractors can
provide input into the design, the one
largest advantage to the owner.
Many projects have been completed on

a team con cept basis and the me chan-
ical contractor can look forward to this
method of construction being a pa rt of
our business in the future.
JM1 6
Bulletin No. JM 2
Bulletin
Job Supervisors Manual

MCAAs Job Supervisors Manual has been replaced by a two-part (instructor and
student) manual that is distributed through the United Association. The publications are
available from the UA's IPT JTC bookstore using the item numbers and titles below.
Job Supervisor/Leadership and Development Student Binder

This training manual explains how to be a better leader on the job. It tests the student's
traits and suggests different approaches to solving problems. Role playing is used to
show examples of situations and their solutions. Labor and management representatives
are involved to give their views of the importance of this training. Overhead
transparencies are available on CD.
Job Supervisor/Leadership and Development Instructor Binder
To order:
Call 301-218-1241 or
Visit the online store at https://www.cpostores.com/ipt. This is a restricted site; users will
need the e-mail and password from their UA business manager.
For additional assistance/information, contact:
International Pipe Trades JTC - Bookstore

687-B Commerce Drive
Upper Marlboro MD 20774
301-218-1241
Fax: 301-218-8961
E-mail: iptbookstore@uanet.org

Bulletin No. JM 3
Bulletin
Scheduling
INTRODUCTION together to develop a coordinated
master project schedule. The
Contractors schedule jobs, development of a coordinated schedule
generally, because it enables them to requires that each subcontractor be
work effectively and efficiently, both prepared to identify its specified work
alone and with other contractors. activities and the time duration required
Specifically, scheduling is advantage- to complete those activities. The work
ous because it incorporates all job activities are then coordinated and
activities into a master schedule, gives a sequenced in an attempt to create an
framework for coordinating resources unobstructed window of opportunity in
and activities necessary for timely job which to complete each work activity.
completion, and affords a time scale for
monitoring progress and adjusting job Because scheduling for a multi-party
activities. project is a complex process and since
schedules are not static, it is important
On any construction project involving that a contractor designate one
a mechanical contractor, several kinds representative who is responsible for
of schedules may be used, but none is updating schedules and communicating
independent of the others. On a typical changes. It is a general rule that written
project, the following schedules will be notification of schedule changes be
developed and maintained: given to everyone involved in a project
as soon as a change is made. Regulator
Prime contractors master schedule meetings should be held to update the
Mechanical construction schedule coordinated master schedule and the
Labor and job supervision schedule revised schedule should be dated and
Prefabrication schedule distributed to all subcontractors.
Purchasing and delivery schedule
Tool and equipment schedule MECHANICAL CONSTRUCTION
Subcontractor(s) schedule SCHEDULE
PRIME CONTRACTORS For the mechanical contractor, the

MASTER SCHEDULE mechanical construction schedule is the
foundation of all project activities.
The development of a master schedule Development of this schedule involves
for any project is the responsibility of the four steps:
prime contractor. The prime contractor
and the subcontractors should work 1. A review of the prime
contractors schedule should be

undertaken to ascertain the 4. Activities that can be started and
existence of an overall project completed at any time within one or
schedule and to determine more time periods in the general
whether the overall schedule is schedulesometimes called float
complete and feasible. Special functionsshould be identified.
attention should be paid to whether Identification of these functions
the general schedule adequately allows some flexibility in scheduling
allows for the completion of since they provide some room for
mechanical activities and what adjusting to unforeseen circum-
clarifications in the general schedule stances and taking advantage of
are necessary before a mechanical especially favorable conditions for a
schedule can be designed. particular task.
2. Project milestones should be LABOR & JOB SUPERVISION

identified, including the start and SCHEDULE
completion dates, and the projected
activities of other trades. A labor and job supervision schedule
is used to make sure that there are
3. Mechanical activities should be always enough of the right people to do
listed in sequence and then plotted the work, as well as to circumvent
on a bar graph which represents a unnecessary fluctuations in labor and
basic time line showing the day, supervision load. In this process, the
week, or month when the scheduler plots a bar graph based on
various project activities should start the mechanical schedule which also
and finish.1 Many contractors now shows the number of employees and
use computer software to assist supervisors assigned to each task. In
them with this task. To find analyzing the resulting bar graph, a
scheduling software suppliers, you contractor can calculate the number of
may wish to consult MCAAs list of workers and supervisors needed
Manufacturer/Supplier members at during any time period by adding up the
http://www.mcaa.org/directory. number of tasks and the number of
people assigned to each task. Once the
results are in, both the mechanical
construction schedule and the labor and
1 There are a variety of scheduling methods that supervision schedule can be
can be used to give you control over your part of modified until the mechanical schedule
a project. To decide which one is best, a
contractor must evaluate the complexity of the
reflects what the contractor considers to
job and advantages of each method. Many be the best use of company labor; that
Federal projects specify certain methods as part is, a schedule that maintains a fairly
of the contract, although even the smallest job even manpower load for the duration of
can benefit from some form of written the project and ensures that the right
schedule. Among the methods available are bar
charts (which are referred to in the examples in number of properly qualified people
this bulletin) and network diagrams (including the are there when they are needed.
well-known Critical Path Method), both of which
can be used to advantage. For very complex PURCHASING & DELIVERY
jobs, there are consultants available who have
experience working with the details involved SCHEDULE
in scheduling for large projects.
A purchasing and delivery schedule
is used to ensure that all equipment and
materials are delivered on time and that
JM3 Copyright, Mechanical Contractors Association of America, Inc., Revised 2010 2

all purchases are obtained at the best productivity from subcontractors, as well
price. In a process similar to the one as smooth coordination with other
used for the labor and supervision mechanical activities.
schedule, a comprehensive list of items
to be purchased is prepared and the A successful subcontractor
conditions affecting purchasing for schedule must involve the
the project (such as delivery subcontractors themselves. Only in this
considerations) are examined. Then the way will they get a clear overview of the
purchasing and delivery activities are project and an understanding of
plotted on a bar graph using the same how their efforts will affectand be
scale as the mechanical affected bythose of other
construction and labor and job subcontractors and of the
supervision schedules. mechanical contractor.
TOOLS & CONSTRUCTION To schedule for subcontracting, have

EQUIPMENT SCHEDULE each subcontractor supply information
on delivery dates and storage
This schedule is used to make sure requirements for his
that tools and construction equipment equipment, materials, and tools, as well
are available when needed (i.e., that the as his manpower needs for the duration
right tools and equipment are on site of the job. Then plot a schedule for each
when needed) and are managed in the subcontractor on a separate bar graph
best way, with particular attention to and on a master subcontractor schedule
ensuring that all special tools and rented (using the same time scale as
equipment are returned to their sources those used by the other schedules)
when they are no longer needed. which shows all subcontractor
Development of this schedule involves a activities.An analysis of the
two-step procedure: master subcontractor schedule should
reveal if subcontractor activities are
(1) identifying the tool and equipment coordinated with the mechanical
requirements of the job, specifying activities and those of the other trades,
needs for standard tools, specialized and if each subcontractor has
tools and equipment, and enough time and room to work
rented tools and equipment; productively.
(2) plotting a tool and equipment
schedule on a bar graph using the LOOK AHEAD SCHEDULE
same time scale as those used by
the other schedules and stipulating The prime contractor should develop a
deliveries of tools and equipment to coordinated short interval look ahead
the jobsite and return of all tools and schedule each week, based upon an
equipment to their sources. updated master schedule. The use of
this schedule will keep all
SUBCONTRACTOR SCHEDULE subcontractors informed as to the status
of the project and will assist in
It is estimated that subcontractors identifying requirements for manpower,
perform 20 percent to 30 percent of the tools, construction equipment, material
work specified in any mechanical equipment, and subcontractors. It also
contract. For this reason alone, it is easy creates a form in which the onsite
to see why a subcontractor schedule is personnel can discuss coordination of
an important guarantee of maximum their specific work activities with other
JM3 Copyright, Mechanical Contractors Association of America, Inc., Revised 2010 3

Bulletin No. JM 4
Bulletin
Pre-Job Conference
Foreword
Planning Ahead is a basic management concept for businessmen in any industry.
In construction management, it is essential for the successful completion of a job.
One technique of planning that we highly recommend is holding a Pre-Job

Conference with the owner, architect and all contractors on the job. This should be
done as soon as possible after contracts are signed or as far as possible in
advance of starting work.
The attached bulletin outlines the importance of the Pre-Job Conference and
presents an agenda for your use at these meetings. For more information on this
subject, please review the section in MCAAs Project Managers Manual.
The Pre-Job Conference serves a very set the stage for continued
important communications function on a communications and better job relations.
project. It is of such importance that one
should be held on every major job. The Pre-Job Conference may be
chaired by the owner, architect or
In fact, the general or special contract general contractor. In addition to these
conditions frequently may specify that people or their representatives, the
such a conference be held. If there is no meeting should include the resident
such requirement in the general and inspector or consulting engineer, all
special conditions of a contract on any prime contractors, main subcontractors,
job, a mechanical contractor should hold and sub-subcontractors, if desired.
such a conference anywayone with
the owner and architect and one with Following this meeting, the
the subcontractors. It should become subcontractor should have an in-house
part of each contractors job conference with both his key people and
management procedures. all subcontractors in attendance. Many
important matters can be clarified at this
Not only may these conferences be the time. Although requirements will vary
first occasion that all parties on the from job to job, the following example
construction team have to meet face-to- may be helpful in establishing an
face and become acquainted, they also agenda for such a conference:
Copyright, Mechanical Contractors Association of America, Inc., 1996, Revised 2013. 1

AGENDA FOR PRE-JOB CONFERENCE
CORRESPONDENCE:
(1) Mailing address of owner, architect, engineer, general contractor and other major
subcontractors
________________________________________________________________________
(2) E-mail address of owner, architect, engineer, general contractor/construction manager and
other major subcontractors.
________________________________________________________________________
(3) Cell phone numbers of owner, architect, engineer, general contractor/construction manager
and other major subcontractors field representatives.
________________________________________________________________________
(4) Who is responsible for the job conference minutes and will a copy be mailed to everyone?
________________________________________________________________________
(5) Who will call future meetings?

________________________________________________________________________
SUBMITTALS:
(1) Number of copies for each party _______________________________________________
(2) Length of time for processing _________________________________________________
(3) Shop drawingsresponsibility for review ________________________________________
INSPECTIONS:
(1) Are notices required? _______________________________________________________
(2) Authority of the inspector ____________________________________________________
(3) What tests require written reports or signature? __________________________________
(4) Daily Reports _____________________________________________________________
(5) Photos __________________________________________________________________
JOBSITE CONDITIONS:
(1) Special hazard areas _______________________________________________________
(2) Welding permits required ____________________________________________________
(3) Shutdowns _______________________________________________________________
(4) Parking __________________________________________________________________
(5) Working hours ____________________________________________________________
(6) Security clearance (badges required) __________________________________________

(7) Change house _____________________________________________________________
(8) Contractor gate ____________________________________________________________
(9) Temporary toilet facilities _____________________________________________________
(10) Craft jurisdictional problems __________________________________________________
(11) Temporary heat ___________________________________________________________
ACCIDENTS:
(1) Ambulance service available __________________________________________________
(2) Doctors to be listed for service ________________________________________________
(3) Nearest medical facility ______________________________________________________
(4) Accident reporting procedure _________________________________________________
OWNER FURNISHED EQUIPMENT:
(1) Delivery schedule __________________________________________________________
(2) Receiving, storage, installation, start-up, guarantee ________________________________
(3) Insurance to be furnished ____________________________________________________
SAFETY PROGRAM:
(1) OSHA requirements ________________________________________________________
(2) Tool box meetings _________________________________________________________
(3) Safety equipment required and/or available ______________________________________
(4) Safety responsibility of various contractors ______________________________________
SCHEDULES:
(1) C.P.M ___________________________________________________________________
(2) General Contractors schedule _______________________________________________
(3) Subcontractors input to schedule _____________________________________________
(4) Notification of change in schedule _____________________________________________
STORAGE AND WAREHOUSING:
(1) On-site locations __________________________________________________________
(2) Off-site locations __________________________________________________________
(3) Bonded warehouse ________________________________________________________

(4) Contractors yard __________________________________________________________
BILLINGS AND PAYMENTS:
(1) Cut-off date ______________________________________________________________
(2) Billing date _______________________________________________________________
(3) Payment date _____________________________________________________________
(4) Approval of billing __________________________________________________________
(5) Approval of percentages _____________________________________________________
(6) Retention ________________________________________________________________
(7) Material stored ____________________________________________________________
CHANGE ORDERS:
(1) Who approves ____________________________________________________________
(2) Field change orders ________________________________________________________
(3) Overhead and profit percentages _____________________________________________
(4) Hand tool rate ____________________________________________________________
(5) Equipment rental schedule __________________________________________________
(6) Mark-up on subcontractors _________________________________________________
BACKCHARGES:
(1) Require they be billed out separately _________________________________________
(2) Require that they be rendered monthly _______________________________________
(3) Percentage of overhead for labor and material _________________________________
(4) Require that work sheets must be signed by firm representative ___________________
(5) Require immediate notice of backcharges to determine responsibility _______________

Bulletin No. JM 5
Effects of Job Schedule Delays on

Construction Costs
INTRODUCTION from about $17,000 to $7,715,000 per con-

tract and averaging nearly $1,620,000. Total
A study of mechanical and electrical pro- actual prime costs were about $150 million,
jects, conducted by MCAA and the National ranging from $20,000 to nearly $10 million per
Electrical Contractors Association, has contract, and averaging about $2,100,000.
shown that significant delays in construction The total cost overrun and the average of in-
and distortions in planned schedules are un- dividual overruns were both about 30 percent.
common and cannot be anticipated in bids. The total labor costs overrun was 48 percent,
When they do occur, they have a devastating but the average of labor cost overruns was 55
effect on construction costs, particularly labor. percent.
Delay-related factors account for a large Estimated prime costs (including mate-
majoritynearly 90 percentof the total rials, labor, subcontracts and other direct job
labor costs overrun experienced by these con- expenses) ratios of the total sample were typ-
tractors on projects with schedule problems. ical of ratios for specialty contracting:40.5 per-
cent labor, 48.6 percent materials and 10.9
One-half of the delay-related excess percent direct job expenses. Actual prime
costs are due to losses in labor productivity. costs were distorted by the adverse effects of
Extra supervisory costs are the next most sig- schedule disruptions on labor costs and direct
nificant factor, and overtime premiums the job expenses: 46.5 percent labor, 41.7 per-
least important. cent materials and 11.8 percent direct job ex-
penses. A summary of monetary data on the
In the study, total estimated prime costs prime costs of mechanical projects is given in
equaled approximately $115 million, ranging Table I.
Copyright, Mechanical Contractors Association of America, Inc., 1996, revised 2002
1
Job Management
Table 1 Mechanical Projects

Summary of Monetary Data on Prime Costs
(Dollar figures are in thousands. Percentages are expressed to the nearest whole percent and
are derived from the totals and subtotals on this table.)
Overrun as
Percentage
Estimate Actual of Estimated
Labor
Total $12,509 $18,887 51%
Average 544 821
Range 351,519 402,821
% of Total Prime Cost 35% 43%
Delay-Caused Overruns 0 4,931 39%
Loss of Productivity 0 2,992 24%
Materials
Total 15,442 16,841 9%
Average 671 732
Range 123,659 303,844
Direct Job Expense
Total 7,238 8,499 17%
Average 483 567
Range 42,168 122,387
Total Prime Costs
Total 45,963 59,946 30%
Average 1,768 2,306
Range 585,546 708,087
Total Prime Cost figure does not equal the sum of Labor, Materials and Direct Job Expense because
figures were not reported for those categories in some instances. Percentages were computed on the
sum of Labor, Materials and Direct Job Expense of those making complete reports.
Totals of delay-caused overruns and those specifically due to loss of productivity include these date
only from reports that included labor cost estimates and actual total labor cost.
NATURE OF DISRUPTIONS specialty contractors is often significantly de-

layed or increased in scope due to such hin-
The study found that schedule delays drances as:
and disruptions are not usually under the con-
trol of the specialty contractor, whether he is 1. Unexpected congestion in shared work-
a separate prime contractor or a subcontrac- ing areas by other trades who should
tor. The specialty contractors work, in most have completed their work earlier.
cases, cannot be performed until preceding 2. Physical obstructions permanently in-
work has been performed by other contrac- stalled out of sequence by other con-
tors or subcontractors. Moreover, the work of tractors.
2 JM 5
Job Management
3. Temporary physical obstructions that ANTICIPATING DELAYS IN BIDS

should have been removed prior to com-
mencement of the mechanical or electri- Contractors cannot normally anticipate
cal work. delays and/or disruptions at the time of bid-
ding. E xperienced bidders may add to
4. Interference by employees, customers or their estimates the cost of usual or normal
property of the owner when portions of delays and disruptions which are repeatedly
the space are occupied before comple- encountered on projects of the same type,
tion of mechanical or electrical work. size and complexity or with the same own-
er. These occurrences can be anticipated
and are not deemed serious or significant.
CAUSES AND EFFECTS OF DELAYS
Inadequate coordination by owners, RECOVERING OVERHEAD
general contractors and construction man-
agers is the major cause of failure to main- Contractor overhead costs are also sig-
tain schedules, followed by administrative nificantly affected by delays. Unabsorbed
delays in correcting and clarifying ambigu- overhead that is not allocable to other pro-
ous design documents. Poor design ranks jects, which cannot be undertaken until a de-
third. layed project is finally completed, can be
especially expensive, but this factor has been
Contractors who have experienced se-
difficult to document.
rious schedule problems report that delays
affect productivity of the work force most sig- Standard overhead procedures fail to
nificantly. Next, they affect loss of momen- recognize that overhead is actually more of a
tum and productive rhythm, followed by the function of time than of prime cost. A $50,000
need for redundant mobilization and demo- contract that takes three years to complete
bilization in various job areas and by em- probably requires more of the company over-
ployees. head services than the $100,000 job, com-
pleted in one year.
The causes and effects of schedule dis-
ruptions can be avoided by: Many contracts pre-establish a maxi-
mum percentage, such as 15 percent, that can
Planning more realistic schedules
be applied to the prime costs of change or-
More effective enforcement by those hav- ders to cover overhead. Such percentages
ing the authority to do so often apply to general contractors and sub-
contractors uniformly and are seldom ade-
Better design quate for change orders of specialty
More efficient administration. contractors. Administrative costs are propor-
tionately much higher for change orders than
No radical departures from conventional for the same amount of prime cost expended
procedures are necessary, the study con- as part of the much larger original contract.
cluded. The means and expertise to imple- Moreover, the administrative costs incurred by
ment these needed steps exist within the the subcontractor actually performing the
industry. change order work are a great deal higher
JM 5 3
Job Management
than those incurred by the prime contractor Contract Appeals, and most state courts and
for work being performed under subcontracts. arbitrators.
One solution is to use the Eichleay for- The Eichleay formula is based on the rul-
mula, developed to allow contractors to re- ing of the Armed Services Board of Contract
cover unabsorbed overheadcontinuing Appeals, Decision 5183, December 27, 1960,
overhead that is not being absorbed by other in an appeal of the Eichleay Corporation from
work that cannot be undertaken, or by over- a ruling of a contracting officer. It recognizes
head reimbursements on the temporarily re- that overhead is a function of time as well as
duced prime costs on the contract. It can be of prime costs and assumes that all field of-
used when it is difficult or impossible to prove fice overhead is being recovered as direct job
actual allocation of company overhead to the expense.
specific project. It is generally accepted by the
U.S. Court of Claims, Federal Boards of The formula is described in Table 2.
Table 2 Eichleay Formula

1. Billings for Delayed Contract Total Company Overhead
Total Company Billings During During Contract Period
Extended Period of Performance
on the Contract (Contract Period)
= Overhead Allocable to the Contract
2. Allocable Overhead = Daily Overhead Allocable

Actual Days of Contract To Contract
Performance
3. Daily Overhead Number of Days of Delay =

Amount Claimable for Unabsorbed Overhead
4 JM 5
Bulletin No. JM 6
Bulletin
Working With Owners

OBJECTIVES manage multiple contractors and
produce an accurate coordinated
Develop guidelines for an effective construction schedule.
and cooperative work environment Startup and commissioning
on a construction project. make sure that the owner has
Establish up-front responsibilities personnel to take responsibility
with the owner, design team, for systems startup and
suppliers and subcontractors; and commissioning.
Schedule regular communications If existing facility, potential for
meetings to ensure a professional, working around existing
cost-effective project. operational systems and
personnel. Need to make sure
POTENTIAL ADVANTAGES OF that procedures and safety
WORKING WITH AN OWNER measures are in place.
Owner might not normally
Better payment terms available. provide Builders Risk Insurance.
Dont be afraid to ask for earlier or Insure that this is in place prior to
more frequent payment or down construction. Also, be aware of
payment. the deductible for the Builders
Potential for lower retention or no Risk policy and clarify who is
retention. Again, dont be afraid to responsible to pay the
ask. deductible.
Can often avoid requirement to Owners will often have a lack of
provide performance/payment bond. understanding of scope change
Good performance can lead to and the cost impact when they
repeat business and possible dont make timely decisions.
service and maintenance contract.
PRIOR TO CONTRACT
POTENTIAL PITFALLS OF WORKING
WITH AN OWNER Maintain a good image and a
positive relationship with the owner.
Owners representative will often Find out what the owner wants, and
be a contract employee and not then stress it. Convince the owner that
engaged in owners business. you fit his want list. Show the owner
Owners often lack construction security and comfort with your business
expertise and sophistication to (i.e., show insurance, financial strength,

bonding capability, safety, experience, heat services, such as gas or
licensing, organization, equipment, electric, sanitary, water, cost of
value, etc.). power, site offices, site security, site
cleanup, snow removal, dust control,
CONTRACT wireless internet access)
Progress and time schedules
Coordinate with all prime con- Inspections/testing
tractors. Make sure who the owners Material handling
designated representative is (with Materials furnished by others
control of the project). Lay out the Record keeping requirements
owners responsibilities (example: Payment/cost breakdowns
Article 4, AIA Document B141 2007, Subcontractors/suppliers
Standard Form of Agreement Between
Changes/claims
Owner and Architect). Use standard
Productivity
contract documents to promote mutually
acceptable contract language for both PrefabricationPayment and
the owner and contractor. Storage
Tools/equipment
DURING CONSTRUCTION Ordering and paying overtime
Quality/cost control
Proactively manage the Back charges
relationship with the owner. Use public Cleanup
relations (PR) and news releases for the Record drawings
owner. [Please note that more Warranty-guarantee period
detailed information on this subject Training of owners maintenance
is available in Bulletin MK5, Listening personnel
To Our Customers.] Commissioning
Offer Preventative Maintenance and
Create an organized project Service Contract
notebook for the owners representative,
with tabs on job minutes, schedules, OWNERS GENERAL
subcontractors and supplier lists, etc. RESPONSIBILITIES
Schedule regular project meetings and
keep insure that minutes of project 1. Provide complete project
meetings are maintained and information.
distributed. (See checklist of items to 2. Provide all real estate survey
cover.) information.
3. Have all geo-technical data
Job meeting checklist to clarify responsibility (i.e., underground
responsibilities: storage tanks).
4. Toxic or hazardous materials on site
Permits/Licenses (i.e., asbestos).
Insurance 5. Provide proper insurance including
Builders Risk Insurance.
Safety
6. Secure project drawings and con-
Parking
tract documents.
Storage 7. Provide all legal approvals for the
Construction drawings including BIM project development.
process 8. Clear all necessary easements and
Shop Drawings and submittals assessments of the property.
Temporary facilities (i.e., temporary
Copyright, Mechanical Contractors Association of America, Inc., revised 2014 2

9. Establish the ability to pay for 7. Follow up on final payment, and
construction costs. clear any final lien waivers that may
10. Pay for performance and payment be necessary. Note the states lien
bonds (if required). requirements to insure that final
11. Should communicate with the sub- payment is made before lien rights
contractors only through the prime expire.
contractor and not be contractually 8. Transfer billing arrangements of any
obligated to any of the contractors utilities that may have been in your
subcontractors, unless set up name to the owners name.
otherwise, such as a C/M project. 9. Request a letter of recommendation
12. Waive subrogation against from the owner, architect and/or
contractors, architects, engineers, engineer.
subcontractors and sub- 10. Request permission to take pictures
subcontractors for loss (carried of sections of your work. Ask
under the owners insurance). permission for use in marketing
13. Agree to arbitration of claims and campaigns.
disputes in questions arising out of 11. If appropriate, consult with in-house
or relating to the contract. services to pursue a service and/or
14. Provide a representative to be in maintenance contract.
charge of the project.
15. Be aware of any fault or defect in
project nonconformance with the
drawings or specs, and give prompt
written notice to the contractor.
AFTER CONSTRUCTION
1. Complete operation and

maintenance manuals and record
drawings promptly.
2. Provide operational instructions to
the owners maintenance team and/
or provide for a maintenance con-
tract.
3. Document start-up dates of major
equipment and inform the owner of
warranty periods.
4. Make sure all punch list items are
complete and permit items inspected
and signed off on by the local
authorities.
5. Send your congratulations to the
owner for the completed project with
a building plaque, news release, or
any other tangible thank you
method. (This is also a nice touch for
the architect/engineer/ general
contractor.)
6. Advise your bonding company that
the project has been completed to
open up available bonding capacity.
Copyright, Mechanical Contractors Association of America, Inc., revised 2014 2

Bulletin No. JM 7
Bulletin
Jobsite Coordination
Historically, job coordination has been 1). Coordinated drawings are furn-
one of the p rimary responsibilities of the ished to insure that n o interfer-
general contractor, but today, with new ences will occur. It is imperative
methods of job management, i.e., that all trad es participate and sign
Construction Manager, this resp ons- off on the completed drawings,
ibility, in many cases, is passed along to including but not limited to HVAC,
all the contractors on the project. The plumbing, sprinkler, ele ctrical and
construction manager c an be architec- general construction.
tural and en gineering firms or organiza- 2) The contractor has assumed that
tions specializing in this form of job all the co ntract drawings have
management. been coordinated durin g the de-
sign phase, and that th ere is ade-
The mechanical contractor is most likely quate room in ce ilings, shafts and
to be burdened with much of this mechanical equipment rooms to
responsibility since his work will con- install the work shown.
sume most of the space in the ceilings, 3) The contractor will not b e respons-
shafts, and in the mechanical equipment ible for relocation of mechanical
rooms. shafts.
4) Any and all costs in curred due to
Many specifications ha ve clauses that insufficient space will be the re-
cover coordination, and as a mechanical sponsibility of the archit ect, engin-
contractor, you should analyze this cost eer, construction manager, general
impact at bidding time. One area that contractor or owner.
may have to be qualified at bidding time,
or certainly before con tract signing, is Some contractors make it a practice to
called Coordinated Drawings. With notify the architect, en gineer, construc-
single-line duct layouts and some-times tion manager, general contractor or
little or no engineering interface within owner of these condit ions, but in your
the design team, coordinated drawings work area, there may be other quali-
could be a costly item. fications required.
Some qualifications that have to

be noted are:

Bulletin No. JM 8
Partnering
Foreword
Simply put, partnering is a process in which the different parties involved in a construction
project work cooperatively to complete the project in a satisfactory manner. Partnering is now
used extensively in many segments of the industry, and this overview of its history, the way it
works, and its advantages can be useful to mechanical contractors.
WHY PARTNERING? Partnering, on the other hand, starts with

a cooperative attitude and works from there.
No change is made without a reason.The It is a way of structuring a project so that it is
move toward partnering in the construction unnecessary for one party to lose and another
industry grew out of an environment in which to win. In the way partnering is supposed to
excessive recourse to litigation had gone a work, everyone is a winner.
long way toward draining the industrys finan-
cial and human resources, as well as deplet- GOALS AND METHODS OF PARTNERING
ing much of the profit from contractors. In fact,
construction gives birth to more litigation than A partnering relationship is not contrac-
any other U.S. industry. This pre-partnering tual, but it includes a written statement of prin-
environment was characterized by adversar- ciples that define the parties common
ial, rather than cooperative, relationships expectations and objectives. It also provides
among all parties. Thus, there could be dis- a compelling mission statement that includes
putes between owner and general contractor, clear mutual objectives and guidelines for ac-
between general contractor and subcontrac- countability and resolution of disagreements
tor, between subcontractor and subcontrac- through trust and commitment.
tor, between management and labor, and the The partnering process can be devel-
list could go on. oped by any party to a project and for any
1
Job Management
kind or size of project. An owners intention to Development of mutual goals and objectives.
encourage partnering, for instance, can be At the initial partnering workshop, stakehold-
provided for in the project solicitation adver- ers identify all their respective goals for the
tisement and specifications. Such a provision project in which their interests overlap. These
would emphasize the voluntary nature of jointly developed and mutually agreed upon
partnering and would assert that any costs goals may include achieving value engineer-
associated with implementing the partnering ing savings, meeting the financial goals of
process would be shared equally without af- each party, limiting cost growth, limiting re-
fecting the contract price. view periods for contract submittals, early
completion, no lost time due to injuries, min-
Partnering can also be included in a presen-
imizing paper work generated for the purpose
tation at the prebid conference. In the context
of case building or posturing, no litigation, or
of a negotiated contract for private work, it
any other goals specific to the nature of the
might be a contractor who proposes the use
project.
of partnering. Even in public works contracts,
the contractor can initiate a partnering agree- Develop strategies for implementation. After
ment after the award, since partnering does setting out the goals, stakeholders together
not change the contract. develop strategies for implementing their mu-
tual goals and the mechanisms for solving any
problems that may arise.
THE KEY ELEMENTS OF PARTNERING
Continuous evaluation.To ensure implementa-
Although each partnering relationship tion, the parties agree to plan for periodic joint
will be different in certain respects, all exer- evaluation based on the mutually agreed-to
cises of partnering must embrace the follow- goals.These evaluations ensure the plan is pro-
ing key elements: ceeding as intended and that all stakeholders
Commitment. Commitment to partnering are carrying their share of the load.
must come from top management. A jointly Timely responsiveness. Timely communica-
developed partnership charter or statement is tion and decision-making can not only save
not a contract, but is a symbol of commitment. money, but can also keep a problem from
Equity. The interests of all parties are consid- growing into a dispute. In the partnering work-
ered in the creation of mutual goals. There is shop, the parties develop mechanisms for en-
a commitment to satisfying each partys re- couraging rapid issue resolution, including the
quirements for a successful project by utiliz- escalation of unresolved issues to the next
ing win-win, rather than adversarial, thinking. level of management.
Trust.Teamwork is not possible where there is

cynicism about the motives of other members HOW THE PARTNERING PROCESS
of the team. Through the development of per- WORKS
sonal relationships and communication about If the partnering process is to work, the
each stakeholders risks and goals, there will willing participation and support of the senior
be better understanding. With understanding management of all organizations involved
comes trust. And with trust comes the possi- must be assured. Since trust and communi-
bility for a synergistic relationship. cation will not be established just because top
2 JM 8
Job Management
management thinks it is a good idea, top man- nering is to be able to disagree without be-
agers must be visible in the process by at- coming disagreeable.
tending an initial partnering workshop. Their
The second day of the workshop starts
continued support for the process can be
with the development of a pledge or mis-
demonstrated by continued participation.
sion statement that each member signs as
All partnering projects start with a well- a commitment to the team. The pledge de-
planned, well-run workshop that is tailored to fines the long-term goals and objectives of
a specific team and a specific project. Two, or the project and becomes a win-win charter.
sometimes three, days are scheduled for the It must include the following objectives to
workshop for most projects. This workshop is provide measurable milestones for project
crucial to the success of the partnering success:
process.
To champion open and frank communica-
The workshop should be held at a neu- tions between the participants.
tral site and will be significantly improved by To encourage value engineering savings.
the presence of impartial facilitators with en-
gineering and construction experience. The To limit cost growth.
job of these facilitators is to provide training in To promote safety to avoid lost-time in-
communication, group dynamics, and team juries.
building.
To avoid litigation.
A primary goal of the workshop is to iden-
To finish ahead of schedule.
tify and develop one or more team members
who are enthusiastic about the partnering After the pledge is developed and
process, since the presence of a strong leader signed, the initial workshop is devoted to iden-
is necessary to gain the support of all stake- tifying and understanding potential problems
holders. and developing specific mechanisms to ad-
dress these issues. The problems and issues
The first day of the workshop is devoted
discussed can include a variety of subjects
to team building. It includes enjoyable hands
such as expedited requests for information,
on exercises that teach the value of commu-
special processes for submittal and shop
nication and trust. This leads to the develop-
drawing reviews, value engineering proce-
ment of a friendly atmosphere in which team
dures, conflict resolution, the impact of sched-
members can get to know each other as indi-
ule changes, a safety awareness program,
viduals with individual strengths and weak-
and, where appropriate, the interface between
nesses. It is the first day of the workshop in
construction personnel and facility operators.
which an environment of mutual trust is es-
tablished.This is absolutely necessary so that Since it is the goal of the workshop to
team members can express their concerns in create an environment of high trustin which
a non-judgmental way and actively listen to everyone feels comfortable expressing ideas
the concerns of others. These attitudes, in and contributing solutionsit is essential that
turn, foster an on-going project climate in potentially difficult areas of the contract
which issues can be raised, openly discussed, should be discussed openly. Understanding
and jointly settled.The key to successful part- all the stakeholders risks and concerns and
JM 8 3
Job Management
seeing how each portion of the contract fits in team members. This facilitator can also share
relation to others helps to build the team atti- experiences from other partnering efforts to
tude that is necessary for project success. help resolve similar problems.
This process will help each party understand
the personalities with whom they will be work-
CONCLUSION
ing before actual problems arise.
Finally, the workshop is the place where Mechanical contractorsalong with the
a leader must be selected from among the rest of the construction industryhave wit-
participants. This leader is to provide day-to- nessed how adversarial and confrontational
day coordination of the partnering effort, to in- methods of problem-solving negatively affect
clude providing administrative and logistical both the quality of work and the contractors
support, encouraging communications, and bottom line. The more money spent on litiga-
promoting problem solving. tion, the less profit is made.
After the initial workshop, the large part- Partnering is a way in which we can redi-
nering group should meet at least once a rect our energies to the ultimate goal of con-
month during the course of work.These meet- structing a quality product on time and within
ings will introduce any new members, evalu- budget. It is a challenging endeavor that in-
ate progress, and renew the team spirit volves a basic change in the way we think
created at the workshop. Since they will also about the way we work. In the final analysis,
address emerging issues, a facilitator who is partnering is a process through which indi-
also an experienced construction engineer vidual contractors can cooperate in taking
should be present to evaluate the teams in- charge of a project. It has the potential to
teraction and check on the participation by all change our industry one project at a time.
4 JM 8
Bulletin No. JM 9
Bulletin
Project Forecasting
Introduction
developed and implemented to preserve
Project Managers are often confronted
positive trends or correct negative
with aggressive schedules and less than
trends. The Merriam-Webster dictionary
complete construction documents. In
includes this definition for forecast,
this environment, managing a project to
foresight of consequences and
a profitable outcome is predominantly
provision against them.
about controlling change and
implementing resourceful and efficient
Project Managers must always know
strategies to minimize the cost of
exactly where a project is financially and
construction.
which way the margin is likely to trend
given current circumstances. Effective
Change comes in many forms; there are
plans can only be made when you
scope changes and design changes, but
understand exactly where you are at
more common are changes in
that moment and what trends you are
anticipated conditions, incorrect
currently encountering. Working as
estimating assumptions, late equipment
hard as we can, or working as fast as
deliveries, weather concerns, under-
possible, doesnt cut it.
performing subcontractors or
construction managers. Experienced
Project management must be able to
and resourceful project managers are
identify specific tactics - cut current unit
constantly monitoring these changing
costs by 10%, reduce crew rate by
conditions and reacting accordingly.
$2.00 /hr, etc. - to effectively manage
Some manage to the old school of that
project profitability.
says, Build it as cheap as possible and
it will cost what it costs. Unfortunately,
Forecasting is about knowing where
tight margins, litigious attitudes and high
project finances are at all times and
construction costs dont lend themselves
evaluating tactics to mitigate negative
well to this wait and see approach.
trends and support positive trends. How
What is Forecasting and Why is it can you correct a downward trend if you
so Important? dont know its occurring? How do you
protect positive variances if you dont
In its simplest terms, forecasting is the know theyre accumulating? Most
use of accurate and timely data to importantly, you need to discover
understand exactly where a project is negative trends as early in a project as
financially and to identify developing possible. The sooner a problem is
cost variances as soon as possible. discovered the more likely it can be
Only then can effective strategies be corrected. Figure 1 graphically depicts

the importance of discovering negative It Begins with a Good Job
cost variances early in a project. The Breakdown
importance of early discovery cannot be
over-emphasized. Based on a review of Even small projects can quickly become
over 500 contracts, the Office of the complex and accurately evaluating them
Under Secretary of Defense for by looking a total costs is impossible.
Acquisition has observed that: Totaling up costs and tossing them in
one big bucket, or even only a couple
Once a contract is 15 percent buckets, makes it extremely difficult to
complete, it is highly unlikely to get any meaning out of the numbers.
recover from a cost overrun.
Given that a contract is more than Accurate forecasting must begin with a
15 percent complete, the overrun at good job cost breakdown or work
completion will not be less than the breakdown structure. Proper project
overrun to date, and the percent cost breakdown should begin with
overrun at completion will likely be estimating if possible, and be done with
greater than the percent overrun to a look ahead as to how the project will
date. be built and how it can be easily
tracked.
These findings have been confirmed at
the 95 percent level of confidence and Cost Categories
were generally insensitive to contract
types and type of work. Nearly all projects can be thought of as
a compilation of five separate smaller
This is why forecasting is one of, if not projects; a labor project, a material
the, most important project management project, an equipment project, a
tasks. subcontract project and a general
conditions (or other direct job costs)
Forecasting can be a complex and project. These individual projects,
overwhelming task if your companys referred to as cost categories in this
accounting and project management bulletin, are each managed differently
systems are not set up to accommodate and the help a project manager may
a culture of continuous, or frequent receive varies with each. A project
forecasting. This bulletin will attempt to manager may enlist a general foreman
lay a framework around this topic that to help forecast labor and a purchasing
should help to begin the process of agent to help with equipment
developing accounting and project forecasting. Furthermore, each of these
management systems and practices to cost categories has a different life span;
facilitate accurate and timely if bought out promptly after award (as a
forecasting. project should be), the equipment
category can be accurately forecast very
Accounting and job costing specifics can early in a project as opposed to the
vary dramatically from one company to labor category.
another. Some companies rent
company-owned equipment to projects, To further simplify forecasting material
some carry additional variable and equipment costs, it may be wise to
overheads or burdens on labor, etc., but consider separating these categories
the general principals presented here into large purchases made by office
can be applied in any situation. personnel (equipment) and day to day
miscellaneous items ordered by field

2
personnel (material). This strategy costs are certainly important to
allows items such as large bulk piping understand where a project stands and
purchase orders to be included in to produce accurate financial reports,
equipment and thereby reduce the size but good project management involves
of the material category (day to day itself primarily with the future and
purchases) which is always more working with forecasted and committed
difficult to forecast. costs. Specific terminology varies by
company, but basically there are four
Cost Codes types of cost we deal with;
Depending on the size, complexity and Original Estimated Cost/Budget: The

length of a project it may be necessary original project estimate (including all of
to further breakdown cost categories the assumptions and clarifications that
into cost codes This topic is well are associated with it). This cost never
covered in other materials, but with changes.
regard to forecasting it is important to
point out that a good cost code Incurred Cost: The value of invoices
breakdown must be done with a look and labor cost actually charged to a
ahead as to how work will be measured project.
and tracked. This is often not possible at
the time an estimate is performed and Committed Cost: The value of incurred
estimating data may need to be costs combined with open purchase
rearranged by project management. commitments such as subcontracts,
purchase orders, and purchase
For example, if a project will be built agreements.
floor by floor, dont break down the
estimate by system. In this case, work Forecast, or Revised Cost/Budget:
should be broken down by floor and Project Managements current estimate
include hours, labor cost AND units. at completion of, or to complete, the
This will allow you to produce estimated project. Includes change order work,
productivities and estimated hourly adjustments for actual productivities,
costs and to more easily calculate actual buyout variances, actual working
productivities and actual hourly costs conditions, etc., effectively, Project
throughout the project. Individual Managements current project estimate.
subcontracts and equipment can also be
broken into separate cost codes, but in Project Management needs to focus on
this case, it is important to have a good committed cost and variances that
reason for additional breakdowns. If develop between committed cost and
your cost accounting system allows you forecast costs always be looking
to easily access individual purchase ahead. It is easy to review and analyze
orders and their status, further incurred costs, but that doesnt affect
breakdown by cost code is often not profitability. Good project management
necessary or can be limited to a few focuses on the future and controls those
major items. costs that are yet to be incurred.
What is Cost? If a project is bought out early and

purchase orders and subcontracts are
Once costs are incurred, it is generally used for all purchases, a project can be
too late for project management to have largely committed well before 15% of
any effect on profitability. Incurred the costs are incurred. This dramatically
increases opportunities to discover and

3
resolve budget problems and reduces installed or hours spent in conjunction
the uncertainty in forecasting. with work completed. Methods can vary
from sophisticated quantity surveys
Charge it Where it Was Budgeted! using marked up progress prints to a
simple manpower loading schedule
Accurate cost accounting is obviously (such as the one shown in Figure 4).
critical to accurate and timely Labor should always be tracked at the
forecasting. Errors commonly occur and cost code level but methods may for
produce inaccuracies or complicate larger jobs than smaller jobs. It is
forecasting when costs are not charged critical to use a logical approach that fits
to the cost categories and cost codes the project rather than someones
where they were budgeted. It helps to opinion or gut feel. This information is
think of the job cost breakdown as a also invaluable should it become
matrix (see Figure 2). Costs must be necessary to pursue a claim on the
budgeted, committed and incurred in the project. It can also be very valuable
same category and cost code to feedback to the estimating group.
produce accurate and useful financial
reports. It is also critical that field labor
supervisors understand the importance
It is critically important that project of forecasting, the method used, and be
management, purchasing and job intimately involved with producing and
costing procedures exist that facilitate redeeming labor forecasts. Statements
the posting of costs to the location like, I think were doing good, or I
where they were budgeted. think were in good shape, should send
up a red flag. These types of
Figure 3 demonstrates the effect errors statements are evidence that no logical
in job costing, or purchase order tracking system exists and project team
posting, have on accurate forecasting. members are flying by the seat of their
In this case a piece of equipment pants. Dont be surprised if these
estimated at $10,000 was budgeted to statements are followed up with, I
cost code 001, the purchase order was thought we were in good shape, or I
posted to cost code 002 and the invoice thought we were doing well.
was posted to cost code 003. The
combined effect produces a $30,000 Negative labor trends discovered early
forecast cost at completion. This is a present great opportunities for resourceful
very simple example, but on a project project managers. If the negative trend is
with thousands of transactions, you can due to the actions, or lack of actions, of
very quickly lose control and create others, timely fact based data is critical in
meaningless cost reports if the company making a claim, or arguing for better
does not have a culture committed to working conditions. If the trend is an in-
accuracy and compliance with house issue, perhaps you can increase
procedures. apprentice labor, or increase fabrication
and subassembly, or re-evaluate
Forecasting Labor supervision.
The key to a good labor forecast is Never underestimate the

quickly and accurately determining resourcefulness of good people
project-to-date productivities or unit when they discover a problem early
costs. As stated earlier, this starts with enough to take corrective action.
a proper job cost breakdown, but it also Management needs to make sure the
requires a method for tracking units project management team has the

4
tools and systems to discover and field materials. Then, as the field staff
quantify problems as early as orders materials, a set of progress prints
possible! is colored in, or marked, to indicate what
areas have been fully ordered (this has
Forecasting, Equipment and the secondary benefit of helping
Subcontract Costs supervisors focus on purchasing in a
logical fashion). These marked up
The first key to accurately forecasting documents can be evaluated by a
equipment and subcontract costs is to variety of means (footage ordered/total
act with a sense of urgency when footage, etc.) and a reasonable
buying-out a project. The project team percentage of total material ordered can
needs to quickly identify items and be calculated. Since we have already
subcontracts to be purchased, assemble established that as much as possible
a purchasing log and get these items should be purchased with POs, we
bought out. The second key is to focus should be able to quickly price the
on committed cost. As the buyout is orders and enter a commitment into the
accomplished quickly and accurately, job cost system. Comparing the value
enter purchase commitments into the of the committed cost to the forecast
job cost system. Third, by purchasing cost produces % committed. Compare
as much as possible early in a project, this value to % ordered from the
including placing bulk pipe and fitting drawings. Any variance between %
orders, you can minimize the ordered % committed must be
outstanding dollar amount in the addressed.
material category and reduce day to day
material purchases - which greatly As an example, if committed cost is 30%
complicate forecasting. of the forecast cost and marked up
drawings indicate 50% of the job has
By comparing the committed costs to been ordered, it would appear there are
estimated values, it is possible very additional profit, or contingency, funds in
early in a project to identify negative the material forecast. Keep in mind that
variances that need to be compensated purchase commitments must be entered
for and positive variances that may accurately and timely.
serve as contingency funds for a later
date. Once again, if discovered early, The Role of the Accounting Group
there is a significantly better chance of and Systems in Forecasting
compensating for negative variances.
Job cost accounting systems and
Forecasting Material Costs software play a critical role in acquiring
good data and simplifying forecasting.
Forecasting the future cost of material Because accurate and timely
purchased on an intermittent basis from forecasting is critical to maintaining and
the field is extremely difficult. Once increasing profitability, these accounting
again, the prompt and accurate entry of systems and tools must be carefully
purchase commitments is critical. designed and selected. A company
Always be thinking committed cost; culture that demands accuracy and
incurred cost is history. prompt data input is critical to producing
meaningful forecasts.
One simple forecasting technique that
often suffices is to first establish with There is a wide variety of software
field supervisors the starting value for available that provides both job cost
(accounting) tools and forecasting tools.

5
At a minimum, the system should: allow Regularly using a methodical approach
for adequate job cost breakdowns; to look ahead and forecast project
combine job cost, payroll, and performance can help identify upcoming
purchasing data easily and in a timely problems and opportunities for savings.
fashion; produce budgeted, incurred, The question how often should I do a
committed, and forecast costs; be forecast isnt appropriate. The best
available to project management at any project managers will always be working
time; and facilitate the easy entry and to an accurate and credible forecast.
tracking of change orders. Many
systems use computer calculations to How often they may actually update or
aid in forecasting and some permit on revise the forecast depends on the
screen forecasting by simply adjusting nature of the project and the accounting
any one of the following values: hours, tools available. The level of detail in the
labor dollars, unit cost, total cost, or forecast depends on project complexity
units. More advanced software and it needs to be a team document that
packages produce computer calculated is understood and supported by all
cost variances by applying actual unit stakeholders trade supervisors,
costs and/or actual labor unit costs to purchasing, subcontractors and the
uncompleted work. client, when appropriate.
In Summary Furthermore, performance is improved

simply by performing accurate and
Effective project management focuses constant measurement. It is a fact that
on the future, just as good trade whether youre trying to lose weight, get
supervision must plan ahead for labor in shape, or manage a major
crews to be productive. The ability to construction project, accurately and
manage to a budget, be resourceful and regularly measuring progress improves
develop creative plans to minimize results.
future costs separates great project
management from good project
management. And, the sooner potential
problems are discovered, the greater
the chance they can be avoided.

6
Reprinted with permission.
Cost Categories
L M E S ODJC
Cost Codes
001
002
003
004
005
006
007
008
009
010
011
012
013
Totals
Figure 2
Cost Category - Material
Budgeted Committed Incurred Forecast Cost

Cost Codes Cost Cost Cost at Completion
001 $10,000 $10,000

002 $10,000 $10,000
003 $10,000 $10,000
Total $30,000
Figure 3
Figure 4
LABOR TRACKING AND FORECASTING
wk estimated actual forecast

1 1 0 0
2 2 1 1
3 4 3 3
4 4 3 3
5 5 3 3
6 5 4 4
7 6 4 4
8 6 5 5
9 4 6 6
10 4 6 6
11 4 6
12 4 5
13 3 5
14 3 5
15 2 4
16 2 4
17 2 3
18 2 2
19 2 2
20 1 1
21 1 1
Total 67 35 73
7
estimate
6
actual
5 forecast
4
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Bulletin No. JM 10
Bulletin
Controlling Project Costs Caused by

Third-Party Commissioning Agents
INTRODUCTION 2. Request a copy of any and all forms
that the commissioning agent may
Mechanical contractors have been subject request from the mechanical
to scope-of-work creep by third party contractor, including any required
commissioning agents. They may require record keeping or any other data
activities that are beyond the original bid capture system.
scope and design of the project. This
impacts the mechanical contractors cost 3. Pay particular attention to:
and potentially has schedule implications.
In addition, pricing the cost of working with a
a. Duct and piping pressure testing
third party commissioning agent at bid time
can be difficult if the scope of the requirements
commissioning agents work is not b. Assembly testing
understood. c. Duct cleaning
d. Hydro testing, flushing, cleaning
How does a mechanical contractor minimize and fill requirements for
the potential for cost increases and hydronics systems
schedule impacts due to scope creep by the e. Operation and maintenance
third party commissioning agent? How formatting and assembly
does a mechanical contractor price the cost requirements
of third party commissioning accurately? f. Testing and balancing
requirements above industry
PRE-BID IDEASGET THE PRICING standards
RIGHT AT THE BEGINNING g. Cost of chemicals, process
fluids, fuels, and disposal
1. If the plan documents call for third party
commissioning, find out (by the RFI
4. Depending on the commissioning
process, if necessary) who the
agents processes and scope, the
commissioning agent is and what is project managers work may be
included in their scope of work.
accelerated at the front end of the
Request specifics regarding the
project when your staff is busy with
commissioning process the
procurement, submittals and pre-
commissioning agent intends to follow. planning. There will also be time and
scope demands during the close-out

phase. Both time periods can mean -not shown on the project documents, but
that project staff, who may already be required to meet manufacturers installation,
dealing with demanding phases of the operation and maintenance requirements
job, will be doubly burdened. will be provided by others customarily
assigned those responsibilities.
5. If the third party commissioning agent
has not yet been selected or if the POST AWARD IDEAS LIMIT THE
scope of the commissioning agents POSSIBILITY OF SCOPE EXPANSION
services are not clear, consider adding
an allowance for commissioning 1. Request a kick-off meeting with all
interested parties shortly after award to
support in the bid.
review the commissioning plan for the
job. The interested parties should
6. Regardless of how clear the scope of
include the construction manager (CM),
commissioning services may be, it may
design engineer, electrical contractor,
be wise to break out commissioning
controls contractor and commissioning
assistance as an additional cost to the
agent.
base bid, listing the allowance or cost
separately.
During the kick-off meeting (and in
addition to detailing the commissioning
7. Consider the following language to be
plan):
added to your scope/bid letter:
a. Verify with all parties that the
Our pricing assumes that the drawings and contractors are to comply with the
specifications prepared by the designers scope of work, not to re-engineer the
integrate their detailed review of job to the commissioning agents
manufacturers installation, operation and desires. To the greatest extent
maintenance information for the specified possible, verify that the
equipment, and that those requirements are commissioning agent understands
evident in the plan and section views of the
the system design and the
equipment, as well as any associated
contractors scope of work.
installation details. If there is no basis of
design equipment, the contractor qualifies b. Seek input on how the
that there may be added costs associated commissioning agent and CM want
with installation requirements unique to the the contractor to communicate
equipment that have not yet been issues related to complying with the
researched or identified by the design and bid scope of work.
construction team. c. Develop an understanding among
the parties regarding how the CM
And/or: and commissioning agent will
communicate with the owner, if
Our pricing assumes that any associated necessary, when proposed actions
latent construction activities required to
are not in the scope of work.
properly install and operate systems, if not
d. Review the timing of jobsite visits.
rendered in plan, section, or detail, will be
provided by others. For example: concrete Plan for visits at strategic times
and roofing work of any kind, curb leveling, related to the construction schedule
structural reinforcement, or line voltage to identify corrections to the work at
wiring, fire alarm devices, or interlocks, etc. times related to the work activities.

Waiting until the job is in start-up 3. Distribute equipment IOMs to the other
phase to identify corrective actions is trades early in the project. There may be
disruptive and expensive. impacts on others and they need to
e. Request that the commissioning review and respond to their own
agent pay particular attention to the requirements. Dont get stuck with a
control and equipment interface roof tap unit (RTU) condensate drain
pan that pools when the general
right after submittal approval and
contractor doesnt level the curb.
before construction starts.
f. Address commissioning as a
4. Direct the PM, design engineer or
separate activity in the construction
service technician to search the
schedule so as not to compress
temperature control proposal and
these activities with start-up and
submittals and equipment submittals for
punch out.
excluded or missed line voltage
interlocks, fire alarm interface, and
2. Have the commissioning agent review
equipment with field wiring performed by
all samples, models and mock ups, and
others. If you have the resources to
approve them before construction
initiate this effort early in the project, you
begins.
may be able to negotiate a deal with the
DURING CONSTRUCTION IDEAS TO electrical contractor. You may or may
MINIMIZE THE RISK OF DOWNSTREAM not get paid but this should minimize
ADDED COST AND SCHEDULE IMPACT rework and ease start up complications.
1. Require your vendors and suppliers to 5. Execute the manufacturers installation

provide equipment submittals tightly checklists to the extent you are
edited for the project and so responsible and as modified for the
identified. If they do not, then do so job. File in an accessible location.
yourself. You will probably learn some
interesting things. 6. Keep up with internal documentation to
give evidence of quality assessment/
2. If possible before equipment release, quality control (QA/QC) on pipe and
but shortly thereafter, require your duct assemblies: Pressure test reports,
vendors and suppliers to provide as-built drawings, photographs. These
equipment installation/operations will probably be required at the end of
Manual (IOM) information edited for the the project, and if the commissioning
project. If they do not, then do so agent comes looking during
yourself; you may learn a great construction, it discourages scrutiny.
deal. Either way, your foreman (or
delegate to journeyman) should read 7. Consider the commissioning impact
the IOM and compare it to the design, related to temporary use of the
reviewing impacts with the design
permanent mechanical equipment
engineer or project manager as he/she
during construction. Are there
sees fit. There may be change orders;
or there may be multiple, easier ways maintenance requirements that will
to meet a requirement; or there may be become an issue for the commissioning
options available on the equipment that agent later? Discussing these issues in
finesse certain issues. If you are advance may save costs later and,
substituting procedures, there is a depending on the scope, may identify
potential major risk that needs review. change order opportunities.

Bulletin No. JM 11
Bulletin
Temporary Usage of HVAC Equipment

Introduction
Todays building owners need to understand When there is a lot of debris at the
the risks involved in using permanent HVAC site, that portion of the system where
systems to provide temporary heat during work is going on should be
construction. dampered off. If the whole site is at
risk, the entire system should be
Owners should consider using temporary shut down and protected.
heating, cooling and dehumidification
equipment specifically designed to be used It is preferable not to use the
for climate control during the construction permanent mechanical system, but if
process. it must be used, temporary filters
should be added to all appropriate
The following provides a summary of grilles, intakes, etc. These filters
requirements of the SMACNA IAQ (Indoor must be maintained throughout their
Air Quality) guidelines for an occupied operation and then replaced at the
building under construction, 1995, end of the project.
Chapter 3:
DO NOT USE THE MECHANICAL
HVAC equipment must be protected ROOM FOR STORAGE.
from dust and odors.
Increase filter efficiency, if
The return side of the system is necessary, and use activated filters
extremely vulnerable since it is if there are odor problems.
under negative pressure during
operation. Be sure to watch the When systems are off, all diffusers
location of all intake related parts of and outlets should be sealed with
the system, whether outdoor air plastic.
grilles, ceiling plenums, transfer
vents, etc. to ensure contaminants On existing duct work, professional
are not entering the mechanical duct cleaning is sometimes
system. necessary.
Seal all return system openings with Source control is an important

plastic. And, photograph the sealed method to keep contaminants out of
equipment to document your a building. For the mechanical
procedures. contractor, this typically means

mandatory use of low volatile This impacts the mechanical contractor in
organic compound (VOC) caulks, several areas:
adhesives, sealants, cleaning fluids,
etc. This would also include welding, 1. An indoor air quality (IAQ)
which could be more problematic. management plan must be adopted.
The contractor should receive a
Pollution sources may be exhausted copy of this plan before bidding on
through local, portable exhaust the job to determine its
systems. responsibilities. As the contractor,
you may or may not be asked to sign
Portable air cleaners may off on the plan, but have a copy
sometimes be required. signed and dated by the architect-
engineer or the general contractor in
Items that give off VOCs can be case changes are made and you are
controlled by enclosing or sealing. not notified. In some cases, you
may even be asked to provide your
Pathway interruption is often used to own procedures on how you keep
keep contaminants from spreading the mechanical systems free from
through a worksite. This can involve contaminants.
the mechanical contractor when the
HVAC system is needed to 2. Credit 3.1 requires you to meet or
depressurize the work area. Take exceed control measures as
care to protect the system when it is recommended by SMACNAs IAQ
used in this way. This might mean Guidelines for occupied buildings
extra filter changes and even duct under construction, 1995, Chapter 3.
cleaning due to heavier air flow. The SMACNA Guideline addresses
HVAC protection, source control
A recommended exhaust rate for pathway interruption, housekeeping
negative pressure for this guideline and scheduling.
is 10% greater than the supply air
rate. 3. This credit discourages the
temporary operation of
Whether using positive or negative mechanical systems, if possible.
pressure, always remember to
protect the system from 4. You may also be responsible for
contaminants. Do not forget to keeping logs, whether you purchase
rebalance the system, if necessary. the system or not, of filtration media.
You will need to list the
LEED Considerations manufacturer model number, menu
rating and location of all filters and
verify they were replaced prior to
As a mechanical contractor on a LEED job,
final occupancy.
it is important to take time to consider the
LEED NC version 2.2, which provides a
point (EQ Credit 3.1) preventing
contamination of building systems and
materials during the construction process.

Bulletin No. JM 12
Bulletin
Integrated Project Delivery (IPD)
Introduction process at the earliest possible moment.

The assumed outcome, if all parties are
Our industry today appears to be brought into the integrated and
evolving at a faster pace than we have collaborative model, is maximized
experienced in the last 30 years. efficiency at all stages of the design and
Customers are demanding greater construction process.
value, technologyboth hardware and
softwareis evolving rapidly, and our To best understand the concept of IPD,
need to increase productivity is driving we will compare and contrast common
profound changes in how we execute traits of traditional project delivery
our scope of work in the construction methods versus traits of the IPD
industry. method. We will also look at some of the
benefits to the various parties involved.
Lean concepts traditionally used in the Then, we will address some of the basic
manufacturing industry are alive and principles of IPD and show the varying
well in the construction industry. At the levels of IPD.
core of Lean is the elimination of waste.
Through this drive to eliminate waste, Common Traits of IPD
owners and general contractors (GCs)
The best comparison of traditional
are seeking new contracting methods to
project delivery vs. IPD comes from
aid the overall Design/Bid/Build process.
Integrated Project Delivery: A Guide,
The Integrated Project Delivery (IPD)
version 1, 2007, AIA National I AIA
method is becoming the dominant
California Council. The table on the next
contracting strategy to assist in
page shows the comparison of six
streamlining all aspects of the
specific areas associated with either
construction process and aid in the drive
method (Teams, Process, Risk,
to eliminate waste from the system.
Compensation/Reward,
The IPD methodology is rooted in the Communication/Technology, and
idea of truly integrating all parties Agreements).
(owner, designer, GC/CM, and subs) in
the planning, design, and construction

Traditional Project Delivery Integrated Project Delivery
Fragmented, assembled on Teams An integrated team entity
just-as-needed or composed of key project
minimum-necessary basis, stakeholders, assembled
strongly hierarchical, early in the process, open,
controlled collaborative
Linear, distinct, segregated; Process Concurrent and multi-level;
knowledge gathered just-as- early contributions of
needed; information knowledge and expertise;
hoarded; silos of knowledge information openly shared;
and expertise stakeholder trust and respect
Individually managed, Risk Collectively managed,
transferred to the greatest appropriately shared
extent possible
Individually pursued; Compensation Reward Team success tied to project
minimum effort for maximum success; value based
return; (usually) first-cost
based
Paper-based, 2 dimensional; Communications/Technology Digitally based, virtual;
analog Building Information Modeling
(3, 4, and 5 dimensional)
Encourage unilateral effort; Agreements Encourage, foster, promote
allocate and transfer risk; no and support multi-lateral open
sharing sharing and collaboration; risk
sharing
Source: Integrated Project Delivery: A Guide, version 1, 2007 AIA National I AIA California Council.
As you can see, the Traditional Project which ultimately drives a more
Delivery method is a very silo-based favorable, fun culture while eliminating
and individualistic model in which risk is impediments throughout the lifecycle of
passed down to the lowest level and the project.
information is shared on an only-as- Benefits of IPD
needed basis. It does not encourage or
foster any kind of team effort, but rather Benefits that arise from the use of the
an atmosphere in which contractors IPD delivery method are vast and
focus on covering their risk and not impact all parties involved in the
considering the needs or success of construction process. Designers benefit
other stakeholders. from the expertise contractors provide
by participating early in the design
On the opposite end of the spectrum is process. Documentation time is
the IPD delivery method. It focuses on streamlined, and IPD leads to better
leveraging the knowledge base of all cost control and budget management.
stakeholders where everyone is Contractors benefit from cleaner design
collaborating to ensure the overall drawings that reduce change orders and
success of the project and each of the RFIs and allow for early pre-planning
stakeholders. It drives a more that can increase productivity and lead
welcoming and friendly atmosphere,

to more effective adoption of fabrication savings plans where risk is spread
and modularization techniques. across all parties.
The owners are winners as well with Through early goal definition the team
IPD since the project team better can set the ground rules for tracking
understands the owners' goals. This throughout the project, and those rules
facilitates schedule consistency, a are owned and agreed to by all
streamlined process for evaluating cost stakeholders. This sets the stage for
options, more accurate budgeting, better how the team will measure its success.
forecasting and easier management of Once the on-boarding process is
costs, schedules and quality. complete, the team focuses on planning
because the IPD methodology believes
Basic Principles increased planning will result in better
efficiency during each stage of the
At the core of the IPD delivery method
project. Planning is also seen as a key
are collaboration and planning. To
area to drive collaboration in the design
achieve a higher level of collaboration
phase which will ultimately reduce the
and planning, the IPD method increases
execution (construction) phase.
the number of participants involved in
the early planning and design phases of Planning processes include such task
the project. In addition to the traditional areas as schedule, performance
team of owner, architect, designer, and tracking, BIM execution, fabrication, etc.
GC/CM are major and minor Essentially all aspects of the design and
subcontractors. The team might also construction process are followed by all
include major equipment suppliers. parties throughout the lifecycle of the
Through a process called on-boarding, project. The components of the plan will
the team begins to redefine a typical be tracked to ensure adherence and
project team by empowering team measured to ultimately gauge project
members with the tools to work together success in safety, schedule, quality and
in a manner that requires mutual budget.
respect, trust, open communication, and
collaborative, innovative decision- Technology plays an important role in
making. the IPD world as it is typically used to
aid in streamlining processes and
Leadership is made up of principles held maximizing both functionality and
by each team member and decisions interoperability. Use of BIM, heavy
are made as a group with buy-in by all
fabrication, and modularization can
parties required to move forward with an
idea. A common feature in an IPD typically be found due to the increased
project is the lack of any company collaboration of trades and the early
affiliation. The project team is viewed as entry into the project and design
one organization in and of itself; this process.
helps to break down the walls and silos
found in more traditional project delivery Levels
models. While the term Integrated Project
Compensation strategies in an IPD Delivery may be fairly new, the
world are typically GMP or T&M. The concepts are present in a variety of
key components are those of mutual contracting strategies or delivery
benefit and reward for all parties and are methods that we are more used to
typically designed around shared seeing. A joint effort of the National
Association of State Facilities

Administrators (NASFA), Construction This document attempts to provide a
Owners Association of America (COAA), better understanding of IPD, and
APPA: The Association of Higher includes definitions of the different levels
Education Facilities Officers, Associated of IPD. The chart below, which was
General Contractors of America (AGC) developed for the publication, provides a
and the American Institute of Architects glimpse into how we see IPD concepts
(AIA) published a at play in other, more common delivery
document titled, Integrated Project methods. The publication further
Delivery For Public and Private Owners explores the concept of IPD as a
in 2010. philosophy or as a delivery method.
Level One Level Two Level Three

Typical Enhanced Required
Collaboration Collaboration Collaboration
Level of Collaboration Lower Higher
Philosophy or Delivery IPD as a Philosophy IPD as a Philosophy IPD as a Delivery
Method Method
Also known as N/A IPD-ish; IPD Lite; Multi-Party
Non-Multi-party IPD; Contracting; Pure
Technology Enhanced IPD; Relational
Collaboration; Hybrid Contracting; Alliancing
IPD; Integrated
Practice
Delivery Approaches CM at-Risk or Design CM at-Risk or Design Integrated Project
Build Build Delivery
Collaboration Typical; collaboration Enhanced; some Required;
not contractually contractual collaboration required
required collaboration by a Multi-Party
requirements (early Contract
participation of
stakeholders, use of
BIM, and sharing of
models, etc.)
Common Contract Open Book, cost-plus Open Book, cost-plus Multi-Party, Open-
Type with a Guaranteed with a Guaranteed Book, cost-plus
Maximum Price Maximum Price without a Guaranteed
(GMP); fixed fee (GMP); fixed fee Maximum Price
(GMP); shared
financial risk/reward
tied to project
outcome
Common Design; Qualification Design; Qualification Design; Qualification
Procurement Methods Based Selection Based Selection Based Selection
(QBS) Construction; (QBS) Construction; (QBS) Construction;
QBS or Best Value QBS or Best Value QBS or Best Value
(fees) (fees) (fees)

Whether IPD is being used as a method see components that are
philosophy or as a delivery method is evident on most of our projects today,
largely determined by whether or not such as BIM, design-build, fabrication,
collaboration is contractually obligated. modularization, last planner, etc. IPD
Owners who choose to fully implement takes these individual ideas or
IPD as a delivery method and technological advancements and
contractually obligate all parties to the combines them with a culture of open
collaboration levels necessary will see communication, collaboration, mutual
the greatest benefits. Using IPD-ish or respect, mutual reward, and goal setting
IPD as a philosophy can still result in to provide benefits to all stakeholders in
some benefits to the owner, but it is the construction process. It does require
unlikely to provide the full range of a different view on resource allocation
benefits. due to the early involvement of key
project personnel, but the benefits
IPD is a product of the natural evolution appear to be well worth it.
of the construction industry. Those that
have experienced IPD as a delivery

Bulletin No. JM 13
Bulletin
Minimizing the Risk of Poor Site Conditions
Introduction
Site conditions may significantly impact 6. Are material lay-down areas

productivity on the job. Poor site conditions available?
can affect material handling as well as the
actual time required for installation of pipe 7. Can material be handled within the
and equipment. existing building? How do doorways,
hallways, stairs, etc. impact material
This bulletin will provide examples of site handling?
conditions to consider as well as strategies
to address unanticipated site conditions and 8. Are break/lunch areas, portable
changes to those conditions. toilets, parking and trailers
reasonably close to work areas?
Site Conditions Checklist
9. Is lighting sufficient? Minimal OSHA
Clearly, site conditions are a job-specific requirements may not provide sufficient
issue, but here is a starting point for lighting for crews to work productively.
consideration:
10. Is adequate power available? If not,
1. Is there a mud control plan for the what are the plans for generators, gas
worksite? powered equipment, etc.? Is there a
need for special ventilation for gas
2. What are the pad conditions? Is the powered equipment?
underground work installed after the pad
has been poured? 11. How will the schedule impact the
site? Will the interior be dried in? Is
3. What are the de-watering plans? Who temporary heat needed and, if so, will it
has responsibility? be provided?
4. What are the soil conditions? Are the 12. How do owner-occupied areas affect
soil boring reports available? site conditions?
5. What are the egress and access 13. What access is provided to multiple
conditions around the site? Can floors? Are there permanent stairs,
forklifts and other material handling temporary stairs, extension ladders,
equipment navigate the site as needed? elevators, man-hoists etc. If elevators

or man-hoists are provided, are they 2. Use the RFI process to obtain clarity
sufficient for all the craft labor working on site conditions that are not
on the site or will the crews have to wait addressed in the bid documents. For
to access the elevator or hoist? example, if the soil boring report is not
provided on an underground bid,
14. Is roof access readily available? request it as a specific RFI. If forklift
access is a concern, submit an RFI.
15. What is the plan for trade contract And, the RFI process will document your
storage of materials inside the
bid assumptions if a problem develops
building in the proximity of work
later.
areas? Are any conflicts anticipated?
3. Clarify items on your bid that were
16. Are there special security
either not answered clearly or not
requirements for worker and delivery
answered at all. Again, this notation
access to the site?
will document your bid assumptions.
17. If crane use is shared by multiple
4. Consider how site conditions may
crafts, what is the schedule and what
change during construction. Does
certainty exists that the schedule can
the schedule (if one is provided at bid
be maintained?
time) give any clues?
18. Will temporary/permanent HVAC be
5. Be assertive and raise any site issues
available for comfort during
that deviate in a significant way from
construction?
your expectations at bid time as soon
as they develop. Understand that cost
Five Steps to Mitigate the Risk of
over-runs caused by changed or
Poor Site Conditions unanticipated site conditions can result
in claim issues. Be sure to comply with
1. Make site conditions a specific any claim notice provisions in the
element of every bid and proposal. contract. Waiting until the job is over to
Have a clear understanding of the raise these issues is seldom a winning
issues you may face related to site strategy.
conditions when you bid the job. Visit
the site, including new construction, to
identify any potential site condition
issues.

Bulletin No. JM 14
Bulletin
Design-Assist Project Delivery

INTRODUCTION method, an owner or CM/GC may award
a construction contract on a best value
Design-Assist project delivery is a basis prior to the completion of the
recent trend in the construction industry design. While Design-Assist is not
whereby owners and construction considered a form of Integrated Project
managers (CM)/general contractors Delivery (IPD), there are similarities that
(GC) create collaborative hybrid design may provide benefits to the mechanical
teams. These teams are tasked with contractor.
selecting optimal systems at a
manageable cost so that the project can
The Design-Assist process places the
be completed within the required
MEP subcontractors under contract
schedule and budget.
early in the project during the design
phase. Subcontractors are selected
Mechanical contractors contribute their
using a bidding process based on
knowledge of constructability,
schematic design or design
estimating, construction coordination,
development documents.
and schedule/cost control to the design
process. Working together, the team
Using this process, the project team is
resolves issues during the design phase
able to employ the expertise of the
rather than in the field, where costs are
Design-Assist subcontractors in both the
higher and risks are greater.
design and construction phases to
optimize project cost, value and
This method of project delivery, which is
constructability. The Design-Assist
distinct from Design-Bid-Build and
process seeks to resolve design and
Design-Build, offers a number of
constructability related issues prior to
advantages and also involves risks that
construction, thus maximizing the
mechanical contractors need to be
overall value, speed of construction, and
aware of.
quality of the final product.
THE DESIGN-ASSIST PHILOSOPHY
The Design-Assist process is not
intended to transfer design liability to the
The Design-Assist project delivery
Design-Assist subcontractors; the
method benefits from the early
design professionals retain both
engagement of Design-Assist
responsibility and liability for the design.
subcontractors, usually the mechanical,
electrical and plumbing (MEP)
Building Information Modeling (BIM) is
subcontractors. Under this procurement
often utilized on Design-Assist projects
Copy right, Mechanical Contractors Association of America, Inc., 2015. 1

to bring the constructability expertise of Two Step Process the CM/GC issues
the subcontractors to the engineering a contract for the portion of the Design-
design of the project. Assist process that involves the
mechanical contractor working with the
THE BIDDING PROCESS AND CM/GC and mechanical engineer during
CONTRACT FORMAT the design and budgeting process. This
is done with the goal of negotiating a
Guaranteed Maximum Price or Lump
Under a Design-Assist construction Sum Price contract for the construction
approach, the owner typically contracts at the completion of the design.
with a CM/GC on a Design-Build basis
or with a CM/GC at Risk with a BENEFITS TO THE OWNER AND/OR
Guaranteed Maximum Price format. CONSTRUCTION MANAGER/
GENERAL CONTRACTOR
The CM/GC will usually issue a Request
for Quotation (RFQ) or Request for Design-Assist allows the CM/GC to
Proposal (RFP) to the MEP bidders bring the major trade subcontractors on
based on preliminary project documents board early in the design process to
(design development drawings, design gain their knowledge of pricing,
narrative, scope of work, construction constructability, design alternatives, etc.
schedule, etc.). The documents that are
issued as part of the RFP or RFQ are When the mechanical contractor
not a complete design package. participates in the design and
constructability process, potential design
A contract is awarded to a successful and construction problems can be
mechanical contractor on a qualification/ addressed before construction, thereby
evaluation basis (rather than a low bid reducing costs for redesign as well as
approach). Factors that are used in the RFIs and rework during construction.
evaluation process include: strength of
the proposed project team, previous The Design-Assist process gives the
Design-Assist or Design-Build owner and CM/GC more confidence in
experience, the contractors financial the constructability and pricing that the
strength, relevant project experience mechanical contractor develops for the
and level of expertise in BIM/CAD project. In addition, it lowers the owners
coordination, as well as the mechanical risk of price creep due to unexpected
contractors construction cost budget. design changes.
The two predominant methods of The Design-Assist process can be used

contracting after award are: on a fast track schedule and a
successful project can be completed in
Single Step Process the CM/GC less time than the traditional Design-Bid-
issues a single Design-Assist contract Build project approach.
that includes the mechanical
contractors cost for involvement in the BENEFITS TO THE MECHANICAL
design and budgeting process as well CONTRACTOR
as a commitment to participate in the
project construction. The contract can The Design-Assist approach can yield a
be based on the mechanical contractors more collaborative, less adversarial
budget or the GMP established during contract approach. This often results in
the RFP process. a win-win relationship between the

owner, CM/GC and mechanical If design errors or omissions are
contractor. discovered during construction, the
responsibility for the cost of these errors
Award of contract usually takes a b est or omissions will often fall to the
value approach where factors other mechanical contractor to absorb since
than low price are part of the evaluation they were involved as a partner in the
process. design process.
Because the mechanical contractor will The success or failure of the Design-
be intimately involved in the design Assist process often relies on the culture
process from an early stage, the and mindset of the companies involved.
contractor has more control over and Companies that traditionally work in the
input on the system design, materials, Design-Bid-Build and low-bid
constructability issues, etc. This should competitive environment might not be
enable the contractor to better manage good partners on a team utilizing the
risk and cost. Design-Assist process.
The design liability resides with the MANAGEMENT RECOMMENDATIONS

mechanical engineer that has been FOR MECHANICAL CONTRACTORS
contracted by the owner or CM/GC as
part of the Design-Assist process. Mechanical contractors should carefully
evaluate the other partners in the
RISKS TO THE MECHANICAL proposed Design-Assist process,
CONTRACTOR particularly the owner, CM/GC and
mechanical engineer. If their mindset
There is a risk for the mechanical isnt collaborative, the Design-Assist
contractor committing to a Guaranteed process will have a lower chance for
Maximum Price (GMP) or Lump Sum success and a higher risk to the
price early in the Design-Assist process, mechanical contractor.
before the design is far enough along to
have confidence in pricing. There will The mechanical contractor should
be pressure from the CM/GC to actively involve a project manager
maintain the estimated project cost and/or estimator in the early stages of
within the owners established budget to the Design-Assist process, while design
prevent the owner from obtaining is in progress. Since a construction
competitive pricing. The end result budget is often established as part of
might be a lower profit margin than the RFP process, it is important for the
desired as the mechanical contractor mechanical contractor to take an active
absorbs construction costs for late role in the design and constructability
design changes while trying to keep review, and to provide budget pricing
their estimate within the Lump Sum or updates on a regular basis during the
GMP budget. design phase.
If the mechanical contractor cant Be cautious of a proposed Design-

maintain the construction estimate Assist process that requires the
within the owners budget, there is a risk mechanical contractor to provide a price
that the owner and CM/GC will solicit guarantee as part of the RFP process
other mechanical contractor bids for the without sufficient allowance for
project after the design is complete. contingency. At this early stage in the
process, the design is often not
developed enough to allow an accurate

estimate to be prepared. Good SOURCES OF INFORMATION USED
communication of the work scope IN THIS BULLETIN
included and allowances being carried
can provide some leverage during final 1. Alliance for Construction
pricing. Excellence, Design-Assist, Best
Method Approach to
SUMMARY Subcontracting, final issue March 8,
2013.
The Design-Assist approach offers the
mechanical contractor the opportunity to 2. Pharmaceutical Engineering, Fast-
work with the owner and CM/GC in a Track Life Science Projects: When
collaborative contracting approach. This to Use Design-Assist and Why It
enables the mechanical contractor to Works, September/October 2011.
manage risk and increase the chances
for a profitable and successful project. 3. MCAA Management Methods
There are certain benefits available to Bulletin JM 12, Integrated Project
the Mechanical Contractor to participate Delivery (IPD), 2015.
in a project where the Design-Assist
contracting process is employed, but the 4. MCAA Management Methods
contractor also needs to be aware of the Bulletin TC 3, BIMWhat Is It and
potential risks involved and manage Is It Right for My Company?, 2015.
those risks accordingly.

Bulletin No. JM 15
Bulletin
Turnover Meetings
Estimating/Sales to Project Management
INTRODUCTION Sounds simple enough, but the details
are critical, and how your company
The beginning is the most important culture addresses turnover meetings
part of the work. Plato, one of the can turn a dull and routine meeting into
greatest thinkers of all time, famously a productive and rewarding planning
said this almost 2,500 years ago. Even exercise. The remainder of this Bulletin
though this concept has existed for identifies the traits of highly-effective
thousands of years, some still dive head turnover meetings.
first into a project without much thought
about how to start or even a complete WHAT PROJECTS REQUIRE A
understanding of the project to be TURNOVER MEETING?
undertaken.
Every project that is managed by
Pre-project planning is critical to a someone or some team, other than
successful project and MCAAs Planning those who estimated and sold the
for Profitability: Your Guide to project, requires a turnover meeting.
Successful Pre-Construction Planning
does an excellent job of discussing the In some ways small projects often
planning process. This Bulletin will benefit more from a thorough turnover
expand on one early aspect of the pre- meeting than large jobs. Small jobs
project planning process the turnover with their quick pace and thin margins
meeting. cant afford to get off to a bad start, and
there is simply no time to recover from
WHAT IS A TURNOVER MEETING? one.
Otherwise known as a kickoff or start-up For very small projects, the meeting
meeting, the turnover meeting is a might involve only one or two people
transfer of information from one party to and take 30 minutes, but the concepts
another. In this case, the information is of an effective and thorough turnover
transferred from the person or persons are the same regardless of the project
who prepared the estimate and proposal size.
to the project management team who
will be executing the project. The
turnover meeting is effectively a handoff
a turnover of the project.

WHO ATTENDS THE TURNOVER THE PROJECT MANAGER
MEETING?
The project manager is the most
Be wary of the project manager who important figure in the turnover process.
confuses being in control with being the Highly effective project managers
one who needs to know everything and understand that they need a team. They
then dishes out that information on a work hard to communicate team roles
need to know basis. By including the and expectations and hold individuals
entire project management team in accountable. This is true even on small
the turnover meeting, you create a projects maybe the team is small
collaborative environment, encourage (perhaps just a foreman, the fab shop
creative discussion, and accelerate the supervisor, trucking manager and the
sharing of information. The presence of labor superintendent), but each team
the entire team also increases the member needs to understand the big
project experience, and there is no picture and how their performance
substitute for experience (well come impacts the overall process. The
back to that later). turnover meeting sets the tone for a
collaborative process.
On top performing teams, each
individual must know and understand Henry Ford said, Coming together is
the role of every other team member the beginning, keeping together is
AND how their actions impact the progress, but working together is
performance of others. Only by success. At the turnover meeting, the
understanding how their actions impact team begins to work together and the
others performance can team members project manager must be the team
make productive improvements to the leader and foster productive
overall process. Construction is a team relationships.
sport, and the team must be together
when the initial game plan is revealed. WHEN DOES THE TURNOVER
MEETING OCCUR?
So, who is the project team? This can
vary widely based on the type and size
The most effective meetings take place
of the project. On large projects in
after the attendees have an opportunity
complex organizations, the team might
to review some of the documents and
include the following:
project materials. Ideally, estimating
Project Manager and PM Staff furnishes those materials to project
Estimator management for their initial review and
Account Manager development of a preliminary
understanding of the project. This also
Labor Superintendent allows operations to select appropriate
General Foremen team members and finalize the project
Fab Shop Foreman staff. The foreman selected should be
Safety and Risk Manager familiar with this type of work and
facility.
Engineering Manager
Trucking/Tool Room Manager HOWEVER, it is critical that project
management have a sense of urgency
Purchasing Manager
about the turnover meeting. The project
CAD/BIM Supervisor review MUST be conducted with a
Service Sales Supervisor sense of urgency and the team selected
without delay. If estimating/sales feels a
project award is imminent, they too must

act with urgency and furnish project Project Overview: A big picture
management with the estimate, review; the customer, the nature of the
proposal and other sales materials as work, the type of contract, the schedule,
soon as possible. etc.
Once project management has Estimating Details: What are the
completed a preliminary review and the numbers? A review of the estimating
project team is finalized, the project summary sheet, number of hours, how
manager should immediately schedule much money is being carried for the
the turnover meeting. equipment, whether it is taxable, etc.
The Logic Behind the Estimate: This
HOW LONG DO THESE MEETINGS
is a critical and often overlooked aspect
TAKE?
of the meeting. A good estimate and
proposal are more than a collection of
If conducted well, turnover meetings
numbers; they are a preliminary
almost always take longer than you
construction plan. This is a discussion
think they will. Very small projects can
about what is BEHIND the numbers.
be quick, but large, complex projects
Why did we use a certain productivity
can take days to thoroughly turnover. It
factor? Where do we think the crane will
is important not to rush this process and
be set? What can we fabricate? Where
to focus on DETAILS.
can we store materials? How did we
NOTE there is no question that details assume the equipment would be set?
are important to project management What are the most significant risks
and labor when we begin a project. An (financial and safety) in the project?
extremely valuable side effect of good What are the opportunities for gross
turnover meetings is that estimating and margin improvement in the project?, etc.
sales learn what is important to
NOTE Remember that good turnover
operations. Operations must seek
meetings have the added effect of
details in the turnover meeting, and by
improving future estimates.
doing so, they help to improve the
estimating process. The Deal: We are in the contracting
business. It is very important that in
addition to planning how we intend to
WHAT ARE THE TOPICS OF
build the project, we dedicate time and
DISCUSSION?
energy to understanding and optimizing
the deal.
Attached to this Bulletin are a variety of
sample forms that can help to guide the The deal as referred to here can be
discussions at these meetings. But, it is just as important to a successful project
important to think of those forms and as the construction plan. Aspects of the
checklists in that mindset as guides deal that need to be discussed and
and reminders. Each project has unique understood by the team might include:
challenges and subtle differences that What are the contract terms and
become obvious only through conditions?
discussion and questioning.
What clarifications, or exclusions,
Generally the topics covered in the were identified in our proposal?
turnover meeting fall into the following Why did we pursue this project?
categories.
What is our relationship with the
customer?

Do we have any special vendor supportive of your estimators and
relationships? encourage them to be open and share
all of their thoughts and ideas.
What is the process for change
order, or additional, work? The turnover meeting is not the place to
be critical of estimating. The attitude of
In what format will we present
project management should be
change orders?
understanding, supportive, optimistic
Can we offer substitutes, provide and forward thinking. Mistakes will be
value engineering? uncovered, and that is a good thing in
the sense that when found early they
NOTE the turnover meeting is the
can often be overcome.
time to identify cost savings
opportunities. The project is in the Stay focused on the goal and remember
honeymoon phase and partners the world is filled with problem finders
are most likely to be cooperative. It because that is easy. The most effective
is important to identify margin and project managers look forward, are
building improvement ideas now, optimistic and are problem solvers.
while the project is fresh in the
Good project managers will try very hard
estimators mind, and with the entire
to find BOTH problems (risks) and
team present.
opportunities at the turnover meeting.
Is there a value engineering deduct Studies show that the earlier these are
to offer that can also help to discovered, the greater the possibility
establish the change order format? that risks can be overcome and
opportunities maximized.
How will the labor rates be
established? Great project managers enlist the entire
team in this effort. They understand that
the estimate doesnt determine how the
A NOTE ON EFFECTIVE
job will end, just where it starts. By
COMMUNICATION AND ATTITUDE
involving estimating, they may even help
to develop better estimates.
The personalities and communication
styles of successful project managers
can be VERY different than those of AVOIDING INFORMATION
estimators. Effective project managers OVERLOAD
need to understand those differences as
they push for sales specifics and details. There can be an enormous amount of
The turnover meeting can be information exchanged at the turnover
intimidating for estimators if they feel meeting, particularly for large projects.
their work is being scrutinized and This makes it important to have an
criticized. organized approach to the meeting.
Here are some techniques that help.
Estimators typically have a very short
time frame and little information with Break down the project into five sub
which to prepare proposals and projects and review each as though
estimates. Their assumptions and plans it is a separate, independent job. The
will normally be very preliminary and stages are:
perhaps with little or no direction from 1. The Labor Project. What are the
the customer. Nonetheless, it is always labor-related items and issues, such
more effective to fully understand an as the labor estimate, crew make up
early preliminary plan and build on it
instead of starting from scratch. Be

and size, material handling plan, by project management. Effective
fabrication plan, etc. project management looks ahead
and tries to take control of future
2. The Material Project. What are you
events to manage the outcome. The
buying, who is buying it and for how
best way to do that is to develop a
much, opportunities for value
sound plan and update it regularly.
engineering, storage plans, etc.
3. The Equipment Project. Who is 2. Experience. Use the combined
buying, any relationships, delivery experience of the team to apply best
and rig plan, who does start up, practices, learn from past mistakes
warranty details, etc. and anticipate obstacles. Share like
4. The Subcontract Project. How experiences and use them to identify
much did we carry, what is the exact potential hazards and opportunities.
scope, who is qualified, etc.
3. Risk AND Opportunity
5. The General Conditions and Other Management. Get into the tiniest
Costs Project. What do we need to details of the project and work to find
rent (lifts, cranes, etc.), tools, jobsite the risks AND the opportunities. The
office, permits, etc. best way to manage the risks and
Use the team. Operations and project optimize the opportunities is to find
management can ask that individuals them as early as possible.
take a leadership role in one aspect of
the job. For example, they might assign
an assistant project manager or
purchasing agent to lead the equipment
buy-out or assign the labor
superintendent or general foreman to
spearhead the details of the labor plan.
Checklists and forms can be extremely
helpful to thorough and productive
meetings (attached to this Bulletin are
several examples). Incorporate them
into your company procedures and see
that they are used consistently.
SUMMARY
Turnover meetings are much more than

simply exchanging estimates. These
meetings will have a significant positive
impact on your business if your
company culture embraces three critical
strategies and initiates them at turnover
meetings:
1. Planning. Its really all about

planning. Having estimating/sales
develop an effective preliminary plan
that can be built on and developed

MAJOR PROJECTS: NEW JOB SETUP CHECKLIST PROJECT NAME / NO.________________________
ITEM RESPONSIBILITY (NAME) DATE COMPLETED
Turnover meeting w/ estimating
Letter of Intent
Signed Contract
Insurance certs to customer
Contract Abstract (Notice, CO proc, etc)
Verify contract docs (dwgs, schedule, specs) dates & revs
Project specific subcontract/ PO terms
ID and communicate to team unusual General Conditions (temp heat,

clean up, drug testing, extended warranties, special testing, X-Ray
welding, special safety rules, other work rules, liquidated damages, etc)
New job setup input form
Assumptions to customer and GF
Kickoff meeting w/ general foreman
Safety program - job specific
Cost code strategy and breakdown
Labor Cost ($'s & hours) breakdown
Equipment Breakdown
Subcontract Breakdown
Material Breakdown
Other Cost Breakdown
Schedule I milestones
Manpower loading curve
Productivity tracking plan
Crew mix I crew rate breakdown
Purchasing Log - enter ALL Equipment and subs
EQ Purchasing Plan - WHO buys what
Material purchasing plan
SIGNED subcontracts & insurance certs
Change order log
Change order template - breakdown, job specific
Change order labor rates
RFI Log
Shop drawing log
Set up filing system
Schedule of Values
Value Engineering review
Submit VE - "T" drill shaped nozzles, grapple
PVF and Hanger standards
Duct construction standards
Permits - who and which?
Jobsite office and tool storage
Equipment rental plan I special tools
Construction Plan document
Turnover meeting with CAD
Foreman books with safety info
Initial tool order
New hire packets - project specific

Site Risk Assessment
General Contractor:
Are we Prime Contractor? Y N Job #:

Job Name:
Project Manager:
Piping Foreman Y N Who:
Sheet Metal Foreman Y N Who:
Plumbing Foreman Y N Who:
Laborers Y N Who:
Boilermakers Y N Who:
Site Address :
Start Date: Finish Date:

Day Shift: Y N Night Shift: Y N
Weekend Work: Y N Shift or Overtime: Y N
Our Job Scope:
Roof Work Y N Confined Space Y N
Shut Down Roads Y N Asbestos Y N
Shut Down Sidewalks Y N Lead Y N
Respirators Y N Lockout/Tagout Y N
Ladders Y N Special PPE Y N
Scaffolding Y N Hearing Protection Y N
Rigging Y N Disable Fire Suppression Y N
Weld/cut/grind Y N Lasers Y N
Equipment Storage Y N Mobile Work Force Y N
Aerial Lift Y N Helicopter Y N
Tool Storage Y N Job Site Trailer Y N
Fork Trucks Y N Crane Y N
Trenches/Excavations Y N Who:
Core Drilling Y N Who:
Insulator Y N Who:
Electrician Y N Who:
Excavator Y N Who:
Roofer Y N Who:
Balancer Y N Who:
Controls Y N Who:
Demolition Y N Who:
Special Tools Y N What:
General Trade Y N Who:
Other Y N Who:
Notes:
ATTACHMENT A
PLANNING TURNOVER REQUIREMENTS
Job Number: _______________ Job Name: _______________________________

Meeting Date: ______________ Piping Planner:____________________________
S/M Planner:_________________________________
PLANNING & ADMINISTRATIVE NEEDS:

Is the job Competitive Bid or Negotiated?
Coordination Drawings (for others) or for Fabrication (HTL) Only
Mechanical and Plumbing drawings and Project Specifications
Flow diagrams, riser diagrams, or P&IDs available?
Architectural background drawings and Structural shop drawings (in AutoCAD) - Must be latest Revision or Revit
model (release form required?)
Equipment submittals, pre-approved, approved? Available in AutoCAD?
Submittals from Owner-furnished equipment or other trades, if required (ex. Lights)
Pre-planning Meeting Date: ____________, Productivity Meeting Date:_____________
Estimated planning hours: S/M______; PIPING ______; ADMIN:________
Are change order hours to be separated?
Deadlines for shop drawings / Drawing Schedule, By Project Manager
Who will contact GC / CM / Architect/Engineer / Other subs for clarification and coordination and who will document?
(PM or Planning) __________________________
Note: PM shall forward all RFIs to HTLs Customer (Planning can e-mail to PM)
All other contract drawings and shop drawings from other subs
Will Planning manage shop drawing log? _______ (Shop drawings distrib. by PM)
Who will attend coordination meetings / internal progress meetings
What coordination is required with other trades?
Foreman input on spooling and subassembly
Will additional cost codes be used for changes, meetings, spooling, material lists?
SHEET METAL DRAWINGS INCLUDE:
Areas and systems to be drawn: ____________________________________________

________________________________________________________________________
Background to include:
Ceiling height, type of ceiling & light locations, type (note T-bar type if lay-in tile ceiling). Show GRDs.
Structural steel elevations (Do we add or show steel on backgrounds?) Model Steel / Label Only
Equipment layout
Other Needs:
Structural coordination (curbs, framing, openings in walls / roof / floors)
Duct standards - HTL Standards or Contract specs
Specialties, Hanger locations, attachments, and details, what are we hanging from?
VAV, FD Schedules (in spreadsheet form, not on drawings)
Can duct be streamlined, alternate routing, duct resizing acceptable?
Other Value Engineering ideas: ________________________________________________
Coordination meeting required (MEP)
Do we need approval before fabricating?
As-Built?
Seismic - Yes/No Sub ?
Is Planning to include special details such as linear diffusers & custom plenums?
Can we minimize transfer ducts? Can we use HTL standard transfer duct?
What can be sub assembled?
What opportunities are there for modularization?
PIPING DRAWINGS INCLUDE:
Areas and systems to be drawn: ____________________________________________

________________________________________________________________________
Background to include:
Ceiling height, type of ceiling & light locations.
Structural steel elevations (Do we add or show steel on backgrounds?) Model Steel / Label Only
Equipment layout
Other Needs:
Structural coordination (curbs, framing, skids, platforms, openings in walls / roof / floors)
Sleeve information
Piping standards HTL Standards or Contract Specs
Specialties, Hanger locations, attachments, and details
Do expansion loops, guides and anchors need to be shown?
Material takeoff / Bill of Material
Alternate routing acceptable?
Value Engineering ideas: ________________________________________________
Seismic - Yes / No Sub ?
Coordination meeting required (MEP)
Do we need approval before fabricating?
Spooling by ___________________________
What opportunities are there for modularization?
As-Builts?
Insulation Sch.
GENERAL NOTES:
Planning will use standard convention for drawings for scale, layering, etc. Show service and access clearances. Provide
static pressures for duct.
H.T. LYONS STANDARD CONSTRUCTION PLAN
JOB NO.______________________________ JOB NAME ____________________________

PROJECT MGR._____________________ACCT. MGR.________________________
To be developed by the PM after the turnover meeting on every project over $500,000. The plan shall
include:
Foremen:_________________Planner(s):__________________________________________
Customer (Co. Name)________________________

Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
Owner : _________________________ Contact: __________________________
Phone:
e-mail address:
Architect :________________________ Contact: __________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
Mech Engr: _______________________ Contact: ___________________________
Phone: ______________ Cell:_______________ Fax: ________________
e-mail address:
Consultant: _______________________ Contact: _______________________
Phone:___________________ Cell:_______________ Fax: ___________
e-mail address:_________________
CM/GC :___NA________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
Elec Cont : ________________________ Contact:_____________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
ATC Cont (Co. Name):__________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
Insulator (Co. Name):___________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
TAB Sub (Co. Name):___________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
_____ Sub(Co. Name):___________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
Inspection(Co. Name):___________________ Contact:________________________
Phone:______________ Cell:_______________ Fax: ________________
e-mail address:__________________
1. Contract Documents specifications, drawings, addenda, schedules with dates (list below)
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
2. Pipe and duct standards: H.T. Lyons _____ or Other _____ WHO RESP_______________
3. Schedule (the CM, GCs, ours, or both) attached _____ or PM to provide by ____________
4. Pre Construction Manager: ______________________
5. Pre Construction tasks required:
___________________________________________________________________________________
___________________________________________________________________________________
6. Permit requirements
Authorities having jurisdiction___________________________________________________
Codes (by contract) __________________________________________________________
Permit pulled by H.T. Lyons _____ or CM/GC/Owner _____ Permit No. _________
7. PA One Call: Required _____ or Not Required _____
8. Purchasing log attached _____ or PM to provide by _________
9. Purchasing responsibilities
PM shall originate purchase of all equipment and subcontracts
PM shall delegate to Purchasing Manager to purchase _________________________
_____________________________________________________________________
Foremen shall originate purchases of all field materials including _________________
_____________________________________________________________________
Planning shall take off material for shop fabrication including _____________________
_____________________________________________________________________
Review Table 2 (also 1 and 3) under section 6 of the Project Managers manual
10. Submittal and delivery log attached _____ or PM to provide by _____
11. Job phases can be areas of work, separate trades, phases set by the GC/CM, or most useful will be
our own break down of the project into smaller pieces.
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
12. Labor breakdown for each trade with detailed description for cost codes attach.
A good figure for labor breakdown is an average of 500 to 1000 hours per cost code.
For example, a project with 12,000 hours would make sense to have 12 to 24 cost codes.
13. Attach manpower loading curve:________________________________________________
14. Plan to update manpower loading curve:_________________________________________
15. Productivity tracking plan:_____________________________________________________
__________________________________________________________________________
16. Any special scope items or special tools required:__________________________________
__________________________________________________________________________
17. General condition items:
Work hours __________________________________
Break time __________________________________
Lunch area __________________________________
Break area ___________________________________
Parking _____________________________________
Trash disposal ________________________________
Port-a-johns __________________________________
Temp. power _________________________________
Temp. heat ___________________________________
Water _______________________________________
Cleanup responsibilities _________________________
Refueling of trucks, welding machines, forklifts _______
18. Constraints/restrictions to accessing our work

___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
__________________________________________________________________________
19. Key material and equipment deliveries
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
20. Plan for fabrication and subassembly
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
__________________________________________________________________________
21. Tool list prepared by foremen, attached _____ or foremen will provide by _______
22. Plan for trucking and storage:

___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
23. Plan for material handling to upper or lower levels:
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
24. Equipment rental plan:
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
25. Plan for hangers or supports in all areas:

What is the structure type: existing _____, new _____, bar joists _____, steel beams _____, metal
purlins _____, concrete slab on Q-deck _____, concrete slab on formed deck _____, precast slabs
_____, prestressed or posttensioned slabs _____, metal roof decking only _____, wood _____, or other
_____ (describe) ____________________________________
Will supplemental steel be required? No _____, Yes _____ Where? ______________
Will horizontal pipe be attached with concrete inserts _____, beam clamps _____, drill in
anchors _____, welded clips _____, or other ______ (describe)__________________
Will horizontal duct be attached with strap inserts _____, beam clamps _____, drill in anchors _____,
shot pins _____, or other ______ (describe) ________________________________
Can trapeze hangers be used?_________________________________________________
Plan for supporting pipe risers _________________________________________________
Plan for supporting duct risers _________________________________________________
Are pipe sleeves required in concrete walls _____, masonry walls _____, gypsum bd.
walls _____. What type? _________________ Will they be firestopped? _________
When will these sleeves be needed? _______________________________________
If H.T. Lyons lays out duct openings, describe plan for lay out in
Concrete formed walls _____________________________________________
Masonry walls ____________________________________________________
Gypsum board walls _______________________________________________
Concrete floors ___________________________________________________
Roof deck _______________________________________________________
26. Excavation and backfill plan:
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
27. Safety plan:
Emergency phone # ____________________________________________________
Nearest hospital/clinic (attach map) _______________________________________
On site certified 1st aid/CPR _____________________________________________
Kevin Lamberts cell number 610-633-9238 ________________________________
OSHA Posting location _________________________________________________
Safety Orientation _____________________________________________________
Weekly toolbox talks ___________________________________________________
Hard hats and safety glasses _____________________________________________
Steel toed shoes _______________________________________________________
Fall Protection ________________________________________________________
Drug testing __________________________________________________________
MSDS sheets _________________________________________________________
Confined space entry ___________________________________________________
Excavation deeper than 4 feet ____________________________________________
Crane lift or helicopter lift _______________________________________________
Spill kit required ______________________________________________________
Daily inspections by foremen including recording on daily report _________________
Other_______________________________________________________________________________
________________________________________________________________
___________________________________________________________________________________
_______________________________________________________
28. Planning concerns, list of what information is required on the shop drawings attach CAD Turnover
checklist
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
__________________________________________________________________________
29. Early RFIs, problems, or potential for changes attach RFI log:
Problems Potential Solutions
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
30. Pressure testing, ASME, QA/QC, Commissioning plan and procedures summary:
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
________________________________________________________
31. Value engineering ideas
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
32. Cost Savings Ideas include idea, estimated cost to implement, estimated savings
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
33. Administrative issues, contract and scope review notes, billing date, union waivers
and procedure for change notification.
Billing date ________________________________
Bill for stored or fabricated materials? __________________________
Tax exempt project? ________________________________
Job recovery or waivers? ________________________________
Change notification required? ________________________________
Schedule delay notification required? __________________________
Proceed on verbal or written changes? Use HTL extra work order form
Retention reduction? ________________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
TURNOVER MEETING
Job Name: JOB #:

PM: Date: Time:
Team: Sales Engineer: Value:
Waivers Y N Job Recovery Y N Tax Exempt Y N

Permits Y N Cert.of Insurance Y N Specified Billing Date Y N
Site/Shipping Address:
Bill To & Address if New:
Start Date: Finish Date:
Schedule by:
Whos in Charge of Manpower? Shift or Overtime? Y N
PF Field Hrs SM Field Hrs Plumber Hrs Svc. Tech Hrs

PF Shop Hrs SM Shop Hrs Trucking Hrs Balancing Hrs
PF Plann. Hrs SM Plann. Hrs Laborer Hrs
Design Complete Y N Design By Whom?

Pipe Fab Y N SM Fab Y N
Pipe Coord. Dwgs/Plann. Y N SM Coord. Dwgs/Plann. Y N
Engineering Y N Engineering By Whom?
Controls Y N Controls By Whom?
Commissioning Y N Commiss. By Whom?
Mobile Work Force Y N ASME Y N
National Maintenance Y N Domestic Steel Req? Y N
PO Log Complete Y N Quick Entry Required Y N
Insulator Y N Balancer Y N
Electrician Y N Controls Y N
Excavator Y N Y N
Roofer Y N Y N
Crane Y N Trailer(s) Y N
Fork Truck(s) Y N Scrap Y N
Special Tools Y N Equip Storage Y N
General Trade Y N
Job Specific Safety Requirements:
S Nearest Medical Help:

A
F Where is Safety Info Posted:
E
T
Site Safety Rep:
Y
NOTES: Attendees:
Bulletin No. JV 1 Revised
File: Joint Ventures
Bulletin
Joint Ventures
WHAT IS A JOINT VENTURE? A joint venture should have all or most
of the following characteristics: joint
A joint venture (or co-venture or joint control and management, sharing in
Adventure, as it is sometimes labeled) profits and losses, a common
has been defined in many ways. One undertaking, and a single venture.
such definition is:
It has sometimes been referred to as a
A joint venture exists when two or one shot partnership, but it is not a
more persons (corporations) traditional partnership. Nonetheless,
contribute cash, labor or property to a most of the state laws that govern
common fund with the intention of partnerships apply to joint ventures and
entering into a transaction for the the rights of members of the venture.
purpose of making a profit to be It is now possible in most states for
shared in proportion to the respective corporations to enter into partnerships
contributions. and, of course, joint ventures.
A more detailed definition would be: A joint venture generally is not an

An association of persons with an association considered taxable as a
intent to engage in and carry out a corporation, but the danger exists that if
single business venture for joint it does not satisfy certain requirements,
profit, in which they combine their it could be so treated for tax purposes.
efforts, property, money, skill and These requirements relate to the free
knowledge, without creating a transferability of interests, centralization
partnership or corporation, by of management, continuity of life of the
agreement that there shall be a venture and limitations on liability.
community of interest among them
as to the purpose of the undertaking, A joint venture is not a separate
and that each joint venture shall corporation. However, for specific long-
stand in the relation of principal term ventures, such as operation of a
as well as agent to each of the particular plant, a joint venture
other co-venturers with an equal corporation, that is a corporation
right of the control of the employees formed by two or more corporations as
necessary to carry out the common the sole shareholders, may be created.
purpose of the venture.

WHO MAY CREATE A JOINT joint venturer has to ask is, Who is my
VENTURE? co-venturer going to be? The
profitability of the venture will depend in
Under the definition, any two or more large measure on the ability of the
persons, partnerships or corporations venturers to work together and, critically,
may form a joint venture. on the financial strength of the
coventurer.
In the construction industry, a joint
venture would ordinarily be between two All of the potential benefits, as well
or more corporations or firms in the as the advantages of sharing risk, can
industry on a horizontal or a vertical be lost by the insolvency or bankruptcy
basis. of a single member of the venture.
Horizontal means two or more WHY IS A JOINT VENTURE

corporations in the same field, such as DESIRABLE?
two mechanical contractors, whose
skills, know-how, equipment and other The reasons for a contractor to enter
resources complement and extend each into a joint venture are numerous and
other. If the marriage is between sometimes unique. As a general rule,
two or more companies, neither of which the following are usually present:
would, on its own, have the capacity to
bid or perform the job and the result is to To guard against mistakes in bids by
increase competition by creation of a crosschecking and dual estimating;
new bidder, little or no danger under the
antitrust law exists. However, if the joint To increase working capital;
venture is comprised of two or more
companies and each of which has the To increase bonding capacity or
capacity to bid and perform the job provide bonding capability and to
independently, and its result is the decrease bonding cost;
reduction or elimination of competition,
the formation of the joint venture may be To add managerial strength and
a violation of the antitrust laws. knowhow;
In a vertical venture, two or more To secure specialized and

companies complementing but not complementary skills;
duplicating each other would become
the joint venturers. This could be limited To increase labor supply;
to two venturers such as a mechanical
contractor and an electrical contractor. To pool equipment;
A better example, however, would be
an architect, engineer, general To reduce overhead expenses;
contractor, mechanical contractor and
electrical contractor coming together in To spread the risk of loss;
a joint venture to furnish the owner with
a turnkey project. To involve a local contractor;
Since a joint venture has all the To expand into new geographical
elements of a partnership, but none of areas;
the safeguards as to limited liability
enjoyed by a corporation, the most To be more competitive on projects
important question that a prospective with diverse components; and

To enhance Small Business venture, this would require 50 percent
Enterprise/Disadvantaged Business, ownership by members of a minority
Enterprise/Minority Business, group: African-Americans, Native
Enterprise/Women Business and Americans, Asians and Spanish-
Enterprise participation. surnamed Americans. In the case of a
joint venture between corporations, the
The reasons for the inclusion of a local minority company must have at least 51
contractor are numerous. They include: percent of its voting shares owned or
controlled by minority persons. Including
Knowledge of local conditions; a minority contractor not only complies
with Labor Department regulations, but
Access to a local labor supply and such a joint venture may gain
union relationship; preference or set-asides when the
companies bid on federal contracts.
Familiarity with local license and permit They may also be eligible for direct
Requirements; procurement not subject to competitive
bidding.
Knowledge of local suppliers;
When Should the Joint Venture Be
Personal relationship with or Created?
knowledge of owner; and
1. Before a potential job or contract is
Political connections. open for bid. The advantages are
derived by the opportunity of having two
All of the above reasons can be reduced or more organizations doing preliminary
To onethe ability to bid and perform spade work with time to work out
larger and more complicated or cooperative arrangements on
specialized jobs and return a larger management and financing. The
profit to the co-venturers. Of course, the disadvantages are that since each job is
corollary is that the joint venture gives unique, many of the details of the joint
the owner an additional bidder and a venture agreement must be left until the
stronger contractor at a lower cost. contract details are known.
There is one further reason for forming 2. When bids are solicited. By forming
a joint venture which may involve either a joint venture before bidding so that the
a local or national co-venturer. Under bid can be submitted in the name of the
Executive Orders prescribing Equal joint venture, the co-venturers can
Employment Opportunity (No.11246 as reduce or spread their costs of bid
amended) and the Office of Minority preparation. In addition, by cross-
Enterprise (No. 11458), the Labor checking or preparing separate
Department has adopted rules and estimates, the co-venturers can
regulations requiring provisions for materially reduce the chance of bid
equal employment opportunities in all omissions or mistakes.
government contracts. Federal
departments and agencies, particularly 3. After receipt of an award by one
the 8 (a) program of the Office of co-venturer. By waiting until an award
Business Development of the Small is made, the contractor has the
Business Administration, have advantage of knowing the exact extent
established preferences and incentives and details of the contract and can
for minority contractors. In the case of a select his co-venturer or venturers with
partnership or its alter ego, a joint knowledge of what additional capital,

labor, equipment and knowhow are The joint venture agreement is a
necessary to complete the contract. He contract governed by law. Usually the
does not know, however, if a potential law governing the contract will be that of
co-venturer is willing to enter into a joint the situs of the work, which may not be
venture with him. Care must also be the homeand familiarstate of one or
taken to assure that the contract permits more of the co-venturers. In New York,
assignment to a joint venture. for example, a little known ruling of the
Attorney General states that since
4. Before each separate venture. corporations have the power to enter
Often co-venturers, after completing a into joint ventures under the New York
successful joint venture, will wish to Business Corporation Law, a
continue the venture to bid on or corresponding obligation exists to file a
perform additional contracts. certificate of assumed name under the
It is best that a new joint venture General Business Law. It is vital,
agreement be executed for each such therefore, that your lawyerand the
venture, not only for the different lawyer for the other venturersprepare
conditions present in each job and review the agreement, not only to
but to prevent treatment of the venture assure that it complies with the
as an association considered taxable as governing law but that it accurately sets
a corporation and to limit trust fund forth the intentions of the parties and
liability created by statutes such adequately protects your interests with
as Article 3-A of the New York Lien Law. respect to potential liability to the
bonding company, owner and subs.
5. Use of a letter of intent to create a
joint venture. If the parties considering 2. What should the joint venture
a joint venture elect to put a joint bid agreement include?
together but wait until the award to
formally establish the joint venture, it is First, the agreement should set forth
advisable to prepare a letter of intent, the name by which the joint venture
signed by both parties, to enter into a will be known and the contract or job
joint venture if the joint bid is accepted which the venture is to bid and/or
by the customer. Many times, the perform.
owner or general contractor will want to
see the letter of intent as evidence that The most important provision
the bid is reliable. concerns management. Is
management to be shared equally?
HOW TO CREATE A JOINT (This is often a basis for disagreement,
VENTURE particularly if the parties have not
worked together before.) Is one venturer
A joint venture can be created without to have the general management of the
any written agreement and merely by job? Is each of the venturers to have
actions of the parties and the application management responsibility for a
of law. To do so, however, puts the particular segment of the job? (This is
parties in the position of having created often necessary in a vertical joint
liabilities and duties that have not been venture between contractors in different
precisely delineated. fields.)
1. Who should prepare the joint

venture agreement?

The second most important provision Contracting authority should be clearly
Is financing, not only how, when and in stated, such as who may bind the joint
what proportions the capital is to be venture without joint consent and any
supplied but how the profitsor dollar limitations on such authority.
lossesare to be shared. Usually, the
co-venturers will share profit and losses A method of settling disputes
in the ratio in which they contribute between or among venturers, usually
capital. The agreement should also by arbitration under the rules of the
establish how the parties will provide American Arbitration Association,
additional capital for the joint venture if should be included. If one co-venturer
needed. should fail to carry out its part of the joint
venture by failing to contribute funds,
The joint venture agreement should equipment or manpower or by
state how machinery and equipment reason of insolvency or bankruptcy, the
and expendable equipment and remaining co-venturer or venturers must
working tools are to be acquired for have the right to take over the
the job. Often machinery and uncompleted contract and to control
equipment are rented from the parties, such capital, equipment, tools and labor
while expendable tools are purchased as were previously engaged in the
by the joint venture, from the co- venture. In such a case, the share of
venturers, at an agreed price or from profits of the defaulting co-venturer will
outside sources. And, it should be be reduced to its proportion of the total
determined what fee, if any, the contributions, but the defaulting party
managing party should receive. would remain liable for its full share of
any losses incurred by the joint venture.
It should also be determined whether It is important in this connection that the
overhead items (such as executive, liability of any of the parties under
administrative and supervisory indemnity agreements with sureties be
services) are to be furnished without limited to that percentage of the
cost by the parties, and in what total liability assumed by such party in
proportion, or charged to the joint the joint venture. This provision,
venture, and at what rate. however, should apply only to those
losses directly connected with
Separate books of account and a or arising from the performance of the
special bank account must be set up contract and not incidental, indirect or
in the name of the joint venture. consequential losses that may be
Typically, one of the joint venture sustained by one of the parties. A cross
partners is assigned the responsibility indemnification agreement indemnifying
for keeping the accounting books, the parties against losses in excess of
including accounts payable, accounts the proportionate share of each is also
receivable, billing functions, job cost, worthwhile.
etc. These books should be open to
each co-venturer and a statement The joint venture agreement, in
furnished each month. An accounting addition to prescribing when and how
firm, not necessarily representing either capital and profitsor lossesare to
co-venturer, should be selected in the be distributed after completion of the
agreement to audit or review the books job, should specify how equipment,
of the joint venture, as necessary. tools and other assets purchased by
or contributed to the joint venture are
to be liquidated. Often the parties will
be given the right to purchase or

repurchase at book value before sale to POSTSCRIPT
outsiders. Provision should be made for
obligations which continue beyond the The growing trend in the construction
completion of the project, such as job industry of joint ventures involving
insurance, warranty work and other mechanical contractors has prompted
costs. this bulletin as a means to furnish
MCAA members with information and
Finally, the joint venture agreement guidance on the subject. It should be
should state that it should not be understood that before a joint venture is
construed as a continuing undertaken, other methods for
accomplishing the project should be
partnership or association but as a
studied to assure that the best
joint venture and no one of the co-
procedure is used.
venturers may assign its interests
therein without the prior written For example, there are other forms of
consent of all. combined efforts performed under
agreements with other contractors other
3. Other considerations: than the type of legal joint ventures
covered, and such approaches should
Insurance Be sure to consult the be considered and carefully evaluated
insurance agents for all joint venture during the early planning stages. These
partners. All insurance contracts need include:
to be reviewed for appropriate insurance
limits established, not only by the 1. A joint bid. In this case, one party
customer but also by the parties, based may install all plumbing while another
on the risk associated with the particular handles all heating, ventilating and
job. Also be certain that each partys air conditioning (or various other
insurance policies allow and cover the combinations) for a project. This type
party for joint venture work. can be one bid from a liability
standpoint to an owner, but does not
Bonding Will both joint venture create the same cross-liability in
partners surety companies agree to depth as a joint venture.
bond the project? Typically, one of the 2. Variations of a joint bid. Each party
sureties will issue the bond with a cross takes specific lump sum parts of the
indemnification agreement from the total project and then all share
other. However, each surety may look at responsibilities on other parts, such as
joint venture projects differently. major equipment and subcontracts.
Discussion with the bonding agents
early in the process is critical. 3. Subcontracting. In this instance,
one party subcontracts a part of a job
Staffing Be sure to have a clear idea to another party, as opposed to a
of each partys staffing commitments. straight joint venture.
Who will provide the project manager,
the superintendent, accounting support, In addition, the motivation for initiating a
scheduling, etc. A project organization joint venture should be studied
chart detailing who does what will realistically to assure that the reasoning
minimize confusion later behind the undertaking is sound. There
are examples of poor or weak reasons
for attempting a joint venture, as well as
reasons for not attempting a joint
agreement at all. These categories may
include:

1. Establishing a joint venture for
financial assistance only.
2. Serious tax disadvantages that
exist for legal joint ventures in
some states.
3. Initiating a joint venture with an

attitude and reasoning that mitigate
against a competitive effort. For
instance, this can occur when each
party to the venture is stretching
because of the size of a project and
bases their bids on the high risk
involved if they get the job. Such
bidding likely will not be sufficiently
competitive to make the joint effort
worthwhile.
4. A possible alternative to a joint

venture could be a Limited Liability
Company (LLC). An LLC is
established pursuant to specific state
laws, so be sure to consult legal
counsel. In some states an LLC can
provide an additional layer of
protection to the LLC partners, but
there can also be complications
including insurance, tax, bonding, etc.

Bulletin No. JV 2
File: Joint Ventures
Failure of One Corporate Member of a

Joint Venture to Qualify as a Foreign
Corporation May Penalize All Venturers
INTRODUCTION hand, the penalties, depending on each states

statutes, include restrictions on your use of the
Whenever you are doing any business in
states courts to enforce your contracts or re-
a state other than the state where your com-
cover for injuries, possible invalidation or limi-
pany was incorporated, you must always con-
tation of your contracts made in that state, civil
sider whether or not to register and qualify in
or criminal actions against you resulting in fines
that state as a foreign corporation. Every
or imprisonment, and the chance that corpo-
state has laws which in some manner affect
rate officers or agents may be held personally
or regulate foreign corporations. Generally,
liable for the actions of your corporation.
these laws require you to get the states per-
mission before transacting business there. The first possible penalty mentioned, re-
Penalties, often severe, may be assessed if striction on the use of the courts, applies in
you fail to comply with another states laws re- almost every state and can be particularly
garding foreign corporations. detrimental. In effect, the states have said, If
you do not qualify as a foreign corporation in
our state, you may not sue anyone in our
NONQUALIFYING RISKS
courts. The practical effect of this law is that
The risk you take by doing business in a you may not be able to recover for damages
state other than your state of incorporation, or collect on your contracts with persons or
without qualifying, is directly related to the companies in other states if you are not qual-
severity of the penalties assessed by that state. ified there. At the same time, there is no re-
Of course, there are advantages in not qualify- striction on law suits against you. Thus, you
ing. These include avoidance of certain fees, may be hauled into court as a defendant when
taxes, and reporting requirements.On the other you could not appear as a plaintiff.
1
Joint Ventures
In addition, a case in Mississippi demon- business and, if so, you must make sure that
strates that the possible application of this they are. The failure of one member to qual-
penalty may be even more treacherous [Scott ify in any state might severely penalize you
Company of California v. Enco Construction by precluding the joint venture from going into
Company, 264 So.2d 409 (1972)]. state courts to recover for damages to it or to
enforce its contracts with other persons or
In that case, a California corporation, a
companies in that state.
Texas corporation and a Louisiana corpora-
tion had formed a joint venture to perform a
construction contract in Mississippi. The CONCLUSION
California and Texas corporations were qual-
ified to do business as foreign corporations Two general rules are suggested as guid-
in Mississippi; the Louisiana corporation was ance for those situations where you may be
not. When these corporations sued another involved in transacting business outside your
company for damages caused by its negli- state of incorporation.
gent acts on the job, the Mississippi court First, whenever in doubt, qualify.You may
threw out their case. The court said that all not only retain your right to sue in the states
members of the joint venture must be quali- courts, but you may also avoid some other
fied to do business in the state or they could harsh penalty as mentioned previously.
not sue in the state courts. This decision was
Second, whenever you are contemplat-
sustained by the Mississippi Supreme Court
ing a joint venture for any project, require
despite the fact that the unqualified Louisiana
everyone to qualify in every state the venture
corporation had only contributed 10 percent
enters. This might prevent you and the ven-
of the joint ventures capital and that only the
ture from being penalized when only one
qualified California corporation was actually
member is really at fault.
performing the contract in Mississippi. We
have not determined whether the result in the The Summary of State Regulations and
Scott case has been applied in other juris- Taxes Affecting General Contractors con-
dictions. tains information on prequalification, licens-
ing tax and other requirements affecting
Nonetheless, the lesson is clear. Not
construction contracts. It is available from the
only may qualification be necessary when-
American Insurance Association.
ever you are doing business in a state where
you are not incorporated, but whenever you This bulletin is provided for general guid-
enter into a joint venture with any other com- ance only. Consult with your legal counsel re-
panies, you must determine whether each garding qualification requirements and
member of that venture should be qualified in whether you and your joint venturers need to
each state where the venture plans to do any qualify in a particular state.
2 JV 2
Bulletin No. LR 1
File: Labor Relations
Bulletin
Labor Relations
INTRODUCTION MCAA, the National Association of

Plumbing-Heating-Cooling
To maintain effective labor relations, Contractors and the United
mechanical contractors who employ Association. The booklet outlines
union craft workers need to have a IRCs organization, operations and
strong local organization and continuing policies. It provides suggestions and
cooperative, labor-management instructions to disputants who
programs. wish to resolve deadlocks and thus
discourage strikes, lockouts and
PUBLICATIONS other work stoppages. Download
from www.mcaa.org/private/labor/.
MCAA provides the following
publications to help mechanical MCAA Labor Agreement
contractors in these and all aspects of Reference Library reports on the
labor relations: results of current negotiations,
current issues in labor relations and
Collective Bargaining Guide and the means by which local
Legal Analysis2006 Edition. associations handle a variety of
Labor and employment law experts situations. Go to
Michael Boldt and Ryan Poor cover www.mcaa.org/private/labor/
essential collective bargaining details laboragreementlibrary.cfm.
in plain English. The book also
comes with a comprehensive digest National Service and Maintenance
of all federal labor and employment Agreement is an agreement
laws, and links to government agency between the UA and MSCA covering
compliance websites compiled onto a all service and maintenance work in
CD. Published in 2006. The currently operating facilities. The
publication is available at publication includes the national
www.mcaa.org/store. agreement, plus the Schedule A for
each state and additional labor-
The Industrial Relations Council related resources for mechanical
(IRC) for the Plumbing and service contractors. The current
Pipefitting Industry is an agreement took effect on August 1,
explanation of IRCs voluntary 2010 and will run through July 31,
adjudication services to resolve labor- 2015. Download from
management disputes, which are www.mcaa.org/msca/labor/
provided by joint agreement of

National Plumbing Service stewardship by increasing mutual
Agreement, which is currently being market opportunities. This conference
revised, applies to all plumbing covers the latest and most
service work performed by firms to comprehensive discussions of workforce
maintain the operations of existing recruiting, market initiatives,
plumbing systems within occupied or performance measures, benefits
ready to be occupied facilities in an education, and approaches to meet the
efficient manner. industry's future workforce challenges.
Sessions include discussions of
National Agreement for economic and labor relations issues,
Residential and Light Commercial updates on building trades initiatives
Construction applies to work and challenges, and updates on current
relating to the installation of all labor/management agreements.
HVAC, plumbing and fire protection
equipment and the handling of all Collective Bargaining Seminar
piping, appurtenances and Learn negotiating techniques and
equipment in one or two-family constructive approaches that will
dwellings, multi-family dwelling, improve workforce performance along
townhouses, condominiums and with contractor and industry
similar structures. The Agreement competitiveness. The seminar will help
may be downloaded at members and local association
www.mcaa.org/private/labor. executives improve their understanding
of the bargaining process to assist in
United Association Standard for preparing properly for negotiations, and
Excellence outlines the to make bargaining a constructive
performance standards expected of event for management and labor.
UA members while on and off the Topics covered will include: collective
jobsite. Available free at bargaining innovative terms; labor law;
www.mcaa.org/private/labor/ work conditions and productivity
uastandardforexcellence/. improvements; labor contract
cost/benefit analysis; and planning
CONFERENCES successful approaches in the
bargaining relationship.
MCAA and the United Association jointly
or individually sponsor conferences For more information, about these
designed to educate their respective conferences, please go to
members about shared issues, including www.mcaa.org/education.
those that are important for increasing
market share and forging closer,
mutually beneficial relationships.
Labor Relations Conference,

sponsored jointly by MCAA and the UA,
is aimed at strengthening
communication between the two
essential components of our industry
well-trained UA craftspeople and well-
educated MCAA contractors. By coming
together each year, labor and
management carry out their industry

Bulletin No. LR 2
Market Recovery Programs
INTRODUCTION vertises on radio and publishes a roster of

contractors for potential customers.
Listed below are some examples of dif-
ferent types of successful market recovery
programs which have been instituted in vari- B. Working Together
ous locations around the country. Their pur- ILLOWA Construction Labor Manage-
pose is to strengthen the position of the skilled ment Council, is jointly sponsored by Rock
contractor and increase the market share of River MCA, MCA of Iowa and two UA unions.
skilled work.Although the extent of non-skilled The primary goal of the council is to increase
competition varies throughout the country, the market share for the skilled construction
these programs, or some variation thereof, contractor. This is being achieved through ed-
may be useful one day in your local area. ucational programs, cost-clausing contracts,
an intensive marketing program, education on
INFORMATIONAL/PR-TYPE PROGRAM the problems and solutions facing the con-
struction industry, systematically increasing the
This program consists of utilizing adver- productivity of the skilled construction contrac-
tising, public relations, newsletters, social tor and tradesman, joint fact-finding committee,
functions, goodwill and community relations work site contact teams, user-relation teams,
to strengthen the position of the skilled con- and impact memorandum.
tractor and labor/management relations.
C. Building Together
Examples
This joint project of MCA of Iowa and UA
A. MCA of Northern California Local 387 promotes the skilled label on con-
1. Local 393 (San Jose) has a quarterly struction jobs.
newsletter and holds a monthly labor/man-
agement meeting. D. M.U.S.T.
2. Local 38 (Kraft)has a Labor Manage- Management and Unions Serving
ment Program to promote the industry. It ad- Together is a Labor/Management Committee
1
Labor Relations
reated by contractor associations in space and industrial structures, leading to

Southeastern Michigan and the Detroit new construction, renovation and expansion.
Building Trades Council to strengthen union
market share. M.U.S.T. accomplishes this E. Built-Rite
goal by increasing the competitiveness of
union contractors and by making construction This is an alliance of building craftsmen,
users aware of the advantages of union con- contractors and construction users, all com-
struction. mitted to creating positive change in industry
and work site practices. Their goal is to
To communicate to building tradesmen strengthen construction in the Delaware Valley
their vital role in determining the future of by delivering the best value to the customer for
union construction, M.U.S.T. developed a se- the construction dollar.
ries of messages for inclusion with paychecks.
The inserts discussed the need for quality, On a Built-Rite project, unions, contrac-
productivity and teamwork, and increased the tors and users work together to increase pro-
building tradesmens understanding of the ductivity, to promote harmonious relations, to
challenges in todays construction industry. improve safety and to sharpen the cost-ef-
fectiveness of the job at hand. From pre-job
To effectively convey its message to own- planning to on-site tool box meetings, a Built-
ers, M.U.S.T. has developed a Slide Rite project delivers on-time and on-budget
Presentation which demonstrates, using construction.
completed construction projects, the skill of
building tradesmen and the capability of union
contractors. Recent M.U.S.T. activities in- F. Its Right for the Job
clude:
The Its Right for the Job campaign was
1. The formation of the M.U.S.T./AFL- launched by the contractors who support the
CIO Health Care Coalition. The Coalition is a Piping Industry Progress and Education Fund
buying alliance comprised of management (P.I.P.E.) of Central and Northern Arizona in
and trade unions that seeks to buy insurance the Spring of 1990 with the goals of showing
cheaply without disrupting the design of ben- the value of using skilled, union labor and
efits or the administrative arrangements of broadening the role this organization has in
other union or Taft-Hartley plans. The Coal- improving the local construction industry.
ition started out small, exploring the purchase
of prescription drugs first, but will move on to There are three primary programming el-
the purchase of other types of coverage in the ements to the campaign including: direct mail,
future. industry forums and publicity. The target audi-
ences include general contractors, architects,
2. The development of an historic al- engineers, other subcontractors, legislators,
liance with the Greater Detroit Chamber of large employers, and others.
Commerce, Business Attraction Council
(BAC). By consolidating resources and work-
G. Choice
ing together to attract jobs, M.U.S.T. and the
BAC are breaking new ground. Attracting new Contractors and Hardhats Organized to
business to the region means more office Insure Construction Excellence was spon-
2 LR 2
Labor Relations
sored by Upper Peninsula (MI) Construction agement, which in turn produces a better job,
Labor-Management Council, Inc. CHOICE delivered on time and within budget, always
utilizes a multi-faceted approach to increas- with a strong commitment to productivity. All
ing its market share of work. A primary focus of these are major benefits for builders and
of the recovery is education of membership, developers, and in the long run for the con-
both rank and file, as well as member consumer too.
tractors.
Maintaining contact and dialogue with
the industrys customers is the Councils PINPOINTING PLAN
lifeblood. Constant updates on owners A plan where union and management
needs, perceptions and realities are all facil- agree to work at a lower rate on a particular
itated via CHOICE.With the same regard, the job. The men actually work for a lesser rate
industrys architect and engineering commu- than the prevailing wage rate.
nities are intimately involved with the Council.
H. Cause
UNION WORK RECOVERY PROGRAMS
Contractors and Unions Seal of
Under this type of plan, employees pay
Excellence is an organization of Washington,
into a fund and the union decides which job(s)
D.C. area contractors, Plumbers Local 5, and
to subsidize and how much to subsidize that
Steamfitters Local 602.
job. Employees actually work at the negoti-
CAUSEs partners work together to pro- ated wage rate (cannot be used on Davis-
mote better relations between labor and man- Bacon jobs).
LR 2 3
Bulletin No. LR 3
Bulletin
United Association National Labor Agreement

Summary and Comparison
Over the years, the United Association Some agreements are perpetual, but
and other interested parties have most have an expiration date. Every
developed agreements to assist effort will be made to keep the
contractors and UA labor in determining agreements status current, but always
types of tasks, jurisdiction and labor check to make sure the agreement of
groups covered for projects and other interest is the most up-to-date.
applicable purposes. Until now, there
has not been a central collection of Should you wish to execute an
these agreements. agreement or just learn more about its
contents and requirements, please
The matrix presented in the following contact your local association executive
pages provides a list of the current UA and/or the UA international
National Agreements along with a representative in your area.
summary of their provisions, labor
groups affected and the jurisdictions
covered. For a complete copy of each
agreement, go to
www.mcaa.org/private/labor/pipefitterdb/
contracts and click on the agreement of
interest.

UNITED ASSOCIATION NATIONAL LABOR AGREEMENT SUMMARY MATRIX
AS OF JULY 2014
AGREEMENT PARTIES TO LABOR GEOGRAPHICAL SCOPE OF AGREEMENT SPECIAL CLAUSES

AGREEMENT JURISDICTION
1. NATIONAL Owners, Signatory United National Industrial construction, maintenance, Establishes hours and
MAINTENANCE Contractors, Building Association Agreement repair, replacement, renovation and working conditions.
AGREEMENT (NMA) Trades - Agreement modernization in various plants. Does not Local wages apply. No
administered by the cover new construction. strike/No lockout.
(Effective 1/1/2012) National Maintenance
Agreement Policy
Committee (NMAPC)
2. NATIONAL Signatory Contractors United National Industrial maintenance, repair, Establishes hours and
INDUSTRIAL and United Association- Association Agreement / Site replacement and renovation in various working conditions.
extended by site specific Specific plants. Does not cover new construction. Local wages apply. No
AGREEMENT FOR application to the Contact UA for application of NIAM. strike/No lockout.
MAINTENANCE United Association UA/MCAA drug
testing policy
permitted.
3. NATIONAL National Signatory United National Plumbing and pipefitting work performed Establishes hours and
INDUSTRIAL Contractors and United Association Agreement in construction of industrial and/or working conditions.
Association manufacturing facilities. Local wages apply. No
CONSTRUCTION strike/No lockout.
AGREEMENT Standard For
Excellence. UA/MCAA
drug testing policy
permitted.
More
1
4. NATIONAL POWER Owners, Signatory United National National Maintenance Agreement Add- Establishes hours and
GENERATION Contractors, Certain Association, Agreement On addressing projects where distance working conditions.
MAINTENANCE Building Trades Carpenters, and travel to covered sites are significant. Local wages apply. No
AGREEMENT Boilermakers strike/No lockout.
Special travel and
(effective 1/1/2012)
subsistence
addendum.
5. MID-SOUTH Signatory Contractors United Regional to certain New construction, Industrial Establishes wages,
INDUSTRIAL and United Association Association jurisdictions in maintenance, repair, replacement and hours and working
AGREEMENT via Mid-South Multi Tennessee and renovation work at all industrial site in conditions. No
(Effective May 2012) State Pipe Trades Alabama the jurisdiction of District Council 21 strike/No lockout.
District Council No. 21 Standard For
Excellence.
UA/MCAA drug
testing policy
permitted.
6. NATIONAL Signatory Contractors United National Pneumatic messenger systems, valve Establishes hours and
SPECIALITY and United Association Association Agreement by maintenance and repair, high purity working conditions.
AGREEMENT site specific piping, low temperature refrigeration Local wages apply.
application to the systems, machine pipe cutting and
UA beveling and specialty welding
7. NATIONAL Signatory Contractors United National Plumbing Service Work Establishes hours and
PLUMBING SERVICE and United Association Association Agreement working conditions.
AGREEMENT (Revised Executed Schedule
A applies. Standard
6/2011)
For Excellence.
More
2
8. NATIONAL Signatory Contractors United National Residential and Light Commercial Established hours and
AGREEMENT FOR and United Association Agreement Construction work as defined in working conditions.
RESIDENTIAL AND Association Schedule A Executed Schedule
LIGHT COMMERCIAL A applies. Standard
For Excellence
CONSTRUCTION
(Revised 6/2011)
9. NATIONAL SERVICE Signatory Contractors United National To keep existing mechanical, refrigeration Establishes hours and
AND MAINTENANCE and United Association, Association Agreement and plumbing systems in occupied working conditions.
AGREEMENT MCAA and MSCA facilities operating including inspection, Executed Schedule
service, maintenance, start up, testing, A applies. Standard
(Effective 8/1/2010
balancing, adjusting, repair, modification For Excellence. No
through 7/31/2015) and replacement of mechanical, strike/No lockout.
refrigeration or plumbing equipment and Background check
controls in addition to all other service, and substance abuse
maintenance and operations work. Also testing guidelines.
included by addendum is Installation of
Pneumatic and DDC Control Systems
10. INDUSTRIAL Instrument Contracting Instrument National Instrumentation work, calibration work Establishes hours and
AGREEMENT FOR and Engineering and Control Agreement and control systems work in Industrial working conditions.
INSTRUMENT AND Association Signatory Technicians Facilities. New construction and Local wages apply. No
CONTROL SYSTEMS Contractors, United 50/50 UA and Maintenance work. strike/No lockout
Association, IBEW IBEW
TECHNICIANS
More
3
11. NATIONAL Pipe Fabrication United National Agreement for use of UA Pre Fabrication Establishes hours and
MINIMUM STANDARD Institute, Signatory Association, Agreement Union Yellow Label. Bending and working conditions.
FOR A COMMERCIAL Contractors and United Building fabrication of welded pipe formations Local wages apply.
PIPE FABRICATION Association, Building Trades and and assemblies including ammonia Standard For
Trades and Metal Metal Trades systems for air conditioning and all skid Excellence. UA/MCAA
SHOP (Yellow Label
Trades mounted and equipment related to drug testing policy
Agreement) (Effective ammonia systems. Also includes permitted
5/1/2014) fabrication of piping and/or domestic
plumbing, comfort heating, air
conditioning systems are included,
subject to certain conditions pertaining to
project labor agreements and local
market conditions.
12. NATIONAL Signatory Contractors United National Agreement for use of United Association Establishes hours and
MINIMUM STANDARD and United Association, Association, Agreement Sprinkler Pipe Fabrication Union Label. working conditions.
FOR A COMMERCIAL Building Trades and Building Fabrication of sprinkler pipe or sprinkler Local wages apply.
SPRINKLER PIPE Metal Trades Trades and pipe assemblies, welded or screwed. Standard For
Metal Trades Excellence.
FABRICATION SHOP
13. FOR USE OF Signatory Contractors United National Agreement for contractors engaged in Establishes hours and
UNITED ASSOCIATION and United Association, Association, Agreement the fabrication and assembly of panel working conditions.
PANEL BOARD UNION Building Trades and Building and/or control boards and piping to use Local wages apply.
LABEL Metal Trades Trades and Union Label
Metal Trades
More
4
14. NATIONAL Pipeline Contractors United National National agreement for work associated Establishes hours,
PIPELINE AGREEMENT Association and its Association Agreement with the Mainline Pipe Line Industry wage rates and
Signatory Contractors working conditions.
and United Association Local wages apply. No
strike/No lockout.
Standard For
Excellence. UA/PLCA
drug and alcohol
policies included
15. NATIONAL Distribution Contractors United National National agreement for work associated Establishes hours,
DISTRIBUTION Association and its Association Agreement with Gas Distribution Pipe Line Work; wage rates and
PIPELINE AGREEMENT Signatory Contractors geo-thermal heating and cooling systems working conditions.
and United Association included, with specific local exceptions. Local wages apply. No
strike/No lockout.
UA/DCA drug and
alcohol policies
included.
16. NATIONAL NON- Signatory Contractors, United National National Agreement covering all phases Establishes hours,
DESTRUCTIVE TESTING United Association, Association, Agreement of non-destructive testing work, including wage rates and
AGREEMENT (effective Boilermakers Boilermakers new construction, maintenance, service working conditions.
12/18/2008) and pipeline Local wages apply. No
strike/No
lockout.UA/MCAA
and Boilermaker
MOST drug and
alcohol testing
policies included.
Full text of all agreements is available on MCAAs website in the Labor Resources page of the Members-Only
section at www.mcaa.org/private/labor/pipefitterdb/contracts.
5
Bulletin No. LL 1
File: Legal
Bulletin
Protecting Lien Rights

Whether called a mechanics lien or a generally government entities will
construction lien in any one of the 50 require the general contractor (GC) to
states, all liens securing payment for post bonds as an alternate way to
construction work are created by state protect subcontractors and suppliers. In
statute. The purpose of liens is to many states, only properly licensed
secure payment for work performed on contractors are entitled to liens.
real property, even in the absence of a
direct contract with the real property Once a lien is properly pursued under
owner. the applicable state procedure, it acts as
a cloud on the owners title to the real
Because lien laws are created by state property and it becomes difficult for the
statute, each state has its own unique owner of the property to sell or refinance
set of procedures for filing and enforcing the property without first paying off the
a lien. Though all states permit those debt secured by the lien. In most states,
who supply labor or materials for a if the debt secured by the lien is not
construction project to claim a lien otherwise satisfied, the lienor can
against the improved real property, proceed to foreclose on the owners
there are key differences among state property.
lien laws including:
Though each states lien laws are
Definition of the different, all include strict time limits to
improvement preserve, protect and enforce lien rights.
Definition of proper lien A mechanical contractor that fails to
claimant strictly adhere to the deadlines in their
Definition of labor, services, state will likely waive their lien rights
and/or material that can be the under the statute in their state.
subject of a lien
Procedures and deadlines for A summary of lien and bond laws state
preserving and enforcing the by state published by the Foundation of
lien the American Subcontractors
Association, Inc. can be found at:
http://www.keglerbrown.com/File%20Lib
In addition, it is important to note that
rary/Practice%20Areas/Construction%2
only private property is subject to
0Law/2010-lien-and-bond-manual.pdf.
construction liens. Government-owned
real property is not subject to liens but

However, these statutes are frequently However, this release is effective
updated and amended so check with an only to the extent of amount
attorney in your jurisdiction for the requisitioned by and paid to
current lien procedures in your state. Subcontractor through the date of
the execution of this release. In
In addition to losing lien rights by failing the alternative, the subcontractor
to comply with state statutory can carve out items it is not
requirements, many contractors intending to waive. In this case, at
inadvertently lose lien rights by signing the end of the offending language
overly broad waiver of lien forms. insert something like: This release
Owners and GCs generally require specifically and expressly
monthly waiver of lien forms before a excludes: payment for work
subcontractor is paid. It is important to performed after ____, pending
insure that the subcontractor is only claims, pending change orders,
waiving his rights to the monies actually retention, (add anything else
received. here).
A typical GCs partial waiver of lien will Never waive your lien rights for claims,
state something like Subcontractor change orders or retention that you may
hereby waives and releases any and all not yet have requisitioned, received
liens, claims and causes of action payment for or for work not yet
Subcontractor may have or claim to performed. Note that Owners and GCs
have against Contractor, Owner and the are increasingly including severe
Property through the date of the release language like this not only in the
execution of this release. A literal partial release form, but also in their
interpretation of this language may monthly requisition forms, change order
leave the subcontractor without rights to forms and in other unexpected places.
payment for any work performed prior to Also, sometimes the Owner or GC may
the date of the release. In fact in most update or alter their forms mid-project.
instances, the amount paid each month In every case, before signing, carefully
will not equal the amount due for work review all language on the requisition,
performed in the past month because of release and other forms and make any
retention, pending/unpaid change adjustments necessary to protect your
orders, claims, disputed backcharges, lien rights.
etc. In order to preserve lien rights
pertaining to the retention and these The information in this bulletin
other outstanding, unpaid items, it is should not be construed as legal
recommended that partial release forms advice. A person should contact
be modified. The best time to do this their local counsel for specific legal
when the form is included as a advice regarding the information
subcontract exhibit is before the contained in this bulletin.
subcontract is executed.
The subcontractor should include

language clarifying that the only claims
released by the partial release form are
those for monies actually received
through the date of the release. To
accomplish this, the subcontractor can
insert to the end of the offending
language:

Bulletin No. LL 2 Revised
File: Legal
Bulletin
Purchases and Sales of Goods Under the

Uniform Commercial Code
The Uniform Commercial Code is in effect in all states (but Louisiana has not adopted all
Articles) and in the District of Columbia. The Code varies slightly from state-to-state but is
essentially uniform as to the fundamental concepts.
The Uniform Commercial Code (UCC) meaning. Common terms of the sales
was first published in 1952. It is one of a relationship are prescribed by statute
number of uniform acts promulgated to unless the parties expressly agree to the
harmonize the law of sales and other contrary. Particular attention is given to
commercial transactions in all the long term arrangements.
states. This is important because of the
prevalence of commercial transactions With respect to the sale of goods under
that extend beyond one particular state Article 2, the Code emphasizes contract
(equipment for a project manufactured concepts rather than property concepts
in one state, warehoused in another, such as title. Prior to the adoption of the
and then shipped to the job in yet Code, the remedies available to a buyer
another state). The UCC applies or seller, and the risk of loss when the
primarily to sales of personal property goods were destroyed, turned on who
(goods), and not to the sale of real had title to the goods when the breach
property. Specifically, the UCC does not or destruction occurred. Under the
apply to a construction contract with Code, the remedies of the parties and
another contractor or owner involving the division of risk between them
labor and not just the sale of goods. depend upon the duties of performance
under the sales contract. Basic rules are
The Code consists of 11 Articles, the restated in commercial terms by
longest of which is Article 2, entitled reference to shipment, delivery,
Sales. This bulletin concerns only acceptance of the goods, and similar
sales of goods under Article 2, primarily functional aspects.
the purchase orders that a contractor
writes to material and equipment Mechanical contractors will be
suppliers. Terms long familiar to especially concerned with: warranties,
contractors, such as FOB, FAS and CIF, implied and expressed; sale of samples
are defined in accordance with their or models; and the relegation of offer
generally understood commercial and acceptance in the formation of a

contract to their proper place under the The code recognizes third party
theory that the parties to a contract can beneficiaries of certain limited
set their own rights and obligations by warranties. The warranty extends to any
agreement. The concepts of cover and natural person who is in the family or
cure are used. All these features of the household of the buyer or who is a
Code will be discussed along with other guest in his home if it is reasonable to
sections of the Code. expect that such person may use,
consume or be affected by the goods
WARRANTIES and who is injured by breach of the
warranty. A seller may not exclude or
Section 1 states that the basic limit the operation of this provision.
commercial tenets of good faith,
diligence, reasonableness and care REMEDIES AND DAMAGES
cannot be disclaimed. The Code sets
forth two implied warranties that all The UCC sets forth rules to allocate the
goods must conform with. These are division of certain risks between parties
warranties of merchantability and fitness during shipment of goods and
for purpose. The warranty of appropriate remedies. However the
merchantability implies that goods parties may change those allocations
purchased conform to ordinary and remedies by contract. Section 2-509
standards of care and are of the same deals with risk of loss in the absence of
grade, quality and value as similar a breach of contract, and Section 2-510
goods sold under similar circumstances addresses the effect of a breach of
(a candy bar will be fresh and edible). contract on risk of loss. The theory of
The fitness for purpose warranty implies risk of loss under the Code is cast in
that when goods are purchased for a terms of specific rules to resolve specific
specific use, the seller knows of that use issues rather than a search for title. A
and that the buyer is relying on the contractor would do well to be sure his
sellers expertise, then the goods will insurance coverage is properly defined
conform to that use. Disclaimers of the to protect him from possible loss under
implied warranties of merchantability the approach of the Code.
and fitness for a particular purpose,
however, may be disclaimed by The Code employs the concepts of
contract, but only if the disclaimer is in cure and cover for remedies of
writing and is conspicuous. Such sellers and buyers, respectively. The
disclaimers may not be valid in concept of cure by the seller enables
transactions with consumers such as the seller to cure a non-conforming
homeowners. shipment if the time for performance has
not expired. Thus, a seller who has
It should be noted that in many cases, defaulted because of an improper
particularly in purchase orders involving shipment may thereafter ship the correct
equipment, manufacturers do in fact item or an undamaged item, thereby
disclaim the implied warranties. curing his default, if there is still time
Contractors need to be cautious to avoid remaining for his performance under the
any implied warranties owed to the agreement.
owner or general contractor under the
prime or sub-contract, where the On the buyers side, cover is an
equipment manufacturer has disclaimed additional remedy. The buyer may
those implied warranties. Pass along purchase goods in replacement after a
only the warranties provided by the breach of the contract by the seller and
manufacturer.

collect any difference in cost from the (1) Specify a quantity (which limits the
seller. recovery);
(2) Be signed or authenticated by the
Damages for breach of warranty can be party to be bound; and
limited by agreement. A limitation of (3) Be sufficient to indicate that a
consequential damages for personal contract of sale was made.
injury in the case of consumer goods
only, such as a homeowner, is prima However, a written confirmation of an
facie unconscionable, but when the loss oral agreement between a mechanical
is commercial, it is not. contractor and a supplier may suffice,
unless written notice of an objection to
Consequential damages resulting from a the contents of the writing by the party
sellers breach of contract may include sought to be bound is given within 10
any loss resulting from the general or days after he receives written
particular requirements and needs of confirmation. Partial payment, as well as
which the seller at the time of receipt and acceptance of the goods,
contracting had reason to know and also creates an enforceable contract
which could not reasonably be even without writing.
prevented by cover or otherwise.
However, the breaching seller may The common law rule of forming
receive some protection, in that contracts by offers and acceptances is
recovery for consequential damage is sometimes referred to as the mirror
permitted only when the buyer could not image rule; i.e., an acceptance of an
reasonably have prevented the loss by offer which attempts to repeat the terms
cover or otherwise. Remember, of the offer must reflect those terms
however, as previously discussed, precisely. The acceptance cannot add
consequential damages may be limited to, subtract from, or change those
by contract, and this is a common terms. If it does, it is no longer an
practice in manufacturers and suppliers acceptance but a counter-offer, rejecting
terms and conditions. A contractor must the original offer and requiring, in turn,
again reconcile limitations on an acceptance itself for the formation of
consequential damages in his purchase another contract. Therefore, the only
orders with material suppliers with the sure way to accept an offer under the
obligations for consequential damages prior common law was to endorse the
that the contractor assumes under the offer by the single word accepted and
prime or sub-contract. sign it or by simply writing I accept your
offer. But contractors do not have forms
When dealing under the Code, your so tersely worded.
rights and remedies are controlled by
the concepts of identification and The Code does not use the mirror
conformity. The drafting of an image. Section 2-207 captioned
agreement must be done with the points Additional Terms in Acceptance or
of inspection, acceptance of the material Confirmation provides:
and payment carefully interwoven.
(1) A definite and seasonable
CONTRACT FORMATION expression of acceptance or a written
confirmation which is sent within a
The Code provides that if the price of reasonable time operates as an
the goods is $500.00 or more, writing is acceptance even though it states
required to enforce a contract. Generally terms additional to or different from
that writing need only: those offered terms agreed upon, unless

acceptance is expressly made and Seller). Without the foregoing
conditional on assent to the additional or statement on your Purchase Order, you
different terms. may need a score card to keep track of
the players in this game. You can see
(2) The additional terms are to be that any two parties can be, and often
construed as proposals for addition to are, both offerors and offerees.
the contract. Between merchants such
terms become part of the contract It should also be clear now that it
unless: depends on whether you are pitching or
catching in this matter of preparing the
(a) the offer expressly limits terms printed on the forms used in
acceptance to the terms of the present-day business transactions. The
offer; clear implication from the language of
the Code is that written confirmation or
(b) they materially alter it; or objection to terms which is not sent
within a reasonable time does not
(c) notification of objection to them operate as an acceptance or rejection. It
has already been given or is is always best to resolve any conflict
given within a reasonable time between the written terms before any
after notice of them is received. performance begins. This is especially
important where warranties or express
(3) Conduct by both parties which disclaimers of any warranties are
recognizes the existence of a contract is involved.
sufficient to establish a contract for sale,
although the writings of the parties do Suggestions:
not otherwise establish a contract. In
such cases, the terms of the particular 1. If you do not want to buy material
contract consist of those terms on which except upon terms included on your
the writings of the parties agree, Purchase Order, it should include, in
together with supplementary terms conspicuous type, a clause expressly
incorporated under any other provisions limiting acceptance to the exact terms of
of this Act. the offer.
Here you are informed that the parties 2. If you are the recipient of a sales
have latitude to make an agreement in or purchase order and want no contract
their terms as long as it is done in good except upon your terms, you need reply
faith and does not alter the express only as follows: I accept your offer
limitations set forth in the Act. (identify it), provided you agree to the
following additional (or substitute) terms
Now be sure that you are the last . Or, you may reply, I accept if, and
man to shuffle the papers if there are only if, you agree, etc. The exact words
terms with which you do not agree, and depend on you.
that you make known your
disagreement to the other party 3. To be doubly sure that the
reasonably. Otherwise, you have an contract contains all the terms you want
agreement based on the last terms included, do not begin performance or
presented (unless your first offer states take any action recognizing the
acceptance is limited to the terms and existence of a contract until all forms
conditions stated hereon, any have been received by the parties and
modification shall be ineffective unless the terms have been settled.
in writing and signed by both Purchaser

4. In case of a written confirmation, UCC OFFER AND ACCEPTANCE
be sure it is mailed promptly (perhaps in
the case of substantial transactions, by Prior to the Code, in order for a binding
registered or certified mail, or e-mail if contract to exist, the offer to sell or
applicable.) purchase required an acceptance
delivered in the manner dictated by the
5. Of utmost importance, any legend offer, and without qualification or
on the front side of a form incorporating exception to that offer. The Code
by reference any terms on the reverse reflects the law to generally accepted
side should be in conspicuous type. commercial practices. It includes
Otherwise, there is a danger that a court widespread use of printed proposals,
might construe the reverse side as not purchase orders and acknowledgement
having been integrated with the forms, which often have differing terms
agreement and ignore it. The terms on and conditions. Thus, under the Uniform
the reverse side should be in as large Commercial Code, a contract may be
and clear type as possible. made in any manner that shows
agreement, including the conduct of the
UNIFORM COMMERCIAL CODE: parties, even though the moment of its
HOW IT AFFECTS YOU making is undetermined. (Example:
AND YOUR SUPPLIER Supplier ships goods, buyer accepts
them.)
Good faith between merchant and
customer cannot be implied. Article II of Unless otherwise expressly provided in
the Uniform Commercial Code helps your purchase order, acceptance by the
you protect yourself against any breach supplier may be made in any manner
of good faith, especially if unintentional. (i.e., either by acknowledgement form or
Since ignorance of the law is no excuse, by delivery of the goods). If you want
thorough study of the UCC is essential acceptance in a particular way, you
in the daily conduct of your business. must so specify in your purchase order.
The same rule applies to your response
The Uniform Commercial Code, in effect to a sellers quotation.
in the District of Columbia and all states,
revises pre-existing commercial law, A promise by a supplier to hold a
including sales of goods (except in quotation open for a stated period not
Louisiana), secured transactions exceeding three months (i.e., this price
(conditional sales, chattel mortgages, is good for fifteen days) may be
etc.), negotiable instruments (bill and enforceable even though not supported
notes), bills of lading and warehouse by consideration; if no time is stated,
receipts. then it is for a reasonable time. This
irrevocability of an offer may be negated
Article 2 of the Code is possibly the by an express contrary provision in the
most significant to mechanical offer form, or extended beyond three
contractors since it states the law with months if supported by consideration.
regard to the formation of sales The most important Code provision with
contracts. A brief review of some of the regard to use of a proposal, purchase
principal provisions of the Code relating order and acknowledgement forms is 2-
to sales of goods may help you analyze 207. This section essentially provides
the adequacy of your forms and that even if your purchase order and the
practices in this area. suppliers acknowledgement contain
terms and conditions that conflict in
some degree, and if there is agreement

as to the principal terms of the sale, a WHAT CONSTITUTES ACCEPTANCE
contract may be formed. Under these OF GOODS?
conditions, a contract is formed when a
definite and seasonable expression of Another important question dealt with by
acceptance or a written confirmation the Code is what constitutes acceptance
is sent by the supplier, unless the of goods and how you may reject them.
supplier expressly states that his The Code provides that you have
acceptance is made conditional upon accepted the goods if, after a
your assent to his different or additional reasonable opportunity to inspect them:
terms. In this latter case, there is a
contract only when you assent. Under (1) You signify to the supplier that the
the Code, you may wish to amend your goods do conform, or in spite of non-
forms to provide that acceptance must conformity, you will retain them;
be upon the exact terms of your (2) You fail to make an effective
purchase order. If you do, you will have rejection; or
no enforceable contract unless you (3) You otherwise treat the goods as
receive an unqualified acceptance. your own.
A less stringent alternative is to provide To make an effective rejection, you must

in your purchase order that you object to notify the supplier within a reasonable
any additional or different terms time after delivery. What is reasonable
proposed by the supplier in his depends on the facts of each case,
acceptance and, even if such terms are especially upon contract terms relating
included, the contract shall be upon the to inspection and upon the difficulty of
terms stated in your purchase order. making the inspection (if it has not been
waived in the contract). You should also
If you have not qualified your purchase state in detail the reasons for your
order, if the suppliers acceptance form rejection. They have an important
does vary from your order, and the bearing upon your remedies.
supplier has not conditioned his
acceptance, you must reasonably object Careful consideration should be given in
to his new terms. Otherwise, you will be your purchase order form to include a
bound by them. provision concerning your right of
inspection and the time for rejection of
TWO REMEDIES FOR RECEIPT OF non-conforming goods.
DEFECTIVE GOODS
The Code provides a four-year statute of
Unless your purchase order otherwise limitations for any action for breach of
clearly indicates, a shipment of defective contract, but it permits parties to reduce
(non-conforming) goods is an that period to not less than one year.
acceptance of your offer to buy, and a The statute begins to run from the
contract exists. Your remedies include: breach, not from knowledge of it. A
(1) rejection of the goods and a suit for breach of a suppliers warranty is
damages; or (2) acceptance of the deemed to occur when the goods are
goods and a suit for damages resulting tendered. This statute, however, is not a
from defects. No contract is formed, limitation on actions founded in tort
however, if the supplier notifies the rather than contract (i.e., claims for
buyer that shipment is offered only as personal injury or damage to the
an accommodation to the buyer. plaintiff; reference must be made to the
applicable state statute of limitations for
such an action).

SHIPMENT AND DESTINATION CODE OFFERS BROAD FREEDOM
CONTRACTS OF CONTRACT
The Code distinguishes between The Code rests upon the requirement of
shipment and destination contracts. good faith between the contracting
In the former (i.e., FOB place of parties and renders unenforceable
shipment), the supplier only arranges for unconscionable bargains. It does,
transportation to complete his however, permit broad freedom of
performance. In the latter, (i.e., FOB contract between the parties. As a
place of destination), he must deliver to result, there will undoubtedly be a
the selected point. In the absence of number of items which your purchase
specific agreement to the contrary, the order should contain, or items which you
supplier may use any reasonable carrier may want to include because they are of
or route and make any reasonable special significance to you.
arrangements for the shipping. Whether
the shipment is or is not at the buyers You should also be mindful that in
expense, reasonable arrangements for certain instances, the Code
the shipping (i.e., protection against the distinguishes between commercial
weather, use of specialized vehicles, transactions (transactions between
etc.) are generally the suppliers job. merchants) and consumer sales. A
Special contract clauses (i.e., risk of sellers ability to disclaim certain implied
loss, insurance during shipping, special warranties is an example of where the
arrangements regarding shipping, etc.) Code makes this distinction.
may be desired in your purchase order.
SUMMARY
As defined in the Code, the following
meanings attach to the indicated terms: This bulletin is intended merely to
provide a general outline of the major
FOB place of shipment: Supplier provisions of the Code. Inasmuch as
delivers to carrier and arranges for various states in adopting the Code
suitable shipping contract. Risk of loss is have in some cases incorporated
on you when this has been done. You variations from the proposed Code, it is
pay transportation charge. You have suggested that the advice of local legal
insurable interest when goods are counsel be obtained in reviewing your
identified to the contract. Supplier has purchase and sales practices.
insurable interest until his duties, as
above indicated, have been performed. This bulletin is not intended to be
legal advice. Contractors should seek
FOB point of destination: Supplier has local counsel for specific information
insurable interest until his duties, as regarding the information found in
above indicated, have been performed. this bulletin.
FOB car, vessel or other vehicle:

Supplier loads the goods and tenders
the documents necessary to give you
control over them. You have a risk of
loss upon loading and pay
transportation charges from that point.
The supplier has insurable interest until
then. You have such interest as in the
two prior forms.

File: Legal
Bulletin
Summary of State Regulations and Taxes

Affecting Contractors
Contractors must register to do business corporate filings, statutory
in any states in which they work. Failure representation and corporate staffing
to do so can restrict the ability of the and meeting services.
contractor to access the court system of
that state in the event of a dispute, and Another useful service is offered by
also can subject the contractor to Walters Kluwer Commerce Clearing
various fines and penalties. Once House, Inc. This publication is a
registered, the contractor is obligated to compendium of State Tax Reporters for
stay updated on the various tax and all 50 states and the District of
regulatory laws that he must comply Columbia. Among the topics included
with. Fortunately, there are some are franchise tax, corporate income tax,
materials that can assist contractors property tax, sales and use tax, and
with this challenge. unemployment tax. It also updates
services including:
The Associated General Contractors
(AGC) publishes and updates regularly Tax Tracker News A daily
the Construction State Law Matrix. service providing customized tax
This publication is available by annual news delivered by e-mail.
subscription through the AGC website
(www.agc.org). It covers many topics, Smart Charts Tools to provide
including state licensing requirements, comparative tax treatments across
foreign corporation registration multiple tax jurisdictions.
requirements, bonding requirements,
and sales and use tax obligations. The Tax Calendar At-a-glance state
matrix is searchable by state and by and federal filing date requirements.
topic.
State Tax Review Reviews of
The Corporation Trust Company is a the latest trends in all taxes in all
service organization primarily designed statespending legislation, new
for lawyers, but available to contractors laws, regulations, rulings and
through the contractors attorney. comparative analyses of state tax
Corporation Trust offers out-of-state data.
corporations advice in such areas as
qualifications for doing business,
Copyright, Mechanical Contractors Association of America, Inc., Revised 2013

. 1
Working out of your own state can be
complicated, and it behooves a
contractor to use all information avail-
able.
This publication is not intended to be

local counsel for specific information
regarding the information found in
this bulletin.

Bulletin No. LL 4
File: Legal
Bulletin
Truth in Lending
The Management Methods Committee recommends that contractors seek local
counsel for specific information pertaining to this area of the law.

Bulletin No. LL 5
File: Legal
Bulletin
Funding Liability Under Multi-Employer

Pension Plans
The Management Methods Committee recommends that contractors seek local
counsel for specific information pertaining to this area of the law.

Bulletin No. LL 6
File: Legal
Bulletin
Records Retention
INTRODUCTION RECORD RETENTION POLICIES
It is important for mechanical Your record retention program should

contractors to properly maintain and provide for:
store their records and documents for
many reasons, especially the potential (a) maintenance of records in
for litigation involving a construction accordance with applicable
project. A companys records governmental and legal
encompass many things including requirements;
project correspondence, employee
personnel files, accounting records, etc. (b) safe storage of vital business
These records may be on paper or in records (e.g. articles of
electronic format. incorporation, mortgages); and
Unfortunately, the cost of document (c) an orderly system for the

storage can be huge. These costs can retention, retrieval and disposal of
be somewhat mitigated with an effective records.
company record retention and
destruction program whereby your An important step in creating a record
records, except for those of permanent retention policy is to understand which
value, can be systematically destroyed documents do not need to be retained at
without running afoul of government all. All records not necessary for legal
regulations. and business reasons can be destroyed
in order to reduce the high cost of
A good policy will include guidelines for storing, indexing and handling the vast
storing, using, retaining, and destroying amount of documents and paper which
documents. While no single policy will would otherwise accumulate.
suit all companies, there are some rules Included in this category might be
that are universal. The policy must be in miscellaneous records such as:
writing and known to all employees.
The policy should be implemented and (a) cover letters or correspondence
controlled by a specific individual with and internal memoranda which
adequate authority. The policy should serve only as simple
be enforced uniformly to all projects and acknowledgment;
all employees.

(b) notices of meetings, invitations or disposing of its records in compliance
regrets, arrangements for functions, with regulations.
speakers, etc.; and
In creating a record retention/destruction
(c) stereotyped replies, notices, schedule, first identify all types of
reports, releases, tabulations and documents that your company utilizes.
publications of general information Such a list might include:
unrelated to a particular project that
require no administrative action. Human resource and
administration
Other documents no longer necessary Accounting and financial
for day-to-day operations must Corporate
nevertheless be stored for certain Insurance
periods of time. Your company is most Tax
certainly subject to statutes, regulations Property
or other laws that require documents to Legal
be retained for a minimum number of
Safety
years. Your record retention policy will
Construction Project
need to distinguish what records need to
Documentation
be retained for how long. Additionally,
many important documents must be Non-project specific
maintained permanently (your articles of correspondence
incorporation, mortgage, etc.). If such E-mail and electronic files
records cannot be easily replaced, the
originals of such documents should be Within each category, you will further
maintained safely and securely with identify the different types of documents
extra copies stored away from the and the time you will keep them.
originals in a safe deposit type vault or Different states have different
with your attorney. requirements. Additionally, most federal
governmental agencies (EPA, OSHA,
IRS, etc.) with which your company
RECORD RETENTION/ interacts have set record retention
DESTRUCTION SCHEDULE requirements.
Your record retention program must Every company will have different
insure that you keep those records to specific requirements for retaining
meet your governmental and legal records. It is therefore strongly
requirements. All records are retained recommended that your attorney and
for the period required by applicable CPA review and approve your record
state and federal laws and regulations. retention policy. A sample of a record
This is usually accomplished with a retention policy can be reviewed at
record retention/destruction schedule. http://apps.americanbar.org/lpm/lpt/articl
This schedule identifies each type of es/sampledocretentionpolicy.pdf.
record to be maintained, and lists the
duration that record should be stored. Regarding construction project
documentation, all states have a statute
There are different retention periods for of limitations within which time a
different types of records. A record contractor might be sued on a project
retention/destruction schedule is a and must defend using their project
valuable tool for showing governmental records. Statutes of limitations usually
agencies that your company is run from the date a cause of action is

discovered or should have reasonably destroyed documents and your record
been discovered (the discovery rule). retention policy should include this as a
Therefore, many states also have a requirement.
statute of repose, which creates an
absolute end to the period of time within RECORD STORAGE
which a contractor might be sued on a
project, even if the cause of action has Contractors with a high volume of stored
not yet been discovered. Statutes of paper records often employ outside
repose set definite time limits under companies and pay them for remote
which a cause of action can be brought storage on a monthly basis. Other
against a contractor (e.g. 10 years from contractors maintain their own record
project substantial completion). storage at the office or at a nearby
facility. In either case, stored records
For example, a states statute of are best kept in corrugated boxes with
limitations might require that a lawsuit sheets stored flat in the containers. If
be filed within three years of discovery possible, remove rubber bands, tape
of property damage resulting from an and other materials that might
improperly installed air conditioning deteriorate and discolor the records.
system. If the property damage resulting
from the defective installation is Businesses can choose to store their
discovered 12 years after the projects records via electronic record retention.
substantial completion then the claim When a company implements an
may not be barred by the three-year electronic record retention plan for
statute of limitations. Such suit could be paper files, the original paper copy is
brought up to three years after the destroyed and only a scanned image of
discovery of the damages. However, if, the original exists. As far as the
for example, the states statute of admissibility of these documents in
repose is 10 years from the projects court, the imaged documents should
substantial completion, the lawsuit meet the required criteria needed as
would then be barred as it was not filed long as the imaged document accurately
within the statute of repose period. reproduces the original document and
does not give rise to concerns regarding
In states with statutes of repose, project the authenticity of the original or have
records should be maintained through at the appearance that the document was
least the end of that period. Your tampered with.
attorney will recommend the correct
retention period for construction Emails and other data created and
documents in the jurisdictions where maintained in electronic format in
your company works, and this duration computers are usually considered to be
should then be reflected in your record documents for litigation purposes and
retention/destruction schedule. your record retention program should
include a detailed explanation as to how
Once a destruction date established in these documents will be treated. Such
your record retention/destruction electronic documents contain metadata
schedule is reached, you must insure not visible on the face of the document,
that all documents in the applicable including the document's creation
category are consistently destroyed. amendment history, transmittal history
This includes the shredding of paper and the authors name, etc. You and
and the destruction of various forms of your employees need to understand that
electronic data and computer metadata. even emails deleted from an individuals
It is a good idea to maintain a log of mailbox may remain elsewhere in the

system. Thus the complete destruction CONCLUSION
of electronic documents can be
challenging and should be coordinated A thorough and well-implemented
with your Information Technology record retention policy will benefit your
professionals. company in many ways. It will reduce
the volume of documents by ridding
Electronic record retention is a great your organization of documents that are
benefit for most documents; however, no longer required to be retained by law
you should confer with your attorney to or otherwise necessary for the conduct
see which, if any documents should be of its business. A good policy will ensure
maintained in their original, paper format your compliance with applicable state
in your state. and federal laws and insure your
records are properly maintained in case
LITIGATION of future litigation. Finally, by following a
comprehensive retention and
Notwithstanding any destruction dates destruction policy, you will protect your
set forth in your record retention/ company from charges that it improperly
destruction schedule, your company destroyed documents relevant to
must immediately suspend regular litigation.
retention and destruction procedures
when litigation or a legal document The information in this bulletin
request is pending or imminent. Once should not be construed as legal
you recognize that a dispute may result advice. A person should contact
in litigation or a complaint is already their local counsel for specific legal
filed, all documents related to the advice regarding the information
disputed, including electronic records, contained in this bulletin.
must be preserved.
Destroying relevant documents when

you know a claim is likely can be
interpreted as an attempt to eliminate
damaging evidence, and the potential
civil and criminal liabilities from the
destruction of documents needed for
litigation is enormous. Many states
permit an independent cause of action
for spoliation of evidence, which is the
destruction of evidence relevant to
litigation. You can avoid even the
appearance of impropriety if you retain
and destroy documents on a regular
basis in compliance with your record
retention policy

File: Legal
Bulletin
Employers Liability When Contributing to

Union Testimonial Dinners
The so-called anti-bribery provision of The case of United States v. Pecora,
the Federal Labor-Management 484 F.2d 1289 (3rd Cir. 1973) is
Relations Act prohibits employers and illustrative. The defendant, Pecora, was
associations of employers from, among the business manager of the local
other things, paying money or delivering Construction and General Laborers and
things of value to a labor organization Materials Handlers Union and the
(or any officer or representative thereof), honoree of a testimonial dinner
which represents the employees of the sponsored by the union. Some
employer or which seeks to represent employers purchased tickets at $50.00
them (29 U.S.C. Section 186(a)). per couple and advertised in a souvenir
Section 186(b) of the Act prohibits any program at $300.00 per page. After
person from receiving payments or deducting all costs of the event, the net
things of value that Section 186(a) proceeds were donated to Pecora
prohibits employers from giving. Willful $26,755.0032 in cash, plus a new car
violations of these provisions involving worth $5,324.96 and a color television
money or things of value in the amount set worth $448.00.
of $1,000 or greater are felonies
punishable by fines of up to $15,000 or The government charged Pecora with
imprisonment for up to five years, or violating Section 186(b) by his receipt of
both. Willful violations valued at less the cash and other gifts. Although the
than $1,000 are misdemeanors lower court dismissed the indictment on
punishable by fines of up to $10,000 or the grounds that there was no showing
imprisonment for up to one year, or of a corrupt purpose which it
both. considered necessary to constitute a
violation of Section 186(b), the Court of
The payment (or receipt) of money and Appeals said . . . that is simply not
the giving (or receipt) of valuable gifts as correct and remanded the case to the
specified in Sections 186(a) and (b), are District Court for trial. The Court of
clear-cut violations of the Act. Other Appeals stated that to allow such a
forms of benefits given to union device [contributions to a testimonial
representatives (or received by them) committee] would make a mockery of
are not so obviously within the purview attempts to enforce 186(b).
of the Act, but nevertheless constitute
violations. While the focus of the Pecora case was
on the union managers receipt of cash
and gifts, a lesson can be learned by

employers; namely, that no employer or Be very cautious about any payments of
association representative should any kind to union officials or
contribute to or attend any such function representatives, including attending
where it is even possible that some part testimonial dinners. Also, it is important
of the payment will be received, directly to keep in mind that if, for any reason,
or indirectly, by a labor organization or an employer or association
any representative of a labor representative contributes to such a
organization which represents function, certain reporting requirements
employees of such employer or bar- may apply. Willful failure to submit
gains with the association. required reports to the Department of
Labor constitutes a violation of another
Another case important in this provision of the Labor-Management
discussion is United States v. Phillips, Relations Act.
19 F. 3rd 1565 (1994). In this case, the
United States Court of Appeals, SUMMARY
eleventh Circuit ruled that neither intent
to violate the law nor proof that a union If you should have questions about the
official was in fact influenced is legality of a requested contribution of
necessary to find a violation. As the the type discussed in this bulletin, you
Court stated, Congress must have should consult with your legal counsel.
intended sections 186(a)(1)-(2) to You should determine and pass along to
prohibit payments to representatives your counsel information as to who will
even if they were made without any be the recipient of any funds beyond the
intent to influenceCongress intended cost of the event since that information
the term willfully to require proof only will be of importance in assessing the
that the payment was made knowingly legality of the contribution.
and intentionally, not accidently or by
some mistake. This bulletin is not intended to be
local counsel for specific information
regarding the information found in
this bulletin.

File: Legal
Bulletin
Compliance with Antitrust Laws

All businesses, including ours, should protect price competition. The Sherman
take great care that they maintain strict Act prohibits any agreement affecting
compliance with all antitrust laws and
avoid the perception of violating the the price of a product regardless of the
antitrust laws. This bulletin provides a purpose of the agreement. For example,
brief summary that is intended as a if businessmen reach any form of
general guide only. Your association understanding or agreement that affects
cannot and does not render individual prices (that is, enter into a price fixing
legal advice, and suggests that specific agreement), they cannot attempt to
questions of law be referred to an justify the actions by attempting to show
individuals or companys legal counsel. some legitimate objective or beneficial
result from the agreement. Such
PROVISIONS OF THE ANTITRUST agreements are known as per se
LAWS violations of the Sherman Act. Bid
rigging, of course, is a form of price
The most important federal antitrust fixing. Other per se violations include
statutes relating to the business group boycotts to pressure suppliers or
activities of your company and that of customers not to deal with the groups
your association are Section 1 of the competitor and the division of markets
Sherman Act and Section 5 of the or territories among competitors.
Federal Trade Commission Act. Section
1 of the Sherman Act prohibits a Mere attendance at a meeting where
contract, combination...or businessmen engage in price fixing
conspiracyin restraint of trade or discussions may imply acquiescence
commerce. This means that and participation and make a
agreements between two or more businessman and his company
persons or firms that restrain trade are criminally liable, even though he did not
illegal. A restraint of trade generally actively participate in a resulting price
refers to a practice which inhibits free fixing scheme. Only by an affirmative act
and open competition. The intent of the of withdrawing himself from such a
law is to protect competition as opposed meeting can a non-participant who was
to individual competitors. present at the conception of a
conspiracy avoid liability.
The most critical element of competition
is price and, accordingly, the antitrust The antitrust laws also prohibit
laws are applied most vigorously to agreements among competitors as to

other terms of sale, such as credit and one should tread lightly in this
warranties. In short, each company, in area.)
order to comply with the antitrust laws,
must make its own decisions regarding What constitutes a fair profit
prices and other terms of sale; this level in ones view.
unilateral decision-making process is at
the heart of the competitive process, Possible increases or decreases
which the antitrust laws are designed to in prices on future bids.
protect.
Standardization or stabilization
Section 5 of the Federal Trade of prices in the region or across
Commission Act prohibits Unfair the board.
methods of competition in or affecting
commerce, and unfair or deceptive acts Pricing procedures, including
or practices in or affecting commerce. margins, markups, cost percent-
Unlike the Sherman Act, the Federal ages, discounts, or formulas or
Trade Commission Act reaches policies for arriving at prices.
anticompetitive acts committed by
individual persons or companies, Avoidance of ruinous
whether or not there is any agreement competition.
or combination; but, like the Sherman
Act, it also covers joint actions. The FTC Credit and warranty terms.
is also vested with rule-making powers
applicable to entire industries. Production, Capacity, and Marketing
Plans
In addition to federal laws, most states
have adopted antitrust statutes. Plans to reduce, increase, or
Therefore, no local business can expect maintain production capabilities.
to avoid the antirust laws by claiming
that they do not apply to them.
Plans to reduce or increase
capacity.
TOPICS TO AVOID IN DISCUSSION
WITH OTHER INDUSTRY MEMBERS
Plans to market products,
expand, or contract product lines
There are topics that a businessman
or enter new markets.
should avoid discussing with another
industry member or members to avoid
Allocation of Markets
the perception or in fact an actual
violation, of the antitrust laws. This
applies no matter where the discussions Dividing up winning bids.
take place (e.g., in an office, at a
convention, in correspondence or on the Dividing up territories.
telephone). These topics include but are
not limited to: Dividing up products or product
lines.
Prices
Current or future prices including

bids. (The safest policy is to
avoid any mention whatever of
prices, even of past prices, and

Joint Boycott of a Supplier, YOUR ASSOCIATION AND THE
Subcontractor, or Customer to ANTITRUST LAWS
Pressure a Competitor to Change
Prices or Other Policies The provisions of the antitrust laws and
the penalties for violation also apply to
Boycott to pressure discounter associations and their members and
into raising prices. staffs. A trade association is a group of
competitors and thus a combination
Boycott to pressure competitor to within the meaning of Section 1 of the
raise future prices. Sherman Act. Therefore, any antitrust
violation that occurs through the
Boycott to pressure competitor to association or with the participation of its
change certain competitive officers or staff or is somehow facilitated
behavior. by association activities can also create
liability for the association, as well as
PENALTIES FOR VIOLATION OF THE the participating members.
ANTITRUST LAWS
Strict compliance with the anti-trust laws
Federal antitrust laws may be enforced is, and always has been, the policy of
against individuals and corporations your association. This association
both by government officials and by exercises extreme care, with the
private parties through treble damage assistance of its legal counsel, to avoid
actions. In both cases, penalties can be not only a violation but anything that
severe. might create a perception of a possible
violation. That policy is essential for the
An individual convicted of a criminal protection of its members and for the
violation of the Sherman Act may be continuance of its activities for the
fined as much as $350,000 and improvement and promotion of the
imprisoned for up to three years for industry.
each violation. A corporation convicted
of such a criminal offense may be fined This bulletin is not intended to be
up to $10 million or more in some cases. legal advice. Contractors should seek
Both may be subjected to court local counsel for specific information
injunctions severely restricting their regarding the information found in
activities and to further penalties for this bulletin.
violating such injunctions.
Violation of the Federal Trade

Commission Act can result in issuance
of a cease-and-desist order, which can
impose extensive restrictions on the
activities of a corporation. Failure to
comply with such an order can result in
penalties of as much as $10,000 per
day.
In addition to governmental prosecution

for a criminal or civil violation, the
business can face private actions for
treble damages by injured competitors,
customers or suppliers.

File: Legal
Bulletin
Tax Requirements Applicable to Travel

Reimbursements, Advances and Bargaining
Units Subsistence Allowance
INTRODUCTION This bulletin will explain the rules with
respect to employment taxes insofar as
Employers must generally satisfy federal they apply to reimbursements and
employment tax requirements with advances paid by employers with
respect to all wages paid to respect to travel and other subsistence
employees. A key term which presents payments. It will also address the
interpretational problems in applying this related question of the employers right
requirement is the word wages. to deduct these payments as ordinary
Regulations, rulings and case law have and necessary business expenses.
served to provide guidance and
examples of how broadly the term EMPLOYMENT TAX REQUIREMENT
should be interpreted and how it should (WITHHOLDING)
be applied to particular payment
arrangements. The Internal Revenue If an amount paid by an employer to an
Service (IRS) has set forth a specific set employee falls within the definition of the
of rules for applying employment tax term wages, the employer is generally
requirements in the context of travel required to withhold from the amount
reimbursements and advances made by paid to the employee an amount equal
employers. See IRS Publication 463. to the employees share of Federal
Insurance Contributions Act (FICA) tax
A related set of Internal Revenue and the amount required to be withheld
provisions address the question of and paid toward the employees income
whether employer-paid reimbursements tax in accordance with the Form W-4
and advances may be deducted by the which the employee has submitted to
employer for purposes of arriving at the the employer. The employer is required
employers taxable income. The to promptly pay these withheld amounts
requirements imposed for deductibility to the IRS and to also pay the
purposes relate to the type and degree employers share of the FICA tax and
of substantiation that must be the Federal Unemployment Tax Act
maintained to prove the amount and (FUTA) tax.
purpose of particular travel expenses.

If the employer fails to pay these The regulations specifically require that
employment taxes, an audit by the IRS a reimbursement or advance will be
could impose an enormous tax liability excluded from wages only if it is paid by
on the employer. The employer will be separate check or is otherwise
required upon audit to pay not only the specifically identified. Therefore, if the
FUTA tax and employers share of FICA employer is delivering to an employee a
tax, which it should have paid when the single check for both salary and a travel
wages were paid to the employee, but it advance, the employer should maintain
will also be required to pay from its own particular records of this break-down. If
funds the employees share of FICA tax the payment is not broken down in this
and the income tax which should have fashion, the IRS could treat the entire
been withheld. The IRS will also assess payment as wages subject it to
penalties and interest on any additional employment taxes.
FICA, FUTA and income withholding
which an employer is required to pay as Travel expenses paid or incurred in
the result of an audit. Furthermore, if an connection with a temporary work
employer corporation is unwilling or assignment away from home are
unable to pay the tax, the IRS will hold typically qualified travel expenses.
principal officers of the corporation However, travel expenses paid in
personally liable for making these connection with an indefinite work
payments. assignment do not qualify as
deductible travel expenses and
Because of the potentially large tax therefore are classified as wages.
exposure which could result from an IRS Any work assignment in excess of
audit determination that employment tax one year is considered indefinite.
requirements were not satisfied, it is Also, if it is realistically expected that the
extremely important that employers not employee will work at an assignment for
inadvertently omit from wages items more than one year, whether or not the
which may not legitimately be excluded. employee actually works there that long,
Employers generally have no difficulty the assignment is considered indefinite.
recognizing that salaries, bonuses and Likewise, an assignment that starts as a
similar payments to employees temporary assignment will become an
constitute wages on which indefinite assignment as soon as it is
employment taxes must be paid. A known that the assignment is expected
determination whether reimbursements to last more than one year and then
or advances to employees are properly becomes wages from that point forward,
characterized as wages may not be so according to Rev. Rul. 93-86. Any
simple, however. allowance paid for travel expenses
incurred on an indefinite assignment is
The employment tax regulations supplemental wages to the employee
specifically exclude from the definition of and fully taxable.
wages any amounts paid specifically,
either as advances or reimbursements, In published rulings, the IRS has stated
for traveling or other bona fide ordinary that it is not proper to exclude advances
and necessary expenses incurred or from wages unless the employee is
reasonably expected to be incurred in required to account to the employer to
the business of the employer. Although verify that the reimbursements or
this language would appear, on its face, advances are actually expended for
to be quite broad in scope, the IRS has business purposes. For example, if an
narrowed it in application. employer provides an automobile
allowance for an employee to cover his

daily travel expenses, but does not 1. The first alternative is to satisfy the
require any verification whether the substantiation requirements
employee uses his own automobile or generally imposed on all travel and
travels for free with others, the employer entertainment expenses. To satisfy
will not be entitled to treat the payments these requirements, the employer must
to the employee as reimbursements or obtain from each employee an
advances, and employment taxes will accounting of how particular advances
have to be paid on the amount of the or reimbursement payments were
automobile allowance. actually expended. A simple written
statement from the employee as to how
INCOME TAX DEDUCTIBILITY he expended the funds will not be
SUBSTANTIATION REQUIREMENTS sufficient. Rather, the employer must
require the employee to provide it with a
The requirements imposed by Notice detailed breakdown of particular
894 for employment tax purposes expenses, together with copies of
overlap with the requirements imposed receipts, bills, invoices or other
by Section 274 of the Code with respect corroborative evidence establishing the
to an employers taxable income. specific amount, date, place and
purpose of each travel expenditure.
Unless the employer satisfies the These records should be generally
substantiation requirements imposed by sufficient so that a person reviewing
Section 274, the employer will not be them would be able to verify that the
permitted to deduct the amount of the funds advanced or paid as
travel advances or reimbursements, reimbursements were actually expended
regardless of whether the employer has for travel away from the employees tax
excluded these payments from wages home, including the costs of airfare or
for employment tax purposes. other transportation, meals, lodging and
Furthermore, although Code Section incidental expenses of a non-personal
162 generally permits the deduction of nature. It is suggested that the employer
all ordinary and necessary business audit or review its files maintained for
expenses, this general provision is substantiation purposes, with a critical
limited by Section 274(n) which permits eye to recognizing whether an IRS
only 50% of the cost of meals to be auditor would question the reliability and
deducted. This restriction applies degree of substantiation maintained. If
regardless of whether the meal expense the employer maintains records
is incurred while on travel away from sufficient to satisfy this general
home. substantiation requirement, it will be
entitled to deduct 50% of the amount of
The regulations under Section 274 the employees meal expenses and the
explicitly state that taxpayers bear the entire amount of airfare, lodging and
burden of proof to substantiate each other travel expenses.
element of expenditure for travel. There
are two alternative methods for 2. The Internal Revenue regulations
satisfying this substantiation provide an alternative substantiation
requirement with respect to method which an employer who
reimbursements or advances for travel provides specific subsistence,
and subsistence. transportation or meal allowances
may use. These regulations allow the
substantiation requirement to be

satisfied even though the detailed type is listed on the Form W-2 as wages, the
of receipts, bills and other substantiation employee must report the listed amount
necessary to satisfy the general as income. The employee will be
substantiation requirement discussed entitled, however, to claim deductions
above is not satisfied. This alternative for the ordinary and necessary
relates only to per diem or other expenses incurred for his subsistence
reimbursement arrangements relating to while traveling away from home. In this
subsistence expenses, such as meals, case, the burden of satisfying the
lodging, laundry and other incidental Section 274 substantiation requirements
expenses, incurred during an will be solely upon the employee, rather
employees travel away from home. It than the employer.
does not apply to the transportation cost
to and from the away-from-home The employee should be aware that he
destination. should deduct these business expenses
below the line, i.e., he should deduct
Because the deductibility of meal the expenses from adjusted gross
expenses is limited to 50% of the cost of income in order to arrive at taxable
the meals, an employer who uses a per income, rather than deducting them
diem method must allocate the per diem from gross income to arrive at adjusted
payment between the allowance for gross income. Because the deduction is
meal expenses and the allowance for below-the-line, the employees ability to
other expenses. The employer will be deduct these expenses will be restricted
entitled to deduct only 50% of the meal by Section 67 of the Code. Section 67
expenses allowance but will be entitled restricts a taxpayers right to deduct
to deduct the entire amount of the other certain types of below-the-line business
element of the per diem payment. The expenses except to the extent that the
IRS has stated that it will permit any aggregate amount of such expenses for
employer that pays a single per diem the year exceeds two percent of the
amount to cover both meals and lodging taxpayers adjusted gross income.
to allocate the amount between meals
and lodging on a reasonable basis. To This bulletin is not intended to be
establish such a reasonable basis of legal or tax advice. Contractors
allocation reflecting the average meal should seek local legal and tax
expenses ordinarily incurred by advice for specific information
employees while traveling in the same regarding the information found in
geographical area would be sufficient. this bulletin.
INCOME TAX CONSEQUENCES

TO THE EMPLOYEE
If an employer does not report a

reimbursement or advance on the Form
W-2 provided to the employee, the
employee can exclude the amount of
the reimbursement or advance from his
income. If a reimbursement or advance

Bulletin No. LL 10
File: Legal
Bulletin
Federal Prompt Payment Act
INTRODUCTION PROPER INVOICE
The federal government has enacted The time within which the government
rules mandating prompt payment to its must pay its contractor starts ticking
contractors and vendors. The Federal from the governments receipt of the
Prompt Pay Act (PPA) assesses late contractors proper" invoice. Thus, the
interest penalties against federal most common way a contractor
agencies in certain instances including undermines the benefits of the PPA is
when it pays construction contractors by failing to submit a proper invoice.
working on federal government
construction projects after a payment Under FAR 52.232-27, a proper
due date. invoice includes:
(i) Name and address of the contractor.
The PPA is found in 31 U.S. Code Be sure the firm name on the invoice
Section 3901, et seq. and the rules matches that on the contract.
implementing the PPA are found in the
Code of Federal Regulations at section (ii) Invoice date and invoice number.
5 CFR Part 1315. Subsection 1315.14 The invoice date establishes when the
contains requirements specific to invoice was prepared and dispatched
payments on federal construction should any disputes arise later with
projects. Additionally, the federal respect to the date of receipt of the
construction contract clauses reflecting invoice. The PPA defines receipt of
the PPA in federal construction invoice as the . . . date on which the
contracts are found at FAR 52.232-27 place or person designated by the
(set forth in its entirety below). agency to first receive such invoice
actually receives such invoice. The
These regulations govern payment invoice receipt date then prevails over
terms between the government and its the date of the invoice to establish when
construction contractors, as well as the payment clock begins. There are
between those contractors and their two exceptions to this general rule: if a
lower tier subcontractors. time discount is offered, and if the
agency fails to date-stamp the invoice
upon receipt. In both these cases, the
invoice date is used to start the payment
clock.

3) A listing of the total amount for
(iii) Contract number or other each subcontract under the
authorization for work or services contract;
performed (including order number and 4) A listing of the amounts
contract line item number). The contract previously paid to each
number helps the government match subcontractor under the contract;
contract data against invoice data. and
Without this information the invoice 5) Additional supporting data and
might be declared defective. detail in a form required by the
contracting officer.
(iv) Description of work or services
performed. The data in this portion of (ix) Taxpayer Identification Number
the invoice should be compatible with (TIN). The contractor must include its
comparable data of the contract. TIN on the invoice if required elsewhere
in the contract. TIN information is also
(v) Delivery and payment terms. Include required to make electronic funds
the discount for prompt payment terms, transfer payments.
if applicable.
(x) Electronic funds transfer (EFT)
(vi) Name and address of contractor banking information. The contractor
official to whom payment is to be sent. must include EFT banking information
This must be the same as that in the on the invoice if required elsewhere in
contract or in a proper notice of the contract or other applicable
assignment. regulation or requirement. Note: the
government can waive the requirement
(vii) Name, title, phone number, and to pay by EFT.
mailing address of person to notify in the
event of a defective invoice. The (xi) Any other information or
government has a duty to promptly documentation required by the contract.
notify the contractor if the invoice is Carefully review the contract and note
deemed defective, but the contractor any other substantiating documentation
must include individuals contact or information that is required. Most
information in the invoice. federal contracts will require a specific
invoice form be used. Typically, a
(viii) For progress payments, request for progress payment on a
substantiation of the amounts requested federal project will be on Form SF 1443
and certification. Progress payments are Contractors Request for Progress
typical under federal construction Payment.
contracts. Per FAR 52.232-5, the
contractors progress payment GOVERNMENT RESPONSE AND
application must include a very specific RECEIVING REPORTS
certification (see full FAR language
below) as well as: The government should date-stamp the
contractors invoice on the day it is
1) An itemization of the amounts received. Thereafter, the government
requested related to the various has seven days to determine if it
elements of work specified in the disputes that the invoice is proper (i.e.
contract; adheres to the above standards), or is
2) A listing of the amount included defective. The agency must return to
for work performed by each the contractor any payment request
subcontractor under the contract; which is defective within seven days

after receipt, along with a statement Register on or about each January 1
identifying the defects. The payment and July 1.
clock does not begin until the contractor
resubmits a proper invoice. Per section If the contractor becomes aware that the
1315.14(a)(3), when computing an government has overpaid on a contract
interest penalty owed the contractor, the invoice payment, the contractor must
government must take into account any remit the overpayment amount to the
untimeliness in its notification to the payment office cited in the contract
contractor of an improper invoice. along with a description of the
overpayment. The contractor may owe
Once the government receives a proper the government interest on such
invoice, it will process a receiving report overpayments.
or other government documentation
authorizing payment and indicating that LOWER-TIER SUBCONTRACT
there was no disagreement over PAYMENTS
progress payment amount, quantity,
quality, or contractor compliance with The PPA requires contractors to pay
any contract provision. subcontractors and suppliers within
seven days of receipt of payment from
INTEREST PAYMENTS the government. Subcontractors must
similarly make prompt payment to their
The due date for making progress lower tier subcontractors and suppliers.
payments under the PPA is 14 days
after the government notes receipt of a The PPA requires the contractor to
proper request for progress payment. include provisions in its subcontracts
However, if the government fails to note expressing PPA requirements and the
the actual date it received the request interest obligation assumed by the
for progress payment, the payment due contractor for late payments to its
date is 14 days after the date of the subcontractors. Similarly,
contractors proper request for progress subcontractors must include such
payment. Under the PPA, final payment clauses in their lower tier subcontracts.
is due 30 days after invoice and final
acceptance. (Note that a contract may Nothing in the PPA precludes the
specify longer periods to afford the government or contractor for withholding
government a practicable opportunity to retention. However, contractors must be
fully inspect the work and to determine sure not to include in their invoice to the
the adequacy of the contractors government any retention withheld from
performance). their subcontractors. The PPA
specifically prohibits any subcontractor
If payment in not timely made, the retention in the contractors progress
government should pay an interest payment request. Likewise, a
penalty automatically, without request subcontractor may not requisition for
from the contractor. The governments retention amounts it withholds from its
remittance must show the invoice lower tier subcontractors.
amount, the interest, and the interest
rate used to compute the interest
The contractor may not invoice the
penalty. The PPA interest rate is
government for any other amounts it
published semiannually by the
does not intend to pass on immediately
Department of Treasury, in the Federal
to its subcontractor. If the contractor
intends to withhold funds from a

subcontractor, it may do so provided it http://www.eckertseamans.com/%5Cfile
properly notifies the subcontractor and %5Cpdf%5Calerts%5CPromptPayment
the government. Under FAR 52.232- ActManual2012.pdf Eckert Seamans
27(d), if cause exists to withhold Cherin Mellott, LLC. Revised 4/10/2012
payment from a subcontractor, the
contractor must give notice to the
subcontractor (with a copy to the
government) of the amount withheld,
reasons for the withholding, and The information in this bulletin
remedial actions the subcontractor must should not be construed as legal
take to take to get paid. If payment is advice. Contact your local counsel
not made and is otherwise due, the for specific legal advice regarding the
subcontractor can recover interest on information contained in this bulletin.
the unpaid amount.
Note also that should a contractor

decide to withhold monies from a
subcontractor that it has already
invoiced the government, the contractor
must furnish the government notice of
such withholding in accordance with
FAR 52.232-27 (e). In this situation, the
contractor may need to reimburse the
government for interest during the
period it withholds such sums from the
subcontractor.
CONCLUSION
As described above, the key to timely

payments on federal government
projects is careful submission of proper
requests for progress payments and/or
invoices. Though this bulletin focused
on the federal regulations, the states
have passed similar laws governing
state and local projects. Thus, on state
and local projects, standards similar to
those described above will likely be in
place. For a survey of prompt pay laws
by state, see Fifty State Survey of
Prompt Payment Acts for Construction
Contracts,

FAR Clauses:
52.232-5 Payments under Fixed-Price Construction Contracts.

(a) Payment of price. The Government shall pay the Contractor the contract price as provided in this contract.
(b) Progress payments. The Government shall make progress payments monthly as the work proceeds, or at more frequent
intervals as determined by the Contracting Officer, on estimates of work accomplished which meets the standards of quality
established under the contract, as approved by the Contracting Officer.
(1) The Contractors request for progress payments shall include the following substantiation:
(i) An itemization of the amounts requested, related to the various elements of work required by the contract covered by
the payment requested.
(ii) A listing of the amount included for work performed by each subcontractor under the contract.
(iii) A listing of the total amount of each subcontract under the contract.
(iv) A listing of the amounts previously paid to each such subcontractor under the contract.
(v) Additional supporting data in a form and detail required by the Contracting Officer.
(2) In the preparation of estimates, the Contracting Officer may authorize material delivered on the site and preparatory
work done to be taken into consideration. Material delivered to the Contractor at locations other than the site also may be taken
into consideration if
(i) Consideration is specifically authorized by this contract; and
(ii) The Contractor furnishes satisfactory evidence that it has acquired title to such material and that the material will be
used to perform this contract.
(c) Contractor certification. Along with each request for progress payments, the Contractor shall furnish the following
certification, or payment shall not be made: (However, if the Contractor elects to delete paragraph (c)(4) from the certification, the
certification is still acceptable.)
I hereby certify, to the best of my knowledge and belief, that
(1) The amounts requested are only for performance in accordance with the specifications, terms, and conditions of the
contract;
(2) All payments due to subcontractors and suppliers from previous payments received under the contract have been
made, and timely payments will be made from the proceeds of the payment covered by this certification, in accordance with
subcontract agreements and the requirements of Chapter 39 of Title 31, United States Code;
(3) This request for progress payments does not include any amounts which the prime contractor intends to withhold or
retain from a subcontractor or supplier in accordance with the terms and conditions of the subcontract; and
(4) This certification is not to be construed as final acceptance of a subcontractors performance.
__________________________________________________
(Name)
__________________________________________________
(Title)
__________________________________________________
(Date)
(d) Refund of unearned amounts. If the Contractor, after making a certified request for progress payments, discovers that a
portion or all of such request constitutes a payment for performance by the Contractor that fails to conform to the specifications,
terms, and conditions of this contract (hereinafter referred to as the unearned amount), the Contractor shall
(1) Notify the Contracting Officer of such performance deficiency; and
(2) Be obligated to pay the Government an amount (computed by the Contracting Officer in the manner provided in
paragraph (j) of this clause) equal to interest on the unearned amount from the 8th day after the date of receipt of the unearned
amount until
(i) The date the Contractor notifies the Contracting Officer that the performance deficiency has been corrected; or
(ii) The date the Contractor reduces the amount of any subsequent certified request for progress payments by an amount
equal to the unearned amount.
(e) Retainage. If the Contracting Officer finds that satisfactory progress was achieved during any period for which a progress
payment is to be made, the Contracting Officer shall authorize payment to be made in full. However, if satisfactory progress has not
been made, the Contracting Officer may retain a maximum of 10 percent of the amount of the payment until satisfactory progress is
achieved. When the work is substantially complete, the Contracting Officer may retain from previously withheld funds and future
progress payments that amount the Contracting Officer considers adequate for protection of the Government and shall release to
the Contractor all the remaining withheld funds. Also, on completion and acceptance of each separate building, public work, or
other division of the contract, for which the price is stated separately in the contract, payment shall be made for the completed
work without retention of a percentage.
(f) Title, liability, and reservation of rights. All material and work covered by progress payments made shall, at the time of
payment, become the sole property of the Government, but this shall not be construed as

(1) Relieving the Contractor from the sole responsibility for all material and work upon which payments have been made or
the restoration of any damaged work; or
(2) Waiving the right of the Government to require the fulfillment of all of the terms of the contract.
(g) Reimbursement for bond premiums. In making these progress payments, the Government shall, upon request, reimburse the
Contractor for the amount of premiums paid for performance and payment bonds (including coinsurance and reinsurance
agreements, when applicable) after the Contractor has furnished evidence of full payment to the surety. The retainage provisions in
paragraph (e) of this clause shall not apply to that portion of progress payments attributable to bond premiums.
(h) Final payment. The Government shall pay the amount due the Contractor under this contract after
(1) Completion and acceptance of all work;
(2) Presentation of a properly executed voucher; and
(3) Presentation of release of all claims against the Government arising by virtue of this contract, other than claims, in stated
amounts, that the Contractor has specifically excepted from the operation of the release. A release may also be required of the
assignee if the Contractors claim to amounts payable under this contract has been assigned under the Assignment of Claims Act of
1940 (31 U.S.C. 3727 and 41 U.S.C. 15).
(i) Limitation because of undefinitized work. Notwithstanding any provision of this contract, progress payments shall not exceed
80 percent on work accomplished on undefinitized contract actions. A contract action is any action resulting in a contract, as
defined in FAR Subpart 2.1, including contract modifications for additional supplies or services, but not including contract
modifications that are within the scope and under the terms of the contract, such as contract modifications issued pursuant to the
Changes clause, or funding and other administrative changes.
(j) Interest computation on unearned amounts. In accordance with 31 U.S.C. 3903(c)(1), the amount payable under paragraph
(d)(2) of this clause shall be
(1) Computed at the rate of average bond equivalent rates of 91-day Treasury bills auctioned at the most recent auction of
such bills prior to the date the Contractor receives the unearned amount; and
(2) Deducted from the next available payment to the Contractor.
52.232-27 Prompt Payment for Construction Contracts.

Notwithstanding any other payment terms in this contract, the Government will make invoice payments under the terms and
conditions specified in this clause. The Government considers payment as being made on the day a check is dated or the date of an
electronic funds transfer. Definitions of pertinent terms are set forth in sections 2.101, 32.001, and 32.902 of the Federal Acquisition
Regulation. All days referred to in this clause are calendar days, unless otherwise specified. (However, see paragraph (a)(3)
concerning payments due on Saturdays, Sundays, and legal holidays.)
(a) Invoice payments
(1) Types of invoice payments. For purposes of this clause, there are several types of invoice payments that may occur under
this contract, as follows:
(i) Progress payments, if provided for elsewhere in this contract, based on Contracting Officer approval of the estimated
amount and value of work or services performed, including payments for reaching milestones in any project.
(A) The due date for making such payments is 14 days after the designated billing office receives a proper payment
request. If the designated billing office fails to annotate the payment request with the actual date of receipt at the time of receipt,
the payment due date is the 14th day after the date of the Contractors payment request, provided the designated billing office
receives a proper payment request and there is no disagreement over quantity, quality, or Contractor compliance with contract
requirements.
(B) The due date for payment of any amounts retained by the Contracting Officer in accordance with the clause at
52.232-5, Payments Under Fixed-Price Construction Contracts, is as specified in the contract or, if not specified, 30 days after
approval by the Contracting Officer for release to the Contractor.
(ii) Final payments based on completion and acceptance of all work and presentation of release of all claims against the
Government arising by virtue of the contract, and payments for partial deliveries that have been accepted by the Government (e.g.,
each separate building, public work, or other division of the contract for which the price is stated separately in the contract).
(A) The due date for making such payments is the later of the following two events:
(1) The 30th day after the designated billing office receives a proper invoice from the Contractor.
(2) The 30th day after Government acceptance of the work or services completed by the Contractor. For a final
invoice when the payment amount is subject to contract settlement actions (e.g., release of claims), acceptance is deemed to occur
on the effective date of the contract settlement.
(B) If the designated billing office fails to annotate the invoice with the date of actual receipt at the time of receipt,
the invoice payment due date is the 30th day after the date of the Contractors invoice, provided the designated billing office
receives a proper invoice and there is no disagreement over quantity, quality, or Contractor compliance with contract requirements.
(2) Contractor's invoice. The Contractor shall prepare and submit invoices to the designated billing office specified in the
contract. A proper invoice must include the items listed in paragraphs (a)(2)(i) through (a)(2)(xi) of this clause. If the invoice does not
comply with these requirements, the designated billing office must return it within 7 days after receipt, with the reasons why it is
not a proper invoice. When computing any interest penalty owed the Contractor, the Government will take into account if the
Government notifies the Contractor of an improper invoice in an untimely manner.
(i) Name and address of the Contractor.
(ii) Invoice date and invoice number. (The Contractor should date invoices as close as possible to the date of mailing or
transmission.)
(iii) Contract number or other authorization for work or services performed (including order number and contract line
item number).
(iv) Description of work or services performed.

(v) Delivery and payment terms (e.g., discount for prompt payment terms).
(vi) Name and address of Contractor official to whom payment is to be sent (must be the same as that in the contract or
in a proper notice of assignment).
(vii) Name (where practicable), title, phone number, and mailing address of person to notify in the event of a defective
invoice.
(viii) For payments described in paragraph (a)(1)(i) of this clause, substantiation of the amounts requested and
certification in accordance with the requirements of the clause at 52.232-5, Payments Under Fixed-Price Construction Contracts.
(ix) Taxpayer Identification Number (TIN). The Contractor shall include its TIN on the invoice only if required elsewhere in
this contract.
(x) Electronic funds transfer (EFT) banking information.
(A) The Contractor shall include EFT banking information on the invoice only if required elsewhere in this contract.
(B) If EFT banking information is not required to be on the invoice, in order for the invoice to be a proper invoice, the
Contractor shall have submitted correct EFT banking information in accordance with the applicable solicitation provision (e.g.,
52.232-38, Submission of Electronic Funds Transfer Information with Offer), contract clause (e.g., 52.232-33, Payment by Electronic
Funds TransferCentral Contractor Registration, or 52.232-34, Payment by Electronic Funds TransferOther Than Central
Contractor Registration), or applicable agency procedures.
(C) EFT banking information is not required if the Government waived the requirement to pay by EFT.
(xi) Any other information or documentation required by the contract.
(3) Interest penalty. The designated payment office will pay an interest penalty automatically, without request from the
Contractor, if payment is not made by the due date and the conditions listed in paragraphs (a)(3)(i) through (a)(3)(iii) of this clause
are met, if applicable. However, when the due date falls on a Saturday, Sunday, or legal holiday, the designated payment office may
make payment on the following working day without incurring a late payment interest penalty.
(i) The designated billing office received a proper invoice.
(ii) The Government processed a receiving report or other Government documentation authorizing payment and there
was no disagreement over quantity, quality, Contractor compliance with any contract term or condition, or requested progress
payment amount.
(iii) In the case of a final invoice for any balance of funds due the Contractor for work or services performed, the amount
was not subject to further contract settlement actions between the Government and the Contractor.
(4) Computing penalty amount. The Government will compute the interest penalty in accordance with the Office of
Management and Budget prompt payment regulations at 5 CFR Part 1315.
(i) For the sole purpose of computing an interest penalty that might be due the Contractor for payments described in
paragraph (a)(1)(ii) of this clause, Government acceptance or approval is deemed to occur constructively on the 7th day after the
Contractor has completed the work or services in accordance with the terms and conditions of the contract. If actual acceptance or
approval occurs within the constructive acceptance or approval period, the Government will base the determination of an interest
penalty on the actual date of acceptance or approval. Constructive acceptance or constructive approval requirements do not apply if
there is a disagreement over quantity, quality, or Contractor compliance with a contract provision. These requirements also do not
compel Government officials to accept work or services, approve Contractor estimates, perform contract administration functions,
or make payment prior to fulfilling their responsibilities.
(ii) The prompt payment regulations at 5 CFR 1315.10(c) do not require the Government to pay interest penalties if
payment delays are due to disagreement between the Government and the Contractor over the payment amount or other issues
involving contract compliance, or on amounts temporarily withheld or retained in accordance with the terms of the contract. The
Government and the Contractor shall resolve claims involving disputes, and any interest that may be payable in accordance with the
clause at FAR 52.233-1, Disputes.
(5) Discounts for prompt payment. The designated payment office will pay an interest penalty automatically, without request
from the Contractor, if the Government takes a discount for prompt payment improperly. The Government will calculate the interest
penalty in accordance with the prompt payment regulations at 5 CFR Part 1315.
(6) Additional interest penalty.
(i) The designated payment office will pay a penalty amount, calculated in accordance with the prompt payment
regulations at 5 CFR Part 1315 in addition to the interest penalty amount only if
(A) The Government owes an interest penalty of $1 or more;
(B) The designated payment office does not pay the interest penalty within 10 days after the date the invoice amount
is paid; and
(C) The Contractor makes a written demand to the designated payment office for additional penalty payment, in
accordance with paragraph (a)(6)(ii) of this clause, postmarked not later than 40 days after the date the invoice amount is paid.
(ii)(A) The Contractor shall support written demands for additional penalty payments with the following data. The
Government will not request any additional data. The Contractor shall
(1) Specifically assert that late payment interest is due under a specific invoice, and request payment of all
overdue late payment interest penalty and such additional penalty as may be required;
(2) Attach a copy of the invoice on which the unpaid late payment interest was due; and
(3) State that payment of the principal has been received, including the date of receipt.
(B) If there is no postmark or the postmark is illegible
(1) The designated payment office that receives the demand will annotate it with the date of receipt provided the
demand is received on or before the 40th day after payment was made; or
(2) If the designated payment office fails to make the required annotation, the Government will determine the
demands validity based on the date the Contractor has placed on the demand, provided such date is no later than the 40th day
after payment was made.

(b) Contract financing payments. If this contract provides for contract financing, the Government will make contract financing
payments in accordance with the applicable contract financing clause.
(c) Subcontract clause requirements. The Contractor shall include in each subcontract for property or services (including a
material supplier) for the purpose of performing this contract the following:
(1) Prompt payment for subcontractors. A payment clause that obligates the Contractor to pay the subcontractor for
satisfactory performance under its subcontract not later than 7 days from receipt of payment out of such amounts as are paid to the
Contractor under this contract.
(2) Interest for subcontractors. An interest penalty clause that obligates the Contractor to pay to the subcontractor an
interest penalty for each payment not made in accordance with the payment clause
(i) For the period beginning on the day after the required payment date and ending on the date on which payment of the
amount due is made; and
(ii) Computed at the rate of interest established by the Secretary of the Treasury, and published in the Federal Register,
for interest payments under section 12 of the Contract Disputes Act of 1978 (41 U.S.C. 611) in effect at the time the Contractor
accrues the obligation to pay an interest penalty.
(3) Subcontractor clause flowdown. A clause requiring each subcontractor to
(i) Include a payment clause and an interest penalty clause conforming to the standards set forth in paragraphs (c)(1) and
(c)(2) of this clause in each of its subcontracts; and
(ii) Require each of its subcontractors to include such clauses in their subcontracts with each lower-tier subcontractor or
supplier.
(d) Subcontract clause interpretation. The clauses required by paragraph (c) of this clause shall not be construed to impair the
right of the Contractor or a subcontractor at any tier to negotiate, and to include in their subcontract, provisions that
(1) Retainage permitted. Permit the Contractor or a subcontractor to retain (without cause) a specified percentage of each
progress payment otherwise due to a subcontractor for satisfactory performance under the subcontract without incurring any
obligation to pay a late payment interest penalty, in accordance with terms and conditions agreed to by the parties to the
subcontract, giving such recognition as the parties deem appropriate to the ability of a subcontractor to furnish a performance bond
and a payment bond;
(2) Withholding permitted. Permit the Contractor or subcontractor to make a determination that part or all of the
subcontractors request for payment may be withheld in accordance with the subcontract agreement; and
(3) Withholding requirements. Permit such withholding without incurring any obligation to pay a late payment penalty if
(i) A notice conforming to the standards of paragraph (g) of this clause previously has been furnished to the
subcontractor; and
(ii) The Contractor furnishes to the Contracting Officer a copy of any notice issued by a Contractor pursuant to paragraph
(d)(3)(i) of this clause.
(e) Subcontractor withholding procedures. If a Contractor, after making a request for payment to the Government but before
making a payment to a subcontractor for the subcontractors performance covered by the payment request, discovers that all or a
portion of the payment otherwise due such subcontractor is subject to withholding from the subcontractor in accordance with the
subcontract agreement, then the Contractor shall
(1) Subcontractor notice. Furnish to the subcontractor a notice conforming to the standards of paragraph (g) of this clause as
soon as practicable upon ascertaining the cause giving rise to a withholding, but prior to the due date for subcontractor payment;
(2) Contracting Officer notice. Furnish to the Contracting Officer, as soon as practicable, a copy of the notice furnished to the
subcontractor pursuant to paragraph (e)(1) of this clause;
(3) Subcontractor progress payment reduction. Reduce the subcontractors progress payment by an amount not to exceed
the amount specified in the notice of withholding furnished under paragraph (e)(1) of this clause;
(4) Subsequent subcontractor payment. Pay the subcontractor as soon as practicable after the correction of the identified
subcontract performance deficiency, and
(i) Make such payment within
(A) Seven days after correction of the identified subcontract performance deficiency (unless the funds therefor must
be recovered from the Government because of a reduction under paragraph (e)(5)(i)) of this clause; or
(B) Seven days after the Contractor recovers such funds from the Government; or
(ii) Incur an obligation to pay a late payment interest penalty computed at the rate of interest established by the
Secretary of the Treasury, and published in the Federal Register, for interest payments under section 12 of the Contracts Disputes
Act of 1978 (41 U.S.C. 611) in effect at the time the Contractor accrues the obligation to pay an interest penalty;
(5) Notice to Contracting Officer. Notify the Contracting Officer upon
(i) Reduction of the amount of any subsequent certified application for payment; or
(ii) Payment to the subcontractor of any withheld amounts of a progress payment, specifying
(A) The amounts withheld under paragraph (e)(1) of this clause; and
(B) The dates that such withholding began and ended; and
(6) Interest to Government. Be obligated to pay to the Government an amount equal to interest on the withheld payments
(computed in the manner provided in 31 U.S.C. 3903(c)(1)), from the 8th day after receipt of the withheld amounts from the
Government until
(i) The day the identified subcontractor performance deficiency is corrected; or
(ii) The date that any subsequent payment is reduced under paragraph (e)(5)(i) of this clause.
(f) Third-party deficiency reports
(1) Withholding from subcontractor. If a Contractor, after making payment to a first-tier subcontractor, receives from a
supplier or subcontractor of the first-tier subcontractor (hereafter referred to as a second-tier subcontractor) a written notice in
accordance with the Miller Act (40 U.S.C. 3133), asserting a deficiency in such first-tier subcontractors performance under the

contract for which the Contractor may be ultimately liable, and the Contractor determines that all or a portion of future payments
otherwise due such first-tier subcontractor is subject to withholding in accordance with the subcontract agreement, the Contractor
may, without incurring an obligation to pay an interest penalty under paragraph (e)(6) of this clause
(i) Furnish to the first-tier subcontractor a notice conforming to the standards of paragraph (g) of this clause as soon as
practicable upon making such determination; and
(ii) Withhold from the first-tier subcontractors next available progress payment or payments an amount not to exceed
the amount specified in the notice of withholding furnished under paragraph (f)(1)(i) of this clause.
(2) Subsequent payment or interest charge. As soon as practicable, but not later than 7 days after receipt of satisfactory
written notification that the identified subcontract performance deficiency has been corrected, the Contractor shall
(i) Pay the amount withheld under paragraph (f)(1)(ii) of this clause to such first-tier subcontractor; or
(ii) Incur an obligation to pay a late payment interest penalty to such first-tier subcontractor computed at the rate of
interest established by the Secretary of the Treasury, and published in the Federal Register, for interest payments under section 12
of the Contracts Disputes Act of 1978 (41 U.S.C. 611) in effect at the time the Contractor accrues the obligation to pay an interest
penalty.
(g) Written notice of subcontractor withholding. The Contractor shall issue a written notice of any withholding to a subcontractor
(with a copy furnished to the Contracting Officer), specifying
(1) The amount to be withheld;
(2) The specific causes for the withholding under the terms of the subcontract; and
(3) The remedial actions to be taken by the subcontractor in order to receive payment of the amounts withheld.
(h) Subcontractor payment entitlement. The Contractor may not request payment from the Government of any amount withheld
or retained in accordance with paragraph (d) of this clause until such time as the Contractor has determined and certified to the
Contracting Officer that the subcontractor is entitled to the payment of such amount.
(i) Prime-subcontractor disputes. A dispute between the Contractor and subcontractor relating to the amount or entitlement of a
subcontractor to a payment or a late payment interest penalty under a clause included in the subcontract pursuant to paragraph (c)
of this clause does not constitute a dispute to which the Government is a party. The Government may not be interpleaded in any
judicial or administrative proceeding involving such a dispute.
(j) Preservation of prime-subcontractor rights. Except as provided in paragraph (i) of this clause, this clause shall not limit or
impair any contractual, administrative, or judicial remedies otherwise available to the Contractor or a subcontractor in the event of a
dispute involving late payment or nonpayment by the Contractor or deficient subcontract performance or nonperformance by a
subcontractor.
(k) Non-recourse for prime contractor interest penalty. The Contractors obligation to pay an interest penalty to a subcontractor
pursuant to the clauses included in a subcontract under paragraph (c) of this clause shall not be construed to be an obligation of the
Government for such interest penalty. A cost-reimbursement claim may not include any amount for reimbursement of such interest
penalty.
(l) Overpayments. If the Contractor becomes aware of a duplicate contract financing or invoice payment or that the Government
has otherwise overpaid on a contract financing or invoice payment, the Contractor shall
(1) Remit the overpayment amount to the payment office cited in the contract along with a description of the overpayment
including the
(i) Circumstances of the overpayment (e.g., duplicate payment, erroneous payment, liquidation errors, date(s) of
overpayment);
(ii) Affected contract number and delivery order number if applicable;
(iii) Affected contract line item or subline item, if applicable; and
(iv) Contractor point of contact.
(2) Provide a copy of the remittance and supporting documentation to the Contracting Officer.
NOTE: The FARs are updated periodically. Please check the most recent version which
can be found at:
https://www.acquisition.gov/far/current/html/FARTOCP52.html#wp372482

Bulletin No. LL 11
File: Legal
Bulletin
Contract Clauses
INTRODUCTION clauses, taking into consideration the
possible disastrous effect it could have
Each time a mechanical contractor on his company and/or himself.
executes a contract to perform certain
services, he pledges the assets of his CONDITIONAL PAYMENT
company, and sometimes his personal CLAUSES
assets, to faithfully and properly perform
in accordance with the terms of the There are two types of conditional
contract and will assume all the payment clauses: Pay When Paid and
obligations, responsibilities and Pay If Paid.
limitations contained in that agreement.
The Pay When Paid clause is a typical
Therefore, it would seem prudent that clause that often is contained in a
he would examine all the requirements general contractors agreement. The
of that document to assure himself that clause states that the general contractor
they are proper and equitable, and that will pay his subcontractors when he has
he is willing to accept all aspects of the been paid by the owner. This places the
agreement. Yet, it is all too frequent that subcontractor in the position of being
a contractor, in his haste to sign a paid subject to the action or inaction of a
contract, will not read the document third party over whom he has no control.
thoroughly, will minimize the importance If the owner does not pay the general
of certain terms of the contract, will not contractor for any reason (lack of funds,
explore the potential danger of certain dissatisfaction with performance of the
phrases, or will simply feel willing to general or some other subcontractor, or
gamble that those murder clauses will a dispute with the general), payment to
never surface. the subcontractor may be delayed.
Since the subcontractor has no legal
The purpose of this bulletin is to relationship with the owner, he has no
highlight many of the most dangerous options for obtaining payment (other
clauses that are frequently found in than a lien or sometimes bond suit).
contracts, so that the contractor or
subcontractor may make a reasonable Under the Pay When Paid clause, the
judgment regarding acceptance of those courts have held that a general

contractor may not hold up payment to against the owner that might be
his subcontractors for an unreasonable necessary to secure payment from
length of time if the agreement merely the owner. This is less desirable
states that he must pay the since it requires extensive legal
subcontractor when he receives action and opens questions as to the
payment from the owner. Therefore, owners obligations under his
this clause only shifts the timing of the contract to make payments to the
payment because the general contractor general contractor.
will have to pay the subcontractor within
a reasonable time, even if the owner WAIVER OF LIEN
ultimately does not pay the general
contractor. Liens are usually the final means
subcontractors have available to obtain
A potentially deal-breaking conditional payment for work performed, and care
payment clause is the Pay If Paid should be exercised in reviewing a
clause. This clause stipulates that contract to make certain that he has not
payment from the owner to the directly or indirectly waived his rights to
contractor is a condition precedent to file a lien. Waiver of lien clauses can be
payment of the subcontractor. artfully drawn so that a contractor
Therefore, the contractor is under no waives those rights without being aware
obligation to pay the subcontractor of it.
unless the owner pays the contractor.
The subcontractor assumes the risk of In some states, no lien clauses are
non-payment by the owner. Some unenforceable and in others, no lien
states, including California, have found projects may be legalized (usually those
these clauses invalid. projects must be recorded in public
documents.) On such projects, the
Furthermore, under the Pay If Paid contractors are prevented from filing
clause, the subcontractor can even lose liens. It is suggested that a letter be
his lien rights under such conditions obtained from the general contractor, or
because technically the payment is not any other party having a contract with
due the subcontractor until the owner the owner, stating that the work is not
pays the general contractor, which could recorded as a no lien project.
be after the timing to file a lien. Check
with local counsel regarding this issue. Additionally, monthly partial waivers of
lien forms are usually worded in such a
There are ways of ameliorating such manner that the contractor waives his
qualified payment clauses. For example: lien rights up to the date of the waiver.
This effectively includes retentions
1. Insert in the contract a clause withheld as well as items of work
stating that notwithstanding any performed but not yet paid. It is
other provisions of the contract, suggested that words relating to the
payments to the subcontractor shall date of payment be deleted and the
not be unreasonably delayed for words to the extent of payment
reasons unrelated to the received pursuant to this waiver be
subcontractors performance. substituted.
2. Secure a statement from the General contractors usually require

general contractor granting the subcontractors to present their waivers
subcontractor power of attorney to of lien along with their payment requests
act in his name to take any action prior to receiving payments. If a

subcontractor is reluctant to waive his WAIVER OF CLAIMS BY FINAL
lien rights before he receives payment, it PAYMENT
is suggested that the waiver of lien be
modified to read that it is a conditional Occasionally, a contract may contain a
release and is not effective until the clause stating that any pending or
subcontractor receives the payment asserted claim is waived upon
due. After receipt of such payment, the acceptance of final payment. Be careful
subcontractor might be asked to of these clauses since merely by
substitute an unconditional release for accepting an undisputed final payment,
past amounts received. subcontractors could be giving up their
claim rights. However, even if this
CANCELLATION CLAUSES clause is present, some states have
declared it void and unenforceable as
In the event of a project cancellation, against public policy. Check with
many agreements only provide for counsel in your state. Moreover, always
payment to the subcontractor for work in preserve by written agreement with the
place as of the date of cancellation. This general contractor any claims that
does not take into consideration remain outstanding at the time of final
legitimate costs incurred or committed payment.
by the subcontractor covering work not
yet incorporated in the construction. It is NO WAIVER OF BOND RIGHTS
suggested that the contract agreement
be modified to also include payment for Some states have declared waiver of a
all costs incurred up to the date of subcontractors right to sue against a
cancellation, including payment for prime contractors surety bond void and
material on hand or en route but not in unenforceable as against public
place, and other charges for which the policy. It is important that you know the
subcontractor is liable as well as any laws of your state in order to preserve a
costs arising out of the termination itself claim. Check with counsel in your state.
(e.g., restocking charges) plus profit on
all of these costs. CODE COMPLIANCE
WORK TO THE SATISFACTION OF Often, contracts include provisions
THE CONTRACTOR requiring that the subcontractors work is
to be in compliance with governing
Frequently, statements are included in codes. Since governing codes often
the general contractors contract to the involve design capacities (ventilating
effect that the subcontractors work is to requirements, heating, etc.) the
be to the satisfaction of the general contractor should be certain that he
contractor. This unilaterally gives the does not assume these responsibilities,
general contractor the privilege of which should rest with the architect/
determining the compliance by the engineer through his specification
subcontractor of his contractual requirements, but should limit such code
responsibilities and could be compliance to installation methods
capriciously used. It is suggested that required by public authorities.
the entire clause be stricken as
compliance with the contract documents
should be the sole criterion, and not be
subject to the general contractors
satisfaction.

ASSUMPTION OF GENERAL whether he has coverage, and if not,
CONTRACTORS OBLIGATIONS what the requirements involve.
TO OWNER
COMPLIANCE GENERAL WITH
The subcontractor is usually required to CONTRACTORS CONSTRUCTION
assume to the general contractor all the SCHEDULE
obligations that the general contractor is
bound through his contract with the If a subcontractor is required by the
owner. This is not an unfair general contractors contract to comply
requirement, but it is important that the with the generals construction
subcontractor insist upon examining that schedule, it is suggested that that
document to assure himself that there schedule be checked by the
are no objectionable features in the subcontractor before the contract is
general contractors agreement and that signed to make certain it can be met.
the subcontractor can accept all of the Otherwise, the subcontractor is
applicable requirements. Refusal by the obligated to take whatever means are
general contractor to allow the needed to meet the schedule (i.e.,
subcontractor to check his agreement additional manpower, overtime, etc.) or
with the owner should be cause for face a penalty for breach of contract if
concern. he fails to meet the schedule. An
alternative solution would be to insert
RETENTION REDUCTION the words as approved by the
subcontractor where reference is made
Often the bidding documents and to the general contractors schedule.
specifications describe the formula for
reducing the retention as work LABOR AND MATERIAL
progresses. When reviewing the PROVISIONS
general contractors contract to the
subcontractor, it is often noted, Occasionally, a contractual requirement
however, that the retention provisions is encountered to furnish labor and
are not as favorable as those mentioned material to prevent strikes. This is a
in the specifications or other upstream reasonable inclusion where the
documents. It is suggested that the subcontractor has knowledge and
subcontractor compare the two and authority to comply with trade
require the general contractor to comply jurisdiction requirements of the trade
with the upstream documents. union with which he has an agreement
and also provide material as specified
PRIMARY INSURANCE and required, as long as that specified
material does not violate any trade
Contract agreements frequently require union restrictions.
the subcontractor to provide primary
insurance to the general contractor. The subcontractor should not, however,
This could be a dangerous clause as it be in breach of contract if a dispute
may obligate the subcontractor, possibly arises between unions relative to
at additional expense, to furnish more jurisdiction or other inter-union matters
coverage to the general contractor than or if the material he provides, according
a general liability insurance policy to contract requirements, results in a
normally provides. The subcontractor union dispute. It is suggested that where
should check with his insurance agent such a clause appears in a contract, a
when such a clause appears to see qualification be inserted that it be limited

to conditions within the subcontractors EXAMINATION OF WORK OF
control. OTHER TRADES
A contract clause that requires a
Occasionally, a contract requires the subcontractor to examine all other
subcontractor to furnish the maximum trades work and to be responsible that
number of apprentices his union his work fits, as is sometimes found,
agreement allows. The subcontractor is should be noted as it imposes great
cautioned to review the local trade potential exposure upon him. This is
collective bargaining agreement and usually the duty of the designing
qualify any requirement that could engineer, and the subcontractor might
require an inordinate number of wish to delete this requirement.
apprentices.
COMPENSATION FOR INCLUSION OF ALL WORK WITHIN

UNREASONABLE DELAYS SUBCONTRACTOR UNIONS
JURISDICTION
While contracts usually provide for an
extension of time for delays outside the Frequently, one will find inconspicuously
subcontractors control, some do not hidden in the contract or remotely
allow for additional compensation. It is located on one of the general sheets of
suggested that, where such a clause the plans a notation calling for the
appears, the question of subcontractor to include in its contract
reasonableness be considered. scope all work within his trade unions
jurisdiction. Therefore, even though
Short term delays can usually be work is not included in the applicable
accepted, but where delays are portion of the specifications, if it comes
extensive, and not the fault of the within the jurisdiction of the union
subcontractor, he should be employed by the subcontractor, he
compensated for additional costs becomes responsible for same. The
caused by such delays. These causes subcontractor is cautioned to be alert for
could be as basic as construction this murder clause and either
stoppages due to lack of funding, knowingly accept this obligation or take
governmental intervention, changes in exception to it.
design, change orders involving other
trades, work stoppages, etc., and it is INCLUSION OF ALL WORK IN
obviously unjust to expect the SUBCONTRACTORS
subcontractor to assume all the JURISDICTION
additional expenses, such as increased
labor rates and material costs, resulting Frequently, one will find inconspicuously
from same. hidden in the contract or remotely
located on one of the general sheets of
Additionally, for delays caused by the the plans a notation calling for the
owner or prime contractor or their subcontractor to include all work within
agents during construction, check your his trade jurisdiction. Therefore, even
states laws as a clause that only though work is not included in the
extends days but not dollars might be applicable portion of the specifications, if
void and unenforceable. it comes within the jurisdiction of the
union employed by the subcontractor,
he becomes responsible for same. The
contractor is cautioned to be alert for

this murder clause and either SUMMARY
knowingly accept this obligation or take
exception to it. The above are examples of some of the
pitfalls that are found in many contracts
PLACEMENT OF PAYMENTS INTO used by general contractors. The
SEPARATE TRUST FUND subcontractor would be well advised to
carefully scrutinize the contracts offered
Occasionally, a clause is contained in a him to make very certain that, in addition
contract requiring a subcontractor to to those mentioned above, there are not
place all payments made by the general terms contained which could place him
contractor into a separate trust fund in a dangerous position. Acceptance,
rather than into the subcontractors modification or rejection of these is a
regular account. This technically limits decision that a subcontractor must
the use that the subcontractor can make make, but it should be pointed out that
of these payments, and he should be there are extreme exposures present
aware of this limitation. and the subcontractor would be prudent
to give serious thought, or to seek
BUILDERS RISK DEDUCTIBLE professional advice, before he agrees to
accept them.
Contracts frequently stipulate that the
general contractor or owner will provide The information in this bulletin
a builders risk insurance policy having a should not be construed as legal
sizable amount as a deductible. The advice. Contact your local counsel
subcontractor should be aware of this for specific legal advice regarding the
limitation and protect himself information contained in this bulletin.
accordingly. It is also recommended that
the subcontractor review the bidding
documents to make certain that the
general contractors contract is not at
variance with the bidding documents.
INDEMNIFICATION CLAUSES
Inclusion of unreasonable and

excessively broad indemnification
clauses might not be insurable and
therefore might not be covered in
contractual liability policies. These
clauses should be reviewed by the
subcontractors insurance carrier to
assure that he is covered or what the
impact might be. Moreover, a
subcontractor should insert language
limiting his indemnity obligation for
damages/injuries to the extent they arise
from the subcontractors fault or
negligence.

Bulletin No. LL 12
File: Legal
Bulletin
Liability of a Prime Contractor for

Interference with a Subcontractor
NOTE: The court decision discussed below focuses on a serious problem
which subcontractors encounter from time-to-timea prime contractors
interference with the ability of a subcontractor to perform his work.
Typically, when a subcontractor is in a was responsible for the construction of

contract relationship with a prime the concrete skeleton of the building.
contractor, there are certain activities DiCarlo awarded Cupples the subcon-
that the prime contractor can do tract for the installation of glass curtain
because of the terms of the contract. walls and strip windows.
However, that does not mean the prime
contractor can interfere with the The subcontract and its riders required
subcontractor. Some courts have held Cupples to begin layout of the work on
that the prime contractor cannot January 27, 1986, and to begin erecting
reasonably hinder another partys curtain walls after DiCarlo had finished
performance, the prime contractor has its work on five floors and had removed
an implied good faith and fair dealings, most of the from those floors. Cupples
and in the future, could collect tort was required to substantially complete
damages from breach of contract action. its work within 28 weeks with two key
conditions to their contract obligations:
In H.H. Robertson Company, Cupples 1. that at least three floors of precast
Products Division v. V.S. DiCarlo work had to be ready within 30 days
General Contractors, Inc., the Eighth after Cupples began erecting the curtain
Circuit Court of Appeals upheld a jury wall, and 2. that DiCarlo had to make
verdict in which DiCarlo, the prime available to Cupples one additional floor
contractor, was held to have breached every two weeks for curtain wall work.
its subcontract with Cupples by
interfering with Cupples ability to The entire project was not completed on
perform its work in a timely manner and time. DiCarlo blamed Cupples for failure
in a logical sequence. to enclose the building and render it
watertight within the stated 28-week
DiCarlo was the prime contractor for period, which DiCarlo calculated from
construction of a high-rise office building the date Cupples began layout work.
in Kansas City, Missouri, and DiCarlo withheld Cupples last progress
payment and Cupples subsequently

sued for breach of contract, alleging that that many general Contractors and
DiCarlo had delayed and disrupted the owners often attempt to contractually
perform-ance of its work. The jury protect themselves from these types of
awarded Cupples $373,039.46 on its delay damages by inserting a no
breach of contract claim and $25,664.94 damage for delay clause into the
on its quantum merit claim and rejected contract. While some States have
DiCarlos counterclaim. started to enact legislation holding that
no damages for delay clauses are void
In support of its breach of con-tract and and unenforceable, some states will
quantum merit claims, Cupples enforce such clauses.
presented evidence that: 1. it had per-
formed work outside the scope of its In Scherer Construction v. Hedquist
contract; 2. it had to help another sub- Construction, the Su-preme Court in
contractor fix layout lines to facilitate the Wyoming ruled in favor of a
proper installation of precast panels; 3. subcontractor stating that the con-tractor
some of the concrete panels had been did not deal in good faith and fair
installed incorrectly; and, 4. as a result dealing. In this decision, the court held
of DiCarlos mismanagement of the pro- that in all construction contractors, there
ject, these items hampered Cupples is an implied good faith and fair deal-
efficiency and contributed to the delay in ings. An implied provision is something
completing the project. not directly stated in a contract but is
implied by the courts of arbitration
The Eighth Circuit Court of Appeals panels to address equity and address
upheld the jurys verdict in favor of fairness and avoid injustice. Note:
Cupples. The court found that DiCarlo many states do not recognize a
had a duty not to unreasonably hinder separate cause of action for the breach
another partys performance under the of good faith and fair dealing and it must
contract and that DiCarlo had breached be combined with another cause of
this duty by failing to provide Cupples action under a breach of contract theory.
with timely access to the work areas and
by failing to coordinate its own and other Scherer was a subcontractor who
subcontractors work in a manner which subcontracted with Hedquist, the
would have allowed Cupples to perform general contractor, to provide special
its work in its normal, logical sequence. rubberized asphalt paving work for a
DiCarlo essentially maintained that street renovation project.
under the contract, Cupples was
required to adjust its schedule to fit The subcontract stated that Hedquist
DiCarlos. The court rejected that could order extra work from Scherer or
argument and upheld Cupples argument make changes by altering, adding to, or
that a contractor has a duty not to deducting from the work, and the price
unreasonably hinder its subcontractors would be adjusted accordingly.
performance. 1
Before the project started, Hedquist
While the decision came down in favor approached the owner and requested to
of the subcontractor, please be aware change the asphalt paving to concrete.
The owner agreed and signed a change
order. Because of this change,
1
Reprinted with permission of Kasimer & Ittig, Scherers contract was changed from
P.C. Article by Joseph H Kasimer, Esquire approximately $448,240 to a $105,093
originally appeared in The Supplement, Vol. 2,
No. 6, June 1992.
project, along with an unrecoverable
equipment cost of $35,000. Despite the

contract language, Scherer sued for This supreme court case is significant to
breach of an implied covenant of good the whole construction industry because
faith and fair dealing. it may open the door to other parties
injured by a breach of contract.
The court found that Hedquists act of Therefore, in the future, this holding
seeking a pavement material change to might evolve so that any party in the
concrete from the owner while under construction industry (including prime
contract with Scherer was a breach of contractors) that contracted with another
implied covenant of good faith and fair party have a potential claim for tort
dealings. damages by bringing a breach of
contract action. However, many courts
The court has recognized an implied have limited tort damages to matters
duty of good faith and fair dealing in involving personal injury or property
commercial construction contracts damage and will deny recovery for
permitting a court to go be-yond the purely economic loss in a breach of
four corners of the negotiated contract contract setting.
document in adjudging the parties
conduct for breach. In Wyoming, this will This bulletin is not intended to be
have a big impact on contracting parties legal advice. A person should seek
and in other states, contracting parties local counsel for specific information
will use this argument as persuasive regarding the information found in
authority. this bulletin.
Other examples of the implied covenant

of good faith and fair dealings are:
overbearing or excessive administration
of a contract, coercive withholding of
payments, failure to provide site access,
retaliatory or overzealous inspections.
In another case, Kishmarton v. William

Bailey Construction, Inc., the supreme
court in Ohio held that tort damages
were available in a breach of contract
action without a tort action. In
Kishmarton, a home purchaser was
awarded emotional distress damages in
their breach of contract action against
the builder.
Typically in construction cases,

damages in tort (emotional distress
damages are tort damages) are not
awarded. However, in this minority de-
cision, the court held that to continue to
disallow emotional distress damages
unfairly exposes innocent persons to
harm.

Bulletin No. LG 1
File: Legislation
Business and Politics
INTRODUCTION trying to get his point of view expressed to

elected officials. Certainly a mechanical con-
Numerous laws mandating the regula-
tractor knows the problems of the industry bet-
tion of business affect all business enter-
ter than any elected representative.
prises, from the multinational corporation to
the corner store. Mechanical contracting firms
are no exception; in fact, the construction in- YOUR ASSOCIATION IS A GOOD PLACE
dustry often feels a special burden because it TO START
seems to be buffeted at every turn by regula-
tions overseeing everything from workplace Belonging to an association like MCAA
safety to equal employment opportunity. gives you an advantage that non-members do
not have. As government has become more
For many years, business people felt that
and more present in business operations,
you cant fight city hall; they complied with
MCAA has tracked legislative activities that
regulations, but did not think of attempting to
affect your business, has informed you of the
affect the legislation that had such an effect on
impact of legislation, and has tried to make
them. Now, however, businesses are trying to
the voice of the mechanical contractor heard
make themselves heard on legislative issues.
in Congress. To give members the additional
Business people are sometimes intimi- clout that comes from a concerted voice,
dated by government since it is an area with MCAA joins in coalitions with other business
which they are not familiar. The U.S. Congress groups when appropriate, and takes an active
has special rules and special language, all of part in the activities of the Associated
which serve to frighten outsiders into inaction. Specialty Contractors, a coalition of contract-
(See the glossary of congressional terms ating organizations that strives to better the con-
tached to this document.) With attention to leg- ditions of the construction industry. Most of all,
islative information coming from the daily news your association tries to educate members on
or from trade associations, the typical business the importance of individual participation in
person can learn enough to feel comfortable in the legislative arena.
1
Legislation
WHAT INDIVIDUAL CONTRACTORS much. First, it tends to make us more consis-

CAN DO tent in our efforts with regard to our legislators
in that we tend to establish a dialogue with him
Educating yourself on this unfamiliar topic
or her in an area in which we are knowledge-
is the first step.You should know who represents
able. In addition, this consistency and the cred-
you in Congress. Then keep track of how he or
ibility our continuing efforts engender soon
she votes so you can be prepared to discuss or
identifies us to our legislator so that when we
raise questions about specific legislative posi-
or our industry is mentioned, we are remem-
tions. If you find that your representative works
bered and our views readily come to mind.
in the interest of business and the construction
industry, you may want to contribute time and
money to his or her reelection effort. If the op- THE QUESTION OF MONEY
posite is true, you may want to lend your sup-
port to his or her political opponent. The subject of money and politicians
brings to mind unfortunate historical overtones,
Remember, though, that if we are not all of them in the distant past. It is a mis-
Republicans and our Congressman is a take, however, to think that a political contribu-
Democrat who knows we have not supported tion is just a pleasant phrase that really means
him in the past, we should get to know him buying influence.In some rare cases, of course,
anyway. Often, party members cast more it means exactly that. Much more frequently,
votes for issues promoted by the opposite however, it is a method of ensuring that your
party than for issues promoted by their own message will be heard, not that your message
party. A Congressman should represent dis- will be acted upon. Most politicians cannot be
trict Democrats and Republicans alike. He or bought, but a political contribution will at least
she should desire to please all his people all mean that your ideas can get a hearing.
the time, even though he knows this is im-
possible. He should be eager to find some If you decide to make a contribution to a
common ground to win support. A profes- politicianss campaign, remember that it must
sional politician knows that the best way to de- be large enough to be noticed$1,000,
stroy enemies is to make them into friends. $2,000 or more. Politicians do remember sub-
stantial individual contributors because in
So, whether or not you are pleased with todays lengthy and expensive campaigns,
your representative, it is important that you money contributed really can mean the dif-
make your point of view known.Often, your input ference between winning and losing.
alone or as part of an industry-wide information
campaign may express an idea or viewpoint
that the legislator has not heard often enough. COMMUNICATING WITH CONGRESS
The old proverb about the squeaky wheel get-
MCAAs national office, through periodic
ting the grease is perhaps more true in politics
reports, advises members on pending legis-
than in any other social sphere.
lation affecting our industry. Subsequent cor-
If possible, make your political involve- respondence to our legislators, or to others,
ment more than a one-time effort, since con- will add considerably to our influence as an
tinuing energy in explaining the problems of our association. Next to voting, writing a letter to
industry to elected politicians can accomplish your elected officials is one of the most im-
2 LG 1
Legislation
portant and effective ways that you can par- Avoid phrases or sentence structures
ticipate in the American political system. that might give the appearance of form letters.
This could tag a letter as part of an organized
Writing an effective letter outlining your pressure campaign, which may cause it to be
legislative concerns does not have to be a filed in a waste basket.
frightening prospect. Here are a few hints.
As a constituent, you have the right to
know your legislators position on an issue. Be
HOW AND WHAT TO WRITE sure to ask him for his specific opinion of a bill.
Before starting to write your letter, make Last, thank you letters to Congressmen
sure you have the proper name and address of are surprisingly few and are well remembered
the elected official.If you are not sure who is the when received. Besides being a polite gesture
proper legislator, call MCAA, or your local Board for a job well-done, the note will be remem-
of Elections, Chamber of Commerce or League bered. On the other hand, if a vote is contrary
of Women Voters to get the information. to your position, dont hesitate to let it be
known. That will be remembered also.
If the issue you are writing about has an
impact on your business, use your business
WHEN TO WRITE
letterhead. Make sure your letter is legible,
preferably typed. Be sure your letter has your It is always best to write your legislator
return address on it. Envelopes frequently get during early consideration of an issue, since
thrown away. early information can help develop his or her
position on the issue. Later correspondence
Clearly identify the subject of your letter. aimed at changing a legislators mind will be
State the name of the legislation and the ap- less effective. The best time to write is when a
propriate House or Senate number.State your bill is in committee. It is at this stage that an in-
reason for writing, citing arguments in support dividual legislator can have the greatest ability
of your position. Explain how this issue will af- to impact the outcome and language of a bill.
fect you, your family, or your business. It does
not hurt to include its impact on your commu- Once you have written, dont expect a re-
nity and on the state and national economy sponse right away. Elected officials mail is
as well. If you are writing about a bill that ad- read and answered, but not always quickly. If
dresses a real problem but which offers the you are not pleased with the response that
wrong solution, suggest alternatives. Dont you getthat is, if the response is a form let-
write to complain, but to bring about change. ter, or very noncommittalwrite again. It
never hurts to let your legislator know about
Be sure your letters are reasonable. Dont your concerns.
ask for the impossible and dont threaten. Dont
On the following page, you will find a sam-
say you will vote against the individual unless
ple letter on an issue that is important to MCAA
he does what you ask.Threats will end up hurt-
membersrepeal of the Davis-Bacon Act.
ing your case much more than they will help it.
At any rate, most legislators are aware that if Notice how the letter identifies the letter-
they do not please a constituent, they are not writer then goes on to show knowledge of the
likely to receive his future vote. subject and to express a definite point of view.
LG 1 3
Legislation
SAMPLE LETTER TO CONGRESS REGARDING

DAVIS-BACON LEGISLATION
The Honorable The Honorable

U.S. House of Representatives U.S. Senate
Washington DC 20515 Washington DC 20510
Dear Representative : Dear Senator :
As a member of the construction industry and as a concerned citizen, I am writing you to ex-
press major concern for the repeal of the Davis-Bacon Act. We support the continuation of the
Davis-Bacon Act with appropriate periodic adjustments for reform as may be needed such as the
threshold ceiling.
The Act wasand still isintended to protect a local economic environment from being un-
dermined by an out-of-area employer who may have significantly lower costs but who operates in
the area only temporarily. Without the Davis-Bacon Act local jobs, earnings and taxes are lost.
Davis-Bacon is a critical force in sustaining a well-trained, skilled work force in the increas-
ingly high-tech areas of construction and the training programs which produce these workers. The
industry cannot attract craftsmen capable of doing the quality job necessary in todays high-tech
installations without an adequate wage structure. If skilled workers leave the industry to find bet-
ter-paying jobs, the already existing shortage of capable, trained labor in construction will become
even more acute.
Sincerely,
George Contractor
NOTE: Any personal anecdotes or experiences you can use to illustrate your comments will
make your letter(s) even more effective.
4 LG 1
Legislation
Visiting Capitol Hill
Another effective way to communicate with your legislator is to visit his or her Capitol Hill of-
fice. If you choose to do this, make sure you observe the following recommendations.
Make an appointment. If you want to make sure that your visit is productive. Even if there is only
a few minutes notice, give the legislator or the staff assistant the opportunity to prepare them-
selves for your arrival.
Sell yourself. Remember that you are not selling a legislative proposal or your company (or as-
sociation), but yourself. If you are friendly, helpful, and understandingnot hostileyou will be
more successful.
Get to the point. When making a visit to any elected official, dont take forever to make your pitch.
Tell them who you represent, the number of members and employees you represent, what your
primary concerns are, and how and why these concerns are related to an individual piece of leg-
islation.
Keep your meeting short. Dont take longer than 10 or 15 minutes to express your concerns, un-
less you are asked to expand on your views. If you are respectful of your legislators time con-
straints, you will get in a second time.
Use good manners. When making a visit to a legislators office, make sure that you do not use
any facilities in the office unless offered (this includes the telephone, copy machine, and restroom).
Be kind to staff members. Whether in person or speaking over the telephone, always be kind to
staff members. They will end up being the individuals who have the greatest potential to help or
hinder you and your cause.
Dont make any promises unless you intend to deliver. Just as it is not very good to threaten
an elected official, it is also not wise to make false promises.
Dont forget to say please and thank you. On Capitol Hill you can never say thank you too
often.
Check your facts and figures. Make sure that you are presenting accurate facts and figures, not
ones that you made up.
Dont try to sell a bad bill. If you do not truly believe in the merits of a bill, dont expect others to.
If a bill is ill-conceived or poorly written, it could end up hurting you and your industry far more than
benefiting it.
LG 1 5
Legislation
Dont become discouraged. As you become more familiar with the legislative process, you will
discover the many ways that legislation and people can become thwarted. If you are looking for a
big win the first time out, dont be discouraged if you fail. Remember, visiting elected officials rarely
activates or converts them; it reinforces them.
Getting involved can be productive. Many people who have studiously ignored politics find, to
their surprise, that such involvement can be rewarding, even if specific efforts to influence legisla-
tion are not entirely successful. At the very least, you will learn more about your own industry when
you view it in the legislative context and become aware of the many competing viewpoints. At most,
you will contribute a great deal of knowledge to the continuing political debate.
The following glossary of legislative terms, Hill Talk, will assist you in learning the language
of legislators. It was prepared by the Associated Specialty Contractors, a coalition group in which
MCAA is an active participant.
HILL TALK
Adjournment sine dieThe adjournment of Congress without setting a day to reconvene. This
usually officially marks the end of a congressional session.
Clerk of the HouseChief administrative officer of the House of Representatives with duties cor-
responding to those of the Secretary of the Senate.
Closed or Gag RuleThis type of rule prohibits amendments that have not been approved by
the committee which brought the bill to the House floor.The rule is granted by the Rules Committee
and forces the House either to accept or reject the bill as it stands. The procedure is usually lim-
ited to tax and security bills which are complicated and highly technical.
ClotureA method of limiting debate in the Senate. Under cloture, debate is limited to one hour
per Senator. Three-fifths of the Senate must approve cloture before it can take effect.
ConfereesThose members of the House and Senate who are appointed to conference com-
mittees. They are generally appointed by the Speaker of the House and by the Senate Majority
Leader.
Congressional RecordA printed account of the proceedings in both the House and Senate
chambers which is produced daily.
Enacting ClauseA clause contained in every bill which states: Be it enacted that . . . At any
time during debate on the bill, any member may move to strike the enacting clause, whereupon
immediate vote is taken on the motion. If the motion passes, the bill is virtually dead.
Engrossed BillA passed and amended bill in one House which is rewritten, printed on blue or
engrossed paper, and delivered in a formal ceremony to the other House.
6 LG 1
Legislation
Executive SessionA meeting of a Senate Committee, a House Committee, or the entire cham-
ber which is closed to the public.
FilibusterA method of postponing or preventing a vote. Filibusters are used mainly in the Senate
and generally come in the form of unlimited debate or continuous talking. Filibusters are prevented
in the House by its strict rules.
Floor ManagerA member, usually representing sponsors of a bill, who attempts to steer it through
debate and amendment to a final vote in the chamber.
GermanenessIn the House, rules require that amendments to a bill pertain to the subject mat-
ter under consideration. In other words, they must be germane. In the Senate, amendments are
not required to be germane except when they are offered to a general appropriations bill. However,
in the case of appropriations bills, a majority vote of the Senate can accept them as germane.
Additionally, all amendments proposed after cloture must be germane regardless of the bill.
Grandfather ClauseAn exemption of people who are already engaged in an activity from a rule
which restricts or prohibits that activity.
JournalAn official record or the proceeding of both the House and the Senate. Unlike the
Congressional Record, the Journal does not include the verbatim report of speeches, debates and
the like.
Majority LeaderThe leader of the majority party in the Senate is called the Majority Leader. The
Majority Leader in the House is second in command of the majority party, after the Speaker of the
House.
Minority LeaderThe leader of the minority party in the House and Senate.
Omnibus BillA legislative proposal concerning several separate but related items.
Override A VetoCongress overrides a veto when the president vetoes a bill and Congress can-
cels the veto by a two-thirds vote in each chamber.
Point Of OrderAn objection by a member of Congress that the chamber is violating its rules.
The presiding officer must accept or reject the objection which is then subject to appeal to the full
House or Senate. A point of order can stop any pending business in the House and force a quo-
rum call, remove bill language that does not pertain to the purpose of the bill, and remove from the
record any words that are in violation of the rules.
President of the SenateThe presiding officer of the upper chamber.The President of the Senate
is normally the Vice President of the United States.
President Pro TemporeThe temporary presiding officer of the Senate. The President Pro
Tempore is elected by the Senate to serve when the Vice President of the United States is absent,
which is most of the time.
LG 1 7
Legislation
QuorumThe number of members whose presence is necessary to conduct business. In the ab-
sence of death or resignations, this is 51 members in the Senate and 218 member in the House.
Senators may object to the absence of a quorum and force a roll call.
Ranking MemberThe second in seniority on a committee, of the majority party, after the chair-
man.
Ranking Minority MemberThe first in seniority on a committee of the minority party.
RecommitThe minority party of the House has the right to recommit a bill to its originating
Committee just before the final vote is taken. Such a motion, if voted, usually means that the bill
is dead. The motion may include instructions to the Committee to revise the bill along certain def-
inite lines and return it forthwith. These changes can usually be made quickly and the bill often
passes the same day. If the minority party does not recommit, a member of the majority party may
move to recommit.
Secretary of the SenateThe chief administrative officer of the Senate, responsible for taking
votes, certifying passage, printing and distributing documents, internal budgeting and accounting,
and other duties which are necessary for the continuing operation of the Senate.
Senatorial ControversyThe tradition of allowing Senators of the Presidents party to veto pres-
idential appointments in or nominations from their own states.
WellThe area in front of the Speakers rostrum from which House members may address the
House, Senators speak from their desks.
WhipBoth parties, in both Houses, elect a whip or assistant leader. The whip keeps members
advised on legislative programs, rounds up members for important votes, and keeps his partys
leadership informed on how many votes it can expect for and against a measure.
8 LG 1
Bulletin No. MI 1
File: Management Innovations
Bulletin
5Ss Road to Improvement
Introduction How the 5Ss Work
The 5Ss is a technique of Lean Kinetics staff first learned about

Thinking, which Kinetics adopted from the 5Ss while studying ways to improve
manufacturers in Japan and applied to shop productivity. Next, the company
its operations to improve productivity. participated in a pilot Lean training
Toyota, the automobile manufacturer, course with a local consultant. Through
originated the idea, a nd it ha s been the course, Kinetics staff started imple-
successfully implemented by many menting the 5Ss in one of it s shops.
American companies, including Ge neral After a learning curve and some adjust-
Motors, Boeing, Honeywell and TRW. ment to t he new procedures, the
following changes became apparent:
Although the original 5Ss are
Japanese, Kinetics adopted Boeings Craft employees enjoyed coming
English interpretations: up with ways to apply the 5Ss;
Shop space increased by 1000
Sorting straighten up square feet at a time when an
Simplifying put things in order expensive shop expansion was
Sweeping clean up being considered;
Standardizing use consistent The distance products traveled
ways to do things through the shop was reduced,
saving time and e mployees
Self-Discipline monitor your
own actions energy;
Returned unused material was
With each word are sp ecific ac- valued at $5,000;
tions taken to improve work areas and Flow of materials thr ough the
processes. By appl ying these actions, shop improved, reducing cycle
Kinetics employees were able to reduce time; and
wasted time, materials and information, A safer and cleaner shop
thereby increasing their productivity. environment was created.
The following are the implement- After developing the 5Ss in that
tation guidelines for ea ch step of the shop, Kinetics applied the program to
5Ss. other shops, its tool and equipmen t re-
pair operations, its purchasing office and

to some of its f ield construction sites. Management Overvie w: one-
The following Improvements resulted: hour sessions to introduce
managers to the program and to
Streamlined the tool re turn and help them understand their role;
repair process by eliminating the 5Ss Training: two-hour ses-
tracking of tools valued less than sions for employees th at includ-
$50; ed briefings on the programs
Labeled the bins to ease and concepts, discussions on how
simplify retrieval of returned those concepts should be ap-
tools; plied within their o wn work
Eliminated several steps in the areas, and where to begin;
tool repair process which re- Monthly Revie ws: Customized
duced paperwork and time check sheets were developed for
(about nine hours per week) and each shop or office that the de-
increased productivity; partment could use to perform
In purchasing, buyers reorgan- self-audits of progress achieved
ized their desks so tha t material in implementing the 5 Ss. The
requests, pending purchase check sheets also helped staff to
orders, and other records could identify additional ways to apply
be processed more e fficiently, the techniques.
making it easier to cle ar work
bottlenecks and to cover staff A basic part of the training is a
who were out of the office; 5Ss video tape that Kinetics borro wed
At work site s, gang boxes were from Boeing showing how the prog ram
organized so that tools could be was applied in a Boeing office and shop.
found more quickly (i. e., har- The visual tool helped the emplo yees
nessses were labeled with the see how others had applied the con-
employees name and placed on cepts and how it cou ld be used in both
vertical racks, which red uced the shops and offices. Discussion f ollowed
morning routine by 20 minutes on how the 5Ss con cepts could be
for a crew of 22 employees); and applied in Kinetics operations.
At other shops, car ts were
modified for the storage of tools Kinetics 5Ss Implementation
in specifically designed holders Guidelines
when not in use; clamps on jig
tables were color-co ded to Sorting
indicate the type of clamping
needed (reducing t he time Step 1: Red-tag or mark all items t o be
needed to adjust clamps); and considered as unne cessary, such as
clean rooms were kept fully materials or parts stacked around the
stocked with clean-r oom site, excess parts or inventory, ru sted
consumables for easy access and or age- deteriorated items, outd ated
when needed. posters, notices, memos and disor gan-
ized paper piles on desktops.
Implementing the 5Ss
Step 2: Review all items and sort them
Based on Kinetics p ilot training into the following groups:
at its first shop, an in-house training
process was developed to introduce the In use, or will be used;
5Ss that consisted of the following: Not used or will not be used; and

Unlikely to be used. determine when items are misplace d or
missing.
(Tip: Hold a use auction with employ-
ees to determine if unused or unlikely t o Consider the following:
be used items can be used.)
Shadow boards;
Step 3: Get rid of all it ems that are not, Mark the item and its location;
or are unlikely, to be used and inventory Color-code; and
those that are or will be used. Label drawers with lists of their
contents.
Step 4: Sort those items that are in use
or are likely to be u sed into three Step 3: Develop ways to replace usable
groups: items daily, such as:
Rarely used (once or twice each Establishing lead times for re-
year); placement of supplies used
Occasionally used (once or twice daily;
each month); and Determine minimum and maxi-
Frequently used (daily or weekly mum supply levels a nd mark
use). them accordingly.
Simplifying Sweeping
This concept involves creating a Studies show that a clean work

designated and marked place for every- environment is safer, more produ ctive,
thing according to the frequency of its and more inviting to workers. Sweeping
use. The goal is achieved when: is visually and physically reviewing a
work area to place items in their design-
Items used most often are easily nated storage areas and to clean the
accessible, thus reducing to al- work area. Sweepin g occurs after
most zero the time spent finding clean-up procedures are completed and
an item; and work areas are orderly and safe.
Anyone, including an employee
who does n ot work in t he area, Suggested activities include:
could put an item back in its
designated place according to Determine regular sche dules for
the markings used. cleaning work/break areas;
Acquaint all employees, includ-
Step 1 : Review all frequently used ing those with daily 5Ss re-
items and determine where to put them. sponsibilities, with the programs
Those items used most often should be goals, objectives, and proce-
stored closest to the work area, and dures;
those used less often should be st ored Post area cleaning guidelines
further away. Tools and supplies should and schedules;
be stored safely. Keep tools, machinery and office
equipment maintained and in
Step 2 : Develop a process for st oring operating condition;
items that will enable even new emp loy- Keep work/break areas, office
ees to retur n items to their design ated and conference rooms clean and
places and allow anyone to re adily orderly;

Establish a dependable, docu- Using the 5Ss agreements;
mented procedure to reduce Documenting all 5Ss agree-
hazardous waste and minimize ments; and
the use of chemical products; Incorporating and documenting
and all changes.
Perform safety inspections on a
regular basis. Self-Discipline
Standardizing Self-discipline involves making

and keeping commitments and agree-
Standardizing involves the devel- ments on all the 5Ss and includes:
opment of consistent processes for each
key work function and for the application Ensuring that employe es follow
of the 5Ss throughout the operating all 5Ss rule s for Sorting, Simpli-
area to achieve a high level of quality. fying, Sweeping and Standard-
For standardization to succeed, employ- izing;
ees must understand the value of using Documenting all changes;
and maintaining methods, such as: Posting in work areas a daily ac-
tivity checklist for the 5Ss;
Documenting all current process- Regularly updating t he 5Ss
ses; communication board/binder with
Using the standard 5Ss format current personnel assignments;
for communications board/bind- and
ers; Keeping the work are a orderly
Installing standard visual con- and clean.
trols for th e area (i. e., sign-
boards, shadow boards, outlines,
etc.);
___________________
The management innovation described in this Management Methods Bulletin was

recognized by MCAA with the presentation of the 2001 E. Robert Kent Award for
Management Innovation, one of the associations most distinguished awards. For
information about the award and the nomination process, please call 800-556-3653.

Bulletin No. MI 2
File: Management Innovation
Bulletin
Managing Office Operations with
PaperVault
Introduction
PaperVault is a data and paperwork assigned to a counter so the employee
management system that its inventor is aware that it must be completed by a
Don Pheil, CEO of DPW, Inc. (S. San certain time. And, once the employee
Francisco, CA) developed to manage completes the task, the counter is
the companys finances, projects, decremented accordingly.
invoicing, bids, change orders, and
other operations. Originally designed Completion of a task may not be all
for DPW, Inc., the software has been there is, however. Sometimes, the end
revised and expanded to fit most any of one job triggers another task for
size or type of company needs, which is another employee in the company.
why DPW, Inc. won MCAAs 2006 E. Then, the counter for the new task is
Robert Kent Award for Management initiated which alerts the responsible
Innovation. person that a task needs his or her
immediate attention.
Initially, PaperVaults functions were
relatively simple; it logged jobs, bids, To be sure DPW, Inc. employees and
and change orders and retrieved management are on top of the work
internal documents easily and quickly. flow, PaperVault provides an instant
Over time and as the company grew, its visual display of who is responsible for
needs changed and PaperVault evolved what tasks company-wide and when
to meet them. they must be completed. Management
can see at a glance where potential
Counters bottlenecks exist.
One of the features that distinguishes
PaperVault from other data Tracking Project Bids
management software packages is An excellent example of how
patent pending counters that focus PaperVaults counters work is how the
employees attention on tasks that must system manages bids. When DPW, Inc.
be completed within a certain time receives a bid invitation from a general
frame. By monitoring the counters, the contractor, the information is logged and
78 employees responsible for specific assigned to an estimator. The walk-
tasks can more effectively manage their through and due dates trigger the task
daily work schedule. The more counters that are unique to each
immediate the need for a task to be employee in the bid process within the
completed, the higher the increment company. Because PaperVault makes

bid information available to everyone on Electronic Mailing
the bid team, critical information (i.e., PaperVault knows what information
due date) is not overlooked. goes in which e-mails. When an
employee chooses to create a particular
The system works especially well when type of e-mail, (RFI, change order,
DPW, Inc. receives bid invitations from quote, etc.) for a project, the system
several general contractors for the same automatically generates a customized
project. Once a bid letter is created for message, including default text and all
the first contractor, it becomes the relevant reference numbers, in the body
template for letters and other of the message. The user can fine-tune
documentation for the other contractors. the text as well. When the message is
PaperVault also modifies the bid ready, PaperVault will send it by e-mail
documents as appropriate for each or fax to the client, as specified by the
contractor. If DPW, Inc. wins the bid, all user.
the bid information is instantly converted
to project information. Another useful feature of PaperVault is
that all associated documents for a bid
Document and Correspondence or project are instantly available for
Management quick selection to be added as an
Document and correspondence attachment to an e-mail or fax message.
management is the heart of PaperVault. Users may either open a dialog box to
The system was created so that all find a document in the system or use
DPW, Inc. employees could quickly view the browse function for documents
all the documents associated with a job. outside PaperVault.
The system allows the company to send
and receive documents and PaperVault also manages incoming
correspondence from clients and documents associated with electronic
vendors in hard-copy, e-mail and messages. The system automatically
facsimile forms. files replies to the relevant bid or project
file using a proprietary process. After
What makes PaperVault so much more the reply is filed, PaperVault removes it
effective than other document from the employees in box, thereby
management systems is the manner in reducing clutter. This e-mail becomes
which it associates and displays project another link in the communication
documents. The programs three-paned chain and will display as a related item.
display allows users to view internal
documents in the uppermost pane and Billing
external documents in the middle pane. PaperVaults features also ensure that
The bottom pane chronologically invoices are received by clients on
displays all relevant/related documents specific days each month, as they
and correspondence once an item from require. Each project form has a field
the upper or middle pane is selected, for the billing due date. Once that
thereby providing the user with an information enters the system, a counter
instant history of all communications is initiated for the responsible employee.
received for that particular issue. And,
issues can involve a paper trail of Several days in advance of the billing
change orders, RFIs, account date, the projects and change orders
receivables, insurance and much more. designated for billing are presented to
PaperVault, therefore, enables anyone the assigned employees who
to quickly and easily understand the immediately know how many billing
background on an issue. tasks they must complete for that day.

A screen provides them with the comes in, PaperVault logs and files the
information they need to calculate the message and generates counters for
billing. Once the task is complete, the needed actions. The module, therefore,
counter is decremented. At the same displays accounts receivable information
time, a new accounting counter is for each project and each customer as
initiated with the accounting department well as each invoice. And, PaperVault
to prepare and send the invoices. This draws all its information from the
process is simple and easy and construction accounting program without
prevents delayed payments. entering into the financial accounting
system.
Although PaperVault cannot guarantee
a client will pay his bill on time, it does Built-in Flexibility
simplify the billing process and ensures PaperVault is as nimble as it is
that DPW, Inc. employees and their comprehensive. The system provides
clients do not miss due dates and for custom tasks that can be initiated
deadlines. And, if theres any question from any screen in the system. Any
about a bill, PaperVault eases the employee can take on the task, a note
response because the system field dispenses information and follow-
documents the billing and payment up dates, and counters are triggered to
history so completely and logically. ensure the work is completed. Searches
are easy and quick; employees can
Accounts Receivable search the system with a project
The crown jewel feature of PaperVault number, contractor name or address.
is the accounts receivable module. And, a contractor can adopt portions of
While the system is not an accounting PaperVault, rather than the entire
program, it effectively manages system.
accounting information to ease the tasks
facing DPW, Inc.s accountants. With a Pheil said that PaperVault has helped
few keystrokes, PaperVault can send an DPW, Inc. grow. PaperVault permits us
e-mail to the general contractors to take on additional work and scale our
accounting department staff reminding staff properly as we grow. It is easy to
them that action is needed on an integrate and monitor the work of a new
invoice. The DPW, Inc. employee can employee.
attach the relevant invoice and all _________
associated documents, such as signed If you are interested in adopting
invoice packages, lien releases and PaperVault for your office operations,
insurance certificates. When a reply please contact Don Pheil at DPW, Inc.
at dp@dpwinc.com or 650-588-8482.

Bulletin No. MI 3
Bulletin
Serviceeye
H.T. Lyons, Inc.
Allentown, PA
INTRODUCTION WHAT IS SERVICEEYE?
The 2010 winner of MCAAs E. Robert Serviceye is an informational tool that

Kent Award for Management allows users to log onto serviceeye.net
Innovation is H.T. Lyons, Inc. from anywhere to view the details of
(Allentown, PA) for its custom-design service activity immediately after work is
service software, Serviceeye. Service performed. Electronic service reports
mechanics, project managers and greatly reduced the time, costs and
dispatchers worked internally to create a paper previously used to administrate
service software package that would and document service and maintenance
reduce the costs of service technicians work.
paperwork associated with equipment
Serviceye is also a communications tool
maintenance and repairs and
that allows users to post messages and
construction. Serviceeye provides
action items to one another on a
detailed work and billing history for each
bulletin board, assuring that critical
piece of equipment covered by H.T.
communications are transferred to all
Lyons, eases access to documents,
concerned parties.
simplifies the payroll process, provides
an affordable solution to remote Serviceeye is also a remote monitoring
monitoring, saves the company over tool on working screens, making live
$40,000 per year in unbillable labor data readily available 24/7 to users on
costs and much more. five parameters. Historic trend reports
are also easily viewed on-screen.
Since winning the E. Robert Kent
Serviceye allows service and repair data
Award, contractors from across the U.S.
to be tracked by each piece of
have contacted H.T. Lyons about
equipment, thereby simplifying
logistics and costs involved in installing
replacement cost analyses and
Serviceeye in their operations.
quantifying the cost of unreliable
equipment.

Serviceye is also a document 7. Each evening, Serviceeye
management tool that allows critical summarizes the ESRs created that day
operation and maintenance documents, and e-mails a Daily Summary Report
such as wiring diagrams and parts lists, (DSR) to dispatch and service
to be stored for easy access by any user supervisors.
at any time.
8. Each morning, dispatch reviews
the prior days DSR to confirm the data
HOW DOES SERVICEEYE WORK? is correct.
The following provides a step-by-step
WHAT ARE SERVICEEYES
breakdown of the procedures involved in
Serviceeyes operation: BENEFITS?
1. Project Managers set up project Companies that adopt Serviceeye into

folders and service supervisors create their operations will realize a number of
service contract folders for each client. important and valuable benefits:
The folders are organized to create a
logical file tree and include basic Easily accessible O & M records
information, such as the appropriate Serviceeye makes available O&M
union rate for the associated work. records, as-built information, start-up
records, digital photos and more at
2. Dispatchers schedule projects,
any time, day or night.
preventive maintenance visits and
service calls by creating Work Orders in Prompt delivery of service reports
the company information Once a service visit is complete,
management/accounting system. Serviceeye instantly e-mails a copy
of the service report to the customer
3. Every 15 minutes, Work Order
and makes a PDF version available
information is automatically exported to
for viewing on the Serviceeye
the appropriate Serviceeye folder and
website.
made available to technicians via the
Internet to their workbooks. Simplified tracking of the service
history and expense for specific
4. Technicians use their wireless
workbooks to view Work Order pieces of equipment
information, O&M documents, Serviceeye maintains an electronic
comments and any other information folder for each individual piece of
stored in Serviceeye folders. They can equipment. Service reports,
select open Work Orders and create invoices, comments and documents
Electronic Service Reports (ESRs) as related to each piece of equipment
they perform their tasks. are stored in this file and can be
sorted and viewed in a variety of
5. When performing service work, ways.
technicians assign ESRs to specific
pieces of equipment which in turn Provides inexpensive remote
causes a service and cost history to be monitoring and trending of a
created for the piece of equipment. customers facility
Serviceeye has the capability of
6. When the work is completed, the monitoring five parameters for less
technician clicks save and the ESR is than $1,000 in hardware and one
instantly e-mailed to the customer days labor. The Serviceeye screen
contact associated with that folder, is designed to keep the five
dispatch and the technicians supervisor. monitored parameters viewable

whenever Serviceeye is being used, Reduces management time spent
alerting users to unusual or problem reviewing service reports and
situations. Serviceeye also preparing invoices
produces trends and can be Serviceeyes electronic service
programmed to send e-mails at pre- reports are pull-down boxes and
determined times. auto-fill data from dispatch to
Eliminates downtime simplify the technicians job. The
Serviceeye instantly e-mails service reports can be quickly and easily
reports to service supervisors and checked for accuracy by dispatch as
dispatch when a visit is complete. the work is completed. The reports
Dispatch and supervisors also are entered into the billing system,
receive a summary of daily activities. allowing billing clerks to check for
accuracy.
Improves communication
between technicians, the office For more information about
and customers Serviceeye, please contact Richard
Serviceeyes electronic bulletin U. Perosa, president of H.T. Lyons, at
board feature allows users and RUPerosa@htlyons.com.
customers of specific accounts to
post and respond to comments.
Management instantly sees all
comments requiring their action.
Simplifies and expedites the

payroll process
When projects and service contracts
are created in Serviceeye, dispatch
provides the proper rate class for
each piece of equipment.
Technicians never need to enter
pay rates, and all payroll information
is automatically entered into the
payroll system each Sunday night.

Bulletin No. MI 4
Bulletin
Articulating Weld Boom

INTRODUCTION The boom is equipped with the
necessary power to make it work
The 2008 E. Robert Kent Award for wiring for electricity to power the boom,
Management Innovation went to Shinn a grinder/convenience outlet,
Mechanical, Inc. (Kent, WA) for its compressed air, argon, welding gases
Articulating Weld Boom. (98-2, 75-25), water coolant for the weld
torch and a plug-in for foot control of
Shinn Mechanicals fabrication workers pipe positioners. The design allows the
designed the boom as part of its effort to fabricators to perform any type of
establish a new fabrication shop at the welding, including TIG, without any
companys new location in Kent, WA. cords or hoses on the floor.
The boom and other fabrication
equipment were intended to provide the BENEFITS
most efficient pipe fabrication operation
possible for the space available. The Shinn Mechanical boom was
designed to greatly improve safety, the
WHAT IS THE ARTICULATING WELD ergonomics for the fabrication workers
BOOM? and the ambient air quality in the
fabrication facility.
The boom was designed, constructed
and installed by Shinn Mechanical First, the boom will greatly reduce
fabrication workers. hazards and potential for injuries. The
boom moves easily and locks into
It uses a lattice-style design, extending position with air brakes that are
from a 20-inch diameter, Schedule 160 controlled by switches at the working
steel column. The boom has three end. The boom is also equipped with a
sections, with pivot points between the 20-foot picking boom mounted on the
sections, providing a true articulating same column; it has a 4,000 pound
boom that allows the working end to be lifting capacity. The boom holds all the
placed anywhere within a 30-foot radius cords and hoses overhead and out of
from the base. A welding machine is the welders way, thereby eliminating
suspended from the end of the boom, the potential for electrocution and
and mounts for grinders are also tripping.
included.

Shinn Mechanical also designed the
boom to remove noxious fumes and
gases from the work area. The boom is
equipped with a complete industrial duct
system mounted with a point-of-use
exhaust hood at the end for removal of
gases and smoke. A VFD-controlled
exhaust fan expels the gases, filters the
exhaust and re-circulates the cleaned
air into the shop. With these features,
the air quality in the fabrication shop is
greatly improved.
For more information about the

Articulating Weld Boom, please
contact Mike Shinn at
mikes@shinnmech.com or call 425-
373-9800.

Bulletin No. MK 1
File: Marketing
Fundamentals of Marketing Your

Own Services
BACKGROUND no hope of communicating your sales mes-

sage, let alone making a sale. So, in addi-
What Is Marketing? tion to informing people, effective marketing
also overcomes suspicion.
Marketing is the art and science of get-
ting people to realize: 1) that they need what
you offer, 2) that what you offer is unique in How Marketing Works
some way, 3) that your services are worth
what you charge, and 4) that you want their Effective marketing grabs your audi-
business. ences attention, suspends their suspicion,
and makes it easy for them to understand what
This seems an easy enough task until youre trying to tell them. And it does it all in
you realize that no one listens readily, 30 seconds or less.
especially to a sales message. Call it
ignorance. Call it sales resistance. Its really In 30 seconds?
suspicion. People are naturally suspicious
of anyone trying to sell them something, es- Absolutely. Think about your own reac-
pecially if: 1) they are not certain that they tions to marketing. How quickly do you make
need what you offer, 2) they have always up your mind whether to read, file or throw
purchased what you offer from someone away a sales brochure? How much of a tele-
else, or 3) they have no evidence of the qual- vision commercial do you watch before you
ity and value of what you are selling or the decide to go to the kitchen for a sandwich?
reliability of your company. As long as sus- When a manufacturers rep telephones, how
picion stands in the way, you have virtually long do you give him to make his pitch?
1
Marketing
How Marketing Uses Time makes the entire company stronger. And, if
done properly, marketing can even be fun.
Marketing compresses time. It squeezes
minutes into seconds. It shaves a paragraph
down to a single word and crams a thousand Treat Marketing Like Any Other Project
words into a single picture. And this is where Treat marketing the same way you treat
the art and science of marketing meet.The sci- any construction project. Determine a scope
ence of marketing pinpoints the audience, of work, a budget and a schedule, assign a
identifies what motivates them to buy, and de- project team, plan, establish procedures for
fines the sales message in the briefest possi- reporting and tracking progress, and follow up.
ble terms.The art of marketing devises symbols Delegate specific responsibilities and hold
that the audience instantly recognizes, sym- people accountable. Use the team approach
bols that suspend suspicion and arouse cu- for problem-solving. Subcontract work that is
riosity. A symbol may be a catchy phrase beyond your in-house capabilities.
(Reach out and touch someone), a logo
(Coca-Colas red-and-white wave), a familiar
Start with Commitment
face (sports celebrities selling Miller Lite), or a
visual image (the Coppertone girl lying on a Start by committing time and money to
surfboard). These symbols communicate a lot the effort. Six months and 10 percent of your
of information at a glance and have become in- annual net profit are good rules of thumb.
creasingly familiar through repetition. They The six months are for thinking, planning,
have become a natural part of the environment, researching and producing your first promo-
so natural that we are no longer suspicious of tional materials. A 1- to 2-hour meeting of
the sales messages they communicate. everyone involved in the marketing effort
should be held at least every two weeks dur-
A PRACTICAL APPROACH ing that period. After the initial materials are
Avoid The Marketing Mystique finished, monthly meetings are usually suffi-
cient.
Many businesses believe that success-
ful marketing is impossible without an ad Ten percent is the figure most marketing
agency and big dollars. For enormous corpo- consultants recommend.You can spend less,
rations marketing to consumers nationwide, you can spend lots more. What you spend de-
this is probably true. For the mechanical con- pends on what you want your marketing effort
struction and service industry, it is not. to do and what media are required for the job.
Set up a marketing account and be certain
Any mechanical contractor can success- that all outside services (writers, photogra-
fully market his services with a high-priced phers, printers, video producers, etc.) and in-
marketing consultant. And the advantages go house staff hours spent on the effort are
far beyond saving money.Doing your own mar- charged against it.
keting gets you and your staff thinking about
your customers and your company in fresh
ways. It opens up whole new areas of en- Pick a Team
deavor, stimulates involvement at all levels of Start with a core team of no more than
the company, boosts morale and generally six people, including yourself. Select people
2 MK 1
Marketing
from different levels of the company-top Pool Ideas

management, estimating, project manage-
At the second and third meetings, pool
ment, office operations, field supervision,
the information the team members gather, fig-
service departmentto avoid ivory tow-
ure out what it means, and make further re-
erism and insure that people who actually
search assignments to fill in gaps. By the end
work with clients and other trades (and know
of the third meeting, everyone on the team
these people best) can contribute.
should have a pretty clear idea of what kind
Pick people who have good communi- of image your marketing materials should pro-
cations skills, are enthusiastic about the com- ject and what information about your company
pany, and are team players. and services is most likely to convince your
audience to buy from you.
Brainstorm
In the two weeks between the third and
The first meeting should be a brain- fourth meetings, the team members should
storming session aimed at getting specific an- think about ways to communicate that image
swers to the ten fundamental questions listed and message to the audience.
on the Marketing Planning Sheet (Figure 1).
Use this sheet as an agenda for the first cou- Consider All Options
ple of meetings, as well as a guide for further
research. Figure 2 is a partial list of effective mar-
keting materials and techniques. Consider all of
Research them, as well as any others that come to mind.
Each one addresses a different audience and
All ten questions cannot be answered at communicates a different kind of image and in-
meetings. Assign specific questions to team formation. Consequently, each one is useful in
members to research. Have them talk to of- a different set of circumstances.This is why you
fice staff, mechanics in the field and the shop, cant start your marketing effort with the an-
other trades, current and former customers. nouncement, We want to do a series of radio
Find out everything you can about your target ads. Limiting your options before you brain-
audience, your audiences perception of your storm and research puts you on a track that may
company and its services, and how your own not really suit your audience and your company.
employees and your subcontractors view your
company. Without this information, you can-
not define a believable sales message. Get Professional Help
Youre in the mechanical contracting
Expect surprises. Unless you regularly
business. If you wind up as a general con-
conduct the kind of project review sessions
tractor on a project, you always subcontract
recommended by MCAAs Project Managers
the excavation, concrete and masonry.Youre
Manual, where you meet with project owners,
certain that an owner can tell the difference
architects, engineers and general contractors
between a brick facade built by a mason and
to gather frank comments on your companys
one built by a plumber.
performance, youll likely discover that your
customers see you quite differently from the By the same token, always subcontract
way you see yourself. the writing, photography, graphic design,
MK 1 3
Marketing
videography, and other production activities ble review camera-ready copy, rough cuts of
involved in your marketing effort. Your project audiovisuals, and plans for press confer-
managers might write passable reports, your ences, open houses and other events.
estimator take wonderful vacation pho- Take your time. Thats why you allow
tographs, and your office manager draws cre- yourself six months.
ative doodles, but theyre not professionals.
And though you may not see the difference, FOLLOW UP
your customers will!
After you distribute your new brochures,
Hire outside help the same way you hire stage your open house or show your new
construction subcontractors. Look at the work video, find out what your audience thinks.
theyve done and hire people who have ex- Your sales statistics will give you some idea,
perience in the type of project youre propos- but telephone calls and face-to-face conver-
ing. Get references and check them. Avoid sations give you more specific information.
people who are difficult to work with, dont lis- Youll be surprised how willing people are to
ten, or dont fully explain what they offer. Dont offer comments and suggestions when you
be embarrassed to ask simple questions, and express interest in their opinions.
dont trust subcontractors who avoid giving
you straight answers. Record all customer comments on index
cards and maintain them in a file.When it comes
Take your time. Allow 46 weeks to find time to update your marketing materials or de-
good support firms. sign new ones, that file will prove invaluable.
Give clear instructions as to what you
want.If you can show a writer or designer sam- CONCLUSIONS
ples of other companies materials (not just Do your homework.
contracting firms but any companys) that you
like and dislike, it gives them an idea of your Identify your audience, its needs and its
tastes and goals. Listen to reasonable rec- suspicions.
ommendations. Get a clear idea (rough Involve people at all levels in your com-
sketches, outlines, layouts, storyboards) of pany.
what the finished product will look like before Plan and project a specific image.
work begins.
Address your audiences suspicions.
Have a specific contract with each firm.
Know what the work will cost, what standards Communicate a specific sales message to
must be met, how corrections will be handled, a specific audience with each marketing
what schedule will be followed, and how you piece; dont try to cover all the bases with
will be billed. one brochure or one ad.
Keep everything simple and brief.
FOLLOW THROUGH
Once you decide on your message and
You are ultimately responsible for proof- approach, hire professional talent to give
reading, for okaying final editing, for ap- your marketing effort muscle and polish.
proving ink colors, type styles and design el-
Listen to as many recommendations and
ements. Have as many sets of eyes as possi-
4 MK 1
Marketing
points of view as you can, but do what feels Take as much time as you need to do it
right to you. right the first time. Its embarrassing and
difficult to undo a mistake distributed to
Repeat marketing efforts regularly and fre-
500 potential customers!
quently to keep your name in front of your
target audience.
Go first class. The investment is almost al- NOTE: You should refer to MCAAs
ways worth it. Mechanics of Marketing Manual for addi-
tional information.
MK 1 5
Marketing
Figure 1
MARKETING PLANNING SHEET
1. What are we selling?

_____ Construction services
_____ Maintenance services
_____ Equipment
_____ Other
2. Who are we trying to sell to?

_____ Owners, architects, engineers
_____ General contractors
_____ Commercial building operators
_____ Industrial building operators
_____ Residential customers
_____ Other
3. What motivates our target audience to buy?

_____ Quality of work
_____ Low price
_____ Guarantees & warranties
_____ Company reliability (reputation)
_____ Company responsiveness to customer needs and situations
_____ Good communications and working relationships
_____ Experience or familiarity with a particular company
_____ Other
4. Why should they buy from us?

_____ Unique service
_____ Quality of work
_____ Low price
_____ Our reliability (reputation)
_____ Our responsiveness to customer needs and situations
_____ Our good communications and working relationships
_____ Our experience
_____ Other
5. Who are our competitors and what do they offer that is unique?
1.
2.
3.
6 MK 1
Marketing
Figure 1 (continued)
6. What makes our services worth the price we charge?

_____ Uniqueness
_____ Quality
_____ Low price
_____ Our reliability (reputation)
_____ Our responsiveness to customer needs and situations
_____ Our good communications and working relationships
_____ Our experience
_____ Other
7. What is our companys reputation in the marketplace? What strengths and

weaknesses are we known for? (State in one sentence of ten words or fewer.)
8. What do we want our companys image to be? What do we want to be known

for? (State in one sentence of ten words or fewer.)
9. What customer suspicions must we overcome?

_____ Our lack of prominent image
_____ Our prices, which are higher than our competitors
_____ Our poor reputation or recent poor performance
_____ Our lack of experience in a particular area
_____ Recent change in our companys structure or management
_____ Our company size
_____ Other
10. What kind of message will our target audience respond to?
_____ Person-to-person sales contact
_____ Personal letters from our company president
_____ A sales brochure
_____ A short videotape or slide/tape presentation
_____ An article in a newspaper or magazine
_____ Radio ads
_____ Television ads
_____ An open house where prospective customers can tour our facilities
_____ A local sports event sponsored by our company
_____ Having employees speak at civic club dinners, visit classrooms to introduce
students to the contracting business or donate time to community service pro-
jects
_____ Other
MK 1 7
Marketing
Figure 2
A PARTIAL LIST OF PROFITABLE MARKETING OPTIONS
1. Effective use of the telephone

Training people to answer the telephone politely and handle calls efficiently every time
Training people to sell directly by telephone
Following up every service job with a call to the customer to make sure the job was done
satisfactorily
2. Print media
Sales brocures (a different one for each target audience)
Advertisements in newspapers, magazines and trade journals
An article in a local newspaper or magazine about your companys 10th anniversary,
the recent completion of a big project, the opening of a new office or shop facility, or
your sponsorship of a local event
An article in a trade journal about an innovative construction technique or manage-
ment procedure
A monthly or bimonthly newsletter that keeps your customers and potential customers
informed about your company and what it offers
3. Direct Mail
A one-page letter on fine stationery, announcing new services and signed by the com-
pany president (for small, targeted mailings)
A sales brochure accompanied by brief cover letter addressed to a specific person
and signed by the company president
Flyers mass-mailed to residential customers and including a discount coupon for spe-
cific work
4. Audiovisuals
A slide/tape program of no more than 5 minutes, featuring your companys facilities
and services. (Slide programs are less expensive than video and are easier to update.
A slide program can also be transferred to videotape for easy viewing and distribution)
A videotape program of no more than 5 minutes. (The program can either be shown
to the prospective client during a sales presentation or simply mailed to him/her with
a cover letter and/or brochure.)
A professionally narrated audio cassette of no more than 3 minutes, briefly describ-
ing your company and its services. (Can be mailed directly to prospective customers
at low cost.)
5. Personal contact
Interviews with past customers regarding your companys performance
Scheduled meetings every six months between your company rep and current,
prospective and past clients to find out what their needs are and to explain new ser-
vices you offer
8 MK 1
Marketing
Figure 2 (continued )
6. Media
Radio ads promoting residential construction and maintenance services
Television ads promoting residential services
Sponsorship of local Public Broadcasting System radio and television programs
7. Community Service
Active membership in the local Chamber of Commerce
Having company managers offer their services as speakers to civic clubs and schools,
to explain the role of construction in the community and the opportunities the indus-
try offers young men and women
Sponsorship of a local school or youth club sports team
Participation in local business community sports leagues
Participation in local government-sponsored events (parades, community picnics,
Town Appreciation Days, etc.)
8. Company Events
An open house for invited prospective clients to tour your facilities and find out about
the services you offer
An annual summer picnic or Christmas party for special customers and guests
Grand Opening Celebrations for events such as the opening of a new shop facility or
the introduction of a new type of major equipment
Press conferences announcing the launching of large new projects or company
participation in significant community activities
MK 1 9
Bulletin No. MK 2
File: Marketing
Why Mechanical Contractors Should

Furnish Equipment
Close examination of the major operating Further, it is not unusual for the total
problems of owners, architects, consulting en- cost of prepurchased machinery, equipment
gineers, general contractors and mechanical and/or supplies plus the contractors installa-
contractors reveals one simple, yet almost tion charges to total more than the contrac-
startling fact: nearly all of these problems are tors bid were the contractor furnishing the
common to all members of the construction in- total bill of material as well as installation.
dustry, and can be solved only through a bet-
However, it may be well to consider
ter understanding of the problems among
some of the advantages sought by Direct
these diverse groups.
Purchasing:
It usually follows that any new construc-
tion method or procedure that benefits the A. To Permit Early Purchase of Long-
owner of construction is readily accepted by Delivery Items to Insure Timely Deliveries
everyone in the construction process. and to Avoid Construction Delays
One procedure, commonly known as di- This objective at first appears reason-
rect purchase or prepurchasing, while not able and commendable, particularly when
new, is becoming a more widespread prac- viewing stretched delivery days as a result of
tice because on the surface it appears to offer product shortages. (It is not unreasonable to
some definite advantages in keeping down believe long delays will exist at least for as
costs. However, there are some hidden pit- long as worldwide demand continues for
falls which ultimately not only increase costs, equipment, pipe, valves and fittings.)
but also could delay completion of the con- However, it seems appropriate to mention that
struction project. first-time buyers or irregular purchasers
1
Marketing
should not be surprised to find that entering C. To Provide the Engineer With Closer
an order does not necessarily or automatically Control of Compliance with
insure the purchaser a place in line for deliv- Specifications in Equipment Bids
ery. Manufacturers personnel, similar to other
This seems only logical, since the me-
people, respond to pressure from repeat buy-
chanical contractor would submit data to the
ers or to emergency demands. Normally the
engineer for approval prior to release for ship-
Owner/Buyer is not personally acquainted
ment anyway. There is no doubt an engineer
with purchasing people and unfortunately
has the knowledge and experience required
may find himself being shuffled, stalled, jug-
in order to evaluate compliance with specifi-
gled, or sometimes misled.
cations.
Looking at the reverse situation to long
deliveriessuch as a down economyit is However, closer control of compliance
not surprising to find manufacturers lumping with specifications does not take into account
orders in order to fill out a production run. one manufacturers customary practice of pro-
While such a practice effects production viding certain required auxiliary apparatus in-
economies, it does not necessarily insure stalled as factory assembled vs. anothers
timely delivery. practice of shipping auxiliary apparatus as his
subcontract from a distant sub-supplier; or one
The mechanical contractor, on the other
vendor providing drilled/tapped motor mounts
hand, has long-standing acquaintenceships
and isolation units where another plans for the
with suppliers, vendors, and manufacturers,
purchaser to make these arrangements.
and as a repeat, experienced buyer can expect
and demand commitments to be honored. Saying it another way, then, the owners
interest is output within certain tolerances,
B. To Save the Contractors Markup for and this implies installed/operating outputs.
Overhead and Profit While close compliance with specifications in
It is only good business for an owner to individual components is an ingredient, it is
seek maximum value in his construction con- not the entire recipe. While the engineer and
tracts. The key phrase here is maximum value. owners representatives can vouch for the
An owner seeks a profitable return on his in- soundness of each component, only the me-
vestment over the life expectancy of the con- chanical contractor is qualified to combine
templated plant. In like manner, a contractor is these components into an operative me-
in business to realize a return on his plant, chanical system.
which consists of men, money, material and ex-
pertise. For overhead and profit the contractor D. To Incur Possible Cost Savings by
renders a service. It is not unreasonable to as- Beating Price Increases
sume the owner will ultimately pay (at least, and
perhaps more) the same price for service he Certainly placing an order today gives
renders himself. Any wise owner recognizes he price protection against a price change to-
gets things done through other people, people morrow, assuming the vendor doesnt, for per-
who know what they are doing. This is to sug- fectly legitimate reasons, change his mind.
gest the qualified mechanical contractor is the Here again the owner as an infrequent buyer
owners other people. finds himself at a purchasing disadvantage.
2 MK 2
Marketing
mechanical contractors, buying as repeat 2. Equipment is purchased by owner,

buyers, are in a strong position to insist that architect or engineer and merely turned over
vendors/manufacturers keep their price and to the contractor for installation when it ar-
delivery commitments. If there is a critical rives at the jobsite. Under this arrangement,
scheduling problem, a letter of intent quite the purchaser retains full control and re-
often accomplishes the same purpose, sponsibility, both administratively and finan-
thereby giving the owner the best of all worlds. cially. Under the second precedure, the
purchasing authority not only assumes the
E. If the Owner is Purchasing Production purchasing function of the mechanical con-
Equipment, the Owner Would Naturally tractor, but also assumes all other functions
Feel He had the Expertise in Selection (except installation) normally provided by the
Rather than the Installing Contractor contractorincluding advertising for equip-
ment bids, evaluating the bids, issuing the
There is no quarrel with this premise. purchase order, handling procurement, ex-
Usually it is the Owners experience that trig- pediting delivery, arranging receipt and un-
gers the decision to buy direct and save all loading of equipment, and issuing payment.
that time and money in the other listed cir-
cumstances. Assuming for the moment that equipment
has been ordered, it may be wise to now con-
It is not the intent of this bulletin to dis- sider some responsibilities that normally be-
pute this action because this is probably the long to the mechanical contractor but which
exception that justifies an Owners prepur- now become the domain of the purchaser.
chasing decision. However, this bulletin em- It may be appropriate to recommend that
phasizes the risk the owner takes in the contractor should meet with the owner well
prepurchasing. Not only is the owner under- ahead of time to clear up any possible misin-
taking tasks wherein he often is untrained terpretation of the meaning of: the owner will
and unskilled, but he is additionally exposing furnish the equipment. It is not unusual for
himself to the risk of his final completed cost costly wrong assumptions to be made at this
being more than the cost would have been if point, wherein the owner assumes he is buy-
he had issued a contract for furnishing and ing some of the below-listed items while the
installing an operating system to a compe- contractor assumes the contract to be an
tent mechanical contractor. equipment hookup only. It is possible neither
Direct purchasing generally follows one party has considered where the equipment to
of two procedures: be furnished is coming from, what pieces are
included, what is required for proper installa-
1. Equipment is purchased by owner, ar- tion, or who is responsible for a wide range of
chitect, or engineer prior to the awarding of a particulars.
construction contract. Then, when the con-
Among items to be considered are:
tract is awarded, the purchase order for the
equipment is assigned to the mechanical con- Transportation to town
tractor, thereby transferring responsibilities
Delivery on the jobsite
and rights having to do with purchase and pay-
ment for the equipment. Rigging into final position
MK 2 3
Marketing
Foundation and foundation bolts Finally, it is only fair to note that the list
does not include the coordination necessary
Electrical starter and controls
between the vendor, the transporting carrier,
Hookup to the chilled water/hot water the drayage/cartage company, the storage
distribution system company and the insurance representative.
Duct work tie-in
From years of experience, the mechani-
Care, custody and control cal contractor has developed knowledge and
Warranty labor expertise of those seemingly unimportant de-
tails that can make or break a successful job.
Output of the equipment Being in a high-risk industry, the Mechanical
Startup, test, balance and adjust. Contractor has learned not to overlook or for-
gettoplanforpotentialhazards.Herearesome
Additional questions to consider might examples of details that are often overlooked
very well include: when mechanical equipment is purchased by
1. What happens if the manufacturer failed parties other than the mechanical contractor:
to complete the shipment and some of
the required parts and pieces are back- 1. Transit Insurance. A mechanical
ordered? (To really illustrate this point, contractors normal insurance program cov-
imagine the site on which the plant is to ers damages to equipment in transit. The
be built is remote, with limited or sea- Contractor carries this special insurance be-
sonal accessibilility, foreign, or govern- cause he knows that the insurance provided
ment classified; and there is no way to by railroads and trucklines is inadequate. The
ascertain prior to final assembly if all the insurance provided by these freight carriers is
pieces are present.) Or if there were a either limited to a predetermined number of
checklist, who ascertains whether the cents per pound (generally much less than the
bill of material is complete? value of the goods) or, in the case of nonreg-
ulated freight carriers, liability claims can be
2. What happens if the foundation bolts or collected only through legal action. In no case
templates are incorrect or missing alto- does the equipment manufacturer assme lia-
gether? bility for in-transit damage of equipment pur-
chased F.O.B. factory.
3. What happens if, because of a partial
backorder, the equipment is shipped in
2. Advertising for Bids. While this
cartons rather than assembled, even if
function does not appear complex, the me-
specified assembled? Who assumes
chanical contractors purchasing knowledge
this responsibility?
should be put to advantage in: (1) advertising
4. If there is a change in the work due to a or requesting bids from the most qualified
change order that requires a change in manufacturers and sales representatives, (2)
the equipment, who pays the difference setting a uniform bid time and bid format, (3)
and who is responsible for the domino- advising equipment bidders of planned con-
effect changes that could result from struction schedule, and (4) advising of any
the equipment change? special or unique aspects of the project.
4 MK 2
Marketing
3. Receiving and Analyzing Bids. 5. Obtaining Proper Submittal Data and

Although several different bids for mechani- Approval. Vendors submittal data should
cal equipment may meet the technical spec- be reviewed not only for compliance with
ifications, manufacturers vary in the manner Specifications prior to submittal, but also for
in which they quote items of equipment. The dimensions, space requirements, piping con-
experienced mechanical contractor can nections and entry clearance requirements for
quickly spot subtle differences that might re- installation.
sult in unforeseen extra costs to himself or
to the owner as the project progresses. For 6. Releasing for Production and
example, the mechanical contractor is Establishing Delivery Schedule. Follow-up
watchful for: is necessary to assure timely and official re-
lease, acknowledgement by manufacturer,
Inclusion of accessory items which may or and definite scheduling for delivery at the right
may not be specified, but which are sometime and place.
times not directly furnished by the manu-
facturer, such as safety relief valves, 7. Expediting. Most manufacturers
thermometers, etc. are locked into a fixed production cycle which
cannot be altered or shortened once a cer-
The stated exclusion of certain accessory tain point has been reached. Skilled expe-
items diting, therefore, should be conducted before
Types of vessel connections, e.g., flanged, reaching that point. Mechanical contractors
threaded, plain end, grooved for Victaulic are experienced in this function. During times
fittings, etc. when most manufacturers can obtain all the
business they want, it is not uncommon to
Method of shipment (air, ship, motor trans-
find many of them fail to expedite their own
port . . . and what named carrier)
vendor-purchased items such as motors, dri-
Terms of payment ves, gears, coatings and even steel plate for
vessel shells. This leads to numerous un-
Delivery commitments
necessary delays in fabrication of the equip-
Method of packaging, including size, ment. Through persistence and proper
weight, number of pieces and unloading expediting techniques, a skilled mechanical
requirements contractor can assist the manufacturer in
Mounting details of motors and drives checking out all possible delays on vendor-
furnished items.
Extent of prefabricated refrigeration pip-
ing included for large refrigeration ma- 8. Shipping. The mode of shipment
chines can be critical. Details considered should in-
clude method of shipment (airplane,
Whether bolts, nuts and gaskets are
steamship, truck, rail, and in some foreign
shipped/packed separately.
situations, pack animal), location of proper
4. Issuing Purchase Orders. Specified rail siding, need for open-top trailer, addi-
wording is needed to cover inclusions, exclu- tional in-transit insurance, arrangements for
sions, terms and conditions of payment, war- straight-through truck and drivers if neces-
ranty responsibilities, etc. sary, etc.
MK 2 5
Marketing
9. Receiving. Coordination and timing contract was awarded, a major nationwide in-
are extremely important in accepting delivery dustrial firm issued over $2,000,000 worth of
of equipment, especially heavy items such as purchase orders to 12 major manufacturers
boilers and chillers. Scheduling of trained perfor 59 items of air conditioning and mechani-
sonnel and proper unloading equipment must cal equipment. The purchase orders con-
coincide with arrival of the shipment for proper tained provisions for reassignment to a
handling. In many cases, mechanical con- mechanical contractor as well as specifying
tractors must obtain advance information from shipping datessome over one year in the fu-
vendors regarding lifting lug points, distribu- ture. The only reason for prepurchase was to
tion of weight and other necessary details for gain lead time on long-delivery items so con-
proper and safe handling and hoisting. struction schedules could be maintained.
10. Clarifying Guarantee. Many more When the mechanical contract was later
disputes concerning manufacturers versus awarded and the purchase orders assigned,
contractors guarantee obligations arise in the mechanical contractor immediately com-
cases of direct purchasing than when equip- municated with all vendors to confirm the de-
ment is purchased by the contractor. Such dis- livery dates. In virtually every case the vendor
putes never serve the owners interests and had neglected to pursue the terms of the orig-
result in time-consuming and expensive delays. inal purchase order with respect to delivery
11. More Than a Purchase Order. It is dates, had failed to expedite paper work, and
generally agreed that if there is any single most importantly, had totally neglected the all
most important benefit resulting from direct or important function of expediting outside-pur-
prepurchasing, it is that long-delivery items chased accessory items of equipment, such
can be purchased early to avoid construction as motors, gear drives, and even steel plate
delays. for vessel shells.
However, the mere issuance of a pur- The results of prepurchasing on this pro-
chase order does not necessarily trigger the ject were:
machinery to assure delivery at the desig-
nated time.Mechanical contractors know from Of the 12 manufacturers, five replied
experience that the only way to assure deliv- they would in fact meet the originally promised
ery is through constant follow-up. It takes a schedules, but did not furnish satisfactory ev-
well-planned methodical system of checks idence that the current status of production
and cross-checks to do that effectively. Some would ensure on-time delivery, thus calling for
manufacturers (more accurately, some em- additional checking. The other manufacturers
ployees of some manufacturers) will give the replied they would not meet their originally
novice expediter a quick satisfying answer promised schedule.
one which, if not checked out thoroughly, will
Of 59 items of prepurchased equip-
later result only in dissatisfaction when
ment, only 12 items were shipped on-time as
promises are not kept.
had been specified in the original purchase
As a case in point, consider what hap- order. Twelve items were delivered 1 to 8
pened on one recent project in Houston, weeks late; 22 items were more than 4
Texas. Seven months before a mechanical months late.
6 MK 2
Marketing
These delays were incurred despite the service in coordinating and expediting
best effort on the part of the mechanical con- equipment delivery. But when another
tractor, but he was handicapped by not hav- party issues the purchase order, even with
ing been involved in the purchase from the subsequent assignment, the mechanical
outset. The contractors expediting efforts in- contractor loses leverage in the expediting
cluded phone calls, telegrams, letters and per- function. The responsiveness of manufac-
sonal visits to factories (one factory was turer to contractor is an all important lever-
visited six times!). In conclusion, no amount age, without which the contractor is limited
of expediting will help if not done at the proper in his ability to elicit full cooperation from
timeand the proper time begins immedi- the manufacturer in terms of expediting
ately after issuance of the purchase order! submittals, expediting deliveries, obtaining
Other recent examples of direct pur- information, and other forms of vitally
chasing that were self-defeating are: needed cooperation.
An owners representative took direct 12. Even After Installation There Are
bids on major mechanical equipment for a Problems. Warranty date, start-up proce-
school project the same day as mechanical dures, test-balance-adjust arrangements,
construction bids were taken. punch-list corrections and warranty labor are
Directly purchased roof-top air con- just beginning at the end of the job. While a
ditioning units, prepurchased for a school pro- qualified professional mechanical engineer
ject, were shipped from the manufacturers may be able to write a set of specifications
stock soon after purchase, and arrived at the that spell out these details in favor of the
project before any contractors were even set owner, nevertheless, this is just one more area
up to begin construction at the site. Special in which the mechanical contractor has the
arrangements had to be made for a contrac- expertise. The owners competence is in the
tor to unload the equipment at the jobsite in area of production or finance.The contractors
an open field. competence and advantage are in the areas
of coordination of men, machines, materials
In neither of these cases were the clients
and money.
best interests served. In the first case, where
equipment and construction bids were taken Most construction is on a contract basis
at the same time, no time advantage whatso- and the contractor is ultimately responsible
ever was gained for any long-delivery items. that the system produces the specified out-
In the second case, the owner suffered extra put. The owner who purchases by contract
costs for non-coordinated receiving, and now can fairly anticipate his final cost.When equip-
risks damage to equipment which is unat- ment, materials or supplies are pre-
tended and unprotected at the jobsite. purchased, however, the owner hazards a
Under normal circumstances, the me- pay-as-you-go system, and nobody bene-
chanical contractor can provide a valuable fitsespecially the owner!
MK 2 7
Bulletin No. MK 3
File: Marketing
Diversification for Profit and Growth
Positioning our companies to maximize vice, this allows them to develop and broaden
profits and survive has become a greater chal- their marketing strategy. In turn they can take
lenge today than in past years when the U.S. advantage of projects offering opportunity for
economy was growing at a rapid rate and prof- increased profit margins.
itable work was more attainable. The widening scope and increasing so-
Most mechanical construction firms con- phistication of services in the interest of
centrated their efforts on performance of growthreducing competition and increas-
work. Little or no effort was made to develop ing opportunities for profit and survivalre-
marketing techniques that could increase quires that we look beyond, while not
profitability, diversification and growth. neglecting, the subcontractor role. A con-
tractor should seek direct contracts with own-
A few mechanical firms recognized early
ers and their representatives as part of a plan
that many opportunities for profit improve-
to market selected special projects where the
ment and growth were open to them when
mechanical work is predominant. Selling ser-
they thought of themselves as being in the
vices on an all-trade basis as a prime con-
business of providing construction services
tractor requires an intense study of the
in the broad sense. They recognized that me-
nature of services needed by construction
chanical expertise should be viewed as the
users in your general market area.
talent base, rather than the more limited def-
Conducting such a study will more than likely
inition of services offered as a piping, plumb-
reveal that many construction users need
ing or mechanical contractor in the traditional
construction services calling for multi-trade
role of subcontractor.
involvement (trades in addition to mechani-
When management recognizes and ac- cal trades) under one firms responsibility.
cepts the view that they should be selling their Developing customer relationships with own-
mechanical expertise as a construction ser- ers and their representatives and diversify-
1
Marketing
ing services will also reveal opportunities to tracked and the complete scope of work can-
broaden management, make it more sophis- not be defined.
ticated, and challenge and motivate employ-
ees to upgrade their performance. 6. High volume, short duration projects
as per (5) above, involving multi-trade staff
This diversification will change a firms and field forces, who must accomplish so-
corporate philosophy and create a corporate phisticated, complex system repair, upgrad-
culture, which views the diversified markets ing and additions.
as opportunities for personal and corporate
profit growth. Projects of this nature require large ex-
penditures and turn finances over (usually
The following is a partial list of conditions without retainage) relatively quickly, allowing
open to a diversified mechanical contractor, total profit margins to be absorbed in a short
which are projects of opportunity. period of time for reinvestment in other pro-
1. Direct award and contractual deal- jects. (Corporate and profit growth).
ings with a responsible owner as a prime con- 7. Special process and possibly power
tractor, or with a firm representing the owner projects, contracted as a prime contractor to
when that firm is contracted on an open-end an owner, that call for mechanical systems
negotiated contract. (Control over your own and prefab piping erection, where the prefab-
performance). ricated piping is provided by others.
2. Project conditions calling for maxi- Opportunities for profit margin im-
mum performance to comply with tight sched- provement are usually available in this type
ule requirements of a profit-making owner of project.
firm. (Time is money).
8. Special projects, usually process-ori-
3. Projects of a special nature that, due ented, where the work is multi-trade and con-
to complexity and schedule requirements, tracted directly with an owner. In these there is
limit competiton. limited design and construct capability required
4. Special projects, predominately me- of the mechanical contractor working in con-
chanical in nature, requiring direct contracts cert with an owners engineering department
with owners for multi-trade services, where or owners hired engineer. Projects of this na-
the sophistication involved places mechani- ture can offer opportunity for negotiation.
cal contractors in competition with large con-
9. Projects of a commercial, insti-
struction or engineering constructor firms of
tutional or process nature, that offer op-
the type we historically can compete well
portunity to negotiate directly with owners
against.
in the team concept of building. (See Man-
Preparing for this slot in the market place agement Methods Bulletin JM 1Job
opens the sophisticated mechanical contrac- Management Section.)
tor to many opportunities to provide process
Diversification is a natural road to growth
and power retrofit services.
for any construction firm.The mechanical con-
5. Special projects where the nature tractor, however, has many built-in advan-
of the contracted services are semifast tages, not the least of which is that most work
2 MK 3
Marketing
is performed and managed by his in-house Broadening services motivates person-

forces. This makes the transition to sophisti- nel to grow. However, it requires management
cated projects of opportunity as a prime con- to select bright, competent people, suited to
tractor (without competing or conflicting with the rigors of the construction industry.
the general building contractor he works with) Marketing will help create your future rather
an easy one for those so motivated. than waiting for it to happen.
MK 3 3
Bulletin No. MK 4
File: Marketing
Value Engineering
INTRODUCTION atic application of recognized techniques

which identify the function of a product or
Contractors had better become well in-
service, establish a value for that function,
formed on Value Engineering (VE) because it
and provide the necessary function reliably
is fast becoming a way of doing business in
at the lowest cost. The systematic part is
the construction industry. With construction
embodied in a method called the Value
costs rising at an alarming rate, applied Value
Engineering Job Plan.
Engineering is an effective way to offset these
costs. The contractor who understands VE VE JOB PLAN PHASES
and becomes practiced in applying it can be
more competitive and broaden his profit mar- The Information Phase is the first step in
gin. the VE Job Plan. In VE, some questions are
asked that are not ordinarily asked. The faith-
Value Engineering usually concentrates ful pursuit of these questions is part of the
on the 20 percent of a project that represents power of VE. One of the questions to be an-
about 80 percent of the cost. In building con- swered in this first phase is: What must the
struction, this includes the mechanical/elec- project item accomplish?This may not be the
trical areas almost every time. To the building same as what it now accomplishes. The an-
owner, the control of costs in this area can swer being sought is one that identifies the
mean a project completed within budget at a function or functions that the item is supposed
time when rising costs and material delays to perform.These functions, reduced to a verb
threaten it to be otherwise. and a noun description to provide clarity, are
another power of VE.
Value Engineering is the management
technique that achieves the required func- The natural creativity of people on the
tion at the lowest cost. Defined by the study team is brought out in the job plans sec-
Society of American Value Engineers, Value ond phase, Speculation. Several methods are
Engineering (Value Analysis) is the system- used to stimulate the generation of ideas as al-
1
Marketing
ternatives for performing the basic function. Although the incentive clause is titled
These ideas are reviewed with care and seri- Value Engineering, the application of the for-
ous consideration is given to each one during mal VE technique is not required in order to
the third phase, Analysis. A few choice alter- submit a cost reduction proposal under the
natives are then worked up in detail during the clause. It is also not required in order to sub-
Development or fourth phase of the VE Job mit a cost reduction proposal that an engineer
Plan. The idea that shows the best promise for carry out the VE studies or to submit a VE
technical and economic feasibility is proposed change proposal.
for implementation. This last or fifth phase is
the Report phase.The finished proposal is pre-
sented to those responsible for making deci- ADVANTAGES IN USING VE
sions necessary to put it into effect.
If the application of VE is not required,
why all the noise about VE? It has been
CONTRACT CLAUSES demonstrated that using the VE method is
The Federal Government has led the very effective and can result in significant sav-
way in contractual VE with the Corps of ings. The application of VE results in reduced
Engineers and the General Services cost, but cost reduction is not necessarily VE.
Administration (GSA) as the chief users of VE Typical cost reduction activities often result in
incentive clauses in construction contracts. item cost reductions ranging from 10 to 25 per-
The General Accounting Office (GAO), the top cent. In comparison, it is not unusual for VE
fiscal investigative arm of Congress, recom- reduction to range as high as 75 percent or
mended recently that all federal agencies more. An extensive study made a decade ago
adopt a Value Engineering incentive clause to showed that on the average, a saving of $10
be included in all contracts for $10,000 or could be expected as a return for every $1 in-
more. The GAO also urged a more intensive vested in VE activity. A more recent study has
promotional effort to encourage VE change shown that that ratio is still valid. The $1 is for
proposals from both contractors and subcon- managing a VE program which includes train-
tractors. GAO leaves little doubt as to its en- ing and engaging in VE studies. One cannot
dorsement of the VE incentive system by logically deny the value of VE techniques, but
which contractors can propose cost-saving management should realize that both time
measures and share in the dollar savings de- and money must be allocated to VE if results
rived therefrom.These shares under the GSA are to be achieved.
clauses, as an example, provide 50 percent Value Engineering potential should be
of the savings to the prime contractor origi- considered as bids are prepared. Check to
nating a VE proposal, and for a subcontrac- see if a VE incentive clause is in the bid pack-
tor-initiated proposal, 30 percent for the sub age. If it is not, push for its inclusion in the
and 30 percent for the prime. Those outside contract. The existence of the VE clause
the Federal Government also recognized its should not alter the bid. Estimators, suppli-
value, i.e.American Telephone and Telegraph, ers, and subcontractors should be asked to
a major building owner, now asking for VE point out potentials for VE immediately fol-
management for all construction among its lowing contract award. The effort to do VE
twenty-four Bell systems. should be done early. Discovery later in the
2 MK 4
Marketing
contract of construction features where costs Engineering incentive clause (based on Case
could be drastically reduced may not permit No. 68-6).
you to take advantage of Value Engineering To make VE really work for you, you
because of the lack of time. Some of the clues should get training for your team. Also, you
for VE potential are unnecessary require- could temporarily hire a value specialist to
ments and features, high-cost materials, dif- lead the team.The training is usually obtained
ficult construction methods, high labor cost from VE consultants, although there are some
items, and outdated material and equipment schools that offer it. The Society of American
items. Value Engineers has established a program
The area of mechanical equipment is es- of certification of value specialists. This was
pecially ripe because VE is an especially ef- done to assist the public in identifying those
fective way to get new products into a project. individuals with a recognized level of knowl-
The specified equipment may have been ar- edge and experience in value work.
rived at by a seat-of-the-pants evaluation, or The climate is right to negotiate a shar-
a limited catalog search or simply by tradi- ing arrangement for cost reduction proposals
tion. The VE approach is to question every- in contracts that dont initially have such a
thing, even back to the design criteria. In the clause. The customer would like the contrac-
opinion of the Board of Ethical Review of the tor to use VE and so should the contractor, so
National Society of Professional Engineers, it that the larger benefits can be realized by both
is not unethical for engineers or others em- parties. Furthermore, if the contractor sees an
ployed by the contractor to present changes area where cost reduction can be possible, he
in engineering designs, plans or specifi- is encouraged by the VE clauses to submit a
cations prepared by the design engineering proposal, even though he may not use formal
firm, such as would occur under a Value VE techniques to develop it.
MK 1 3
Bulletin No. MK 5
File: Marketing
Bulletin
Listening to Our Customers
To succeed in this industry, we all require feedback from our customers in
order to change and/or improve. The objective is to get those customers
talking. We have outlined a diverse list that will give us that opportunity. When
we ascertain what our customers expect, we can attempt to meet those
expectations. COMMUNICATION plus ACTION equals SATISFACTION.
INTRODUCTION the customer, addresses suggested

approach strategies, specifies tools to
This bulletin is the resu lt of a Customer
increase marketability and offers ways
Service Survey sent to the MCAA
to assess customer satisfaction after the
membership by the 19 99 Management
project. An important reminder t o all
Methods Committee. The reply received
contractors is that they should not
most frequently in the survey was that
conduct a customer satisfaction survey
meeting the customers expectations
unless they are prepared to take action
was the most important factor in cus-
on the results.
tomer satisfaction. This reply was the
bridge which led to the developme nt of
THE SERVICE CUSTOMER
the Listening To Our Customers
The mechanical contractor that wants
bulletin.
to expand into the service market must
develop a service pla n that suits not
A successful mechanical contra cting
only their own needs, but also more
company constantly seeks ways to
importantly, one that sat isfies the needs
enhance business operations by en-
of their customers.
couraging honest feedback from cus-
tomers. Whether it is with a follo w-up
For the traditional tools and materi als
survey, telephone call, personal visit or
service work, the standard metho ds of
post-job review, the best way to in-
marketing (i.e. Yellow Pages, is com-
crease efficiency and profitability, and to
pleted. newspapers, flyers, radio, etc.)
demonstrate added value, is by listen-
can get one into the bu siness. To retain
ing to our customers.
customers and successfully enter into
longer term service a nd preventative
Customer expectations and satisfaction
maintenance contracts, a personal rela-
are important factors in the success, or
tionship with your cust omers must be
failure, of any business. This bulletin will
cultivated along with implemen ting
identify four different ca tegories of cus-
methods of continuou s communication
tomers -- Service, Design-Build, In dus-
and feedback (i.e., follow-up surveys,
trial, and Bid/Plan & Spec -- and sug-
phone calls, personal visits, etc.).
gest ways t o improve communications
with each group. The bulletin identifies

To be a truly successful service contrac- On new design build or plan/spec
tor in the future you must become a val- projects have service group handle
uable resource for you r customer and the equipment start-up and/or build-
meet their expect-ationsexpectations ing commissioning.
defined by them. Introduce your marketing group to
the owners.
Who is a Service Customer?
Suggested Questions to Get Your
Government agencies Customer Talking
Industrial customers
Health care providers Was our dispatcher co urteous and
Commercial customers helpful?
Retail customers Was your bi lling accurate and time-
Consulting engineers and architects ly?
Was your p roblem(s) communicated
Approach to Service Customers properly to our technician?
Was our A ccount Executive court -
Provide a d iversified group of tech- eous and professional?
nicians fully equipped t o handle a Was the knowledge and skill of ou r
wide variety of applications. salesperson up to your expect-
Ability to provide service 24 hours a ations?
day, 7 days a week. Did the sales staff offer professional
Provide adequate su pport infra- advice?
structure including administrative, Were our quotes delivered in a time-
sales and engineering personnel. ly fashion?
Computer systems for monitoring Was the attitude/helpfulness of our
client systems and service man - salesperson professional?
agement programs for dispat ching, Was the skill level of our technician s
invoicing, preventative maintenance professional and up to your expect -
programs, etc. ations?
Obtain necessary licen ses, bonding Was the attitude of our technicians
and insurance. professional?
Was the jo b conducted in a clea n
Tools for Marketability and efficient manner?
Did the technician wor k in a safe
Timely response to service requests. manner in relation to himself and
Competent technicians. others?
Diagnose and solve problems. Was the communication of any find-
A wide vari ety of services offered ings and recommendations clearly
(Total Systems Responsibility) explained?
Design/build services. Did we respond to your needs in a
Flexibility in adapting to customers timely fashion?
business policies and procedures as Was the cost of service comparable
they pertain to budg eting quoted to your perceived value?
projects, T & M work, etc. Did we meet your overall expecta -
Solicitation of prospective customers tions?
through cold calling, e mployee and And, always be open to additional
customer referrals, account develop- comments by the customer.
ment of existing construction cus-
tomers.

THE DESIGN-BUILD CUSTOMER Suggested Questions to Get Your
The mechanical contractor who is either Customer Talking
trying to expand into the Design/Build
market, or to strengthen his involvement What was your assessment of th e
in this market, will have the most suc- value received on the project?
cess when he can dev elop a per sonal Did the proj ect meet your expecta-
relationship with his customers. This tions?
requires personal contact, relationship Were you able to use the facilit y
building (and trust) and follow through when we promised it would be
after performance to be succe ssful. The ready?
points and questions that follo w are Did you receive a quality project?
tools to utilize during this process. The Are there any problems that have
more long t erm thinking that is ap plied developed after you began using t he
to solving your customers needs, the facility?
more successful you will be. If another similar project were to
come about would you use o ur
Who is a Design-Build Customer? company?
Would you recommen d us to an-
Public or private owners other company starting this process?
General contractors Do you fee l that this process deli-
Owners vered the project earlier and at a
reasonable cost as compared to the
Approach to Design-Build Customers conventional design, bid and build
process?
When trying to learn more about a And, always be open to additional
design-build customer, the best comments by the customer.
method is with a personal interview.
The design-build approach to con- THE INDUSTRIAL CUSTOMER
struction is best applied when a The mechanical contractor performing
contractor can develop a relationship industrial work must be dedicated to the
of trust between himself and the 24-hour needs of an industrial plant. The
contractor. company needs to be c apable of assist-
When a trusting relationship is ing the clie nt in solvin g problems and
developed, the design-build contrac- flexible enough to work with several
tor can focus on the customer and plant engineers at the s ame time. Being
his needs and not spend a great a "total system responsibility" contractor
deal of time selling the process. will be a great asset.
Tools for Marketability
The greatest successes are ach ieved
through the development of personal
Ability to perform project mechanical
relationships. This re quires personal
design.
contact, relationship-building (and t rust)
Ability to responsibly subcontract a
and follow-through after performance.
projects mechanical design.
The more long-term thinking that is
Ability to responsibly pr oject budget
applied to meeting the industria l cus-
and work with project mechanical
tomer needs, the more successful you
consultant to assure design to as-
will be. The following points and ques-
sure design stays in bud get
tions are tools to use in developing the
(design/assist).
industrial market.

Who is an Industrial Customer? Suggested Questions to Get Your
Customer Talking
Manufacturing firms
Research laboratories Did we respond promptly to you r
Government agencies needs?
Water treatment plants Was our safety progra m carried o ut
Utilities to your satisfaction and did we follow
Petrochemical plants all of your safety rules?
Was the a ttitude of our employees
Approach to Industrial Customers professional?
Did our employees communicate
Most industrial plants work 365 days clearly?
a year. Contractors se rvicing these Can we negotiate your next project?
plants must be committed to their And, always be open to additional
shifts and schedule. comments by the customer.
Must be available when the cus-
tomer calls and have people that can THE BID / PLAN & SPEC CUSTOMER
respond nights, weekends and holi- The mechanical contra ctor who bids on
days. plan and spec work is in a unique
Have a list of supplier s where yo u market. The owner/user ma y have l ittle
parts can be found on an emergency or no choice about fr om whom they
basis. procure their constru ction services. The
Must have adequate in surance cov- most common e xceptions are
erage. eliminating:
Must be able to offer assistan ce in
design and layout of piping and 1) bidders who have failed to meet
HVAC systems. the qualifications of the bid appli-
cations; and,
1) Engineering 2) contractors who have failed to
2) CAD drawing perform for the specific owner on
3) Specifications previous projects. The greatest
success will be achieved through
Must be a ble to work effectively, an in-house process that con-
efficiently and safely wi thout imped- firms that all the owner's pre-
ing plant production. requisites are met.
Tools for Marketability Who is a Bid/Plan & Spec Customer?
Most industrial plants will not allow a Government agencies

company to work in the facility if th e Engineering firms
experience modification rate is over Architecture firms
1.0. Also, the total OSHA recordable Private sector
frequency rate needs t o be 7.0 o r General contractor/construction
less. manager
Customers look for safe ty programs
that include: Approach to Bid/Plan & Spec
Customers
1) Weekly toolbox talks
2) Investigation of all accidents Usually the government agency
3) An in-house drug testing pro- must take the low bidder.
gram

Bids are du e at a very specific date Suggested Questions to Get Your
and time. Customer Talking
Negotiations are rarely entered into.
Projects out for bid are normally Were submittals t imely and accur-
advertised. ate?
Did the construction schedule meet
Tools for Marketability the contract requirements?
Did our su pervisory personnel pe r-
Pre-qualification must be up to date form adequately?
with any pu blic agency that has this Did we adequately supervise our
requirement. subcontractors?
Licenses must be current with an y Did we co mply with your constru c-
public agency that has this require - tion site safety regulations?
ment. Did we exhibit integrity and business
Review trade publications tha t ethics?
identify jobs out for bid (i.e., F.W. Did we comply with all applicable
Dodge Reports). labor relations requirements?
Contact engineers abo ut upcoming Was the a ttitude of our employees
projects and be sure to be put on professional?
bidders list. Was the jo b conducted in a clea n
Contact Owner / Architect / Engineer and efficient manner?
immediately upon kno wledge that Was our safety progra m carried o ut
you are a low bidder. Provide de- to your satisfaction and did we follow
cision-maker with documentation all of your safety rules?
showing you are qualified. Was the communication of any find-
Meet any specific public agency ings and recommendations clearly
requirements. explained?
Did we respond to your needs in a
1) Insurance modification rates timely fashion?
2) Insurance limits and meeting How would you rate our overall per-
specific government insurance formance?
specifications Can we negotiate your next job?
3) Bonding And, always be open to additional
4) MBE/WBE participation comments by the customer.
5) Affirmative action

Bulletin No. MK 6
File: Marketing
Public Relations: An Important Marketing

Tool For The Mechanical Contractor
INTRODUCTION new and renewed customer confidence and

enthusiasm.
One area of most startling change in re-
cent years has been the growing role of cre- If management is genuinely committed
ative marketing in achieving recognition and to sound expanded marketing and if it seeks
success for the mechanical contractor.Until re- the help of legitimate, creative public relations
cently, executives of many companies refused counsel already experienced in and sensitive
to concede that every contractor, regardless to working with such a client, the contractor
of size, must be persistently promoted. surely can realize abundant dividends from
But in recent years, economic pressures, this investment, not only in terms of additional
coupled, with newly uncovered sophistication assets and goodwill, expanded exposure and
and the rejuvenation of heightened competi- a more satisfying business climate, but also
tive instincts, have convinced an increasing in the fulfillment of a better standard of living
number of mechanical contractors that they for customers and employees alike.This valu-
now face a rare moment to tell the public, the able assistance does not have to be expen-
government and the industry their impressive sive, and it can successfully supplement your
story of accomplishment, capabilities and internal marketing ability.
convictions. Like the rest of us, they also have
an immediate and serious obligation to con- SELECTING A PUBLIC RELATIONS
tribute to the preservation of our free enter- CONSULTANT
prise system, and they can easily achieve
these worthwhile goals within the under- Your company, regardless of size, must
standable restraints of time, energy, expertise carefully select its public relations consultant
and resources with the resultant benefits of . . . ideally an individual or firm that has broad
1
Marketing
contacts, imagination, independence, in- ness community. A huge budget is not re-
tegrity, knowledge, reliability, respect, self- quired . . . just determination, innovation, con-
confidence, a variety of services and sistency and vision.
talentsand perhaps most critically, a special
and refreshing brand of finesse and vitality for PUBLIC RELATIONS AS A CRAFT
handling your industry.
As a well polished and highly influential
In return, your counsel should ask that discipline, public relations has a mandate to
you and your employees fully cooperate with show the client those tested techniques that
him;that you first sanction an honest appraisal can most effectively work for him. Our craft is
of your present image;that you solicit and pon- alert, responsive, versatile. We must play to
der his expertise and judgement; that you take your strength; no need to respect marketing
him into your trust; that you candidly concede weaknesses. Let public relations express it-
your own imitations; that you encourage bright self to you in many viable ways:
ideas; and that you allow his efforts sufficient
time to bear fruit. Do not expect him to invent 1. General Publicity. You and your ex-
instant miracles to compensate for years ecutives can be interviewed on radio and tele-
of lethargy in developing and retaining vision, and in newspapers, trade publications
customers. and magazines. They can author articles
which should be reprinted and distributed. Do
not overlook airline, alumni, city, corporate,
MANAGEMENTS PR ATTITUTE AND consumer, foreign, fraternal and special in-
DEDICATION terest magazines; letters to the editor sec-
After many years of working with clients tions; syndicated columns; graphics;
in the construction industry, my associates brochures; seasonal letters; and mailing in-
and I are convinced that while a clients bud- serts.
get in some cases may be prerequisite to the 2. Government Involvement. Where
impact of a marketing program, the real key legally permitted, your reputation, assets and
is attitudeyour attitude.Lavish finances sim- talents should be selectively channeled into
ply cannot assure success unless the thrust support of political candidates, causes and
receives highest priority. parties. Get to know local, state and national
Responsible public relations historically elected and appointive public officials. Where
has always been utilized by the industry. Its appropriate consider a government appoint-
justification is to challenge, to educate, to moment for important contacts, experience and
tivate, to serve . . . and in the process, to gain exposure. Testify on behalf of your company
valuable visibility for your company, large or or industry before administrative and regula-
small, as an attractive instrument to help the tory commissions, government panels, and
public satisfy critical mechanical contracting legislative committees. Make yourself avail-
requirements. Subtly tell your storyand cus- able to government agencies and lawmaking
tomers readily stream forth. In countless bodies as expert counsel.
cases, working as a team, public relations and 3. Public Speaking. The platform can
advertising have substantially contributed to help you attain precious credibility, visibility,
the growthif not the survivalof the busi- personal development, and new business. Be
2 MK 6
Marketing
encouraged and trained to address prestigious His material must reflect contemporary
groups, conventions, and conferences, forums, rhetoric, convincing logic, concise organiza-
civic and philanthropic and youth clubs.Initiate, tion, honest and substantial investigation of
confirm and help plan engagements. fact, sincerity of purpose, a spirit of optimism,
Participate in news conferences. Tape and a genuine appeal to the listener to react.
speeches for radio and television. Reprint and He must resolutely ignore the temptation to
distribute manuscripts. Invite community lead- be crude, insensitive, offensive, pornographic
ers to hear messages. Edit speeches into or vulgar. The speaker must remember that
newspaper and magazine interviews and arti- his appearance, credentials, personality, tem-
cles. Nominate best texts for awards and other perament and overall conduct before an au-
recognition. Make certain that following every dience are just as critical to success as what
speech, each contact is followed up. The true he says and how he says it.
value of an engagement is not simply the 30-
minute speech but also all of the marketing ac- Improvement comes to the man who dili-
tivities which you can then schedule around it. gently and readily reviews each of his
speeches. He should go over his notes, en-
Public speaking, by the way, does not courage listeners and lecturers to critique him,
have to be a miserable ordeal. On the con- and analyze closed circuit television broad-
trary, a growing number of contractors are not casts, motion pictures and tape recordings of
only enthusiastically acknowledging lecture presentations. He should grab every oppor-
requests but are actually seeking them out, tunity to speak. Experience perfects skills of
and having fun fulfilling them. Influencing oth- compositon, delivery and timing. And with
ers, on behalf of your company and the in- these skills, you can contribute immeasurably
dustry, is rewarding. to your own personal and professional effec-
tiveness as well as to a sounder understand-
If you need to improve your speech con- ing of our economic tenets and, more
tent and delivery, consider speech training. specifically, of your industry.
Learn how to organize cohesively and then
communicate your thoughts before unfamiliar 4. Civil Participation. Perhaps today
audiences, how to respond to unexpected more than any period in our history the me-
questions from the floor, how to express your chanical contractor is becoming increasingly
personality in a one-to-one relationship before aware of economic, political and social frus-
and after an appearance, how to be courte- trations, and is equally determined to share in
ous, prompt and resourceful in writing to the civic activities, which at best may only indi-
curious and concerned in an audience. Learn rectly relate to revenue and profits.
how to deal with the unpleasant.
Because of mounting vicious attacks on
The modern executive learns that a business, and because our way of life is al-
speech must be conceived, developed and re- ways susceptible to collapse from within,
hearsed repeatedly to be polished. He learns every mechanical contractor has an absolute
to detect accurately the frequency and depth charge to pitch in and help preserve our her-
of the audiences laughs, tears and applause. itage; cleanse and guarantee the climate of
He learns to make sure each listener hears, opportunity; safeguard our liberties; revitalize
understands and reacts to the message. our drive and determination; and strengthen
MK6 3
Marketing
our national purpose. This is a burden, but sion or relocation should be planned and pro-
commitment to the future is a burden that sim- moted. It is all too easy to ignore these activ-
ply cannot be ignored. As in the past, why do ities. To recognize, organize and publicize
we today not stand tall, proud, unafraid, them, however, is in each instance to afford
unashamed and rekindle that positive attitude you one more excuse to create momentum
that earned America its envy, admiration and and to suggest progress and prosperity.
plenty?
7. Public Recognition. An executive,
For example, you and your management or other employee, having accomplished or
should seriously consider joining suitable contributed generously to the betterment and
Chambers of Commerce; charitable, cultural stability of community or industry, can rightfully
and youth organizations; industry and profes- be recommended for special tribute, such as
sional associations; and service clubs, and a commemorative or congratulatory resolu-
then work to assume leadership roles. You tion, Congressional Record insert, Freedoms
should also carefully weigh becoming a Foundations or other patriotic award, govern-
trustee of churches, colleges, foundations, ment recognition, honorary degree, or Man or
hospitals and school boards. You can learn Woman of the Year designation. Your public
how, when, where and why to apply prudently relations consultant or staff can instigate and
your strengths in service to others while, at supervise arrangements, presentation and
the same time, becoming acquainted with publicity in the expectation that well-deserved
those who may enhance your companys acclaim will motivate the recipient toward
growth. greater heights of achievement; give authority
and prestige to your endeavors; and challenge
5. Philanthropics. Assign a reason- others to emulate your example.The company
able schedule of annual contributions. In itself can similarly be honored.
some cases, tasteful publicity and recognition
can be arranged at the time of gift presenta- 8. Business Image. You and your em-
tion. A meaningful relationship can often be ployees can also achieve critical visibility and
comfortably cultivated between you and the impact your customers and prospects by mas-
recipient.Corporate donations should be aug- tering such fundamentals as how and where
mented by branch allocations. How about to mix well socially; the art of meaningful con-
local fellowships and scholarships, a gift to the versation; proper dress; attractive office
community, volunteers for United Way, spon- decor; gracious entertaining; knowledge on
soring a Boy or Girl Scout troop, management current topics; as well as the impact of a hand-
guest lectures at the university, supervising a shake, kind and prompt letter, warm word,
teenage Junior Achievement corporation, di- smile, pleasant telephone call, friendly staff,
alogue with the inner city, or counseling with thorough follow-up, and the proper handling
senior citizens? of consumer complaints and concerns.
6. Special Events. Such significant Imaginative, functional, forthright and
events as anniversaries, dedications, em- discerning public relations is today within the
ployee additions and promotions, ground easy grasp of every mechanical contractor
breakings, holiday observances, customer who is seriously interested in marketing its im-
and company milestones, and office expan- portant services to assure a prosperous and
4 MK 6
Marketing
satisfying tomorrow. It is never a question of mechanical contractors offers you, your

whether you have an imageonly whether management and other personnel a pre-
that image is good or bad. It is also correct to cious chance for challenge, gratification and
point out that most of us prefer doing business profitability. Indeed, a chance well worth
with the competentbetter yet the competent grabbing.
and successful, or at least the association per-
ceived to be a winner.
NOTE: Additional public relations concepts
This exciting new trend toward more are contained in MCAA Mechanics of
creative and intensified public relations for Marketing Mannual.
MK 6 5
Bulletin No. HR 4
MK 7
Marketing
Bulletin
Guidelines to Using Social Media in Your

Business
INTRODUCTION business or connect more closely with

employees, clients and customers.
About 10 years ago, a new form of
communication came about that made Before using social media in your
our shrinking world even smaller and business, however, it is strongly
more connected. Social media has recommended that you consult with
allowed people to easily, quickly and your companys attorney to be sure
inexpensively connect with and stay on you fully understand the legal
top of the lives of friends and family concerns and how to avoid potential
locally and around the world. Social liability. Using social media in
media has also greatly expanded employee selection or performance
opportunities for businesses to promote evaluation or disciplinary proceedings
their products and services at minimal or is fraught with legal issues and
no cost to an audience as small or as companies should proceed with
large as they wish and can reach. Its a utmost caution.
brave new world of communication!
WHAT IS SOCIAL MEDIA?
As with any new phenomena, however,
traps await the uninitiated and unaware, Social media are Internet-based services
generally resulting from the fact that that allow users to exchange personal
making available and sharing too much information, photos and videos and
information is not always a good thing. messages with other users, usually
All of the social networking services family and friends, or in a business
available grow and thrive because they situation, or with employees and
encourage users to openly promote customers.
themselves, their daily activities, social
relationships and their opinions about Facebook
people and issues. Depending on the In February 2004, a Harvard University
situation, that openness may work for or undergraduate student created a
against you. powerful new way for people to connect
and communicate socially. Facebook
This bulletin provides guidance to those became almost an overnight sensation
companies who choose to use social by offering users an easy, convenient
media services to promote their way to stay on top of each others lives

through the Internet. The service allows also requires more hands-on
users to post personal information in a maintenance to keep the message fresh
personal profile, photos and videos and engaging for the intended audience.
and exchange messages with their
group of friends. Facebook also offers If you decide to point your companys
users the option of joining common marketing strategy in the social media
interest groups, such as through work, direction, it is strongly suggested that you
school or sports teams. Today, hire an expert in this area, or an agency
Facebook has over one billion users of experts, to help you. Be aware of the
worldwide. opportunities and limitations that social
(http://en.wikipedia.org/wiki/Facebook) media offers, and have ready some ideas
about who you want to reach and what
Twitter actions you want the audience to take to
In 2006, Twitter entered the social guide the experts thinking about how
networking arena. It allows users to best to represent and promote your
send and receive brief messagesup to companys interests. Consider these
140 characterscalled tweets. Unlike simple guidelines when youre starting to
Facebook, Twitter allows unregistered plan your strategy:
users to read tweets, and registered
users can post tweets on the Twitter Define your audience: Most
website or through several cell phone users of social media tend to be
applications or apps. The service is younger (teens to 30
gaining popularity rapidly; it currently somethings), but the older
has 140,000,000 users. generation is catching on.
(http://twitter.com/about) Deciding on who you want to
reach the demographics of your
LinkedIn audienceand what actions you
LinkedIn is a social networking service want your audience to take will
for professionals; in a sense, it quickly define the options for your
transforms a persons professional marketing plan.
network into an online network. Created Do your homework: Social
in 2002, it allows users with common media is one of the places where
business interests or connections to link one size does not fit all. Different
up and stay in touch about business audiences use different sites and
issues, new job opportunities and more. different marketing strategies
Subscribers receive invitations from work differently with different
other subscribers to join their network. audiences. Once youve defined
Currently, LinkedIn has more than your audience, then investigate
150,000,000 subscribers. what kinds of content and
(http://learn.linkedin.com/what-is- presentation approaches work
linkedin/) best for them.
Care about sharing: Keep an
MARKETING IS ALL NEW AGAIN open mind about different ways to
present your message that will
When it comes to marketing a inform andyes, lets be up front
companys brand, products and about itentertain your audience.
services, the Age of Aquarius is upon Social media users like to share
us. Social media marketing is a lot intriguing informationthats why
cheaper and more nimble than print, videos of dancing cats and
radio and television advertising, but it giggling babies get a lot of
attention on morning television

talk showsbut a clever video or prepared should you receive an
a colorful graphic that shows off unfavorable comment about your
the best characteristics of your company, its offerings or its
company and/or its products and performance. Have a plan in
services will get the kind of place that clearly spells out what
attention from your current and steps who should take by
potential customers that can whenand enforce it.
build your business. The word Decide who speaks for your
will get around. company: Not every employee of
Interact with your audience: your company is best equipped to
Unlike traditional print and represent it in a social media
broadcast advertising, social advertising campaign. Decide
media ads can and do invite what qualities about your
immediate comments from company you wish to project and
users. Their interactive features who is best suited by knowledge,
are what make them so powerful experience, temperament and
as a marketing medium. other characteristics to fill the
Supposing you decided to spokesperson role. Once the
announce your companys latest decision is made, stick with it.
product or service offering. A flat That person will become the
statement may draw interest gatekeeper of what goes out
from your audience briefly, but and comes in to the companys
including a video demonstrating social media sites.
the new product or service and Fresh is best: Do not let your
inviting comments make that ad companys social media site
more engaging and interesting. and/or message become stale
Blogs are ads too: Blogs are and stagnant. Keep new ideas
online diaries authored by a and information flowing to keep
single person, usually around a your audience engaged and
theme. The best blogs invite coming back for more.
comments from viewers, which Remember what youve learned
keeps the blog interesting and about your intended audience and
provocative. If you choose this what kinds of messages and
option to promote your company approaches work best on them.
and its offerings, be prepared for Your media experts will know best
good and not so good how often to change messages or
comments. Use the good content delivery options to keep
comments as testimonials on the audience interest peaking.
quality of your offerings, and use
the criticisms to guide These are just a few basic tips to help
improvements. By welcoming you sort out what needs to be done
and acting positively and should you decide to take the plunge into
proactively on all comments, you social media to market your business. At
will build relationships and trust the end of this bulletin, several online
with your intended audience. sources are listed to provide you with
Keep your cool: You can even more information and guidance in
control the message going out, this area. For more information, go to
but you cant control the input http://www.topRankblog.com/2011/12/20-
from your audienceor who else social-media-dos-donts
they may be sharing that input
with. Know this going in and be

EMPLOYEE RECRUITING ISSUES measure prohibiting employers
from requiring such information of
Current news is replete with stories job applicants and employees,
about how employers are using social and other states are considering
media sites to vet job applicants similar proposals. Nevertheless,
personal and professional backgrounds. the privacy considerations make
Those stories become even more this an area thats best left alone.
interesting when an employer discovers DONT use false identification to
unflattering or conflicting information gain access to a candidates
about an applicant that may affect social media site.
his/her suitability for a position. DO assign another staff person to
Depending on how those background conduct the social media
searches are conducted and how the background check on the
resulting information is used, the applicant and direct him/her to
employer could face legal difficulties. report only job-related
information after the applicants
Background checks using social media qualifications for the position
sites are legal if they are job-related and have been verified.
are conducted in accordance with the DO a complete background check
provisions of the Fair Credit Reporting on the applicant using sources
Act (FCRA). If negative information other than the social media
about a job applicant is uncovered in a network.
background check using social media,
the employer must: Consult with legal counsel on any
planned use of social media for
1. Notify the applicant should recruitment, applicant screening and
he/she lose the position as a evaluation or current employee
result of that negative performance as the law is rapidly
information; and changing in those areas with respect to
2. Identify the source of that privacy and other employment policies.
negative information (i.e., For example, some employee postings
Facebook, Twitter, LinkedIn) so about the company could be construed
that the accuracy and as protected concerted activities under
completeness of the information the labor laws. Also, form responses to
may be verified by the applicant. recruiting may be considered applications
for employer recordkeeping
Other considerations when using social requirements.
media as a recruiting practice or
applicant screening or evaluation For more information, visit
device: http://www.hrmtoday.com/.
DONT require a candidate to EMPLOYEE USE/MISUSE OF

provide passwords to a social SOCIAL MEDIA
media site or friend the
employer or other company When an employee chooses to publicly
staff. The practice is not vent his or her opinions about a
currently illegal in most areas of companys products, services or
the country, but the legal business practices on a social media site,
landscape is beginning to it is not unexpected that he or she may
change. Maryland has a face disciplinary actions, especially if

such behavior is expressly prohibited in media site that disparage or
a companys human resources policies. slander other employees or
From the perspective of the employee, disclose confidential company
consider that free speech is protected in information are not protected.
the U.S., and the National Labor Think before you act. Whether
Relations Board (NLRB) is in place to you are an employer or an
investigate employment actions that employee, think about the
may impinge on an employees rights, possible consequences of acting
including when an employee speaks rashly. If you are an employee,
openly about his or her employer on a venting your frustrations with your
social media site. employer online for all the world
to see may not be protected.
The NLRB has taken an aggressive And, if you are an employer,
position when investigating these cases. terminating that employee may
See an NLRB statement issued on prove more costly than less harsh
January 25, 2012 disciplinary actions.
(http://www.nlrb.gov/news/acting-
general-counsel-issues-second-social- Below is a thoughtful article about some
media-report): related employee social media issues.
(http://jobsearch.about.com/od/onlinecare
Employer policies should not ernetworking/a/violating-company-social-
be so sweeping that they networking-policy.htm)
prohibit the kinds of activity
protected by federal labor law, EMPLOYERPROTECT THYSELF
such as the discussion of
wages or working conditions If your companys employee policies
among employees. have not been reviewed and updated
An employees comments on recently to address its use of social
social media are generally not media, now is the time to get it done.
protected if they are mere Work with an attorney who specializes in
gripes not made in relation to this area to determine whether the
group activity among policies address employee use of social
employees. media, actions that are allowed and
when, and those that will results in
Below are some considerations as you disciplinary action.
shape your companys social media
policies: If you determine that your companys
employment policies need to address
Employees free speech is social media use or they need
protectedWhen employees adjustment in this area, consider whether
complain about working too the following is addressed
many hours of overtime or being
overburdened with tasks and Employees social media
impossible deadlines, their right interaction that is subject to
to voice those complaints in the company policies;
office or on Facebook is a basic Who has responsibility for
right thats protected by our accessing social media for
Constitution recruiting actions and when;
with limitations: Employee Posting of professional references
comments posted on a social on social media sites or not;

Monitoring of employees Consult legal and insurance
electronic communications using counsel regarding the
company equipment; development and adoption of all
When or if social media access electronic communications
is allowed during working hours; policies.
When or if social media access Consult with your insurance
is allowed using company broker about coverages for
equipment; electronic and social media
Legal restrictions on use of concerns, particularly as they
social media regarding relate to unfair employment
discrimination, harassment and practices.
confidentiality of company Ensure your supervisors and
information; managers are informed about and
Investigation of claims made on trained on policies and
social media sites concerning procedures relating to employee
harassment or discrimination; use of electronic and social
Security procedures to address media.
employer-sponsored blogs;
Procedures to protect the For more information, visit the following
company logo or brand when online resources:
used on social media to promote
products and services; http://socialmediagovernance.com/
Employees authorized to
represent the company on social http://www.topRankblog.com/2011/12/20-
media sites; and social-media-dos-donts
Conduct, practices or http://jobsearch.about.com/od/employeeri
procedures used in social media ghts/a/fired-for-facebook.htm
that will result in disciplinary
action. http://getworksimple.com/blog/2011/12/0
5/social-media-the-workplace-the-dos-
donts
CONCLUSION
http://humanresources.about.com/od/car
As stated earlier, social media is a eernetworking/a/social_media.htm
powerful new communications tool that http://www.vistage.com/content-and-
allows us to share our lives and our connectivity/vistage-library/ten-dos-and-
thoughts with anyone anywhere. It has donts-of-social-media.aspx
reshaped the way we think, act and
relate to one another, but we should be http://www.sebrisbusto.com/publications/
careful how and when we do so. This is getEmploymentLawNotes.asp?employm
especially true for those in business who entlawnote_id=0512
choose to bring their company closer to
their employees and customers through
this communications medium.
Before you embark on this journey, take

some cautionary steps to protect
yourself and your company along the
way:

Bulletin No. MK 8
File: Marketing
Bulletin
Creating a Readable Corporate Newsletter
INTRODUCTION BACK TO BASICS
Communication is a must for a modern Whether youre starting from scratch or

business. Staying in touch regularly with rethinking an existing publication, its
customers, employees and others who always a good idea to consider the
may be interested in your companys basic elements of your publication
products and/or services, upcoming because they tend to change over time.
events, or other business developments
is critical to your companys growth and Assess the Audience
success. Is the newsletter strictly an in-house
publication for staff or is it shared with
Thanks to the availability of myriad print customers, equipment suppliers or
and electronic media, the Internet and others? Is your audience older, younger,
social media, companies have many middle-aged or of mixed generations?
options for connecting with their internal
and external audiences. This bulletin There may be other questions that will
focuses on one optionnewsletters. help you define the newsletters
audience. Answering them accurately
WHAT IS A NEWSLETTER? and completely will help you set the
newsletters content and style to build
A newsletter is a collection of brief interest in the publication.
articles that interest a defined group of
people, such as a companys customers Develop a Mission Statement
or employees. Most newsletters contain Your companys newsletter has a
photos or other graphics related to these purpose, so write it down. Keep it
stories to help visually break up the text. simpleone or two sentences will do.
The mission statement will help you
Newsletters are published regularly maintain control over the content and
(typically weekly, monthly, bimonthly or avoid straying into areas that are
semi-annually) and may be printed and inappropriate and uninteresting to the
mailed or created and sent newsletters audience.
electronically.
Consider the Content
A newsletter serves several purposes: Defining the newsletters purpose and
Informs audience will help you determine its
Educates content. If the newsletters audience is
Alerts narrowly defined, the articles should be
Entertains (sometimes) confined to the information that will
Copyright, Mechanical Contractors Association of America, Inc. 2013

interest and appeal to that audience. For grammatical errors. Never rely solely
example, a newsletter for your sales on automatic spell-checking
team might include fast-read articles programs. Content should also be
with selling tips, sales projections and checked for accuracy by those who
goals and information about upcoming are closest to the content area (i.e., a
meetings. A more general audience, sales manager in the case of a sales-
such as your entire staff, might be related article). This is especially
interested in articles about staff important if you are working with an
changes, benefits policies, programs outside writer who is not familiar with
and other corporate developments. And, the mechanical contracting industry.
your customers may be interested in
articles about staff changes, new Who will select images/charts that
products and services, incentive complement the content and lay
programs and discounts, and your out each issue? This may be the
companys other projects. same person who creates the initial
design, or this task may be passed
When choosing the subjects for the along to someone else in the form of
newsletter articles, be careful not to a template with built-in styles.
stray from its purpose. For example, if
the publications purpose is to inform How will the newsletter be
customers about new products, it is not distributed? While electronic
appropriate to include announcements transmission is cost-effective,
about upcoming internal meetings. efficient and saves resources, many
people still prefer printed
Develop a Budget publications. Survey your readers to
A newsletters budget will be influenced determine their preferences. If they
by a number of factors, including prefer a printed publication and your
whether the work will be done by staff or company does not have high-
external vendors. The companys resolution photos, you would do well
preferred distribution method (print and to invest in a digital camera. Lower-
mail versus electronic) also plays a role resolution images will, in most cases,
in budgeting. Consider the following be adequate for an electronic
questions to see the impact various newsletter.
options will have on your bottom line.
It is important that these decisions be
Who will create the initial design? made during the planning phase and
Is there someone on staff who is evaluated on a regular basis.
willing and able to take on this task,
or will the assistance of an outside Look at How it Looks
designer be needed? Even the best written and most
interesting newsletter can turn off a
Who will write the content? Do staff reader if it looks cluttered and/or visually
members have the time and expertise flat. A clean layout, a dash of color and
needed to write for a newsletter, or well-placed graphics can do wonders for
will a professional writer be needed to a publication.
assist?
There are many reasons for thinking
Who will proofread the content? It about the look of your newsletters as
is best to have someone with well as its content. When doing so,
excellent proofreading skills check consider the following items.
your newsletter for typographical and

selecting or developing graphics that,
Type style and size should be in order to be successful they must
comfortable for your audience to work within the context of the story.
read. Most publication experts For example, a story about your
recommend sans serif typefaces companys recent uptick in sales
such as Arial and Calibri for headings would benefit from a graph or chart
because they are more attention- that visually illustrates the
getting. These same experts information. A story about a current
recommend serif-style type (letters project, however, would be better
with a tail on their end, such as served with photos of the project.
Garamond or Times Roman) for text
because they are easier to read. Keep in mind that your newsletter is not
Type size and the amount of space the only publication that your audience
between lines (also called leading) reads. Give your newsletter a distinctive
will vary depending on the age of look and your audience will want read its
your audience. In general, the older contentand look forward to doing so.
the audience, the larger the typeface
or, when smaller typefaces are used, The Nameplate
the larger the leading. Smaller fonts The nameplate is the top area of the
(anything under 9 for a younger newsletters front page that presents its
audience, 11 for an older audience) name, date, volume or issue number
can be exhausting to read. and the company name and/or logo. It
sets the tone for the publication, and its
Consistent typefaceuse one the first thing readers see when they
typeface for text and one for headers receive the publication.
and subheads. Most typefaces come
in families that include options like Its okayin fact, its highly
bold, italics, or condensed versions of recommendedthat you choose a
the type, so you can achieve a clever name for your newsletter. For
number of different looks within the example, if you are in the pipe welding
typefaces you select. Using a variety business, something like The Pipeline
of typefaces for each article makes rather than ABC, Inc. Piping Newsis
your newsletter look disorganized, catchy and clever and will spark the
confusing and hard to read. When attention of your reader.
choosing typefaces, make sure to
keep your mission in mind. If your Be creative when designing the
mission states that you publish only nameplate. Choose a typeface thats
business news to keep your clients consistent with the typeface youve
informed, for example, you will want chosen for your headers and subheads.
to avoid casual typefaces like Comic Consider using color and/or reversing
Sans. out the name (white letters on a dark
background). Organize the other
Coloreven just one color plus information appropriately in the area
blackgives your publication some underneath the name.
zing and catches the eye.
The Masthead
Graphicssuch as photos, graphs The masthead is a list of your
and chartsbreak up the text and companys owners, departments, or
make articles more interesting and officers and the companys contact
readable. Keep in mind when information (address, phone, fax, e-mail
and website). It generally includes the

name of the person responsible for the Design ElementsThese include
newsletter (the editor) and their contact the symbols at the end of articles
information, as well as the newsletters (wingdings or dingbats), headers and
mission statement. subheads, page numbers (folios),
ruled lines, charts and photographs.
The Format
The format or structure of the newsletter Create a Style Sheet
is also important to how well it reads. Once youve decided on type, format,
Important points to consider include: nameplate and all the other elements in
your newsletter, write them down so
DimensionMost printed others who work with you will have a
newsletters are 8 1/2 inches x 11 guide. You may also want to create a
inches. Electronic newsletters template to keep these elements stored
generally follow a standard size for the next edition of the newsletter.
designed to work well with a variety
of devices. GOING TO PRESS
Number of PagesThe number of Whether you print and mail your

pages will vary depending on your newsletter or send it electronically, keep
audience and the type of news you in mind the following before you publish.
plan to share. Four to eight pages is
a good start. You can always add Sweat the Details
pages later. If your newsletter will be No matter how many times you read
printed in a booklet format, pages through the newsletter text, you will miss
must be added in multiples of four. something. Have someone with a fresh
pair of eyes read through it for grammar,
ColumnsNewsletters are usually typographical and spelling errors. The
one, two or three columns. More than newsletter is a reflection of your
three columns will crowd the page. company and the quality of work and/or
service it provides. Make sure the
MarginsDecide how wide your publication looks good and reads well.
newsletters page margins should be,
and how much space there will be To Print or Not to Print
between the columns. For example, Once your newsletter is finalized, it will
page margins of one inch on all sides be reproduced and distributed according
and a column margin of 1/2 inch. to the decision made during budgeting.
JustificationChoose whether your If your newsletter will be printed

columns are even on the right either in-house on a color copier or
(justified) or ragged. Justified outside with a commercial printing
columns may look neater than ragged press, consider the following:
right ones, but they tend to spread
out the words in the lines, which can Draw up a schedule with deadlines
become difficult to read. for copy, graphics, proofs and
delivery. This schedule should be
ParagraphsDecide whether your made in collaboration with the
paragraphs will start flush left or with person who will be designing the
an indent. Either is fine, as long as newsletter (whether a member of
theyre consistent. your staff, a design firm or your
printers design services). A typical
newsletter includes 23 rounds of

design proofs for review. These let viewed and navigated on a wide range
you check the content for accuracy of devices, including tablets and
and completeness. The printer will smartphones, and printed from any
provide a final proof of the computer.
processed files, called a blueline or
digital blueline. This is your last PDF requires that you first design your
chance to make sure that everything newsletter using another program,
is in place and represents your whether standard office software or
company well. Changes are still design-specific software. The document
possible at this stage; once you sign is then easily converted into a PDF file
off on these proofs, printing will for e-mailing, generally at the touch of a
begin. button or two. Keep in mind that some of
your readers companies may have e-
Submit your newsletter materials to mail size restrictions, so your PDF file
your printer. Each printers should be no larger than 2MB.
requirements will vary, so its best to
work out the details with your E-mail marketing services offer a
vendor. selection of design templates that can
be adapted to create the look of your
Consider using recycled paper, newsletter. These services generally
particularly if your company is include a safe unsubscribe feature that
highlighting its green projects. lets users change their subscription
There are many varieties of paper options and tracking reports so that you
and the costs vary widely. The can tell which stories are of most
greenest papers sometimes interest to your readers (and which
involve complex chain of custody arent being read at all.)
issues that add to their costs and
require additional labeling and Regardless of the option you choose,
approval of your materials. Your consider sending your newsletter from
printer can provide guidance on the an e-mail address such as
options available in your area. If you news@yourcompany.com, which shows
choose to use a recycled paper that the name of your newsletter or company
does not require specific labelling, as the sender rather than an individuals
consider including the recycled logo name. This will help differentiate your
and text indicating that the newsletter from everyday business
newsletter was printed on recycled correspondence.
paper.
A consistent subject line will make it
If you choose to distribute your easy for readers who like to sort their
newsletter electronically, there are incoming e-mails into folders. For
two basic options for distribution. example, you might use Your
Newsletters Name for MM, DD, YYYY
1) Convert the document to a format where MM, DD and YYYY are replaced
such as Adobe Acrobat PDF and with the month, date and year on which
send it via e-mail. the newsletter is distributed.
2) Use an online e-mail marketing

service such as Constant Contact to
design and send the newsletter.
Both options allow your newsletter to be

June 20..
The Pipeline Page 4
Volume 1, Issue 1
T HE P IPELINE
ABC Pipe Services, 1234 Anywhere Street, My Town, Anystate 01234
Web site address www.abc.com, Phone number 102-555-1234
ABC Wins New Refinery Job INSIDE THIS ISSUE

By John Doe ABC Wins New Refinery Job 1
ABC Breaks Ground on New Pre-Fab Facility 1
ABC Pipe Services won the pipe welding subcontract ABC Welcomes New Staff 2
for the new Worldwide Petroleum Refinery (WPR) that
Benefits Meeting Scheduled 2
will be located just outside My Town. ABC CEO Mike
IPads Ordered 3
Someone received notification of the award at 5:00 p.m.
on June 1. Employee of the Month 3
Calendar 4
The pre-job conference will take place on July 1 at the
office of Jones General Contractors. A meeting of ABC
project estimators and managers will take place this
week, so watch for the memo.
The new refinery will feature state-of-the-art piping

systems that will produce approximately 100 barrels of
refined petroleum products per day. WPR and Jones
GC estimate the project will take three years to
complete. The plant will supply WPR customers along
the eastern U.S.
The project calls for up to six welders during peak

work periods. Project managers and ABC Safety
Director Mike Smith will be on hand to keep work
flowing smoothly. Foreman Bill Legree will supervise Artists drawing of new WPR refinery
the pipe installation crew.
Thanks and congratulations to the proposal team for a

job well done, said Someone.
ABC Breaks Ground on New Pre-Fab Facility

By Chuck Something features will make the facility a safer and healthier
workplace for pipe fabricators.
ABC started work on the construction of its new pre-
fabrication shop last week. The new 10,000 square-foot Construction of the pre-fab shop is estimated to be
structure will be located adjacent to the companys completed by November 1 of this year. ABC contracted
main offices. with General Supply Fabricators to design and construct
the facility.
The new facility will feature the articulating weld boom
which won the MCAA 2008 E. Robert Kent Award. For more information, contact Chuck at cs@abc.com.
The device allows welders to move around the floor
while keeping cords off the floor and includes an
exhaust hood for venting welding gases. The booms
Page 2 The Pipeline
ABC Welcomes New Staff
ABC has just hired two new senior project managers

for upcoming projects.
Joe Smith is an 18-year veteran of pipe installation

projects for a variety of commercial and industrial
facilities. Joe is relocating from the Chicago, IL area. He
will join ABC on September 1.
Carl Jones has been a project manager for over 10 years

with two Indiana companies. He will also join ABC on
September 1.
Please welcome Joe and Carl.

Joe Smith Carl Jones
Benefits Meeting Scheduled [Note: For employees newsletter only]
A meeting about changes to employee benefits is The meeting is expected to take about two hours, so
scheduled for August 15, 10:00 a.m. 12:00 p.m. in the be sure not to schedule any meetings in or outside
main conference room. All employees must attend. the office during this time.
The main subject of the federal Affordable Care Act

(aka Obamacare), which will take effect on January 4,
2014. ABC employees are subject to the requirements of
this law, and its provisions will be explained during the
meeting.
Other benefits to be discussed include sick leave,

vacation leave, per diem policies and educational
reimbursement policies. Briefing materials will be
provided and questions will be encouraged.
Mandatory meeting scheduled

for all employees on August 15,
10:00 a.m. 12:00 pm.
The Pipeline Page 3
iPads Ordered for Project

Managers
All ABC project managers will carry the latest version of

Apples IPads while in the field to stay in touch with ABC
management, office staff, customers and owners.
These devices are a convenient way to stay connected with

critical personnel for consulting purposes and to check
invoices, permit filings, and more without returning to the
office. The devices are also handy for reviewing project
documents, CAD files, email, the status of equipment
deliveries, schedules and upcoming meetings.
ABC management decided to purchase the devices

because project managers were using too much time
A brief training session has been scheduled for August 10
returning to the office on inquiries and other matters that
in the conference room at 1:00 p.m.
could be handled with an iPad.
Please direct questions to HR Director Joan Smith
The order has been placed and all project managers will
(js@abc.com).
receive their iPads in two weeks.
ABCs Employee of the Month Gary Speshal
Project Foreman Gary Speshal is the ABC Employee of

the Month. ABC CEO Mike Someone announced the
selection during a meeting of top managers.
Speshal was selected for his overall excellent

performance supervising craft workers on projects and
continued loyalty to ABC during his 15-year tenure with
the company. Mr. Someone noted that, Gary works
hard to ensure craft workers are productive and
efficient while theyre on the job. He also makes sure
they follow safety protocols and hazard avoidance
procedures.
Speshal will receive a $100 American Express Gift Card

and one day extra leave.
Gary Speshal (r) examines blue print on a job site.
Congratulations Gary!
The Pipeline Page 4
ABC Pipe Services Calendar of Upcoming Events

CEO and Owner: Mike Someone
The Pipeline Pre-Job Meeting July 1

Editor: Joan Smith
js@abc.com Benefits Meeting August 15
Phone:
111-555-1234 x23 New Staff Arrives September 1
Fax:
111-555-5678 Labor Day September 2
Your source for ABC Pipe Services
news and information.
Company Name
Street Address Note: Mailing Panel is
City, ST ZIP Code unnecessary for internal
newsletters.
Customer Name
Street Address
City, ST ZIP Code
Bulletin No. OT1 Revised
File: Overtime
Bulletin
How to Estimate the Impacts of Overtime

on Labor Productivity
Introduction Previous MCAA publications on
The cost impact of unplanned extended overtime inefficiency included
overtime work1 may exceed the histograms that depicted loss of labor
increased costs of the premium pay productivity data based on various
associated with an overtime work overtime schedules. The histograms
schedule. This impact comes in the form published in MCAAs Bulletin Nos. 18-A
of reduced worker productivity as and 20 were based on the 1947 U.S.
compared with the productivity of work Department of Labor Bulletin No. 917, a
performed on a straight-time basis. A study of prolonged overtime worked in
mechanical contractor confronting the manufacturing sector. As several
significant periods of unplanned courts and commentators have
extended overtime work must consider recognized, the 1947 Bulletin No. 917
the reduced productivity associated with has limited application in the
working an overtime schedule. construction industry.2 As a result,
MCAA Bulletin Nos. 18-A and 20 have
A number of published studies attempt now been superseded by this version.
to quantify the decrease in labor This current publication is based on
productivity associated with working more recent studies that provide a basis
extended overtime in the construction of estimating labor inefficiencies utilizing
industry. This chapter will discuss the data provided by construction
most frequently cited studies that have contractors or from quantitative data
been used to quantify overtime labor actually measured on construction
inefficiency in the construction industry. projects.
The chapter also will set forth some
general guidelines for a mechanical Background
contractors consideration in assessing Often mechanical contractors are
the labor inefficiency impact of directed by an owner or general
unplanned extended overtime. The contractor to accelerate the work for a
principles set forth in this chapter can variety of reasons. Acceleration can be
provide meaningful guidance in achieved by adding crews, adding shifts,
estimating the loss of labor productivity and/or working longer hours over and
arising from overtime in the forward above 40 hours a week for the primary
pricing of change orders as well as in a crew. This latter form of acceleration is
retrospective application. known as overtime, and the direct
costs of this process (i.e., the overtime
payroll premium costs) are reasonably
easy to compute. However, the indirect seeks to provide the mechanical
effects of working an overtime schedule contractor with estimated inefficiency
can be more difficult to quantify. The rates for various overtime schedules
primary indirect effect of working an seen most frequently on construction
overtime schedule is the loss of labor projects. The percent inefficiency values
productivity by the workers performing offered herein are reasonable estimates
the overtime work. The added cost in of the inefficiency impacts that can be
terms of the loss of labor productivity sustained by mechanical crews working
may, as noted above, exceed the direct various overtime schedules. The
payroll costs of supporting an overtime inefficiency percentages are to be
work schedule. The subject of this applied to all hours worked by a crew
chapter is the added inefficiency costs performing on an overtime schedule and
of working overtime. While the MCAA not just the overtime hours.3
has not prepared an empirical study
within this chapter, the better- known The construction industry generally uses
overtime inefficiency studies have been three terms to describe different
revisited herein and compared, thus overtime scenarios: shutdown or
allowing the contractor to consider turnaround projects, spot overtime, and
several sources of data in one set of extended overtime. Shutdown or
tables. turnaround projects are those in which a
system or plant is completely shut down
Overtime inefficiency is the most for the project duration, and due to the
generally accepted category of labor production value of the system or plant,
inefficiency within the construction the construction schedule is highly
industry. That is true because virtually compressed (often working 24/7 with
everyone who has worked extended multiple shifts) in order to minimize the
hoursexecutives, managers, technical duration of the shutdown. These
and support personal, as well as the working conditions are clearly
field labor forceshave personally felt understood during the bid/proposal
the reduced productivity effects of process, and the contractor should
overtime schedules. These effects can include the associated inefficiencies in
include fatigue, increased absenteeism, the mechanical contractors bid or
increased incidence of accidents, proposal.4
reduced morale, and a more negative
work attitude. Spot overtime is short in duration (from
as little as one day to a week) and is
While many prime contractors and generally not planned in advanceit is
owners may be willing to pay the usually caused by a delay or other
mechanical contractors direct cost of unanticipated event that requires the
overtime if the acceleration was not mechanical contractor to make up
caused by the mechanical contractors quantities or finish work that was not
delay, the mechanical contractor is completed during the preceding week.5
much more likely to be denied its Spot overtime is also normally worked
inefficiency costs for the overtime by only a few crews at a timethose
schedule. It is essential for the responsible for the specific work scope
mechanical contractor to establish a in question. The impact of working
range of inefficiencies that may arise as periodic and infrequent spot overtime is
a result of embarking on an overtime normally considered negligible in terms
work schedule such that payment for the of inefficiency effects. As a result, spot
direct costs as well as the inefficiency overtime is not normally calculated in
costs can be reimbursed. This chapter industry studies that attempt to quantify

the lost labor productivity due to Roundtable publication entitled
unplanned extended overtime. Schedule Overtime Effects on
Construction Projects (hereinafter
Unplanned extended overtime is a referred to as BRT);
condition wherein the entire project, or a
significant portion of the project (e.g., all 2) The 1989 study published by the
mechanical crews), work an overtime National Electrical Contractors
schedule for an extended period of time, Association (NECA) entitled
sometimes without a planned return to a Overtime and Productivity in
normal 40-hour week. Experience Electrical Construction (hereinafter
indicates that a return to a normal 40- referred to as NECA);
hour schedule tends to reset the
productivity of a crew, such that if the 3) The 1997 study published by Dr. H.
crew returns to an overtime schedule Randolph Thomas of Penn State
after a week or two of a normal University, et al, entitled Schedule
schedule, the productivity loss would Overtime and Labor Productivity:
reset to that of the first week of Quantitative Analysis, published in
overtime. Thus, when utilizing any of the the June 1997 Journal of
data provided herein, it is important to Engineering and Construction
know the work schedule of the crews Management, which was based on
working overtime. If using a study that data included in a 1994 Report to
shows a progressively increasing loss of the Construction Industry Institute
productivity over time, should a crew entitled Effects of Scheduled
cease overtime and return to a straight Overtime on Labor Productivity: A
time schedule, the crews inefficiency Quantitative Analysis (hereinafter
upon resuming overtime work must be referred to as Thomas); and
reset to normal production for the first
measured period. Mechanical 4) The July 1979 United States Army
contractors should ensure that their bid Corps of Engineers publication
or negotiated proposals clearly state Modification Impact Analysis Guide,
that the base price for the work does not Publication No. EP 415-1-3
include any overtime, if in fact, no (hereinafter referred to as the
overtime was estimated. If overtime was Corps).
estimated and its scope exceeds
infrequent and limited spot overtime, an These studies have been in use in the
inefficiency factor should be included in construction industry for many years
the price for the work using a and have been generally accepted as
prospective estimate of inefficiency reliable measures of lost productivity
described in this chapter. due to unplanned extended overtime.6
Each has its strengths and weaknesses,
As previously noted, this chapter does including criticisms ranging from the use
not offer an empirical study based on of limited data sources to the withdrawal
new overtime loss of productivity data. of reports from publication.7 However,
Rather, this chapter reviews, analyzes, the baseline data in any of these studies
and summarizes four existing studies have never been proven to be
that have gained recognition in the inaccurate. Moreover, the concept that a
construction marketplace and have contractors work force becomes less
been utilized to prove claims for efficient as unplanned extended
overtime inefficiency. These studies are: overtime is worked is generally
recognized and has never been
1) The November 1980 Business disproved as an underlying fact.

undermined its underlying data. A
The four studies presented in this positive facet of this study is that its data
chapter as a basis for estimating a were based upon payroll records of the
contractors loss of labor productivity workers compared to actual units of
show striking similarities in their results. material installed on the project by those
These studies and the resulting curves workers. This study provided overtime
are not offered as precise or exact loss of productivity data over a 12-week
forecasts of impacts. Rather, they are period at various overtime intensity
reasonable guidelines to be used to levels and demonstrated that, in
estimate a loss of labor productivity general, inefficiency increases as the
caused by overtime. The courts and overtime schedule extends in duration.
boards of contract appeals have clearly
set forth the principle that a contractor National Electrical Contractors
does not have to prove its loss of labor Association (NECA)
productivity with mathematical precision, NECA provides the user with various
but can offer a reasonable estimate of overtime models measured over a 16-
its damages.8 These studies offer just week period. The underlying data for
thata source from which to prepare a NECA was gathered by surveying
reasonable estimate of inefficiency electrical contractors who were
damages arising from unplanned members of the association.9 The
extended overtime. survey data was compiled and
presented as tables and graphs showing
In some cases a measured mile expected overtime productivity losses as
analysis can be performed that will Low, Average, and High for each
compute, by use of the contractors one-week period. These categories
project payroll and field records of allow the user to factor the weekly
installed material, a comprehensive loss inefficiency by gradients defining more
of labor productivity comparing actual precise levels of impacts. For instance,
impacted and non-impacted production if the contractor had been given
on the jobsite. When a measured mile substantial notice of the implementation
analysis can be performed, such an of overtime to allow some pre-planning
analysis usually subsumes all types of to lessen the effects of the overtime, the
inefficiency categories on a project. contractor could select a Low or
Therefore, if a measured mile labor Average impact. Alternatively, if the
productivity study is utilized, there is no overtime schedule imposed upon the
need for a separate inefficiency analysis contractor created havoc on the project
for overtime loss of productivity using site, or if there was stiff competition for
industry studies. overtime on nearby projects, the
contractor could select a High impact
Discussion of the Four Studies category. Like BRT, NECA
Business Round Table (BRT) demonstrates decreasing labor
The BRT is a study of a Proctor & productivity as the overtime schedule
Gamble construction project that extends in duration.
experienced overtime during the course
of the work. The BRT has been Dr. H. Randolph Thomas, P.E.
frequently cited as a reasonable (Thomas)10
guideline to predict loss of labor Thomas compared various overtime
productivity. While the BRT is inefficiency data with those
sometimes criticized because it is based independently derived from studies
on only one project, its critics have not prepared under his supervision.
Interestingly, Thomas opined that: it

is concluded that the BRT curve is a the aforementioned study was based on
reasonable estimate of the minimum data collected on the project site by site
loss of productivity. For projects personnel.
experiencing worsening degrees of
distress and disruption, the loss of The U.S. Army Corps of Engineers
productivity will probably be greater.11 (the Corps)
Thomas tracked labor inefficiency The United States Army Corps of
caused by overtime in the mechanical Engineers (the Corps) study included
and electrical trades. In order to attempt an overtime loss of productivity graph
to accurately isolate the effects of showing predicted losses of labor
overtime on labor productivity, Thomas productivity for various work schedules
removed projects where overtime over a four-week period. Similar to the
occurred at the outset of the work, other reports cited herein, the Corps
projects that suffered from adverse labor showed declining productivity as the
action, and projects on which there were overtime schedule was extended. The
an inordinate number of changes in Corps overtime inefficiency graph was
scope or other conditions that would widely used to calculate impact and
exacerbate the inefficiencies arising inefficiency claims until the Corps
strictly from overtime. formally withdrew this publication
several years ago for unspecified
Thomas comparative curve utilized in reasons. It is noteworthy that Publication
EP 415-1-3, which contained the Corps indicates that the actual productivity was
overtime study, has never been equal to the planned productivity; a PI >
repudiated by the Army Corps of 1.0 indicates that the actual productivity
Engineers, but was withdrawn without exceeded (was better than) the planned
any criticism of the underlying data used productivity; and a PI < 1.0 indicates
in the overtime inefficiency graph. Thus, that the actual productivity was less than
the Corps study and curve are included (worse than) the planned productivity.
herein to compare its findings with those
of other overtime charts. In all cases, the PI during a normal 40-
hour work week is assumed to be 1.0.
Presentation of Data The PI during a given overtime schedule
The following charts present the loss of is then indicated on the chart over a
productivity as determined by the four number of weeks of consecutive
referenced studies. The loss of overtime. If a chart indicates a PI of 0.90
productivity is presented in terms of a for a given week, that shows a 10% loss
Productivity Index, or PI, such that of productivity for that week (1.00 0.90
= 0.10, and 0.10 1.00 = 10%).
As noted above, the curves were

generally within the same relative order
of magnitude. Using the average of the
four studies, the table of PI at the
where Productivity is in terms of work bottom of this page was developed.
hours expended per unit of work
installed. In this case, a PI of 1.0

Application
The Prospective Application As described herein, the NECA tables
When the period(s) of extended list three impact intensity levels for each
overtime have been determined, the overtime schedule: Low, Average,
mechanical contractor can find the chart and High. For the PI values shown in
for the applicable work schedule and the following table, the Average values
determine a reasonable range of listed in the NECA tables were utilized.
productivity loss by reading the PI for Where two different work weeks
the given week of consecutive extended resulted in the same number of total
overtime and subtracting it from the hours (e.g., a 60-hour work week
normal value of 1.0. For instance, a PI resulting from a 12-hour per day five-
of 0.60 equates to a inefficiency day schedule versus a 10-hour per day
estimate of 40% (1.00 0.60 = .40 x six-day schedule), the PI values derived
100% = 40%). In a prospective, or from the source data were averaged
forward priced analysis, the resulting between the two working schedules.
percentage of productivity loss is Further, from weeks 13 through 16, only
multiplied against the estimated number the NECA PI values were available.
of hours to be worked during that week
When inefficiency factors are applied to
to identify the estimated impact of estimated hours in a forward priced or
working extended overtime. In a prospective analysis, the user multiplies
retrospective analysis (i.e., an analysis the factor percentage against the
prepared after the fact using actual labor estimated hours for the overtime and for
hours), the formula for computing a the straight time worked by the overtime
conservative inefficiency estimate is crews. For instance, if a contractor
discussed in a following subsection. expects to work a 50-hour work week
with 25 mechanics for five weeks, the
computation appears in the forward

pricing table above. MCAAs labor inefficiency factors, were
prepared with the anticipation that these
Based on a forward priced, or factors would be applied to forward-
prospective, estimate of overtime priced change order requests.12 Thus,
inefficiency, the contractor would the percent inefficiency factor would be
request compensation for 552 labor utilized as a multiplier against the
hours of lost labor productivity. estimated hours to provide the forecast
loss of productivity. However, when
The Retrospective Application using tables and factors in a
Retrospective analyses are performed retrospective manner (i.e., applying
after the overtime hours have been these factor percentages to actual
spent. For a retrospective example, let payroll hours), an adjustment must be
us assume that a contractor was made in order to eliminate overstating
directed to put its mechanical crews on
overtime during construction of a the inefficient hours. The use of the
retrospective formula adjusts for the fact
processing plant. The contractors that the inefficient hours are already
planned working hours were a 40-hour embedded within the actual labor hours
week, and in an effort to maintain used in the retrospective computation.
schedule the contractor placed the Multiplying the inefficiency factor against
mechanical crews on a five-day 10-hour the actual hours that also include the
shift over an 11-week period. In inefficient hours results in an
calculating the retrospective (performed overstatement of the estimated
after the fact) loss due to unplanned inefficiency.
extended overtime, the contractor
should apply the formula and 1) Identify the individual craft
procedures described below. persons who worked unplanned
extended overtime.
Most inefficiency tables, such as the

The contractors payroll records should
identify those individual craft labor who 2) Apply the applicable percentage
worked at least 50 hours a week during tables above for the applicable
the period of unplanned overtime. It overtime period (in this case
5/10s) to the craft hours subject to
should not be assumed that every lost productivity due to
worker recorded on the daily craft report unplanned extended overtime
actually worked overtime during a given using the retrospective formula.
week. Note that the number of workers
working over 40 hours declines with In this retrospective example using
each successive week, indicating that actual payroll data, the result is as
some members of the crew did not work shown in the table at the top of the
50 hours. The result of such a following page.
calculation is shown in the table below.
In this example, the contractor lost 748
Note that when the crew moved back to craft hours due to working unplanned
the normal 40-hour week, the OT week extended overtime caused by the
clock started over at Week 1 on March attendant overtime inefficiency over an
27, 2010, and no hours were subject to 11-week period using a retrospective
any lost efficiency in the preceding two analysis approach. In order to produce a
weeks. This was due to the fact that the conservative inefficiency estimate, it is
crew was able to recover during the recommended that when actual labor
normal work weeks ending March 13 payroll hours are used, as would be the
and 20. Thus, when overtime work case in a retrospective analysis, the
resumed for the week ending March 27, retrospective formula should be utilized,
2010, the Week 1 percentages were as described below.
utilized.

The retrospective formula appears as: Thus, in cases where a mechanical
actual labor hours - (actual labor hours contractor is asked to forward price an
(1 + the percent inefficiency factor)), or overtime change order request, both the
as an example from the table above: direct payroll and the inefficiencies
1,250 (1,250 1.05) = the inefficient should be included. The content of this
hours, or 1,250 - 1,191 [the efficient chapter provides the guidelines for
hours] = 59 inefficient hours in a retro forward pricing an overtime-inefficiency
spec tive analysis. This formula solves change order request. In cases where
for the ef fi cient hours [1,191] in the the extent of the overtime is unknown,
equation and then al lows the user to the mechanical contractor, at a
subtract the efficient hours from the minimum, should include an express
total, yielding the inefficient hours [59]. reservations clause in the change order
proposal.
Preparation of the Request for
Equitable Adjustment For example:
It is not unusual for a general contractor
or owner to request that a mechanical This change order proposal
contractor provide a prospective cost represents the direct additional
proposal to accelerate a construction payroll costs arising from the
project. However, such requests are requested overtime schedule. No
often limited to the added payroll costs overtime inefficiencies are included
attendant to the overtime schedule. in this proposal.Amalgamated
When a mechanical contractor is asked Mechanical Contractors expressly
to submit a proposal to engage in reserves its rights to request
overtime on a prospective basis, the compensation for labor efficiencies
attendant estimated labor inefficiencies attendant to the requested overtime
must be added to the direct payroll costs schedule. A revision to this change
of the overtime schedule. order proposal containing the costs
for overtime labor inefficiencies will

be forwarded for processing as soon order request, the contractor takes off
as these costs can be computed. We pipe, fittings, and appurtenances based
estimate that the labor inefficiencies on a scope of added work provided by
arising from this overtime schedule the general contractor or owner. The
will not be less than ____ %.13 labor is derived there from and the final
pricing is added to the change order
There may be occasions when the proposal.
general contractor or owner denies the
opportunity to supplement a change In like fashion to the fullest extent
order request based on future events. possible, overtime change order
Such prohibitions also may be a part of requests should be based on a fixed
the contract or printed on the change scope. A fixed scope means that the
order forms themselves as full accord general contractor or owner will provide
and satisfaction clauses. If the the mechanical contractor with the
mechanical contractor is prohibited from number of days of overtime and the
submitting supplemental change order number of hours per day that are to be
requests, such as for labor inefficiencies worked in order to form a basis for the
arising from an overtime schedule, then forward-priced change order. Once the
forward pricing of the overtime fixed scope is known, then the
inefficiencies may be the only option. mechanical contractor can estimate the
added payroll costs and the expected
For example: loss of labor productivity using the
tables included herein. The tables refer
The overtime pricing contained only to estimated overtime inefficiency
herein includes the added payroll and do not include inefficiencies arising
costs for the overtime schedule from other categories of impacts, such
provided by your office. Furthermore, as unanticipated trade stacking,
this change order proposal contains reassignment of manpower
a loss of labor productivity estimate (disruption), lack of site access, or
based on the overtime schedule that other inefficiency factors. Refer to the
we have received from your firm. The chapter titled How to Use the MCAA
proposed overtime schedule Labor Factors for a more complete
provided by your office is the basis listing of potential inefficiency factors to
of our estimate for direct and consider when preparing a change order
inefficiency costs associated with request or a claim.
this change order request.
Amalgamated Mechanical In summary, it is essential that the
Contractors expressly reserves the mechanical contractor define, in its
right to submit a separate change proposal, what costs are and are not
order proposal in the event the included in its overtime change order
overtime schedule changes in any request. Obviously, if the general
manner from that upon which we contractor or owner direct an overtime
have relied in the pricing of this acceleration effort without a requirement
proposed change order. for a prospective change order proposal,
and with only the requirement to provide
It is recommended that the forward- the proof of overtime payroll costs for
priced (prospective) overtime change reimbursement, the mechanical
order request be treated, to the fullest contractor must make it clear that in
extent possible, in the same manner as addition to the actual payroll costs, a
a sticks and bricks change would be request for reimbursement of its
priced. In a sticks and bricks change overtime inefficiency costs will be

submitted for payment.
Mechanical contractors should not
Conclusions accelerate to mitigate schedule slippage
A sustained and unplanned overtime that was not caused by the mechanical
schedule can result in a substantial loss contractors fault or negligence on a
of labor productivity. The mechanical voluntary basis. If a mechanical
contractor may be entitled to recover the contractor is directed by a general
associated costs, in addition to the contractor or owner to accelerate the
direct overtime premium payroll costs. work by commencing an extended
The current available data on overtime work schedule in order to
inefficiency resulting from unplanned overcome delays not caused by the
extended overtime, when properly mechanical contractor, a specific notice
utilized, provide the mechanical is necessary. While most construction
contractor with a reasonable basis to contracts contain pro visions that require
estimate such losses in either the the mechanical contractor to follow the
prospective or forward pricing of an direction of a general contractor or
original estimate or a scope change, or owner to accelerate the work,15 such
in a retrospective application. The direction and the ensuing acceleration
inefficiency factor will vary depending on must be accompanied by clear and
the amount of overtime to be performed, timely notice that includes a statement
the number of mechanics required, and that the mechanical contractor is
the duration of the unplanned extended proceeding under protest and that a
overtime. Additionally, other inefficiency claim will be filed for reimbursement of
factors may occur simultaneously, such all costs as soon as those costs can be
as stacking of trades, reassignment of computed. If a mechanical contractor is
manpower, or site access restrictions. placed in a position of constructively
Such additional impacts can be accelerating16 a project to overcome
separately estimated using the MCAA delay that has not been caused by the
inefficiency factors described in this acts or omissions of the mechanical
manual.14 contractor, the review of these
conditions by the contractors upper
Crew considerations also can affect management and counsel is highly
overtime inefficiency levels. Such advisable.
considerations include whether or not to A schedule time impact analysis may be
place the entire crew on over time even an essential factor in demonstrating that
if only a definable portion of the work the mechanical contractor is not critically
requires acceleration (i.e., the critical delaying a project. This is important in
path activities), whether or not rest properly deflecting responsibility for the
intervals can be interspersed into the costs of acceleration in that the party
overtime schedule to allow for one or controlling the critical path in a delayed
more weeks of straight time work, or schedule is usually the party that is
whether certain activities that would be found responsible for the costs to
subject to overtime acceleration can be mitigate the delay. One primary means
scheduled for a second-shift crew. of delay mitigation is overtime. If the
These sorts of considerations are made mechanical contractor is being charged
on a project-specific basis and can with the acceleration costs, or the
affect the amount of inefficiency payment for the direct and indirect costs
sustained by a mechanical contractor of acceleration are being withheld on the
resulting from performing the work on an basis that the mechanical contractor
overtime schedule. was the responsible party, the
contractor can employ a schedule time

impact analysis to identify the party greater detail in the chapter on Time
causing the critical path delay. Impact AnalysisMeasuring Project
Delay, many general contractors and
A schedule analysis also may be helpful owners are including broad waiver
in demonstrating, to the extent that the language on change order forms and on
mechanical contractors activities are the monthly payment applications. The
not controlling the critical path of the contractor should take great care to limit
current project schedule, that overtime this waiver language to matters that it
demanded by a general contractor or deems have been settled and take
owner will have no mitigating effect on express exception to each unsettled
the forecast end date of the project. It is item, such as a pending inefficiency
an accepted axiom of construction claim.
Critical Path Method (CPM) scheduling
that reducing the duration (i.e., by way Overtime inefficiency costs for extended
of overtime acceleration) of a path of periods of unanticipated overtime may
logic that does not control the critical exceed the payroll costs of overtime
path has no effect whatsoever on the premium. The mechanical contractor
end date of the overall project. Put should employ every reasonable
another way, the end date of a CPM management tool including issuing
schedule can only be foreshortened by proper and timely notice, keeping
accelerating work on the controlling comprehensive records, performing
critical path. If the mechanical contractor schedule analyses, taking exception to
can demonstrate that its work is not on, broad waiver language, and timely
or even near, the controlling critical submittal of change order requests to
path, accelerating those non-critical help ensure that the contractors right to
activities will have no mitigating effects recover all of its overtime costs are
on a project that is behind schedule and preserved and that payment will be
will represent potentially substantial forthcoming.
economic waste.
1
We are unaware of any data showing the
The mechanical contractor should difference in impact, if any, between
clearly note in its bid or change order planned and unplanned overtime.
proposal whether or not overtime has Generally, planned overtime has been
included in the base contract estimate and
been included in its lump-sum pricing,
was accounted for in the baseline CPM
and if so, to what extent it was included. schedule. Unplanned overtime, which is the
If a contractor includes extended subject of this chapter, occurs when no
periods of overtime in a lump-sum bid or overtime, or only very limited overtime for
change proposal, the attendant loss of equipment setting or start-up tasks, was
labor productivity should be evaluated contemplated under the terms of the base
and if deemed appropriate, the costs contract and is implemented during the
should be included in the lump-sum course of construction.
price for the work. At a minimum, the 2
contractors right to claim for such cost See, e.g. Appeal of J.A. Jones Constr. Co.,
00-2 BCA 31000, ENGBCA Nos. 6386,
impacts should be preserved.
6387, 6390; 2000 WL 1044011 (Eng. BCA
2000) (The study itself states that it was
Preservation of the contractors right to based upon prolonged overtime schedules
be reimbursed for its overtime in manufacturing plants and that it may not
inefficiency costs, on projects where the be applicable to construction projects.)
other party refuses to pay for such
3
overtime inefficiency costs, is of The well-accepted axiom is that the
paramount importance. As described in inefficiency effects of overtime affect the

worker while he or she works the straight- in amount. Thus, courts have recognized
time schedule as well as the overtime that a plaintiff may recover even where it is
schedule. apparent that the quantum of damage is
unavoidably uncertainor difficult to
4
Similarly, on a non-overtime-based project ascertain. The courts have recognized that
estimate, the mechanical contractor should ascertainment of damages, especially lost
qualify in its bidding documents if the bid productivity, is not an exact science. When
excludes overtime work. the responsibility for damages is proven, it is
not essential that the amount of damages be
5
The delay or event causing the mechanical ascertainable with absolute exactness or
contractor to engage in spot overtime may mathematical precision. (and cases cited
not arise from the fault or negligence of the therein).
mechanical contractor. For instance, the
9
mechanical crews may be required to work It is a generally accepted axiom in the
spot overtime installing sleeves in slab pours construction industry that inefficiency
because the concrete contractor was impacts sustained by the mechanical trades
delayed and was required to accelerate, are similar in nature to the inefficiency
thus requiring the sleeving crew to work impacts sustained by the electrical trades
alongside on an overtime basis. given reasonably comparative adverse
conditions.
6
See, e.g., Ace Constructors v. United
10
States, 70 Fed.Cl. 253, 281-283 (Cl.Ct. Dr. H. Randolph Thomas, P.E. is a
2006), affd, 499 F.3d 1357 (Fed.Cir. professor of civil engineering at Penn State
2007)(contractor entitled to recover lost University, author or co-author of a series of
productivity due to overtime based on BRT); well recognized published papers on labor
Appeal of Harbison & Mahony, 68-1 BCA inefficiency, and frequent expert witness on
6880, ENGBCA Nos. 2819, 2820, 1968 WL the subjects of labor productivity and
436 (Eng. BCA 1968)(allowing claim for construction management.
overtime inefficiency based on NECA);
11
Appeal of States Roofing Co, 10-1 BCA Thomas, et al, Scheduled Overtime and
34356, ASBCA No. 54860, 2010 WL 292732 Labor Productivity: Quantitative Analysis
(ASBCA 2010)(Thomas study recognized); Journal of Construction Engineering and
Appeal of Sante Fe Engineers, Inc., 86-3 Management, June 1997.
BCA P 19092, ASBCA No. 29362, ASBCA
12
No. 28058, 1986 WL 20062 (ASBCA 1986), As a conservative approach, it has been
affd, 818 F.2d 856 (Fed.Cir. 1986)(allowing assumed that the NECA overtime tables, as
inefficiency claim using the Corps study). well as other published tables designed for
use as forward-pricing guides, require the
7
See, e.g., Hensel Phelps Const. Co. v. use of the retrospective formula when
General Services Admin, 01 BCA 31249, applying such factors to actual labor hours.
GSBCA No. 14744, GSBCA No. 14877,
13
2001 WL 43961 (General Services BCA The estimated inefficiency percent can be
2001)(the Modification Impact Evaluation derived from the data and tables contained
Guide of the Corps of Engineers is not in this chapter.
recognized by GSA and, indeed, no longer
14
used by the Corps.) While the Corps has The Overtime component (Item No. 15)
removed its Modification Impact Evaluation listed on the MCAA inefficiency factors table
Guide EP 415-1-3 from publication, it has in the chapter on Factors Affecting Labor
not repudiated any of the data contained in Productivity herein was designed to give
that publication. general guidance in forward-pricing overtime
inefficiency. It is recommended that the
8
See, e.g., B.Bramble, et al, Construction more specific estimates of impacts
Delay Claims, 5.07, p. 5-53(3d ed. 2000) contained in this chapter be applied to
(Where the damages are directly overtime inefficiency analyses due simply to
attributable to the breach, they are often the increased level of specificity offered by
recoverable even though they are uncertain the studies and tables contained in this

chapter.
15
A subcontractors refusal to comply with
an acceleration directive provided by a
general contractor or owner, in the presence
of contractual authority to issue such a
directive, may result in a termination for
default. Before a direct, contractually proper
acceleration order from a general contractor
or owner is disregarded, the mechanical
contractor should consult with construction
counsel to evaluate the various courses of
action.
16
Constructive acceleration is a condition
wherein a contractor is directed to
accelerate to mitigate a delay not caused by
the contractor at no additional cost. In
anticipation of a claim to recover the costs of
the constructive acceleration, the contractor
takes express exception to the acceleration
directive, provides notice of a claim, and
then executes the acceleration as directed.
The submission of the claim for added costs
occurs as soon as the contractor can
compute the added costs either while the
acceleration is taking place, or after the
acceleration has concluded. The steps that
should be taken to perfect a constructive
acceleration claim are best set forth by the
contractors counsel.

CFCC of FTI Consulting, Dr. Mike
Pappas, P.E., PhD of Pappas Consulting,
Inc. and Jarad Kriz, CCM, LEED AP
(BD+C), PSP of FTI Consulting with peer
review performed by: Robert Beck,
Executive Vice President of John W.
Danforth Company; Michael R. Cables,
Executive Vice President of Kinetics
Systems Inc.; James Durant, President
and CEO of Trautman & Shreve; Richard
Freeman, Executive Vice President of
Stromberg Metal Works; Matthew Hahr,
Senior Vice President of John J. Kirlin,
LLC; Michael Loulakis, Esq.,
President/CEO of Capital Project
Strategies; Michael Mack, Vice Chairman
of John J. Kirlin, LLC; and Adam Snavely,
President and CEO of The Poole & Kent
Corporation.

Bulletin No. OT2 Revised;
File: Overtime
Bulletin
Shift Work and its Effects on Productivity

The following paragraphs list factors that when he completes his shift. Extra
may affect productivity when work is time will be spent reorganizing tools
done on a shift work basis. Most apply and equipment.
to extra shifts, although you should
note that paragraph B and C also affect 4. Night work will result in work force
costs on a regular shift. All factors may fatigue to a greater extent than
not apply to a particular job. daytime work.
Factors Affecting Shift Work 5. Supervision will be diluted, since the

Productivity normal supervisory employees of the
company must be spread out over
1. Additional NeedsNight versus
several shifts. Supervisory problems
Day. Since the extra shift will be
also include transferring information
performing at night, natural lighting
between shifts as to work
will not be available and good quality
completed, ordering of materials,
artificial lighting may have to be
deliveries, field orders, etc.
provided. Even if the work is done
inside a building, additional lighting
6. Additional welders may have to be
in yards, storage areas, etc. would
qualified for second shift operations,
be required. It would also be
resulting in increased manhours for
expected that the temperature and
testing, together with the cost of
weather conditions at night would be
qualification tests.
more severe than during the daytime
period and additional heating would, 7. The men required for ancillary
therefore, be needed. services, such as laborers and
operating engineers, whose time is
2. Since both shifts will be working on
normally distributed over a broader
the same installation, there will be a
base of total pipefitter manpower,
certain inefficiency in the transition
will add disproportionally to the
from one shift to the other. The new
smaller work forces normally used
shift must go through a learning
on additional shifts.
period to become familiar with the
work done by the previous shift. 8. When only one trade is working
shifts, they probably will not be
3. Since both shifts use the same tools
pushed to complete certain work,
and equipment, they will not be at
as they may be during the regular
the same place and in the same
shift.
condition as a man leaves them

9. If the shift works 7 1/2 hours in lieu Labor Costs
of 8 hours, the percentage of work 1. Hiring for Shift Work. If it is
hours spent in starting, stopping, necessary to hire additional
and coffee breaks becomes a personnel to man the shift, be aware
greater proportion of the work shift. that the productivity of new hires
may not be the same as for the
10. The social aspects of the tradesmen established crew. This may also
may have to be considered, such as depend on the employment levels
the disruptions on family life by and labor availability within your
working nighttime hours, and the local jurisdiction.
effects on a man of having to
change his schedule, such as 2. Shift Premium Differential. Shift
sleeping during regular daytime premium differential should be a part
hours. of the labor contract.
The following is an index of additional 3. Absenteeism. Absenteeism can run
factors which should be considered as as high as 30 percent during
direct costs when pricing bids for shift summer vacation months,
work operations. particularly on Fridays and Sundays,
and when holidays occur during shift
Additional Factors schedules.
Coordination Costs
1. Overtime Supervisory Personnel. 4. Bodily Adjustment Period. An
It may be necessary to overlap adjustment period can be from 30 to
supervisory personnel by 12 hours 60 days, with a productivity loss of
per shift. 15 percent to 25 percent during this
time.
2. Engineering Costs. Additional
engineering costs may be required 5. Accident Rate. An accident rate
for all shifts, at least in the initial increase of up to 15 percent may be
stages of the project. experienced, which would mean
additional workers compensation
3. Project Support and costs.
Communication. A jobsite business
office containing business machines, 6. Efficiency Loss. From 10:00 p.m. to
such as faxes, computers, etc., may midnight, there is up to a 25 percent
be necessary due to the need for loss of efficiency.
intense coordination, communication
and information disbursement 7. Alcohol. Often there is an increased
among shifts. The lack of available consumption of alcohol before
personnel in the home office after coming to work by shift workers.
regular shift hours may require
8. Attitudes. Lack of productivity and
supervisory personnel from all shifts
quality workmanship can transfer
to meet on a regular basis for
coordinating, planning and from one shift to the next.
establishing relationships among
shifts. Job Costs
1. Safety. Safety requires more
emphasis due to potential increase
in the accident rate.

2. Heat. Heat in colder climates may 3. Additional supervisory personnel,
be required to a greater extent on foremen, etc.
second and third shifts.
Conclusions
3. Lighting. Particularly when work is After the contractor considers these
being performed outdoors, i.e., items, he should then determine the
installation of rooftop units, effects on overall productivity and the
additional lighting may be required. cost of shift work based upon overall
productivity. He may also want to
4. Rental of Equipment. All shifts consider that during the short-term, such
must have adequate tools and as one through four weeks, the
equipment available. productivity of shift work will be different
than during the long-term, such as three
5. Delivery Charges. If they are months or more.
required, delivery costs can be
costly outside of regular hours. In situations of a controlled environment,
such as a fabrication shop, there may
6. Material Availability. A crucial
be some advantages (or perhaps less
scheduling consideration, depending
disadvantages) to shift work other than
on schedules and productivity, may
for those outlined above. These factors
be the requirement for
include using a plant twice, thus cutting
accompanying shifts in the
the fixed overhead cost; fewer
fabrication shop.
interruptions on the work force; and less
supervisory problems. The latter is true
7. Tool Availability. Time required in
since fabrication work tends to be
searching for and/or replacing tools
production- type work and information is
can be staggering. Most companies
normally passed directly to the
provide a set of tools for each work
tradesman by fabrication drawings or
shift.
fabrication tickets.
Additional Resources
In some regions of the country, such as
When shift work is not the norm of the summertime in the Southwest, weather
company, all of the items described and temperature conditions may be
above may apply. However, the such that it would be an advantage to
company may also require additional work shifts. If so, this should be
resources to accommodate the shift considered by the contractor. If the
project and other projects in progress contractor is in the position of being able
could suffer drasticallya real hidden to make a decision as to whether to use
cost. Some of the added resources that shift work or overtime, he should
should be considered for sporadic shift determine a total productivity factor for
work: shift work and compare this with the
productivity factor for overtime work, as
1. Additional engineers for the other described in other Management
shifts and overlap with daytime Methods Bulletins. (See Factors
engineers. Affecting Labor Productivity on page 77
and How to Estimate the Impacts of
2. Additional project managers for Overtime on Labor Productivity on page
other shifts for continuity and 105.) This information should be used in
resolution of problems which surface making the final decision.
on late shifts.

Bulletin No. PD1 Revised
File: Productivity
Bulletin
Maintaining Control of Labor Productivity

Introduction maintain an estimating department
In the mechanical contracting sector of comprised of estimating professionals
the construction industry, as with all that will not, in the final analysis, be held
labor intensive trades, once the project responsible for the final labor
has been bought out and the material expenditures on the project. Therefore,
and equipment purchase orders have it is important to conduct in-house
been entered into the job cost system, project initiation meetings wherein the
the largest single variable (and the most estimators can explain, in detail, what
volatile component) that controls profit was included and excluded in the
on the project is the expenditure of labor estimate as well as defining any
hours. Therefore, one of the keys to assumptions that were made in the
profitability on a project-by-project basis preparation of the estimate.
is maintaining control of labor Furthermore, the basis of the labor
productivity. estimate, along with any factors or
special productivity rates that were used
Surprisingly, many labor intensive by the estimators, can be communicated
contractors do not make any attempt to to the project management team.
monitor and control labor hour
expenditures during the life of a With so much profit or loss at stake, it is
construction project. All labor charges important that labor-intensive
are recorded to one or two general contractors make a management
project codes, such as field labor or decision to track labor expenditures on a
shop labor. This method of labor specific and identifiable basis on every
control may be adequate for small and major construction project. As set forth
very simple projects with limited risks of in this bulletin, the reasons offered for
labor overruns. However, on large and not tracking field labor are varied and
complex projects that offer a mechanical generally lack substance. One excuse
contractor the potential to lose that is frequently put forth regarding the
thousands, or perhaps tens of contemporaneous tracking of labor by
thousands, of labor hours, a system of element of work is the difficulty in the
general and summary level labor field with ensuring reasonably accurate
tracking results in an unacceptable level reporting, such as disseminating to the
of risk. It is not standard practice in our labor managers the meaning of the
industry for the team that prepared the various labor codes. Since the reporting
original estimate to also be the team may be unreliable, a contractor may
that manages its installation. Generally, elect not to maintain reasonably detailed
most large mechanical contractors labor records. Other labor managers
simply aver that tracking labor by
multiple-labor codes on a regular basis lines, systems, rooms, crew codes or
is too much work and the investment of other definitions that will allow specific
resources is not sufficiently rewarded by identification of the work on the contract
the value of the information gained in drawings. Each activity should be given
the process. a detailed and specific description of up
to 48 characters in length2 in order to
This bulletin will explore the arguments comport with critical path method
supporting more specific and defined (CPM) schedules that are typically
labor tracking and some of the methods developed from the job plan activity
of achieving greater control over the listing.
expenditure of craft labor on
construction projects. The recommended size of the activity
(i.e., the amount of work that is included
Terms and Concepts Used in in an activity), and the resulting duration
Project Planning and Labor for the activity, are based on the
Tracking principle of optimized tracking.
Optimized tracking refers to the greatest
Original Estimatethe collection of bid
reasonable degree of reporting accuracy
forms, take off sheets, labor adjustment
that can be expected during the course
sheets,1 material, equipment and labor
of the project. The concept of optimized
pricing documents and other, similar
tracking dictates the size of the activity
material that comprise the bases for the
in the job plan, as well as in the project
final labor estimate included in the lump
CPM schedule. In scheduling, the
sum bid for the project. Obviously, an
general guideline regarding the
important historical set of documents
durations of erection activities3 for
regarding the original estimate are the
optimized tracking suggests a range of
bid set of drawings and specifications.
between three to 22 work days for the
majority of the activities defined in the
Job Planning (the Job Plan)the
job plan. Obviously, some activities will
process whereby the estimators and/or
be only one or two days in length by
the construction managers divide the
necessity. However the majority of the
original estimate into identifiable units of
activities in the job plan and schedule
work to which can be assigned the
should have durations that fall within the
materials and equipment that must be
range of 3 to 22 work days. This range
installed and the labor and construction
or duration for the activities used in the
equipment that is required to complete
schedule also provides for optimized
each unit of work.
tracking when these activities are also
used in the job plan reporting system.
Activitythe basic unit of work in a
construction job plan (and in the
The duration of an activity is calculated
construction schedule). The activity is
by estimating the number of labor hours
the unit of work into which the overall
that will be required to complete the
original estimate is divided for the
activity and by estimating the crew size
purposes of tracking and managing craft
for the work. The duration is derived by
labor during the construction process.
dividing the total estimated labor hours
The original estimate is divided into
by the hours required for the crew per
activities during the job planning phase.
day. For instance, if the activity will
Each activity is defined by specific
consume 640 labor hours and the
geographic or contract boundaries such
contractor plans to utilize a crew of four
as: phase, building, floor, sectors and by
mechanics (i.e., totaling 32 hours per
other designations such as by column
day), the resulting duration for the

activity would be 20 work days. prime contractor requesting the
required modifications. If the prime
Obviously and within reason, the more contractor refuses the reasonable
specific the activity data, the more schedule modification requests of the
valuable is the reporting information. mechanical contractor, the prime
Therefore, it is advisable to differentiate contractor should be placed on notice
between the types of systems that may that the baseline master schedule is not
occur within the same geographic area, reasonable. Specifics should be
resulting in more than one activity in an provided in the written notice as to the
area. For instance, if the mechanical activities and/or logic that are incorrect
contractor has HVAC piping, plumbing or inconsistent with the mechanical
piping and duct work within the same contractors reasonable plan to
area, each principal trade would have its prosecute its base contract work.
work identified by separate activities.
Similarly, if the mechanical contractor Activity Identification (ID) Code
has large bore weld joint carbon steel the unique numeric, or alphanumeric,
pipe, socket weld small bore pipe and identifier that is given to each activity.
thin wall stainless steel pipe work, all in The application of activity IDs may be
the same area or phase of the project, it dictated by the contractors job costing
is useful to divide this work into three system, the labor performance software
discrete activities by type of piping in use and by the scheduling software
system based on the crews that will that may be employed on the project. In
perform the installation work. order to simplify the overall labor
tracking operation on a construction
Furthermore, the activity should be project, it is important to utilize the same
defined during the job planning phase codes for all cost, labor and schedule
such that the work can be commenced tracking software systems. Having one
and not halted until the activity is single set of activity IDs for all control
completed. This is one of the systems used on a project will increase
characteristics of an efficiently planned the accuracy of the reporting and reduce
construction project; namely that the the overhead costs to develop and
activities express continuity of work update the systems.
such that there is no planned start-stop-
start disruption contemplated in the Labor Performance Report (LPR)
baseline job plan or CPM schedule. the report format that provides the
planned and the actual performance
Once the mechanical contractor has data for use by field and office
developed its activities, this information management during the life of the
should be shared with the prime project. There is not a single, best form
contractor for integration into the project of this report and many mechanical
master schedule. If the prime contractor contractors have developed their own,
has already prepared the overall master highly effective, version of the LPR. The
schedule, the mechanical contractor LPR can take on many different forms
must determine if the activities created and is called by different names by
in its job plan comport with the various mechanical contractors, but for
mechanical activities created by the the purpose of this bulletin, the report
prime contractor. If the activity durations that provides the labor tracking
of the prime contractor do not comport information will be known as the LPR.
with those contained in the mechanical One example of an LPR is shown at the
contractors job plan, then a written bottom of the following page. The code
request should be submitted to the fields are identified from left to right as

follows: reporting period
Activity ID Codethe unique identifier Variance Week 2the craft hour

for each activity variance as of two weeks prior to the
current period
Activity Descriptionthe definition of
the work that is to be performed Variance Week 1the craft hour
variance as of one week prior to the
Planned Hoursthe originally current period
estimated (or re-estimated hours)4 hours
to perform the work Current Weekthe current period craft
hour variance ( over budget / + under
CO Hoursestimated change order, or budget)
scope change, hours
By maintaining a current and accurate
Revised Planthe total of the original job plan, the productivity of each activity
estimated hours and estimated change of work can be measured on a period-
order hours by-period basis (usually measured by
pay period). Once the activity ID codes,
Last Percent Completethe progress activity descriptions and the planned
of the activity at the previous reporting hours have been input at the outset of
period5 the project, the regular input data
consists of: (i) any revisions to the
Current Percent Completethe original job plan hours (i.e., changes in
progress of the activity at the current scope); (ii) the actual hours from payroll
reporting period information; and (iii) the percent
complete of the activity. In return for the
Earned Hoursthe should have input of the above-listed data, the
spent hours (Revised Plan x Current project team has at its disposal a
Percent Complete) powerful tool that allows management to
review with specificity the areas of labor
Previous Total Actual Hoursthe expenditure that exceed the budgeted
actual hours charged as of the last job plan labor hours. Most importantly, it
reporting period permits the project management team to
identify specific activities of work that
Current Actual Hoursthe actual are indicating unproductive progress
hours charged through the current before the activity is complete, thus

allowing the project management team that will allow proactive management
to proactively address the forecast labor intervention
overrun before it becomes an historical
loss. Mitigating, or documenting, the
inefficiencies associated with non-
The Purposes of, and contractor caused impacts as well as
Methodologies for, Tracking accurately quantifying the
Labor associated costs
The single, best reason to maintain
In fact, these reasons to track labor
better control of field labor expenditures
expenditures contribute to the concept
is to increase profit. There are other
of maintaining, or increasing, profit on
sound reasons for a higher degree of
the project. The job plan should be
labor control on construction projects,
developed with the input and direct
which include:
assistance of the field labor supervisors
Establishing, or verifying, the (sometimes called the labor
accuracy of the contractors bidding superintendent or general foreman). The
units inclusion of the principal labor managers
will increase the opportunity for accurate
Developing an early warning system labor reporting. An essential element of

accurate labor reporting is the clear must be input to update the job plan
definition of the work included in an
activity. Current period percent complete
progress by activity ID code
Documenting the elements of an activity
is an essential ingredient in achieving The foregoing represents the ongoing
accurate labor reporting. One means of data that must be collected and entered
meeting this goal is to mark the outlines into the LPR to allow the report to
or boundaries of each activity on a set of provide a variety of output data that can
contract drawings. The graphic example be used by the project management
below shows how depicting the extents team proactively to address productivity
of a specific job plan activity can provide events that serve to reduce profits
relevant documentation that can be and/or cause delays to the construction
constantly referenced during the life of schedule. The software cost for
the project. implementing and maintaining a labor
tracking and trending system is not the
In addition, other forms can be utilized limiting factor for the use of such
to capture the details of each activity systems. Reporting systems as
that can be referenced during the described herein can now be
project to ensure that the actual labor accomplished using some of the more
hour reporting is accurate. The form advanced features of Microsoft Excel.
shown below has been used on large Therefore, the actual costs of the
and complex projects to document the software and computer platform to run
labor, equipment and material required such systems are no longer a bar to
to perform each activity. The form allows their implementation. It is simply
the contractors planning team6 to record reduced to the will of the mechanical
each set, or task, which will be required contractor to track the expenditure of its
to complete the activity. Such records most valuable and volatile resource
can substantially improve the quality field labor.
and accuracy of actual labor hour
reporting in the field. With an accurate LPR, the project
management team can readily and
Any project reporting system requires an effectively evaluate the productivity of
investment in terms of management defined areas of the project including
resources. If a contractor expects to specific crews, labor managers or other
derive valuable management defined features of the work. Often,
information from any reporting system, inspection of the updated job plan
whether cost or labor efficiency, activity ID codes will alert the project
attention to detail and accuracy are a management team to inefficient labor
necessity. A corporate culture that trends that can be investigated by
supports accurate cost and labor physically observing the work and
reporting is essential. Once the initial interviewing the labor foremen to
data has been input and collected, the determine whether the deteriorating
contractor has the following data that labor productivity has been caused by
must be accurately coded and input on changed conditions, unanswered RFIs,
a period-by-period basis: other impact events beyond the control
of the mechanical contractor or self-
Actual field craft labor hours charged induced inefficiencies.
to each activity ID code
However, if the contractor does not
Estimated scope change hours that institute quality control checks and

reviews of the data and the period-by- engaged to ensure that the craft labor
period coding of the actual labor hours managers who generally decide to
to the job plan activity ID codes, the which activity ID code actual labor hours
resulting inaccuracies arising from this are assigned are charging the hours to
neglect may render the LPR unreliable. the correct activity ID codes. This may
For instance, some mechanical even entail changing the contractors
contractors offer a bonus to labor bonus incentive plans to move away
managers for hours saved on the from bonuses granted purely on
project. This program may have the incremental reporting of labor efficiency.
unintended effect of promoting the In addition, the labor managers must be
balancing of actual labor hour charges given the time and clerical support to
each reporting period. If the craft labor allow for accurate collection of the
manager sees an activity ID code necessary data. Whatever steps are
decreasing in efficiency (i.e., the employed to ensure accurate charging
negative variance increases each of actual labor hours will be effort well
period), there may be a temptation to spent in terms of providing an invaluable
improperly reassign craft hours from the tool for the project management team to
inefficient code to a labor code that is detect potential losses of labor
reporting highly productive work. This productivity before they become
sort of balancing renders the LPR significant.
information suspect and unreliable.
The primary goal of the labor tracking
Every reasonable effort should be and trending methods described herein

is to increase profit. The mechanism by loss becomes project-wide.
which that goal is achieved is known as
proactive management. Simply put, Labor Productivity Trending
this sort of management occurs when a In order to grasp quickly the overall
project team is able to identify negative labor productivity on a construction
trends within its labor budgets early project, it is essential that the data be
enough to allow the manager to identify presented in a format that can be readily
the discrete work activity in which the acted upon by the management team.
inefficiency is occurring and to take Various summary reports and trending
steps to totally remedy or mitigate, or at curves can be produced from the LPR.
least identify the source and location of, or instance, from the summary of the
the productivity loss. Assuming that the LPR, the total project (or the mechanical
activity has been properly developed, it portion thereof) can be computed on a
will have definable and specific period-by-period basis. This data, in
geographical boundaries such that the combination with the variances
labor manager can walk onto the project computed within the LPR, can be
and stand in the area of the activity. combined to create a curve or trend of
The presence of such specific labor labor productivity, as can be seen in the
tracking and trending can allow the example below:
manager to evaluate the potential
causes of the reported inefficiencies and From this sample curve, the trend of the
take the appropriate action before the labor expenditures can be plotted and
quickly evaluated by the project

management team. On this example, terms of labor hours
the total project percent complete, labor
hours over/under budget and percent Progress gained by period in terms
variance are shown on one chart. These of labor hours
types of easily assimilated graphic
presentations can be augmented with The progress (by percent complete)
other types of roll up trending reports that must be achieved by period
that have their data derived from the
LPR without any further input by the Required crew size at the planned
project team. Other sorts of roll up, rate of performance
summary level reporting that can be
generated from the data described Required crew size at the actual rate
previously herein includes the following of performance
example:
Historical reporting on the activities
Such summary level reports require no that have been completed
further input from that described herein
and can provide valuable management Trending of the active activities
information. From the above example,
the following data can be derived: These data can provide further insight
into the typically non-linear expenditure
Total hours ahead or behind the job of labor hours on a construction project
plan and within each discrete activity. The
object of any reporting methodology and
Total project percent complete in output reporting is to increase profits
and eliminate the end-of-project labor

loss surprise that afflicts a large Among other information that is
number of otherwise sophisticated and necessary in order to perform a
successful mechanical contractors. measured mile analysis, the contractor
must have available comparative data in
When Loss of Labor order to compute the varying production
Productivity Claims Arise rates. If the contractor maintained an
On some projects, the mechanical LPR system similar to that described
contractor sustains a substantial loss of herein, then the data required to perform
labor productivity for which the a measured mile analysis can usually be
contractor seeks recovery from a prime compiled.
contractor or owner. Each year, MCAA
member firms incur hundreds of millions By referencing its estimate, or by taking
of dollars in unplanned labor off systems by activity ID codes, the
expenditures due to loss of productivity contractor can equate labor hours to the
impacts not caused by the mechanical quantity of material installed. A
contractor. To the extent that it can be measured mile analysis requires
demonstrated that the mechanical knowing the actual hours expended to
contractor was not the cause of such install a unit of material; for instance,
losses, it may be necessary to develop hours actually expended to install a
a loss of productivity claim. In some linear foot of 14" ASTM A-53 schedule
cases, the very survival of the contractor 40 butt weld pipe by area or time frame.
may depend on the success of such a The vast majority of mechanical
request for equitable adjustment. Once contractors do not track materials
the mechanical contractors estimate installed on a period-by-period basis.
has been eliminated as the source of However, the materials and conditions
the loss, the mechanical contractor of installation can be readily analyzed by
should determine what other events reviewing the historical data that
cause the loss of productivity. Some supports the job plan and the LPR.
commonly overlooked items are the Assuming the mechanical contractor
impacts of RFIs, field change directives has retained the records (such as
and field fit-to-suit conditions, which contract drawings marked by activity ID
are seldom incorporated into the code or the Activity Planning Form) that
compensation for change orders. After provide the basis of each activity, the
careful evaluation of the events that materials installed in the activity can be
adversely affected the labor productivity estimated or, if the Activity Planning
on a project, the mechanical contractor Form has been used, the material data
has the option of either absorbing the are readily available without the need to
loss or preparing a loss of productivity reestimate the materials.7
claim. One of the acceptable methods of
computing loss of productivity is the Assuming that the contractor has
measured mile method. This method is accurately recorded the actual hours
described in the bulletin describing How charged to each activity ID code, the
to Use the MCAA Labor Factors. hours required to install the material and
Simply put, this methodology computes equipment within an activity are
inefficiencies by measuring a identifiable. With that information in
contractors actual productivity rate hand, a contractor can compare the
achieved in a time frame or area of labor required to install systems in less
lesser impact and compares the impacted time frames or areas with the
contractors actual productivity in a time labor required to install similar systems
frame or area of representative impact. in the impacted time frame or area. The
measured mile method is not dependent

upon the contractors estimate because value of the labor tracking and trending
it uses actual installation rates achieved systems described in this bulletin. The
on that particular project site to form the writer had the privilege of having been
basis of the productivity comparison. As employed by one such firm and had the
noted in How to Use the MCAA Labor opportunity, on a first-hand basis, of
Factors, on some projects it will be experiencing the hard work developing
impossible to perform a measured mile and maintaining an accurate LPR
analysis, even if proper labor system and also of witnessing the
productivity data is available. On many material benefits that resulted from this
projects, there is no identifiable proactive management concept.
unimpacted, or less impacted, period
thereby preventing the contractor Paul L. Stynchcomb, CCM, PSP, CFCC
from applying a measured mile analysis. FTI CONSULTING
In such cases, the MCAA factors
1
described in Factors Affecting Labor For the purpose of increasing the
Productivity and How to Use the competitive nature of a bid, many
MCAA Labor Factors can be useful in mechanical contractors discount the
estimating the cause and effect of detailed labor estimate by some factor or
percentage. Any such adjustments should
various sources of inefficiency such as
be carefully documented in the bid file.
Reassignment of Manpower, Crew
Size Inefficiency, Dilution of 2
In todays construction environment, the
Supervision and Overtime most widely used CPM scheduling software

Inefficiency. This data and an system is Primavera . This software system
explanation of what a loss of productivity allows activity descriptions of up to 48
claim entails are addressed in the other characters in length, however the software
MCAA bulletins as noted above. allows for many additional fields into which
the planner may place area, floor, column
Conclusion line, crew identification, or other code
information in order to track the activity with
Measuring labor productivity during the greater particularity.
course of a construction project requires
3
discipline, dedication of the labor Erection Activity as opposed to
management team and an earnest procurement activities, such as Fabricate
desire to understand the somewhat and Deliver Chiller, which may have a
ethereal and amorphous concept of duration of many months and will not be
labor inefficiency. The pursuit of this assigned field erection labor in the job plan
or in the schedule.
understanding, however, can lead to
more profitable construction projects 4
Some mechanical contractors require that
and avoidance of substantial losses that the construction team re-plan the project
are occasioned by impacts causing loss once it has been transferred from the
of labor productivity. estimating department. The construction
team may find differences in the
Authors Note construction estimate as opposed to the
original estimate. The job plan should reflect
Obviously, the labor tracking and
the planned hours determined by the team
trending concepts described herein that will actually take responsibility for the
were not originated by the writer. I am profitability of the project.
compelled to credit many experienced
5
and highly profitable mechanical The frequency of the reporting periods is
contracting firms, well known within the generally governed by the frequency of the
MCAA membership, for developing, pay periods of the field craft labor, which is
testing and proving the inestimable usually weekly or twice monthly. The longest

effective reporting period in terms of labor
tracking and trending is approximately
monthly.
6
Many mechanical contractors find it very
valuable, and highly profitable, to have the
construction team perform a re-estimate of
the project before commencement of the
work. While time-intensive, this operation
provides an invaluable learning experience
for the project team concerning the
particulars of their specific project and will
provide for a reasonably detailed job plan
that relates to the manner in which the
project team will actually prosecute the
work. Another benefit of this process is the
identification of long lead-time procurement
items.
7
To the extent that change orders have
been issued, the original estimate for
materials must be adjusted for the material
items added by the change orders to create
the adjusted estimated quantities. This is
true for field labor as well.

CFCC of FTI Consulting, with peer review
performed by: Ronald Pearson,
President/CEO of The NewMech
Companies; Matthew Hahr, V.P. of John
J. Kirlin, Inc.; Richard Freeman, Exec.
V.P. of Stromberg Metal Works, Inc.;
Robert Cox, Esq. of Watt, Tieder, Hoffar &
Fitzgerald; and Robert Windus, Esq. and
Stuart Sakwa, Esq. of Moore & Lee, LLP.

Bulletin No. PD2 Revised
File: Productivity
Bulletin
Factors Affecting Labor Productivity

Instructions on the use of MCAAs Labor Factors are provided in the section of this
bulletin titled How to Use the MCAA Labor Factors.

Connecting the Cause and Effect
in Loss of Productivity Claims
By Gerson B. Kramer
Gerson B. Kramer began acquiring his vast experience in measuring differential

productivity during his first post-college job at the Department of Labors Bureau of Labor
Statistics. After graduating from George Washington University School of Law, Mr.
Kramer joined the Justice Departments Court of Claims Section and later the
Commerce Departments Appeals Board. For ten years prior to his retirement, Mr.
Kramer served as chairman and chief administrative judge of the Department of
Transportations Contract Appeals Board. In that capacity, Mr. Kramer heard cases
involving contractors claims for loss of labor productivity and authored a reported
decision on one of the governments largest inefficiency cases in the history of any major
board of contract appeals.
The construction industry is one of the quantum being sought. In my

leading capital industries that drive the experience, productivity can be
U.S. economy. As an industry, it summed up as the efficiency that
depends to a great extent upon labor contractors achieve in converting inputs
productivity to remain profitable. Yet, to outputs. In the construction industry,
many construction firms do not maintain this usually means the conversion of
the necessary records to supply the labor hours to a quantity of installed
quantification of its labor productivity. materials, such as tons of steel erected,
cubic yards of concrete poured or linear
A contractor needs to maintain accurate feet of pipe installed. However, where
contemporaneous productivity records productivity is concerned, there is no
to manage its labor forces and to serve general agreement and no black letter
as a foundation in the event of a law as to how this is to be quantified.
productivity claim. While the courts and This is equally true of quantifying the
boards have established the principle loss of productivity. Furthermore,
that a contractor need not compute its standard cost accounting categories and
loss of productivity with exactness, it standard monetary categories do not
would appear that accurate recording of readily yield the necessary
a contractors productivity is simply a quantifications of labor productivity or
management necessity to ensure loss of productivity. Neither the IRS nor
profitability, irrespective of the portent of the vast majority of construction CFOs
an inefficiency claim. arrange for, or demand, the reporting of
the necessary elements to calculate or
One of the fundamental issues that a quantify productivity or its loss.
trier of fact considers in hearing a
contractors inefficiency claim is cause This lack of quantification on productivity
and effect. Important in the or its loss becomes problematical when
consideration is the question of whether disputes arise. The disputes process
or not the contractors claims as to that is presented to tribunals calls for
productivity impacts comport with the magistrates to make findings of fact on

very specific matters. Although there is This process of matching the facts with
currently no accepted empirical study the claimed loss of productivity is
that delineates a specific methodology designed to provide the deciding
or a particular means of record keeping tribunals with a degree of confidence
to prove productivity or the loss of necessary to reach the ultimate
productivity, one method of labor decisions. It is well recognized that a
productivity quantification that has contractor does not have to prove its
achieved a relatively high level of loss of productivity with mathematical
acceptance is known as the measured exactitude; however this does not
mile analysis. This methodology is relieve the contractor from making a
highly dependent upon the contractors compelling case as to the specific
books and records and also upon the causes of the impacts and to connect
presence of an unimpacted and then with a logical effect. In this regard,
impacted area or period by which a the MCAA factors have been found to
production ratio can be computed. While be a reliable means of estimating a
this methodology has been well contractors loss of productivity caused
received by the courts and boards, it is by individual categories of causation.
also true that this methodology cannot For this reason, How to Use the MCAA
be applied on many construction Labor Factors, which outlines how to
projects for a host of reasons, two being use the MCAA factors to arrive at a
the lack of detailed productivity record reasonable estimate of productivity or
keeping and the lack of suitable or loss of productivity, should furnish much
comparable unimpacted areas or time needed and useful guidance to users
frames. The inability to prepare a who need to estimate productivity
measured mile analysis does not, in and quantities and costs.
of itself, bar a contractors loss of
productivity claim. In such cases, the MCAA thanks Judge Kramer for
contractor must apply a different providing this introduction.
methodology to connect the cause and
effect.
It is a fact that the MCAA factors have

been in use for over 30 years in
furnishing a means of estimating loss of
productivity in construction matters. One
of the most beneficial and advantageous
facts is that the MCAA factors require
users to consider carefully the narrative
facts and project events or milestones
with the trends shown by the numbers.
How to Use the MCAA Labor Factors
repeatedly instructs users to assess
carefully each and every element of fact
along with the use of the percentage
factors provided by Factors Affecting
Labor Productivity. Direct and indirect
impacts need to be quantified carefully
in conjunction with the specific events of
the project.

How to Use the MCAA Labor Factors
Introduction avoid the overly scientific and complex.
Since 1971 the MCAA has offered It is understood that quantifying a loss of
Factors Affecting Labor Productivity in labor productivity is oftentimes based on
its Management Methods Manual. an estimate of losses. However, by the
Known as the MCAA factors, they very complex nature of the issue of the
have been used by contractors to quantification of labor productivity loss,
forward price estimated losses of labor detailed explanations and qualifications
productivity in change order proposals, of applications must be offered to the
and to retroactively price estimated contractor.
losses of labor productivity in the whole
after the completion of a project. Since The MCAA factors have proven to be a
their introduction in 1971, the factor reliable means of estimating the loss of
titles, descriptions and the percentage of labor productivity on construction
estimated impacts have remained projects for over 30 years. The specific
unchanged. values shown in the factor tables must
be applied with careful consideration
How to Use the MCAA Labor Factors and a review of the facts surrounding
has been developed to provide detailed the events, which caused the loss of
explanations suggesting the proper use productivity. The applications of the
of the MCAA factors in estimating losses various MCAA factor percentages will
of labor productivity for both forward and vary as project conditions dictate. This
retroactively priced change requests chapter will provide specific guidelines
and for performing labor productivity and examples of several methods of
analyses. application for the proper use of the
MCAA factors in calculating the loss of
Also included are some points of labor productivity on construction
consideration when assessing change projects.
order conditions and contract language
that may affect the contractors ability to It is important to note that the MCAA
recover its damages. However, this factors have gained wide acceptance in
chapter offers no legal opinions or the construction industry and before
conclusions and the contractor should various courts, boards of contract
review all project documents and appeals and tribunals of the American
conditions with counsel. Arbitration Association. For example,
reference the Appeal of Clark Concrete.1
This chapter has been prepared to In this recent decision by the General
assist the contractor with the Services Board of Contract Appeals, the
quantification of the loss of labor board wrote, in part:
productivity caused by occurrences
described by the various MCAA factors. To assess the impact of
Of all construction-related subjects, the unanticipated conditions on
proof and quantification of the loss of productivity P&K used a manual
labor productivity are recognized as published by the Mechanical
among the most difficult and complex to Contractors Association of America
describe. An attempt has been made to (MCA). P&K has used it on other

projects to measure similar impacts, Direct impact is generally
and the publication is generally characterized as the immediate and
accepted in the mechanical industry direct disruption resulting from a
for this purpose. We have change that lowers productivity in
previously accepted the use of this the performance of the changed or
manual for this purpose as well. unchanged work. Direct impact is
Stroh Corp., 96-1 BCA at 141.132; considered foreseeable and the
also see Fire Securities Systems, disrupting relationship to unchanged
Inc., VABCA 3086. 91-2 BCA 23,743 at work can be related in time and
118.902. The manual lists various space to a specific change.
types of impacts, and for each, a Cumulative impact is the unforeseeable
percent of labor costs which disruption of productivity resulting
represents loss of labor productivity from the synergistic effect of an
under each of minor, average, and undifferentiated group of changes.
severe impacts. Cumulative impact is referred to as
the ripple effect of changes on
Coupled with credible testimony, the unchanged work that causes a
MCAA factors can be useful to decrease in productivity and is not
contractors, owners, boards of contract analyzed in terms of spatial or
appeals and other courts and tribunals temporal relationships. This
for the purpose of estimating a phenomenon arises at the point the
contractors loss of labor productivity. ripple caused by an indivisible body
on two or more changes on the pond
There are many definitions for the of a construction project sufficiently
impact costs associated with a overlap and disturb the surface such
productivity loss on a construction that entitlement to recover additional
project. The Department of Veterans costs resulting from the turbulence
Affairs Board of Contract Appeals in one spontaneously erupts. This
decision offered the following cogent overlapping of the ripples is also
explanation: described as the synergistic effect
of accumulated changes. This effect
Impact costs are additional costs is unforeseeable and indirect.
occurring as a result of the loss of Cumulative impact has also been
productivity; loss of productivity is described in terms of the
also termed inefficiency. Thus, fundamental alteration of the parties
impact costs are simply increased bargain resulting from the change.2
labor costs that stem from the
disruption to labor productivity The Armed Services Board of Contract
resulting from a change in working Appeals has also found that two types of
conditions caused by a contract productivity impacts can arise from
change. Productivity is inversely changes to the contract and the board
proportional to the manhours wrote as follows:
necessary to produce a given unit of
work. As is self-evident, if It is undisputed that the costs of
productivity declines, the number of performing changed work include
manhours of labor to produce a given both (a) those costs directly related
task will increase. to the accomplishment of the
changed work, called hardcore
The board continued in its explanations costs, and (b) those costs arising
of inefficiencies: from the interaction between the
changed work and unchanged work

or expended to offset inefficiencies effects of changes on the productivity of
experienced as a result of changes, a construction project.
called impact. Viewed broadly,
impact embraces: the man hours, General Discussion of Loss of
labor costs, and material costs that Labor Productivity
are expended to offset inefficiencies To offer the lowest bid price or
experienced as a result of negotiated price for a construction
Government-caused or contractor- project, labor intensive contractors such
caused changes or other departures as mechanical and electrical contractors
from the plan. Included is the must plan to control labor productivity.
process by which the above Controlling the productivity of labor
inefficiencies in the performance of during construction is central to
contract work are created. maintaining a fair and reasonable profit.
When events occur which could not
Among other things, impact reasonably be foreseen by a contractor
includes: inefficiencies due to during the bidding or negotiating
overcrowding, over or process, and which materially and
undermanning, skill dilution, negatively impact the contractors labor
extended overtime, shift work, and productivity through no fault of the
local and cumulative disruption. contractor, the contractor should
consider seeking recovery of the costs
Local [or direct] disruption refers to of the loss of labor productivity.
the direct impact that changed work
has on other unchanged work going For the purposes of this chapter,
on around it. Conceptually, for owner refers to the party with whom
purposes of this appeal, cumulative the contractor executed a contract. If a
disruption: Is the disruption which subcontractor, it could be the general
occurs between two or more change trade contractor; if a prime mechanical/
orders and basic work and is electrical contractor, it could be the
exclusive of that local disruption that
project owner, whether public or
can be ascribed to a specific change. private.
It is the synergistic effect . of
changes on the unchanged work and
Contractors have long understood that
on other changes.3
adding new scopes of work to the
original work plan can disrupt the flow
It is clear that a contractor must and rhythm of the otherwise productive
consider both the direct impacts of a crews. The added work often comes at
loss of labor productivity caused by a
the peak of the planned effort on the
change to the contract scope of work, as project, when craft levels are already at
well as the cumulative impact of
their highest points on the labor curve.
changes in scope to the unchanged Also, added scope often affects the
work. In the past, many contractors schedule, available work spaces, ability
have used the MCAA factors only when of labor supervisors to effectively
forward pricing a loss of productivity manage base contract craft labor,
component of a change order proposal.
material and equipment procurement
In addition to providing updated general and many other productivity-related
instruction on the uses of the MCAA
factors. Sometimes the effects of a
factors, this chapter seeks to explain scope change/change order, or a series
how the MCAA factors can also be of such changes, on labor productivity
applied equitably and reasonably when
can be of a higher dollar value than the
retroactively quantifying the cumulative

direct cost of the change itself. Such retroactive productivity loss
Assuming that the contractor did not analyses take into account the total
cause the changed conditions, the impacts of all unanticipated categories
contractor should seek to recover those of potential loss, such as the quantity (in
losses in labor productivity either within terms of added craft hours) of changes,
the change order, or, if necessary, at the resequencing, schedule delays and
end of the project when all of the effects disruptions, overtime and shift work and
of project-wide changes on the total increase in crew size over the optimum
labor productivity can be measured. The level.
courts have stated clearly that exact
methods of loss of labor productivity Many experts in the field of productivity
quantification are not a condition loss analysis believe that the only
precedent for recovery. Boards and means of recovering a significant portion
courts have recognized the difficulty of of productivity loss is to measure such
measuring productivity loss and allow losses in their totality, at the end of the
the contractor to use several methods, project, particularly when such losses
including the MCAA factors, to measure are a result of a large number of scope
such losses. changes,4 which add a significant
number of craft hours. This is believed
Often, contract language known as full to be true because it can be very difficult
accord and satisfaction language, to evaluate fully the effects of
contained in some change order forms, productivity loss caused by one, single
may require the contractor to attempt to change in scope on the contractors
price all categories of productivity loss entire labor force, when it may not be
within the change itself, as estimated known how many changes will be
values. This is called a forward priced forthcoming in a given time period and
productivity loss and the cost of this how the aggregate of those potential
estimated loss can be included as a line impacts will increase the contractors
item in the change order proposal. While overall productivity losses. Such claims
it can be highly beneficial to include all are typically called cumulative impact
estimated impacts within a change claims and are a recognized
order, thus closing out the change, phenomenon by the major boards of
many owners refuse to recognize labor contract appeals. It is understood that
productivity impacts caused by scope on projects pervasively and adversely
changes or other factors beyond the affected by changes in scope, the only
control of the contractor. This leaves the reasonable means of recovery may be
contractor in the unwanted position of through a cumulative impact claim
either not executing change orders due rather than a forward priced, or
to the risk of waiving its rights or placing individually priced, loss of productivity
a reservations of rights statement on quantification.
each change, which can have the effect
of holding open the option of making Nevertheless, both methods of
further requests for equitable adjustment productivity lossthe forward priced
should the contractor suffer productivity and retroactively pricedare valid, and
losses due to the cumulative impacts of each project may demand the use of
changes in scope on the project. either, or both methods, described
herein.
Productivity loss recovery, which is
sought at the end of a project phase or In terms of actually measuring a loss of
after the project is concluded, is called a labor productivity, several methods may
retroactive productivity loss analysis. be available to the contractor. A highly

regarded method of measuring was not understood to have waived its
productivity loss is known as the cumulative labor inefficiency impact
measured mile. This approach utilizes claim on executed change order forms
actual productivity measurements taken containing full accord and satisfaction
in unaffected and affected portions of a language since such impacts are not
project and, from that data, a fully known while the project is active.
productivity ratio is established.
However, many contractors do not In line with the earlier cases, the recent
maintain labor hour tracking and U.S. Court of Federal Claims case of
material installation records needed to Bell BCI Company v. United States, 81
support this methodology and on some Fed. Cl. 617 (2008) upheld the
projects, there are no unimpacted labor proposition that cumulative impact labor
hours. In such cases, the MCAA factors inefficiency claims were understood to
can be very useful and have been be preserved even in the presence of
accepted by courts and boards as a waiver language on change order forms.
reliable means of estimating a However, on appeal, this decision was
contractors loss of labor productivity. vacated in part by the U.S. Court of
Appeals for the Federal Circuit. The
It must be stressed that the contractor Court of Appeals did not issue a finding
should carefully study the contract as to whether or not the contractor
general and special conditions, the sustained a loss of productivity caused
project schedule, change order forms by cumulative impact. Rather, the Court
and other, related documents to of Appeals found that the broad waiver
understand fully the rights, liabilities, language contained on the
obligations, limitations and remedies governments change order form had
which are provided for by the released the government from any and
documents that comprise the overall all liability beyond the express relief
contract. These documents may dictate provided for in the change order itself.
which method the contractor uses on a
given project. The Appeals Court wrote, The
language [on the change order form]
While the trend at the boards of plainly states that Bell released the
contract appeals had been to define government from any and all liability for
waiver language contained in change equitable adjustments attributable to
order forms as only waiving all impacts Mod 93. The Court further wrote, if
(direct and indirect costs) that were parties intend to leave some things open
knowable at the time the change order and unsettled, their intent to do so
was signed, the current trend points to should be made manifest. As such, the
much stricter and broader contractor was barred from recovering
interpretations of waiver language on its cumulative impact labor inefficiency
change order forms. An example of a costs for the contract modifications that
generally unknowable impact is labor contained the governments waiver
inefficiency caused by cumulative language.
impacts: those impacts arising from a
multitude of unanticipated labor- Based on this appeal, it would be wise
intensive changes in scope. Since for a contractor to assume that if broad
cumulative impact labor inefficiency waiver language is present on the
claims can only be quantified when all of change order form, such language will
the changes are known and the work is be viewed as a waiver of the
complete, in the recent past it was contractors right to later claim for any
successfully argued that a contractor added compensation, even for those

costs attributable to a cumulative impact
claim that cannot be quantified until the
project has been completed. Thus, if a
contractor believes that a cumulative
impact claim may be forthcoming due to
a large volume of labor-intensive
changes in scope, change order forms
containing broad waiver language
should only be executed after careful
weighting of the potential cost impact of
a waiver (i.e., waiver of future
cumulative impact claims) and with the
advice of experienced construction
counsel.
Use of the MCAA Factors for

Forward Pricing Scope Changes
The MCAA factors can be applied to a
pricing sheet for a scope change on an
itemized basis. Once the direct costs of
the change have been estimatedthe
labor, supervision, material, equipment
and other such coststhe contractor
can apply one or more of the MCAA
factors to the change order breakdown
sheet. In order to evaluate properly the
estimated, potential impacts to labor
productivity of changes in scope, the
contractor must determine if the change
requires a departure from the
contractors otherwise productive work
flow. A change of very limited scope,
which may affect only a small crew, and
which may occur in a limited and distinct
area of the overall project, may have
little or no measurable negative impact
on productivity. However, such changes
in scope are rare. Generally, changes
occur in the most active areas, and at
times when crews are at or near their
peak. These types of changes can have
a significant, negative effect on crew
productivity.
In order to estimate potential losses of

productivity using the MCAA factors,
questions can be posed to the
contractors labor supervisor(s) by
management:

These are the types of conditions, for percentage caused by stacking of
the purposes of examples, which can trades, overtime fatigue and
result from the issuance of changes in reassignment of manpower is
scope, and which can cause a loss of attributable to the attendant decrease in
labor productivity. The contractor must worker morale and attitude. Thus, by
apply the appropriate factor categories way of the above example, when using
and percentages. other factors that may already include in
the loss of productivity factor a
Factors Affecting Labor Productivity consideration for decreased worker
includes three levels of potential morale and attitude, it may be advisable
productivity impactsMinor, to avoid applying a potentially
Average, and Severe. Each level of duplicative factor such as Morale and
impact intensity carries its own loss of Attitude. Another example to consider
productivity percentage. The three when striving to avoid factor duplication
impact levels indicate the estimated is the Ripple Effect. This term of art
effects of the changed condition on the has been used in several board
labor hours being analyzed; i.e., specific decisions and is a well recognized
hours within the total hours expended, phenomenon in the construction
or on the total hours expended on the industry. This MCAA factor describes
project depending on the approach the downstream effect on the
being used. Also, the three levels of mechanical contractor of impacts
intensity allow the user to more caused to predecessor trades. For
specifically assign an estimated impact example, the mechanical contractors
for each of the MCAA factor categories schedule may be compressed because
being used, and like the categories the building structure was erected late.
themselves, should be applied with care In order to mitigate the structural delay,
and, if at all possible, with input by those the general trade contractor may
who witnessed the conditions under accelerate the follow on trades by
evaluation. stacking the crews of the various
subcontractors, or forcing the
While this chapter cannot provide for subcontractors to work on an overtime
each and every condition under which basis. In such cases, the loss of
contractors will choose a particular productivity may be better classified by
MCAA factor or factors, or the level of the events that result from the ripple
impact intensity, it is obvious that care effect, such as Stacking of Trades or
must be taken to eliminate overlapping Overtime Fatigue.
factors, to the fullest extent possible.
The unrestrained and ill considered On some projects, a mechanical
choice of multiple factors can lead to contractor may add labor supervision in
unreliable results. order to mitigate a loss of productivity
caused by an unplanned requirement to
For instance, the factor describing substantially increase its work force. In
Morale and Attitude is a valid, but such cases, the contractor generally
somewhat amorphous, category of submits a request for equitable
inefficiency. The effects of a decline in adjustment for its added supervisory
workplace morale and attitude can be costs. Such additions of supervision
embodied in several other MCAA usually do not totally eliminate the
factors, such as stacking of trades, contractors labor inefficiencies. The
overtime fatigue and reassignment of contractor may have suffered
manpower. It would be impossible to inefficiencies such as Stacking of
determine what portion the impact Trades, Logistics, or Reassignment

of Manpower, which the added labor resequencing, crew size increases,
supervision could not mitigate or overtime, shifting of work areas,
eliminate. However, where the piecemealing of the work and general
contractors supervisory forces are disruption of the rhythm of the crews,
effectively increased, it may be then average or severe impacts
duplicative for the contractor also to could be the result.
assert productivity losses arising from
the MCAA factor Dilution of When the factor for Crew Size
Supervision. Inefficiency is used, it is most helpful to
have on hand a planned craft level chart
Indiscriminate assignment of the MCAA based on the estimate or the project
factors can result in estimates that may plan. When attempting to demonstrate
be overstated and unreliable. Therefore, that conditions beyond the contractors
careful testing of each MCAA factor control resulted in a loss of productivity,
and its impact intensity must be carried it is very helpful to show graphically
out by the contractor. The description of what the contractor reasonably
each factor, which has remained expected. Therefore, an estimated/
unchanged for over 30 years, provides planned versus actual craft curve is
generally ample explanation of the type often helpful in graphically depicting the
of impact described in each MCAA effects of unplanned crew size growth.
factor category.
The percent values for each category
It is important to understand that the chosen are additive in the change order
MCAA factors provide a basis for pricing. Once all of the factors have
developing reasonable estimates of loss been carefully evaluated for each
of labor productivity and not for changed condition caused solely by the
developing a loss with exactness. Thus, proposed change in scope, the
when the MCAA factors and their percentages are added together. The
respective impact percentage are total percent is then multiplied against
chosen, it must be with the intent to the estimated craft labor hours for the
connect the cause or causes of the change. For instance:
inefficiency with the reasonable effects.
The MCAA factor descriptions represent
the cause and the impact intensity
percent represents the effect that can
result from the conditions described by
each MCAA factor. However, care must
be taken to consider potential
duplication and overlapping when the
factor categories are chosen.
Likewise, the assignment of the impact

intensity percentage must be chosen
with care. For instance, if the change in
scope is of a limited nature, on a project
with a reasonably small crew size with
little or no schedule impact (as opposed As stated previously, this methodology
to productivity impact), then a minor prices the estimated loss of productivity
category can be chosen. However, if the caused by project conditions only on the
change is significant in its scope and estimated change order hours. But what
requires major rescheduling and/or about the impacts of change order work

on the unchanged hours? It is infrequent contract, work.
that a change in scope is so segregated
from the base contract work that it has The principle is the same as is often
no effect on the crews performing employed to describe the overarching
unchanged, base contract work. How effects of overtime fatigue as it impacts
does the contractor recover the cost of a the overtime hours and the straight time
productivity loss caused by changes in hours worked by the overtime crews.
scope to the unchanged work? There Obviously, if a crew works for eight
are several ways to estimate the weeks of scheduled overtime, 10 hours
impacts to labor productivity of changes per day for six days per week, the
to the unchanged work, two of which fatigue and its resulting effects impact
use the MCAA factors (i.e., the modified both the straight time and the overtime
forward priced and retroactively priced hours worked by that crew. There is no
methods). Another highly regarded way to segregate the impacts of this sort
method of measuring productivity loss is of loss of productivity factor between
the measured mile. This approach straight time activities and overtime
utilizes actual productivity activities.
measurements taken in unaffected and
affected portions of a project, and from Similarly, if the owner issues a major
that data, a productivity ratio is scope change, or issues many changes
established. However, as previously in scope in the same general time
noted herein, many contractors do not frame, it may be impossible for the
maintain labor hour tracking and contractor to segregate the loss of labor
material installation records needed to productivity to the change order work
support this methodology and on some from the loss of productivity imposed on
projects, there are no unimpacted labor the base contract work by the changes
hours. In such cases, the MCAA factors in scope.
can be very useful in estimating the
contractors loss of labor productivity. As an example, a crew of nine pipe
fitters is working productively on base
Modified Forward Pricing for contract work. The owner issues a
Estimating Labor Loss of change, which requires four of this crew
Productivity on the Changed to move to scope change work. The
and Unchanged Work craft supervisor for this crew must now
divert his attention from the total crew
It is a well understood principle that performing base contract work to setting
when significant changes in scope are
up the new sub-crew performing the
issued to a contractor, a loss of labor scope change work. The remaining five
productivity may affect the change order workers productivity on the base
labor hours and the base contract labor
contract work suffers because work is
hours. Previously herein, a method was not being laid out as it was when the
described which only measured a loss
supervisor was focused only on the
of productivity on the estimated change planned work of the single crew;
order hours. This segment deals with
answers to workers questions take
estimating the effects of significant and
longer to resolve and materials and
pervasive changes in scope on the tools are frequently borrowed from
contractors entire labor forces, both
contract work to perform scope change
those working on the changed work and work. These impacts are defined by
those working on base contract labor;
Dilution of Supervision, Reassignment
known as the effects of changes in
of Manpower and perhaps other MCAA
scope to the unchanged, or base factor categories. This is only one

example of how a change in scope can released by the owner for pricing;
affect the productivity of both the
change order hours and the base 3) Performance of the scope change
contract hours. work without change order
execution; and
When attempting to estimate and
recover such losses in labor productivity 4) Not knowing what existing crews will
when changes of a significant be affected by the change order
magnitude affect the base contract work work.
force, a modified approach can be
employed. It is called a time specific Since these conditions are very
MCAA factor method. The time prevalent on construction projects, the
specific method is used for both this contractor may still be left with only
modified forward pricing method and the three options: 1) use the method which
retroactive pricing method (with slightly limits loss of productivity estimates to
different rules), which will be described the change order hours only; 2) wait
later in this chapter. The time specific until the project is over and perform an
method also requires significantly more overall loss of productivity analysis; or 3)
information than does the standard forego making any attempt to recover
forward pricing method, but it attempts the loss of productivity costs from the
to quantify loss of labor productivity to party making the change.
both the change order and base However, if the project conditions allow
contract hours. the use of the modified approach, the
general format is as follows:
This method has some requirements,
which may not be possible to meet 1) The time frame of when the change
because of problems inherent with the order work will be performed must
issuance of change orders. Some of the be known or estimatedin days,
field conditions which can restrict or weeks, or at most, monthly
eliminate the effective use of this increments.
method include:
2) The conditions of the change in
1) Unknown timing of owners approval scope must be knownwhat types
of the change order notice to and magnitudes of impacts are
proceed; anticipated.
2) Lack of foreknowledge on the part of 3) The planned craft hours for the
the contractor regarding pending affected period must be ascertained
changes in scope which are to be from estimates, labor plans or other

labor forecast reports. Similar to the concept of performing time
specific analyses, it is also appropriate
4) The crews which could be affected to determine if the contractors entire
by the change must be known (i.e., crew will be affected by the changes. If
some changes may only affect a change in scope only affects a
certain physical areas of an overall separate and discrete area of the
project, and therefore, not the entire project, it may not be appropriate to
work force). impact the total crew hours by a loss of
productivity factor. It is generally
5) A table is prepared with planned appropriate to use the MCAA factors on
hours per period (day, week or only those crews that will be affected by
month) across the top, including the the changed condition.
estimated change order hours. The
appropriate MCAA factors are listed Unfortunately, many owners simply do
along the y axis of the table. Under not recognize the effects of significant or
each time period, the appropriate numerous changes on the productivity
MCAA factor percentage is of the base contract labor. However,
estimated. The percentages may virtually all contractors recognize this
change from period to period based condition as a costly loss of labor
on the estimated impacts. The productivity. Therefore, the contractor is
percentages are then totaled and frequently left with only one option, a
multiplied against the total, post-project measurement of
estimated/planned craft hours. productivity loss caused by conditions
that are not the fault or responsibility of
6) An example of a resulting table the contractor.
follows:
Impacting the Project Schedule
In this example, a specific time frame Using the MCAA Factors
has been evaluated for estimated
impacts. This more specific method This chapter does not deal with the
permits the contractor to make MCAA development of the schedule time
factor applications, which can vary as impact analysis (TIA) or fragnet.
estimated conditions vary. This is However, contractors should impact the
actually more realistic and compares current project schedule activities with
well with what actually happens in the the loss of productivity estimates
field when changes are issued, or when derived from using the MCAA factors.
acceleration or other impacts occur. In
reality, as time and conditions in the For instance, a contractor originally
field change, the MCAA factors can planned a series of activities as shown
change as well and the estimate should below. One of the activities was
reflect this fact. adversely affected due to a change,
resulting in a 20% impact to productivity.
For instance, if the MCAA factor Inefficiency can impact schedule
Learning Curve is applied to a change, durations and as such, the duration of
which is estimated to have a long term the affected work must also be factored.
effect, this factor may only be applicable Unless crews are added, the originally
for the first two to four weeks of the planned duration for Piping Branches
impact, as new workers become familiar would increase from 18 days to 22 days
with the work area. This methodology as a result of the 20 percent impact to
allows for a more precise estimation of productivity.
loss of labor productivity impacts.

The loss of labor productivity will, in MCAA factors can materially affect the
general, cause planned activities to take schedule.
longer to perform, because the
productivity ratio of 1:1, which was most Retroactively Pricing Losses of
likely used as the basis of the activity Labor Productivity Using the
duration estimate, is no longer accurate. MCAA Factors
The contractor will no longer receive
In many instances, the only option for a
one hours production for an hour
contractor attempting to recover a loss
planned, but rather some production
of labor productivity caused by changed
rate less than the plan. Therefore,
conditions is to wait until the project is
unless crews and supervision are added
over and review the actual loss; planned
to the schedule in such numbers and
versus actual. Such claims are
with such care so as to accommodate
sometimes known as cumulative
the loss of productivity, the work
impact claims. The plan can be the
activities will take longer than planned.
original estimate of craft hours or the
preconstruction target plan. Before a
In this example, the 18-day planned
contractor makes a claim for a loss of
activity in the series will take
labor productivity at the conclusion of a
approximately 22 days each to perform,
project, several obvious considerations
given an estimated loss of productivity
must be made, including:
of 20 percent. The adjustment of the
project schedule for estimated losses in
1. Was the estimate/plan of craft hours
productivity can have a significant
accurate and reasonable?
impact on the critical path, and on
forecasted job costs. As can be seen in 2. Were the conditions, which caused
the graphic at the bottom of the page, the loss of productivity, reasonably
the extension of a duration of a planned foreseeable when the project was
activity by adjusting the duration for an bid/negotiated?
estimated loss in productivity using the

3. Did the contractor cause this loss of This methodology of multiplying the
productivity? MCAA factor percent against the actual
hours is incorrect. The actual hours
4. Were the principal causes for the against which the MCAA factors are
loss of productivity the responsibility frequently multiplied in a contractors
of identifiable parties? retroactively priced claim for loss of
productivity already include the
5. Will the potential cost of recovery contractors loss of productivity;
exceed the loss? therefore multiplying the MCAA factors
against the actual hours overstates the
There are a series of important legal loss of productivity. Only by removing
considerations which could be added to the theoretically efficient hours from the
this list which can only be addressed contractors actual hours can the MCAA
between the contractor and his factors be properly applied in a
construction counsel, and which are not retroactively priced request for equitable
the subject of this chapter. Additionally, adjustment.
this chapter addresses several methods
of calculating a loss of productivity using The actual hours must be further
the MCAA factors; however it does not adjusted to deduct:
address the means and methods of
proving the impacts, often known as the 1. Time and materials hours;
triad of proof, which includes proving
(a) liability; (b) causation; and (c) 2. Hours spent to repair the
resultant injury. This is also known as contractors defective work;
the cause-and-effect connection,
which is necessary in linking an owners 3. Change orders on which a loss of
actions and/or inactions to the productivity has already been
contractors injury. This chapter calculated; (If the contractor has
assumes that the contractor has already included forward priced loss of
determined liability and causation, and productivity in individual, executed
is attempting to quantify the resultant change orders, and then seeks to
injury by the use of the MCAA factors. recover global losses at the end of
the project, these incremental, per
Assuming that the contractor is satisfied change order loss estimates must be
that the loss of productivity is significant factored out of the computations.)
and is principally the fault of another
identifiable party, and that party is 4. Hours associated with executed
legally accessible for redress, then the change orders, where it has been
contractor must prepare the cause and determined that the contractor is
effect analysis. barred from recovering the impact
caused by the executed change
Frequently, contractors use the MCAA orders;
factors to retroactively price the
cumulative effects of changes in scope. 5. Hours expended by crews that were
Often, the method used by contractors not affected by a loss of productivity;
is to multiply the cumulative percentage
of losses of productivity as derived from 6. Other types of productivity losses for
the MCAA factors against the total, which the contractor is responsible
actual hours expended, sometimes with, (i.e., bid errors)
and sometimes without, change order
hours included in the total.5 Also, some contractors simply apply the

total MCAA factor percentage to the of productivity computations. This is
total actual hours for the entire project similar to the format for the modified
duration. This can, in some instances, forward pricing method, described
lead to inaccurate results because the previously.
effects of labor inefficiency can change
during the life of the project. When it is possible to apply this
procedure, the types of losses described
The MCAA factor percentages by the MCAA factors can be more
sometimes change as actual project accurately assigned to discrete time
conditions change. Therefore, it can be periods. The following table shows an
useful to assign the MCAA factors to the example of this type of time-specific
specific impacted time frames within the assignment of MCAA factors. Different
overall project duration. In some cases, MCAA factor categories can affect
multiplying an MCAA factor against the different periods of a project and at
total hours expended for the total different percentages of impact intensity.
duration of the project will result in a As stated, it may be inaccurate to
distortion (on the high side) of the globally apply the cumulative MCAA
forecasted loss of productivity. factors against the total hours expended
on a project. It may, depending on the
The loss of productivity categories specific circumstances, be more
described by the MCAA factors can accurate for the contractor to evaluate
occur in a nonlinear fashion across the the loss of productivity on a periodic,
entire duration of a project. To more rather than on a total project, time scale.
accurately demonstrate the retroactive
loss of productivity on a project, it may The following table demonstrates the
be desirable to divide the project into as-built, retroactive loss of productivity
months (or, if possible weeks) and to analysis using the MCAA factors, the
assign loss of productivity percentages rows indicate:
by MCAA categories by time periods,
based on the accounts of eye witnesses 1. The actual work period being
(field managers, labor supervisors and measured for impacts.
other fact witnesses) or on documents
prepared contemporaneously. 2. The actual, payroll craft labor hours
Consideration of the areas of the project (without supervision).
and the crews working in those areas is
very important in performing this 3. Craft hours deducted for time and
analysis. Only the crew hours that have material ticket work, the contractors
been impacted by the changed own deficient work (rework), any
conditions should be included in the loss estimated, self-inflicted productivity

losses, crew hours that the After interviewing the site personnel, if it
contractor believes were not affected is determined that a 25 percent loss of
by the changes in scope, such as productivity occurred, then the
crews working in areas of the project contractor must determine the number
not proximate to the areas where the of hours that were efficient based on
changed work was performed, and that estimated loss. Thus, taking the
change order adjustments as 1,680 craft hours and dividing that by
described herein. 1.25 results in 1,344 efficient hours. Had
the contractor not suffered any loss,
4. The resulting revised actual hours. 1,344 hours should have been spent on
the work. The difference of 336 hours
5. The list of the MCAA factor are those attributed to the identified loss
categories being applied. of productivity described by the MCAA
factors.
6. The resulting estimated loss of
productivity for each time period. With the above analysis, the hours the
contractor should have spent, if no loss
Note that the total MCAA factor of productivity had been encountered,
percentage has not been multiplied have been calculated (1,344 hours).
against the revised craft hours. Instead, Since the contractor has estimated that
the percentages have been totaled, the the workers were impacted by a 25
adjusted hours divided by one plus the percent loss, the resulting labor hours
decimal percent (i.e., 1.05 for the first being claimed for recovery is 336. If the
period in the table), and that result contractor simply multiplied the 25
subtracted from the total, adjusted percent times the adjusted actual hours
hours. One significant difference (1,680 x 25%), the resulting loss would
between forward estimated and be estimated at 420 hours. The
retroactively estimated productivity loss overstatement of loss would have been
is that the contractors actual labor 84 craft hours (420 336) if the MCAA
hours already include the loss of factor calculation had been misapplied.
productivity. Therefore, it is necessary to
calculate the productive hours first to The Should Have Spent
avoid overstating the loss of Labor Hours in a Retroactive
productivity, Loss of Productivity Calculation
For instance, referencing the preceding One of the foundations of a loss of labor
table, during week 42, the contractor productivity claim is to determine how
actually expended 1,800 labor hours. many hours the contractor should have
However, 120 hours were spent on time spent to perform the work had the
and materials work or repairing deficient contractor not been affected by events
work and were subtracted from the total, caused by others.
leaving 1,680 as the adjusted labor
hours. After removing the contractors The purpose of dividing the actual,
self-inflicted inefficiencies, if any, hours adjusted6 labor hours by 1.n, where n is
not affected by the changes, or the the decimal % of the total of the
hours for which the contractor was paid selected MCAA factors, is to derive the
for the inefficiency (i.e., T&M), what should have spent hours on the
remains are actual labor hours that project. Once the should have spent
already include the non-contractor hours have been calculated, then these
caused losses of productivity. hours can be subtracted from the total,
adjusted actual hours to determine the

hours of lost productivity. In a
hypothetical project, one without
changes in scope, estimate errors and
contractor-caused inefficiencies, the
calculated should have spent hours
should, theoretically, equal the original
estimated hours. However, this
hypothetical condition almost never
exists.
The actual hours are affected by a

series of inextricably intertwined events,
such as impacts of changes to the
unchanged work, impacts caused by the
direct hours of change order work to the
changes themselves, and other factors
that affect the number of labor hours
actually expended on a project.
Therefore, it is highly unusual when the
calculated should have spent hours
equal the original estimate of labor
hours. The frequent inability to match
the original estimated hours with the
should have spent hours only
demonstrates that many factors can
enter into the total hours expended on a
construction project, some of which can
be difficult, or impossible, to identify and
to quantify on an individual basis.
An example of calculating the should

have spent hours appears in the next
column.
The 4,085 hours represent the hours of

lost productivity caused by all types of
noncontractor caused impacts as
calculated using the MCAA factors. The
13,615 hours are the should have
spent hours if 17,700 adjusted, actual
hours were spent and the project difference will most likely be comprised
suffered an overall productivity loss of of the hours expended on scope
30 percent. change/ change order work, the loss of
labor productivity caused by the change
From the following example the obvious order/ scope change work and all
question ariseswhat comprises the categories of contractor-caused issues
difference of 3,615 labor hours between other than the hours subtracted in the
the original estimate and the calculated adjustment phase of the computation
should have spent hours (i.e.,13,615 (in this example, the subtraction of 300
should have spent hours10,000 labor hours which were attributed to the
originally estimated hours)? The contractors own forces).

When the estimated 3,000 hours in full accord and satisfaction language is
scope change/change order work are so broad that the contractors
subtracted from the should have spent cumulative impact claim is barred in
hours of 13,615, the result is 10,615 total or in part because such impacts
hours. The remaining 615 hours (i.e., are claimed to arise from the change
10,615the estimate of 10,000 hours) orders containing such exculpatory
are unidentified, non-productive hours language. Therefore, it is absolutely
for which the contractor is not making essential that the contractor review with
claim. counsel all proposed change order
forms and other contract documents7
It is often alleged by owners that that seek to limit the contractors right of
contractors do not account for their own recoverybefore the contractor
inefficiencies when calculating a loss of executes such documents.
productivity claim. The aforementioned
calculation demonstrates that the In the event that the contractor, or the
contractor has not made claim for 615 contractors counsel, determines that
labor hours, which can be characterized change order hours will not be deducted
as non-productive labor hours for which from the total, actual labor hours, it is
the contractor has taken responsibility. necessary for the contractor to remove
By whatever means chosen by the from the contractors retroactively
contractor, any contractor-caused loss developed loss of productivity claim any
of productivity must be deducted from forward priced loss of productivity hours
the total loss of productivity hours which were included in the contractors
quantified in the contractors request for executed change orders. This is true
equitable adjustment. because the MCAA factor calculation
should include all categories of
In the above analysis, the performance productivity losses, including those
of change order work, as well as the caused to the direct hours of the change
contractors base contract work, would orders themselves. To leave the forward
be performed inefficiently. priced productivity loss estimates in
Consequently, it could be appropriate place when using the MCAA factors in a
for the contractor to recover losses of retroactive computation would be
productivity incurred in the performance double dipping. In performing a total
of change order work as a part of the project, retroactive loss of productivity
contractors overall retroactive loss of calculation, it is necessary to deduct the
productivity analysis as described individual forward priced productivity
above. However, as is discussed herein, losses, which may have been included
it may be determined by the contractors in the contractors individual change
counsel that full accord and orders proposals submitted by the
satisfaction language contained in contractor to the owner. This deduction
executed change orders bars the can be included when arriving at the
contractor from the recovery of adjusted, actual labor hour total.
productivity losses on the direct change
order hours. In such events, the The calculated should have spent
contractor may deduct the executed hours may include, in addition to the
change order hours from the total actual originally estimated hours: (i) actual
hours to arrive at the adjusted, actual change order/scope change hours; (ii)
labor hours, as described in the inefficiencies caused to and by the out
appropriate section of this chapter. of scope work (subject to other possible
limitations discussed herein); (iii)
In some cases, the interpretation of the contractor-caused losses of productivity;

(iv) contractors remedial work hours;
and (v) estimating errors. Consequently,
the comparison of the should have
spent hours to the original estimate is
generally not appropriate. What is
important is that the owner is not being
charged with the should have spent
hours or for contractor-caused impacts
in the retrospective productivity loss
calculation as described in the above
example and elsewhere herein.
some portion of the 615 hours was
Modified Total Cost Method attributable to a loss of productivity
Check of the Productivity Loss caused by the 300 hours of remedial
Calculations work. Thus, with this example, the
contractor has taken to its own account
When using the retroactive productivity a loss of productivity caused by its own
loss analysis, it is prudent for the actions and/ or inactions.
contractor to check the estimated loss of
productivity, which results from using It is possible, however, for the remaining
the MCAA factors against the modified hours to be a negative number. If the
total cost method of calculating the loss remaining hours are represented by a
of labor productivity. The modified total negative number, it would indicate that
cost method consists of a very simple the contractor expected a savings in
calculation: labor, as compared with the contractors
original estimate. While it is not
impossible to put forth labor savings in a
loss of productivity claim, it does require
an added level of confirmation that
savings in labor, as compared with the
original estimate, would be a reasonable
expectation of the contractor.
The reasonable expectation could

include a detailed analysis of the
This section will suggest a simple check originally estimated labor hours, a
on the results of the loss of productivity presence of an historical pattern of
calculations using the MCAA factors. proven labor savings by the contractor
This very important calculation check is on past projects, and a verification that
shown as an example at the top of the the subject project lent itself to a higher-
next column using numbers from the than-anticipated productivity by such
should have spent example on page factors as the presence of a high degree
20: of prefabrication or repetitive work which
was not fully addressed in the original
The remaining 615 labor hours would be estimate. If the remaining hours indicate
the contractors productivity loss not labor savings, the contractor will most
claimed in the contractors request for likely have to demonstrate both the
equitable adjustment. These hours claimed losses and the reasonability of
would remain as a potentially undefined, labor savings, as compared with the
but unclaimed, loss of productivity. original estimate.
Nevertheless, it could be concluded that

Special Considerations for Appeals case, the real party of interest
Full Accord and Satisfaction was the electrical subcontractor. The
Change Orders when Calculating electrical subcontractor did not include
the Loss of Labor Productivity any loss of productivity impact costs in
its change order pricing, and sought to
Many public and private owners are recover loss of productivity in its claim.
including in their change order forms The VAs change order forms contained
language which attempts to bar the full accord and satisfaction language.
contractor from recovering, at a date Complicating the matter, there was
after the execution of the change order, reservation of rights language on the
any added costs arising from the part of the contractor also in evidence.
change, such as loss of productivity.
The referenced languagethat which The board ruled that it was the intent of
attempts to bar the contractor from the parties to resolve all costs directly
recovering additional costs arising from associated with the executed change
the change order after the execution of orders during the negotiations for
the change orderis called full accord change order pricing. However, the
and satisfaction language. The actual decision further stated: We find that
wording varies from project to project, Dynalectrics claims for cumulative
and such language is best reviewed by impact on unchanged work survive
the contractors counsel before the the accord and satisfaction agreement.
execution of the projects first change The board found that, whereas the
order. electrical subcontractor was barred from
recovery of productivity impact costs on
Boards and courts have found that when the work directly covered by executed
such language is included on executed change orders, which contained the full
change orders, the contractor may be accord and satisfaction language, it
barred from the recovery of added costs could attempt to recover the cumulative
arising directly from the change, after loss of productivity impacts to the
the execution of the change order unchanged work.9
document. In some cases, the
application of exculpatory language is Therefore, when the contractors
applied very broadly to bar the counsel finds that the contractor has
contractor from any further recovery executed change orders which contain
arising from a change order containing enforceable full accord and satisfaction
such language. It is equally important to language, the contractor may find it
note that, in a Veterans Affairs Board of advisable to remove from productivity
Contract Appeals case,8 the board found loss calculations the hours (either
that while the full accord and estimated or actual) associated with the
satisfaction language contained on the executed change orders. This deduction
executed change orders barred the would form a part of the adjusted, actual
contractor from recovering retroactive, hour computation explained herein.
direct losses in productivity on the
change order work, it did not bar the Many contractors do not maintain
contractor from the boards records which memorialize the actual
consideration of the alleged losses in hours expended on change orders, or
productivity caused by the change which identify when the change order
orders to the unchanged work. work was actually performed. In such
cases, it is necessary to use the
In the above referenced Veterans estimated change order hours, and to
Administration Board of Contract further estimate when the change order

work was performed. This is best manual. The court, in this portion of
accomplished by the onsite managers, the case, decided for Harmonay, stating
as the fact witnesses who saw the work in part, that:
being performed. An analysis which
deducts the hours for executed change courts have often recognized that
orders may appear as shown below. the extent of harm suffered as a
result of delay, such as the loss of
By using this example, the contractors efficiency claim at issue, may be
deficient work and the change order difficult to prove. Thus, courts have
work covered by executed change recognized that a plaintiff may
orders which contained full accord and recover even where it is apparent that
satisfaction language have been the quantum of damage is
factored out of the calculation. However, unavoidably uncertain, beset by
the impacts of productivity loss caused complexity, or difficult to ascertain, if
by changed events on the unchanged the damage is caused by the wrong.
work remain.
This is an important case which
Court Acceptance of Loss of established that even though the loss of
Productivity Calculations productivity cannot be computed with
There are several court and board exactness, the impossibility of reaching
cases with published decisions which an exact proof of loss does not bar
describe the use of the MCAA factors. recovery.10 Also, in the Stroh case,
The recent Appeal of Clark Concrete which was previously cited, the General
case, cited previously herein, clearly Services Board of Contract Appeals
stated the boards acceptance of the restated two important principals of
MCAA factors publication in presenting productivity loss claims; that exact
a mechanical contractors claim for loss measurement of productivity loss is not
of productivity. In S. Leo Harmonay, Inc. a condition precedent for recovery, and
v. Binks Manufacturing Company, tried in loss of productivity claims, the
in the U.S. District Court, Southern claimant bears the burden to clearly
District of New York in 1984 (No. 82 demonstrate that the cause (for which
Civ. 6868), Harmonay sued Binks to the claimant was not responsible)
recover several categories of project resulted in the effect (loss of
costs, including a loss of labor productivity).
productivity. In the case, Harmonays
fact witness testified to a productivity It is fortunate that courts and boards
loss of 30 percent based on personal have recognized the difficult nature of
observations and the use of the MCAA quantifying with exactness construction

productivity losses and have not found MCAA factors may be questioned. This
the absence of precise measurements issue has been addressed by the MCAA
as a bar to recovery. Furthermore, the in a Declaration filed in 1999. While the
MCAA factors publication has been records of the polling and data collection
recognized as a useful and reliable tool process were not retained in MCAAs
by which loss of productivity impacts files, through historical research, the
can be estimated, particularly when their means of preparation of the factors have
use is coupled with credible fact-witness been memorialized. Pertinent excerpts
testimony. from MCAAs Declaration follow:
When a Contractor Must The MCAA Factors apparently were

Litigate an Inefficiency Claim developed by the MCAA Management
It is usually in a contractors best Methods Committee beginning in the
business interest to settle, or at least to late 1960s and continuing into the
mediate, a construction dispute rather early 1970s. It is (MCAA's) informed
than to litigate or to take the matter to belief that the committee was
arbitration. The decision to litigate, or to comprised of MCAA Member
arbitrate, means handing over the representatives who were
destiny of your case to others. It is experienced mechanical contractors.
usually a better business decision to MCAA records show that in April
control your destiny and bring a 1969 a rough draft on the subject of
contentious matter to an amicable Change Orders in the Construction
settlement, if at all possible. Industry was presented to MCAAs
Board of Directors. In May 1970,
When a contractor has utilized the the Management Methods Committee
MCAAs labor inefficiency factors and reported to the MCAAs Board of
then decides to take its loss of labor Directors on a complete in-depth
productivity claim forward for a hearing study of the whole Change Order
at arbitration, in a court or before a concept as it affects the construction
board of contract appeals, it is helpful to industry. It is (MCAA's) informed
know how the courts and boards have belief that this is the predecessor of
viewed this method of calculating labor the current MCAA Factors. It is also
inefficiency. As noted previously in this (MCAA's) understanding that the
chapter, the MCAA factors, if properly substance of this document has not
changed since that time. It is now
applied, have gained broad acceptance
as a reasonable means of estimating a known as the Factors Affecting
contractors loss of productivity. Labor Productivity.the available
documents indicate that the
However, that does not mean that
committee and its members were
boards of contract appeals automatically
responsible for selecting the titles
find persuasive contractors inefficiency
and descriptions for each of the
claims prepared using the MCAA
factors and formulating the
factors. A contractor should expect
percentage values that are set forth
probative questioning regarding the
in the document. To the best of
factual basis of such claims, how the
MCAAs current knowledge, the
claim was prepared, who prepared it,
information contained in the MCAA
and the qualifications and independence
Factors was gathered anecdotally
of the person testifying on the issue of
from a number of highly experienced
labor inefficiency.
members of the MCAAs Management
Methods Committee. MCAA does not
From time to time, the source of the
have in its possession any records

indicating that a statistical or other Labor Productivity for Electrical
type of empirical study was Contractors.
undertaken in order to determine the
specific factors or the percentages of In terms of preparing to utilize the
loss associated with the individual MCAA factors in a litigation or arbitration
factors. to establish a claim of lost labor
productivity, it is vital that the contractor
The process of collecting data such as retain an experienced and independent
that which appears in the MCAA factors expert to perform the inefficiency
table using a polling process is not analysis, prepare the expert report, and
unusual or proscribed. Such methods testify as an independent expert if
have been used to establish losses of necessary. In several recent cases in
labor productivity by many trade which the MCAA factors were utilized,
associations other than MCAA. The the Armed Services Board of Contract
factor descriptions were prepared in Appeals has indicated that the testimony
advance by the Management Methods regarding labor inefficiency
Committee. A form was created listing quantification should not be performed
the factor descriptions and three levels by an employee or principal of the
of potential impact: Minor, Average, claimant, but rather by an independent
and Severe. The form was then made labor productivity expert. That is not to
available to the MCAA member firms for say that credible fact witnesses, such as
careful review. The intensity data, in the foremen, superintendents, and project
form of the expected impacts percents, managers should not testify as to the
were filled in by the MCAA member causes and effects of issues adversely
firms. From this broad polling process, affecting labor productivity. Credible
the factor descriptions and the expected fact-witness testimony is very important
impact percentages were reviewed and to establishing the cause and effect
finalized by the Management Methods nexus. However, if various formulae are
Committee and then formalized in the to be applied during testimony in
MCAAs publication. litigation or arbitration, including
utilization of the MCAA factors, then the
Not only were the factors prepared by use of an independent expert is highly
experienced and knowledgeable leaders recommended and may be mandatory if
in the mechanical construction industry, an analysis utilizing the MCAA factors is
the factors have constantly been vetted to be credible and reliable.
in the industry for the past 40 years and
found to be reasonable and reliable. Even when an independent expert is
They have remained unchanged since utilized, it must be underscored that the
their first publication and have been MCAA factors should be applied in a
accepted by courts, various boards of reasoned manner, relying on the
contract appeals and arbitration panels methodology set forth in this chapter.
as useful in estimating a contractors Outlandish and unsupportable
loss of labor productivity. Moreover, the inefficiency analyses will draw deserved
MCAA factors have been formally skepticism from courts and boards of
adopted by the Sheet Metal and Air contract appeals. If the MCAA factors
Conditioning Contractors National are not applied in a proper manner as
Association (SMACNA) and have been described in this users manual, a
utilized by the National Electrical contractor can expect to face a high bar
Contractors Association (NECA) and the in its attempts to recover its loss of labor
Electrical Contracting Foundation in its productivity.
publication entitled Factors Affecting

Conclusion Productivity loss caused by changes in
The loss of labor productivity is often scope, including defective design,
difficult to quantify with exactness. The unforeseen site conditions, delay and
MCAA factors can be highly useful to acceleration and change orders, can be
contractors seeking to recover losses in real, provable and recoverable. Using
labor productivity due to events not the the MCAA factors correctly can
fault of the contractor. The contractor materially improve the contractors
facing a project that shows the ability to recover from such losses.
symptoms of delays and inefficiencies
Appeal of Clark Concrete, GSBCA 14340
1
should ensure that the contract terms
99-1 BCA @ 630, 820 (1999).
and conditions for timely notice and
impact quantification are followed with 2
Appeal of Centex Bateson Construction
care. Many otherwise meritorious claims Co., Inc., VABCA-4613 and 5162-5165.
for which the contractor is entitled to
Triple A South, 94-3 BCA P 27, 194,
3
recover its fair and reasonable costs are
barred because the contractor failed to ASBCA No. 46, 866.
follow the contract terms as to notice 4
and quantification, or failed to reserve Scope changes refers to any changed
the right to file a delay or inefficiency condition that is outside of the contractor's
scope of work. These can include added
claim at a point in time after the
items of work over which there is no dispute
execution of a change order. (i.e., approved and pending change orders),
disputed scope items, differing site
The use of the MCAA factors in forward conditions, and acceleration proposals.
pricing change orders can result in an
5
overall acceptable recovery of potential As noted herein, it is imperative that the
loss of productivity in addition to the contractor carefully read the contract,
direct costs of the change. Also, the use including all general and special conditions,
of the MCAA factors can result in a as well as the change order forms offered
more accurate forecast of potential for execution by the owner. The contract
schedule impacts when durations of terms set forth in such documents will, in
most cases, dictate the contractors rights of
activities are factored for the estimated recovery and obligations for timely notice of
productivity loss. delay and inefficiency claims.
It is essential that contractors weigh the 6

Adjusted (reduced) to account for such
value of recouping reasonable amounts items as the contractors remedial work,
for the indirect costs of change orders forward priced inefficiencies contained in
along with the direct costs against the change orders, contractor-caused
potential of gaining a greater recovery inefficiencies and in some cases, the hours
by waiting until the end of a project to directly associated with executed change
assess the cumulative effects of all orders.
changes issued during the life of the 7
Other contract documents such as the
project. monthly payment requisition lien waiver and
As described herein, in some instances, release forms must be reviewed carefully for
the only option available to the exculpatory language that may seek to limit
mechanical contractor may be a or bar a contractors claims.
retroactively quantified loss of
See: Appeal of Centex Bateson
8
productivity claim. In such cases, the
MCAA factors can be applied to the Construction Co., Inc., VABCA-4613 and
adjusted, actual hours expended by the 5162-5165.
contractor. 9
This determination by the board was in

contrast to the appellate decision in the
more recent Bell BCI matter described at
page 9 herein.
10
Luria Bros. & Co. Inc. v United States, 369
F.2d 701, 712, 177 Cl.Ct 676 (1966).
Prepared by Paul Stynchcomb CCM, PSP,

CFCC and Jarad Kriz, CCM, LEED AP
(BD+C), PSP of FTI Consulting, with peer
review performed by: Wayne Day of John
J. Kirlin, Inc.; Raymond Jung of The Poole
& Kent Company; Robert Gawne and
Richard Freeman of Stromberg Metal
Works, Inc.; Herman Braude, Esq. of
Braude & Margulies, P.C.; Robert Windus,
Esq. of Moore & Lee, LLP; and Henry
Danforth, Esq. of Watt, Tieder, Hoffar &
Fitzgerald, LLC.

Bulletin No. PD 3
File: Productivity
Bulletin
How to Apply the Measured Mile Method

of Productivity Analysis
frequently known as the baseline or
Introduction measured mile labor. The process of
calculating the difference between the
When the labor on a project exceeds the should have spent labor hours and the
estimate or job plan, the mechanical actual labor expended in the impacted
contractor often commences an analysis areas or time frames is referred to as
of the causes for, and quantification of, the measured mile method of labor
its labor loss. This sometimes leads the productivity analysis.
contractor to seek relief from a third
party, such as a prime contractor or The more detailed and accurate the
owner. Frequently, the third partys first contractors labor expenditure records,
line of defense will focus on assertions the more persuasive the measured mile
that the mechanical contractors original analysis will be. Contractors are advised
labor estimate was flawed. When to evaluate their record keeping
properly applied, the measured mile procedures to ensure that the
analysis is a very effective means of information necessary for a measured
quantifying the loss of labor productivity. mile analysis is being collected and
This method relies on a comparison of maintained on a regular basis.
the contractors actual unit rate ratios on
the subject project, thus eliminating This bulletin offers a description of the
concerns over bid errors. measured mile method of productivity
analysis, discusses record keeping and
The measured mile method compares provides examples of the analysis
actual labor productivity in an impacted process itself, along with ways in which
period or area with productivity in an the results can be presented. When
unimpacted (or less impacted) labor used properly, the measured mile
period or area in order to establish what analysis can offer a compelling case for
the labor production rates should have recovering a mechanical contractors
been in the impacted labor periods or loss of labor productivity.
areas. To be effective, the work
performed in each area or period needs
to be of a reasonably similar nature. The
work performed in the unhindered or
less impacted area or time frame is

Applying the Measured Mile On another project, one or more
Method to Quantify a Loss of discrete areas could be constructed with
Labor Productivity reasonable productivity while other,
similar areas were affected by
The measured mile method provides for substantial changes in scope, trade
a differential productivity comparison stacking, lack of owner-supplied
between actual production rates materials (logistics), site access
achieved on the same project.1 Because limitations and other identifiable factors.
this methodology relies on actual The differential measurement between
production rates, no reference or such areas can form the basis of a
reliance upon the contractors estimate measured mile analysis.
or labor plan is required. This fact is one
of the most important sources of One means of determining which
credibility for this methodology. method is best for a project under study
is to interview the site management (i.e.,
Identifying the Measured Areas or project managers, superintendents, and
foremen) and seek their input into what
Time Frames
took place (or is taking place) and what
areas or time frames were more
In order to perform a measured mile
productive and less productive. This
analysis, different areas or time frames
interviewing process will also form the
must be identified. These should be
basis of the cause-and-effect connection
contrasted, one from another, by the
that will be required when proving and
inefficiency factors that have been
explaining the production rate
alleged to be the root cause of the
differential.
contractors loss of labor productivity.
The choice between utilizing physical
Once this interview process has taken
areas of a project or time frames is at
place, the observations of the staff can
the discretion of the contractor based on be tested against the actual labor
the specific project conditions. The fact
production records. At this time, it may
pattern may be such that similar
become obvious as to which format will
sections of a building are definable with
be most effective: an area measurement
one or more definable areas having
or a time frame measurement. After the
been less adversely affected by the contractor has decided on whether the
productivity impact factors and with one
measured mile analysis will be made on
or more definable areas having been
an area or time frame approach, the
more affected. These same conditions
collection and analysis of the actual
could be ascribed to discrete time
payroll labor hour and material/
frames. equipment installation data can
commence, as described in greater
For instance, a project could progress to
detail below.
the 50 percent complete point with
reasonable productivity and then be
Reasonable Similarity between
subjected to a substantial acceleration
effort resulting in overtime work, Materials and Work Environment
stacking of trades, crew size
inefficiencies and reassignment of The measured mile method measures
manpower for the duration of the the difference in actual productivity rates
project. The aforementioned case would between sets of productivity impact
suggest a time frame approach. conditions, one having little or no
impacts and one having representative2
impacts. For this measure to be exact3

(which is not a condition precedent to can be more challenging than installing
use this methodology), the same the same type of pipe system in a room
material and/or equipment would have with a 15 ceiling. Installing straight
be to installed by the same crew, under lengths of pipe on pipe racks in an open
the same management, in the same area can be inherently more efficient
work environment, as measured than installing the same type of pipe in a
between two areas or time frames that crowded mechanical room where the
are similar in space and time; with the pipe system has frequent changes in
remaining difference being the direction and may have valves and other
influence(s) of inefficiency being claimed appurtenances that could represent a
by the contractor. The aforementioned lower production rate. Installing
conditions virtually never exist on a equipment during the winter in an area
construction jobsite. Only in an open to the elements with exposure to
academic or laboratory setting would lower temperatures and wind will most
these precisely matched conditions be likely be inherently less productive than
found. installing similar equipment in a heated
mechanical room (this assumes that the
The courts and boards of contract work was not delayed into an
appeals only expect that the areas or unanticipated adverse climatological
time frames under measurement be period).
reasonably similar. These reasonable
similarities between the data being Installing material with a seasoned
measured include: 1) material and journeyman crew with proven competent
equipment types; 2) installation supervision in an unobstructed area will
equipment and/or means and methods; most likely be inherently more
3) experience, quality and quantity of productive than installing the same
supervision; 4) experience and quality of types of material in a congested area
the work force; 5) inherent work with a measurably higher ratio of
environment including exposure to inexperienced workers, less effective
weather factors and height of the work supervision or in more crowded or
being installed; and 6) any other factor constrained conditions.
that would inherently imbalance or skew
the productivity study. All of the potentially inherent differences
must be identified and evaluated when
For instance, comparing the installation performing a measured mile analysis.
of 4, 6 and 8 standard weight A-53 The goal of the analyst is to measure
carbon steel butt weld pipe to the the differences in productivity rates
installation of 8, 10 and 12 pipe of the caused by the productivity impact
same or similar material would be categories identified in the analysis (i.e.,
considered as reasonably similar. stacking of trades, overtime inefficiency,
Comparing the production rate for 2 disruption and other such categories),
carbon steel threaded pipe to large bore and to be confident that the segment is
mechanically welded stainless steel reasonably free of differences that
pipe, if utilized in the analysis, offers would have, on their own, caused a
inherent dissimilarities that will require a measurable variation in the contractors
carefully considered production labor performance.
adjustment and/or thorough explanation
of why the comparison is reasonable. The Project Records
Installing pipe under a roof slab 30 from An essential feature of the measured
the finished floor in a mechanical room mile method is its absence of reliance

on the contractors estimate or labor requires little or no further adjustment in
plan. This method relies on the order to apply this data to a measured
contractors actual unit rate ratio of mile analysis. However, most
production achieved on the project in mechanical contractors do not
different areas or time frames of the contemporaneously track the actual
same project or, in some cases, highly labor hours required to install lengths of
similar projects. In order to establish the pipe, supports, fittings and
contractors actual unit rate ratio, or appurtenances or pieces of equipment
productivity rate, records that set forth in discrete areas or time frames on a
the actual labor hours expended to project. The absence of
install a definable quantity of material contemporaneously maintained actual
and/or equipment is very helpful. They labor installation records does not
are not absolutely required, however, as preclude the use of a measured mile
explained herein. method.
A minority of contractors track, in a Many contractors maintain labor

contemporaneous fashion, the amount performance reports. These are an
of material and/or equipment installed earned value type of reporting because
by hour of labor. This sort of the actual hours expended to install a
contemporaneous labor productivity known quantity of work are compared to
tracking is very meaningful, however it a plan or estimate. These reports
usually requires a very substantial and typically provide a variance between
costly effort to track the actual material discrete activities of work comparing the
installed by type and by labor hour. In planned and actual hours on a regular
some industries, such as the sheet basis, such as each payroll period, or
metal industry, the difficulty of tracking monthly. Such labor performance
actual material installed by labor hour is reporting is described in greater detail
being overcome by electronic means of within the bulletin on Maintaining
bar coding duct sections and tracking Control of Labor Productivity, and a
the duct from manufacture to pre- sample is at the bottom of this page.
assembly to final installation in the field.
Assuming the contractors systems In the sample labor performance report
allow coding of actual labor to a section shown on this page,4 current actual
of duct, its actual manufacturing, payroll hours C Act Hrs are compared
preassembly and installation can be with an updated plan Rev Plan5 to
tracked with a reasonable degree of provide for weekly variances. The
accuracy. Earned Hours are a function of earned
or reported percent complete multiplied
Such contemporaneous labor-tracking against the updated planned hours.
record keeping provides for valuable Thus, the contractors measure of
and timely productivity monitoring that performance using an earned value

reporting system is based on reported actual labor hours by discrete activity,
progress and the contractors estimate, the contractor can assign actual hours
adjusted to incorporate changes in expended to a definable quantity of
scope in order to compute a current, installed material and/or equipment.
revised plan. This system enables the
contractor to divide the overall plan into Due to the differences in expected
identifiable units of work, called production rates between different
activities. These activities usually have piping and equipment systems, it is
work boundaries that are defined by the helpful if the contractor has defined its
description of the activity, as shown in activities by pipe size (i.e., small bore
the example at the top of this page. versus large bore) and general material
type (i.e., butt weld versus threaded,
Assuming the contractor has a labor carbon steel versus cast iron, pipe
performance reporting system that sets installation versus equipment setting).
forth definable features of the work (i.e., Such differentiation will enable the
activities), the contractor can locate the contractor to assign the actual hours by
activity boundaries on a set of contract general categories of pipe system, pipe
drawings and from that information, take type, equipment setting and other
off the material contained in the activity. definable features of the work.
Provided the contractor has coded the
The goal of an exercise such as that frame versus .83 hours per linear foot in
described above is to assign actual the reasonably impacted area or time
labor hours expended to discrete frame. Similarly, the methodology would
elements of the construction process. compare an actual production rate of
This area-by-area comparison method is 1.74 linear feet per hour with an actual
one manner of preparing a measured production rate of 1.2 linear feet per
mile analysis. Once the actual labor hour. The productivity factor would then
hours have been defined and the be computed as 31 percent. Those
material and/or equipment have been calculations appear as:
quantified, a production rate ratio can be
computed.
Assuming the contractor has been able

to identify a nonimpacted or less
impacted area or time frame, then the
actual labor hours and installed units
can be measured. For example, a The loss of productivity factor of 31
contactor measured 1,000 linear feet of percent is then multiplied against the
6 and 8 carbon steel butt weld pipe actual labor hours expended in the
that required 575 labor hours to install6 impacted area or time frame for the
in a definable area or time frame. From work being measured, or 1,250 actual
this data, the contractor can compute a hours x 31 percent = 388 labor hours
labor rate of .575 hours per linear foot, lost due to the productivity factors that
or 1.74 linear feet of pipe per hour of impacted the less productive area or
labor actually expended. Although the time frame.
contractor was unable to differentiate
the labor required to install the 6 The results of this calculation also can
system from the 8 system, the pipe be used to compute the should have
systems were sufficiently similar to spent labor hours between areas or
arrive at a blended production rate. time frames. From the example above,
the contractor demonstrated that it
The contractor must now identify a actually installed butt weld carbon steel
reasonably impacted area or time frame pipe at a rate of 1.74 linear feet per hour
in which similar work was performed but of labor in a less impacted area or time
was adversely affected by the conditions frame. There were 1,500 linear feet of
the contractor has identified during the pipe in the affected area. Absent the
interview process described herein. For productivity factors being complained of
example, it was found that 1,500 linear in the affected areas, the contractor
feet of 4 and 10 carbon steel butt weld should have achieved approximately the
pipe required 1,250 hours to install. same production rate in the impacted
Once again, the contractor could not area or time frame as was achieved in
differentiate between the 4 and 10 pipe the more productive area or time frame;
as to actual labor hours required to 1,500 linear feet of pipe 1.74 linear
install the pipe systems. The blended feet per hour = 862 hours. The actual
production rate equals .83 hours per hours expended in the impacted area;
linear foot or 1.2 linear feet of pipe per 1,250 less the should have spent
hour of labor actually expended. hours of 862 = 388 hours of lost
productivity.
The measured mile method comparison
would be .575 hours per linear foot in When more than one sampling segment
the non/less impacted area or time of work is included in the measured mile

analysis, particularly when the amount shows a productivity rate that is either
of material (i.e., pipe lengths) varies much greater or much lower than other
significantly between the segments of unimpacted or less impacted areas or
work being compared, it may be time frames. The contractor should
advisable to use a weighted average, carefully review these apparent
weighted on pipe lengths or other anomalies and take appropriate action.
material considerations. This process One appropriate action could be to
weights the production averages based exclude these apparent outliers as
on the amount of material being shown in the example below:
evaluated. Examples that follow include
a weighted average computation. Step 1. Identification of Areas and
Depending on the data, some samples Production Rates
using a simple arithmetic average will Assume all areas contain a mix of 4, 6
produce the same, or nearly the same, and 8 Std. Wt. B.W. pipe, 8-hour
results as using a weighted average. workday, 5 days per week, at
However, in analyses with multiple and approximately the same elevation and
relatively large sample groups, and with work environments, but production
significant variances in the quantities of anomalies exist in one of the better
materials, a weighted average approach productivity areas of the study (i.e.,
based on material quantities or other Area C).
measurement metrics can yield
measurably different results as opposed Areas that are expected to be more
to a simple arithmetic average. productive and less productive can be
calculated as shown in the example at
Unusual Study Observations the bottom of the page.
Caused by Inconsistent Project
Step 2. Weighted Average Method
Conditions In the example at the top of the next
page, Area C has been excluded from
One of the goals of a measured mile the weighted average because of its
analysis study is to evaluate differential unusually high rate of productivity. This
productivity rates by comparing similar type of exclusion is known as an
work being performed under similar outlier due to its unusually high rate of
conditions, with the exception of productivity compared with the other
identifiable categories of inefficiency that less impacted areas and thus was not
affect one set of labor hours but not the included in the weighted average. The
other set of labor hours, or at least to second box on the following page
the same extent. Sometimes when provides sample calculations used in
performing a measured mile analysis, determining the weighted average of the
an area or time frame under study less productive areas

Step 3. Example Loss of Productivity Step 4, Option 1: Calculate the Should
Calculations Using the Weighted Have Spent Hours
Averages In the impacted areas, 5,800 LF of pipe
The contractor demonstrated a weighted should have been installed at the proven
average production rate of 2.54 linear rate of 2.54 LF/hour. Samples of these
feet of pipe installed per labor hour calculations are provided at the top of
expended in the less or nonimpacted this page.
segment of work.
Step 4, Option 2: Calculate the
The contractor did not include Area C Inefficiency Factor
due to apparent dissimilarities (an A calculation of the production rate ratio
exceptionally high production rate in would look like the example above.
comparison to the other less impacted
areas). The mechanical contractors result may
vary depending on the option selected in
The contractors demonstrated Step 4. In the examples shown above,
production rate in the impacted areas Option 1 results in 900 hours of
averaged 1.82 LF/MH for 5,800 LF of productivity loss, while the number of
pipe. hours of lost productivity in Option 2 is
892.

As can be seen from the example, the affected by the owner changes and
contractor has removed the one study disruptions in the same time period, the
area that demonstrated an unusually contractor must factor out of its claim
high level of productivity. This may have the inefficiencies caused by the
been caused by having assigned a overtime it chose to undertake to
particularly experienced or hand mitigate its own delay.
selected crew to perform the work, or
perhaps the physical work environment Another adjustment that must be
allowed the installation of the material to considered is the payment by an owner
be performed much more efficiently than or prime contractor to the mechanical
in other areas of the project. While there contractor for change orders that include
is no set guide as to how much variance a loss of productivity that occurred in the
in a particular study segment should impacted segment of the project. To the
disqualify it from a measured mile extent that the contractor has been
method analysis, findings that approach compensated for labor and/or
doubling or halving of productivity in equipment inefficiencies during the
particular segments suggest that such impacted segment, these labor and/or
segments could be outliers in the study. equipment hours must be identified and
However, there can be incidences removed from the measured mile REA.
where vastly different productivity rates
have a reasonable explanation, thus Area Measurement
these sorts of apparent anomalies must
be analyzed on a project-by-project Area-based measurements are often
basis. used in a measured mile analysis to
quantify the loss of labor productivity on
Additionally, if the contractor finds that a construction project. Area-based
its own management problems or crews analyses can usually be derived from
caused portions of the inefficiencies in earned value reports that divide the
the impacted areas or time frames, such project into are spatially-based activities.
self-inflicted inefficiencies must be Assuming that the productivity impacts
identified, quantified and removed from can be segregated by building or project
the contractors request for equitable area, spatial dividing lines between
adjustment (REA). For example, a impacted and less impacted areas make
mechanical contractor may have logical study segments. It is important
experienced delay caused by its own that the work environments be similar
forces and, to mitigate these impacts, from one area to the next, which
embarked on unplanned overtime. This includes the height of the work off the
overtime schedule, depending on its finished floor elevation, if applicable.
intensity and duration, can on its own There should not be any inherent
cause labor inefficiency. In its measured features of any of the areas that make
mile analysis, the contractor finds that it them more productive or less
sustained a substantial loss of productiveonly the inefficiency impact
productivity caused by owner changes categories should form the significant
and disruptions in a particular time differences between the areas, to the
frame of the project schedule. The fullest extent possible.
contractor also finds that this period of
owner change and disruptions is As with a reasonable amount of time in
concurrent with the time period of a time frame-based measured mile
contractor-initiated overtime. Assuming quantification, there is debate within the
the same crews involved in the construction industry and in academia
contractor-initiated overtime were also regarding how large an area should be

in order to offer a credible measure of construction industry and in academia
actual productivity. As of this writing, regarding how long a measured mile
there does not appear to be any firm time frame should be in order to offer a
agreement on this question nor have the credible measure of actual productivity.
courts offered any judicial guidance. In the writers opinion, the time frame
Generally, the area should be should be long enough for the crews to
representative of the overall work, not perform a sufficient amount of work to
an isolated segment of the work that establish a measurable pattern of
would, by its nature, exhibit a much performance. The less impacted or
higher production rate than the balance unimpacted time frames should not
of the project areas. include periods that experienced
unusual or isolated spikes of high
The space within the areas should be productivity that are not representative
reasonablethat is, the area should be of the work on the overall project.
large enough for the crews to perform a
sufficient amount of work to establish a For instance, the learning curve
measurable pattern of performance. commences with lower productivity as
Furthermore, the spaces between the workers arrive on the project at the
areas used in the comparison should be outset of the contract, or begin work in
similar or, if dissimilar, such differences very different surroundings. As workers
should not have had an adverse effect become more accustomed to the
on the underlying productivity. project, or to an area, the productivity of
the crews is expected to increase. If the
Time Frame Measurement time frame is limited to the opening days
or weeks of a project, it may encompass
In terms of utilizing time frames rather this time of lowered productivity due to
than physical areas, the application the effects of learning curve.
methodology is the same. Also, similar Conversely, if the measurement period
considerations have to be made when is at the height of the project such that
comparing the different time frames. workers have gained the benefit of the
Adverse weather may be a factor to learning curve effect, this alone could
consider; if the various measurement increase productivity. The effects of the
time frames fall into different learning curve, both negative and
climatological periods and weather positive, can in some instances be very
impacts are not one of the categories of slight and may not affect the measured
inefficiency being claimed, this may mile comparison, however it should be
require adjustment of the study. In fact, taken into consideration when choosing
any measurable inconsistencies the time frames to be measured. If
between the time frames that could necessary, explain in the written
represent inherently more or less narrative that will accompany the
efficient performance need to be measured mile quantification why the
carefully evaluated. Reasonable care learning curve was, or was not,
must be taken to eliminate from the considered as a variable that could
study any effects that are materially affect the outcome of the study.
different between the time frames being
evaluated. What if the Contractors Earned
Value Records Are Not Available?
As with the proper amount of space
when considering an area-based Most mechanical contractors do not
measured mile quantification, there is an track material and equipment installed
unresolved debate within the

by labor hour on a contemporaneous Affecting Labor Productivity. Discuss
basis. The reasons this sort of detailed what areas or time frames were
tracking does not usually occur include adversely affected by these impact
the level of complexity of most categories and what areas or time
mechanical piping systems, the mix of frames were less impacted. Once the
materials within areas or systems, and differential areas and/or time frames
the cost of having a clerk of the work have been identified, have the
tracking the physical amount of material knowledgeable individuals review the
or equipment installed during each day payroll time cards and other contempo-
of work, tied to the hours spent to install raneous project data to see if the labor
those materials or equipment.7 Where hours expended in those areas and/or
mechanical contractors do perform this time frames can be identified using the
sort of contemporaneous productivity workers names or crew coding. Often,
measurement, the contractor has area foremen or superintendents know
already gathered the information it the workers by name and can identify
needs to conduct a measured mile which workers performed the various
method analysis. There is little or no activities on the project. This is more
need to refer to earned value reports or subjective than using a well-maintained
to other data since the actual production earned value report, however it may
data is being collected on a daily or enable a measured mile method
weekly basis. analysis to be performed.
The absence of contemporaneous labor If the labor hours can be extracted from
and material tracking is not an unusual the payroll system by identifying the
condition in the construction industry. workers by name and assigned to
While many contractors maintain some specific areas or time frames, then the
form of earned value reporting, on some materials installed in discrete areas can
projects the contractor may not have be taken off and quantified in that
maintained any reports that segregate manner. As to time frame measure-
the hours actually expended by physical ments, it may be necessary to review
areas or time frames within the project. progress records such as daily reports,
There are other means of extracting the progress photographs, project sched-
needed information, albeit means that ules or site diaries for descriptions of the
are much more time consuming and that work being installed. Some daily reports
may be more subjective in nature. An allow very specific entries of such
alternate method of data segregation progress information and can be useful
involves the use of the contractors references to allow for the identification
payroll system, time cards, daily reports8 of workers and the material being
and/or field diaries. The CPM schedule installed by time and area. The payment
also may be used to determine when applications or CPM schedule updates
work was performed. also may reveal vital information
regarding when and where work was
In such cases, the interview process is performed, and to what extent it was
very important in order to locate the complete on a weekly or monthly basis.
areas and/or time frames of better and While this sort of investigative analysis
lower productivity. If the site is very time consuming, it may be the
management is available, a list of the only way to extract the labor hour and
categories of inefficiency impacts should material quantity information that is
be compiled. If necessary, refer to the necessary to perform a measured mile
list of inefficiency categories contained method analysis.
in the bulletin that addresses Factors

What if the Less Impacted Area or same project, the less likely the analysis
Time Frame was Adversely will be considered a valid measured mile
Impacted? analysis. That does not necessarily
disqualify the use of very similar projects
On some projects, there is no to produce the comparative areas or
reasonably unimpacted area or time time frames. The two-project measured
frame. This is not unusual. Projects with mile approach is used when the
pervasive defective design impacts can baseline, or less impacted area or time
experience labor inefficiencies from the frame on the project under study simply
outset of the work, and in virtually all does not exist, or would have to be
areas of the project. Projects that are significantly adjusted to explain the
the subject of enormous scope growth inefficiencies in the less impacted area
by way of scope changes (i.e., or time frame.
cumulative impact) can be similarly
affected such that no area or time frame In some cases, it may make sense to
can be found that was immune from offer two measured mile analyses: one
measurable productivity impacts. utilizing a modified baseline comparison
as explained above and one utilizing two
One method of removing labor very similar projects. However, there will
inefficiencies from the less impacted be a need to demonstrate that the
area or time frame is to perform an crews, supervision, work environments,
MCAA labor inefficiency factor analysis types of productivity impacts and other
on those labor hours (reference the factors on the two projects were indeed
bulletin entitled, How to Use the MCAA highly similar, one to the other. While a
Labor Factors). If the less impacted two project method is not proscribed, it
area or time frame has been impacted is worth the extra effort on the part of
by others as a result of unplanned trade the contractor to find similar areas or
stacking, disruption, overtime or other time frames on the single project under
recognized categories of labor impacts, study.
appropriate MCAA factors can be
applied to the less impacted area or Productivity Impacts to BIM/
time frame to set a revised baseline to Coordination and Pre-Fabrication/
be used in the measured mile Sub-Assembly Operations and
comparison. All adjustments to the less Equipment Inefficiencies
impacted baseline labor hours should be
fully explained and justified. If the On projects that suffer from the effects
contractor was responsible for its own of multiple and significant changes in
inefficiencies in the baseline segment of scope (i.e., cumulative impact),
the project, those have to be quantified defective designs, overall disrupted
and explained as well to demonstrate start-stop-start operations and/or
that the contractor has not claimed delays to the schedule, the BIM/
inefficiencies arising from its own coordination and pre-fabrication/
mistakes and corrections. subassembly operations can sustain
significant labor inefficiencies. The
Can Similar Projects Serve as measured mile method can be used to
Surrogates for Areas/Time Frames quantify inefficiencies in these areas of
on the Project Under Study? a project.
The farther a contractor moves from When a mechanical contractor bids a

comparative measurements on the project, labor hours are usually included

for traditional coordinated drawings or, operations, the mechanical contractor
on larger projects, computerized should ensure that the workers are
Building Information Modeling (BIM) coding time to individual projects and, if
drawings. The production of these possible, to discrete segments of the
drawings or computer models usually erection work or drawing. To the extent
leads to some amount of prefabrication that there are areas of a project or
or sub-assembly of systems. A discrete time periods which represent
mechanical contractor can expect reasonably productive work, actual
substantial labor savings if this process hours required to produce a
is reasonably free of impacts from large representative drawing or set of
quantities of requests for information drawings, or to prefabrication or sub-
(RFI), changes, disruptions and delays. assemble a known quantity of material
should be maintained. This becomes the
Many mechanical contractors include baseline set of hours. As with the
coordination/BIM hours performed on erection work, the baseline productivity
change work within the change proposal should be based upon a representative
itself by way of per centages or direct sample and not on unusually simple
hours required to address the changes. drawings or assemblies.
However, many of the issues that affect
coordination/BIM labor and the down- Similarly, actual hours should be coded
stream prefabrication and subassembly and collected on drawings by area or
operations never become a part of the systems, or during time periods which
contract as a change order. It is not represent the effects of the disruptions,
unusual to find that a large percentage RFIs and changes. The goal is to
of RFIs issued by a mechanical establish a differentiation between the
contractor during the coordination/BIM labor hours required to produce
stage never become change orders, coordinated or BIM computerized
thus the added time and disruption to drawings without the adverse effects of
the coordination/BIM process are not inefficiencies not caused by the
equitably compensated to the mechanical contractor and the labor
mechanical contractor. The result is an required to produce the drawings given
undefined overrun in the coordination/ impacts on the project.
BIM efforts. The disruption and
inefficiency of the coordination/BIM Actual prefabrication and sub-assembly
operation then trickles down to the operations can be measured for
prefabrication and subassembly inefficiencies in the same fashion as
operations, which can be additionally field erection activities. In order to
impacted by having to start, stop and perform the comparative analysis, the
then restart operations due to the flow of contractor should have records of the
the drawings, or due to holds placed time required to perform prefabrication
on prefabrication or sub-assembly work and subassembly work by definable
caused by delays, RFIs and changes to segment, comparing the production
the work. rates between more efficient and less
In order to capture measured mile efficient areas or time periods.
information for use in the coordination/
BIM, prefabrication and sub-assembly

Construction equipment can also be way of example contrasting the amount
subject to a loss of productivity. cubic yards of excavated materials that
Depending on how equipment has been were moved in unimpacted and
estimated, the inability to utilize impacted segments of the project.
equipment in an efficient fashion can
add to the cost of construction. If the As with the erection activities, any
inefficiency of construction equipment is appreciable inherent differences
the result of delays, disruptions, stop between segments being measured,
work orders or other adverse conditions other than the inefficiency categories
outside of the control of the mechanical themselves, must be identified and
contractor, this component of added factored during the preparation of the
cost can be the subject of an REA. measured mile method analysis. Also,
any contractor caused inefficiencies
To the extent that usage records can be occurring in the impacted areas or time
maintained for any mechanized or periods must be identified, quantified
motorized equipment, such as gas and removed from the contractors REA
welding rigs, bulldozers, track hoes, along with any inefficient hours paid for
electrical welding packs and similar in change orders or by time and
items, these records can be coordinated materials tickets.
with the contractors measured mile
labor analysis to demonstrate the less Presentation of the Analysis and
efficient and/or delayed nature of the Graphic Charts
equipment usage on the project. A
measured mile analysis can be When presenting a change order
performed on the equipment itself, by proposal, or REA, for loss of labor

productivity, the claimant has the burden Oftentimes, the acceptance or rejection
of proof regarding the cause-and-effect of a mechanical contactors REA for loss
nexus and the damages resulting from of labor productivity can be affected by
the causative events. Therefore, it is the quality of the narrative describing
helpful to prepare a comprehensive the cause-and-effect nexus, the
written narrative report describing the supporting schedule analysis (if
conditions that the mechanical appropriate), payroll and other project
contractor is asserting caused the harm reporting, and the form and content of
and how the resulting damages were the measured mile quantification.
quantified. Presentation graphics, supported by
well-prepared documentation, also can
One effective means of communicating be persuasive in depicting the
the comparative variances that are at differential productivity unit rate ratios
the center of a measured mile analysis derived by the measured mile
are graphic charts depicting various investigation.
productivity curves. These curves can
convey the time lines and differences Conclusions
between the productivity that was
measured in the analysis. Two The measured mile method is, without
examples are provided, one on the question, a very effective means of
previous page, and one above. quantifying a contractors loss of labor
productivity in the construction industry.
In order for the measured mile method

to be reliable and successful, however, same project. Such record keeping can
it must be applied in an appropriate allow a mechanical contractor to
manner. The inappropriate application of perform a measured mile analysis while
the measured mile method may result in the project is still ongoing, and with that
a significantly reduced recovery or, in information, to work proactively to
the worst case, no recovery at all. mitigate productivity losses, if at all
However, many contractors have possible.
properly applied sound and reasoned
logic to prepare measured mile method When mitigation is not feasible or
analyses that contain comparisons of achievable, the mechanical contractor
similar materials, equipment, may be placed in a position of
environments, and crews and also recovering its productivity losses by way
contain any required adjustments of an REA. In its REA, the contractor will
between the segments as described have to identify, justify and quantify its
herein. loss of productivity component.9 A
contractor has several choices in the
Contractors who consistently pre-plan selection of a method to quantify labor
their work and create a mechanical inefficiencies. Where possible, the
schedule in close coordination with the contractor should consider the
general contractors schedule can measured mile method as the one that
significantly improve tracking of the will, if properly applied, produce the
measured mile data. The mechanical most compelling and acceptable results.
contractor, in coordination with its
developed schedule, can create an Additionally, when a mechanical
area-specific labor-coded schedule of contractor anticipates that it will sustain
activities that follows the logical a loss of labor productivity on a project
construction sequence of the project. and such labor productivity losses will,
Whenever possible, this area-specific more than likely, not be equitably
data should be divided and identified by compensated in change orders, the
individual system or piping material. contractor must preserve its rights to
collect its damages by other means,
The general guideline for the duration of such as an omnibus REA. Many change
activities is from between 3 and 22 order forms issued by public and private
working days in order to allow for sector owners contain full accord and
optimal tracking. Mechanical activities satisfaction restrictive language. On
should be created that can usually be many projects, the prime contractor may
accomplished by a single crew in the include waiver language on the monthly
time period noted above. Collection of payment application release forms that
the payroll input then gives the attempt to bar a mechanical
contractor timely data as to how each subcontractor from recovery of any
area performs in comparison to the impacts that are not expressly excluded
original project plan, and in comparison from the waiver provisions. These full
with other similar areas on the project. accord and waiver provisions are
explained in greater detail in other
Since the contractors estimated/ bulletins within this manual, however the
planned hours are used to populate the mechanical contractor is reminded to
area-specific labor-coded activity avoid executing any document that
schedule and labor performance report, seeks to limit the mechanical
the contractor has a record of contractors rights to recover its delay
performance compared to its estimate/ and labor productivity impact costs,
plan and to other similar work on the unless such terms have been reviewed

and accepted by the mechanical decision stated the following, in part:
contractors senior management or
construction counsel. the efficiency factor calculated from
the feeder work was used to adjust
Finally, the more credible the measured the budget for the branch work. the
mile analysis, the greater the VAs labor productivity expert, took
exception to use of the measured mile
contractors REA recovery will be. To be
analysis using the feeder-branch
credible, the contractor must carefully circuit comparison because it violated
apply the test of reasonability a fundamental precept of a measured
reasonably similar comparison areas or mile analysis in that [the electrical
time frame, reasonably similar types of subcontractors experts] analysis
material and/or equipment being does not measure the productivity for
installed, reasonable record keeping or an activity in an unaffected period
source data, reasonable adjustments against the productivity for the same
that may be required to the unimpacted activity in the affected period. [the
and/or impacted segments, such as the electrical subcontractors expert]
indicated, there was no period of
removal of the contractors own
branch conduit installation that was
inefficiencies and inefficient hours not impacted by either the design
compensated in change order in the problems or acceleration. [The VAs
impacted segments, and reasonable experts] principle objection to
conclusions drawn from the analysis. comparing feeder work to branch
The analysis should be accompanied by work was the difference in crews and
a cogently written narrative that crew continuity.
connects the causes with the effects of
the analysis and discusses why such Note that the governments expert
impact causations were not the fault or criticized the electrical subcontractors
responsibility of the mechanical alleged improper use of feeder conduit
contractor. A well-prepared and well- installation as compared with branch
documented measured mile REA can be conduit installation to form the
an important factor in averting costly measured mile as being too dissimilar to
litigation and can offer the potential for a support a reasonable comparison. The
positive recovery of a mechanical Board rejected this criticism and the
contractors loss of labor (or equipment) electrical subcontractor was awarded
productivity. inefficiency damages based on its
measured mile analysis comparing
Appendix feeder conduit production with that of
branch conduit.
Support at the Courts and Boards
of Contact Appeals for the Moreover, in the Appeal of P.J. Dick the
Measured Mile Method Board underscored the favored standing
of the measured mile method to quantify
Reported decisions from the boards of a contractors loss of labor productivity
contract appeals and other tribunals can and also recognized that measured mile
be instructive in the preparation of a quantification was not required to be
measured mile quantification of labor exact in order to be acceptable as a
productivity loss. One of the frequently basis of recovery. This decision mirrors
cited cases in favor of the use of the the oft-cited Wunderlich Contracting
measured mile method is the Appeal of Co.2 decision wherein the Court decided
P.J. Dick1 at the Veterans Administration that a claimant need not prove his
Board of Contract Appeals. This damages with absolute certainty or
mathematical exactitude it is sufficient

if he furnishes the court with a rejected by a court or board of contract
reasonable basis for computation, even appeals if the contractor does not adjust
though the result is only approximate . the underlying productivity rates for
differences in the installation of the
However, the Wunderlich Contracting materials or other conditions not
Co. decision cannot be taken to associated with the inefficiency
extremes and the requirement for categories upon which the claim is
establishing a reasonable basis for based. Such inherent differences can
computation [emphasis supplied] include material types, joint types,
cannot be ignored with impunity. Other elevation of the work, spatial limitations
cases underscore the need for the or other physical conditions that would
claimant to adjust its measured mile make the comparisons imbalanced. The
analysis to take into account inherent goal of the measured mile method is to
dissimilarities between the segments measure labor productivity between two
under study. Danac, Inc.3 and W.G. segments of reasonably similar work
Yates & Sons4 confirm the necessity for with the variable being the labor
the claimant to make productivity inefficiency factors identified by the
adjustments for differences in materials contractor.
and joint types in the segments being
compared. The principal of reasonably similar
comparisons in a measured mile
The decision in W.G. Yates & Sons analysis was clearly defined in Clark
underscoring the acceptance of the Concrete Contractors, Inc. wherein a
measured mile method stated, in part: concrete contractor offered a measured
mile analysis. The aforementioned
Yates, using the measured mile decision was cited, in part, in the P.J.
methodology, computed its alleged Dick decision:
additional labor inefficiency costs by
comparing performance costs We find no basis to conclude that
incurred prior to the defective either the productivity of the same
specification disruption with crew or that exactly the same work is
performance costs after the defective a prerequisite for a valid measured
specification disruption. In DANAC, mile analysis to establish the amount
Inc., ASBCA No. 33394, 92-2 BCA loss of productivity. We agree with the
29,184 this Board endorsed the use GSA Board of Contract Appeals when
of the measured mile methodology it held in Clark Concrete, Inc., 99-1
to measure the cost for labor BCA 30,280:
inefficiency caused by Government
delay and disruption holding: [The Government] is correct in
asserting that the work performed
For labor inefficiency claims, good during the periods compared by [the
period vs. bad period analysis, Contractor] was not identical in each
comparing the cost of performing period. We would be surprised to
work during periods both affected and learn that work performed in periods
unaffected by disrupted events is a being compared is ever identical on a
well established method of proving construction project, however. And it
damages. U.S. Industries, Inc. v need not be; the ascertainment of
Blake Construction Co. Inc. 671 F.2d damages for labor inefficiencies is not
539, 547 (D.C. Cir. 1982) [emphasis susceptible to absolute exactness
supplied] [citation omitted]. We will accept a
comparison if it is between kinds
The contractors measured mile analysis of work which are reasonably alike,
may be significantly reduced or even such that the approximations it

involves will be meaningful. Endnotes
[emphasis supplied]
Bulletin
However, in P.W. Construction, Inc.5 the 1
While this bulletin focuses on the use
contractors measured mile productivity of labor hours in quantifying labor
analysis was rejected because the inefficiencies, some contractors have
contractor failed to take into account chosen to use unit costs. The measured
very different pipe joining methods mile method does not proscribe the use
between the segments being measured. of costs as a surrogate for labor hours,
While different materials and installation however if costs are utilized, the
methods do not necessarily prohibit the claimant must be careful to remove all
use of a measured mile comparison, the factors, such a wage increases, that
claimant must make suitable adjustment would inherently unbalance the
in the computations to account for measured mile comparison.
inherent differences in the segments
being compared. This decision stated, in 2
The term representative is used
part: herein to mean impacts representing a
reasonable and consistent level of
The record shows that welding in the productivity loss arising from the alleged
impaired period was butt-welding on causes as opposed to choosing a
polyethylene pipes, which takes only
limited, particular area or time frame that
15 seconds to 2 minutes per weld,
whereas the welding done in the pre- exhibited the most drastic impacts
disruption period was steel welding, without averaging or weighing the
which may take up to 2.69 hours per resulting inefficiencies with other
weld. this evidence suggests that a impacted areas or time frames.
comparison of the pre- and post-
3
disruption periods must take into Luria Bros. & Co. Inc. v United States,
account the difference in welding 369 F.2nd 701, 712, 177 Cl. Ct. 676
(1966)
Because the impaired rate accurately
reflects productivity during the 4
For an explanation of the data columns
impaired period, but does not
accurately reflect productivity during shown in this sample report, refer to the
the ideal period, the court vacates the bulletin entitled Maintaining Control of
damage award on lost productivity. Labor Productivity herein.
The rates must account for the
5
differences in welding and trenching Many mechanical contractors do not
costs for the different pipes. track actual change order hours by
activity code. Some mechanical
What can be taken away from the contractors do not update the plan on an
aforementioned cases and the other activity-by-activity basis for estimated
measured mile cases in the industry is change order hours. There is no
that the concept of reasonable established standard in the industry in
similarities is crucial in prevailing when this regard. However, at some level, the
utilizing a measured mile analysis. Also, contractor must know if the production
these cases affirm the fact that the rates estimated to perform the work are
measured mile method is the most being met on the project, either at the
widely accepted form of productivity activity level or at the bottom line.
measurement in the construction
industry. 6
Installation needs to be uniformly
defined within the analysis such that
categories of work such as material

handling and pipe support erection are Appendix
1
consistently included or excluded. Appeal of P.J. Dick VABCA Nos. 5597,
5836-37, 5839-50, 5951-65, 6017-24,
7
We note that the trend among many of 6483, 01-2 BCA 31,647
the larger sheet metal contractors is to
2
track the labor required to manufacture, Wunderlich Contracting Co. v U.S. 173
pre-assemble and erect duct work on a Ct. Cl. 180, 351F.2d 956 (1965)
contemporaneous basis. This trend has
3
been facilitated by computerized sheet Danac, Inc., ASBCA No. 33394, 97-2
metal detailing and cutting systems and BCA 29,184 (1977)
bar coding on the duct segments that
4
allow for efficient tracking of the material W.G. Yates & Sons Construction Co.,
and correlation of the material installed ASBCA No. 49398, 01-2 BCA 31,428
with the labor required to perform the at 29 (2001)
work. This mechanization has resulted
5
in many sheet metal contractors being P.W. Construction, Inc. v. The United
able to perform measured mile analyses States 2002 WL 31780958 (Fed. Cir.
while the project is on-going and with 2002
little additional effort in data collection
and labor hour correlation.
8
From the outset of a project, the CFCC of FTI Consulting, Inc. with peer
contractors management should review review performed by: Robert Beck, Exec
the superintendents or foremans daily Vice President of John W Danforth
field reports and/or progress diaries to Company; Michael R. Cables, Executive
ensure that the contemporaneous Vice President of Kinetics Systems, Inc.;
entries contain sufficient detail, are Stephen R. Dawson, President, Harrell-Fish,
accurate and are in the proper format. Inc.; Richard Freeman, Executive Vice
At a minimum, daily reports or diaries President of Stromberg Metal Works;
should specify what work is being Michael A. Mack, Executive Vice
performed, where the installation President, John J. Kirlin, Inc.; Charles F.
activities are taking place by physical Mitchell, General Counsel of The Kirlin
area of the project and by which crews. Group; Adam Snavely, President and
CEO of The Poole & Kent Corporation,
9
The contractor should also endeavor to An EMCOR Company; and Thomas
measure the potential time impacts to Williams, President of Sustainable
the project schedule arising from labor Builders.
inefficiencies and, if applicable, include
those time impacts it its REA. The
subject of potential time impacts arising
from labor inefficiencies is covered
elsewhere in this manual.

Bulletin No. PD 4
File: Productivity
Bulletin
How to Estimate the Effects
of Cumulative Impacts
EXECUTIVE SUMMARY more so than the contractor may
foresee at the time any single change is
This bulletin has been written as a priced. It is not the effect of a single
resource for the subcontracting industry change, but the cumulative effect of
with the purpose of helping the reader numerous labor-related changes in
identify when cumulative impact has scope that disrupts the rhythm of the
affected labor productivity and how to project and frequently results in stacking
quantify the adverse effect in terms of of trades, unplanned crew size
inefficient labor hours. To the extent that increases, piece-meal performance, and
questions arise, contractors are other types of inefficient operations.
encouraged to seek the expertise of
their legal and claims consulting The resulting loss of labor productivity
resources. may be recoverable as an added cost of
the multiple changes affecting the
Definition contractors labor pool. This loss is not
Cumulative impact of changes to a attributable to a single change and
construction contract is the cannot be tied to a specific change by a
unforeseeable disruption of labor traditional cause and effect analysis.
productivity resulting from the effect of Rather, the contractors loss of labor
multiple changes to the contractors pool productivity is the result of the myriad
of labor. Cumulative impact is referred changes radiating disruption and other
to as the ripple effect of changes on adverse effects outward, resulting in a
unchanged work, and on the change decrease in the contractors overall
work itself, and causes a decrease in labor productivity on the project.
labor productivity. This loss of
productivity is usually not subject to The contractor may quantify the effects
analysis in terms of spatial or temporal of cumulative impacts in several ways.
relationships because its source is not a The simplest means of quantification is
single event, but arises from the multiple the total cost method. This entails
changes issued on the project.1 subtracting from the contractors total
labor hours its estimate and change
Contractors have long understood that order labor hours. A variationon this,
when a project is subjected to a large called the modified total cost method,
number of changes in terms of labor subtracts from the total actual hours any
hours, not necessarily dollar amounts, of the contractors bid errors or field
the productivity of the contractors labor retrofit caused by the con tractor. These
force can decrease substantially, even are the least accepted methods of
quantifying the contractors losses. The of the physical base contract work may
contractor may employ the MCAA labor have been installed and may require
inefficiency factors to quantify the labor modification or removal and
inefficiencies caused by cumulative replacement as a result of changes in
impact. The most widely accepted scope. The resulting studies and the
method of recovering loss of labor statistical analyses have now been
productivity is the measured mile published by the MCAA in a form that
method, where the portion of the project allows contractors to utilize the data to
impacted by others (i.e., change) is quantify the effects of cumulative
compared with an undisrupted or less impact.
disrupted portion. The measured mile is
the favored methodology because it is In the following bulletin, contractors will
an empirical, project-specific method of learn what constitutes cumulative
quantifying all types of labor productivity impact, how to explain the phenomenon,
impacts. However, the conditions and, using the Ibbs curves, how to
permitting the use of a measured mile quantify the resulting loss of labor
analysis may limit the projects on which productivity. Examples are provided that
it can be applied. guide the contractor in selecting the
appropriate timing curve, computing the
Only recently have methods been made necessary categories of labor hours and
available for a contractor to quantify the percent of change, and reaching a
adverse productivity effects of reasonable result in terms of the loss of
cumulative impacts utilizing statistical labor productivity, expressed in labor
analyses performed on other hours. The graphic curves presented in
construction projects. William Ibbs, PhD, this bulletin allow the contractor to plot
Professor of Civil and Environmental percent change against the resulting
Engineering at the University of loss of labor productivity percentage.
California, Berkeley, has performed That correlation, derived from the
studies of over 170 individual graphic curves, is then utilized by the
construction projects covering a wide contractor to compute an estimated
variety of project types. Those data number of inefficient labor hours
have been assembled into forecasting resulting from the effects of cumulative
curves that predict, with reasonable impact. The Ibbs methodology has been
accuracy, a contractors loss of labor accepted by triers-of-fact and thus, can
productivity given the labor intensity and be helpful in resolving disputes arising
timing of the implementation of the labor from cumulative impact.
changes.
INTRODUCTION TO CHANGE AND
Professor Ibbs studies have confirmed CUMULATIVE IMPACT
the critical role of the timing of the
performance of changes as correlating There are few subjects in the
to the degree of impact caused by construction industry as widely
change to a construction contract. The discussed in the context of identifying
Ibbs studies show that when change is and quantifying losses in labor
implemented early in a construction productivity as the subject of cumulative
schedule, the effects of these early impact. A principal reason for this
changes can be less than the effects of discussion regarding cumulative impact
changes introduced during the heat of stems from the fact that cumulative
battleat a time when crew sizes and impacts are, in most instances, virtually
the number of activities being worked impossible to identify while they are
are at their maximum, and when much taking place.2 In many cases, the effects

of cumulative impact only become so when even modest change occurs,
evident at, or near, the conclusion of a contractor profit margins and owner
project, when the effects of the value propositions can be jeopardized,
individual changes have been recorded or even evaporate.
in the contractors labor and cost
reports. Reasons for this may arise from Thus, in a challenging marketplace, it is
a lack of detail in contemporaneous important for the contractor to monitor
labor tracking and trending reports, the the status of contract changes on a
manner in which labor reporting was construction project. An important step
maintained, or the late issuance of in this process is for the contractor to
scope changes such that negative attempt to fully understand the scope of
trends do not appear in the labor work in the contract. Only by being
reporting until the project is at, or near, aware of the base contract scope can a
completion. contractor know that an owner is
requiring out-of-scope work to be
Another cause can be attributed to the performed. Unfortunately, at times
notion that a significant number of small contractors perform out-of-scope work
to medium-sized changes are difficult, if without realizing that the labor hours
not impossible, to connect as causes to they are expending are actually for work
quantifiable and specific effects on an that is out of scope. They incorrectly
individual, change by change basis. It is assume that the labor hour overruns
not until these almost invisible and recorded on the labor reporting system
individual impacts of changes mount must be caused by their own issues in
into a tidal wave that the effects begin to the labor plan or by inherently inefficient
become evident in the project records. workers.3
Because todays construction projects A second step in monitoring the change

are complex, expensive, and sometimes process is for the contractor to track the
risky investments for project owners, magnitude and timing of change. Many
many owners seek to impose strict contractors do not record actual labor
bidding or proposal conditions and tight hours expended on change orders or
controls on their projects. Projects scope changes (i.e., by charging actual
sometimes have to go to market by way hours to separate change work codes
of competitive bidding early in the on labor reports) nor are actual start and
development process, with plans and finish dates for changed work tracked in
specifications that are latently the contractors contemporaneous
incomplete or have errors, such as lack records. When changes are performed,
of a coordinated design among the the contractor should create some form
trades. Often the additional costs of documentation (e.g., RFIs, daily field
associated with incomplete design reports, or superintendents diaries) that
and/or design errors do not become will denote when and where change
apparent until the project is under work is being performed and by what
construction. At the same time, there is crew size. In the absence of this
fierce competition in the marketplace as contemporaneous data, change work
evidenced by the large number of files should be maintained that
contractors pursuing the projects document the estimated labor hours
released for bidding. The result is an required to perform the work, and, at a
industry that is competitive and which minimum, when the change work was
creates tight profit margins for the estimated to have commenced and
builders. Moreover, some projects are when it was completed.
economically fragile and susceptible,

However, even with identification and costs arising from the adverse effects of
monitoring of the work scope cumulative impact. As a starting point,
accompanied by reasonable efforts to change is defined by the Construction
segregate and account for job costs, the Industry Institute (CII) as any variation
cumulative impact of multiple changes in a projects scope, whether physical,
often cannot be accurately captured administrative, commercial, or
within the contractors cost reporting schedule.5 For the purposes of this
system. As noted by legal and bulletin, change will refer to changes in
accounting experts: the contract scope, whether existing as
formally approved change orders or
The advisable practice for capturing and unapproved scope changes submitted
reporting claimable costs is to segregate by the contractor to the appropriate
the costs that are a direct result of the contractual party (e.g., owner or prime
events that impacted the project.This contractor). As will be discussed more
argument has merit in theory but in
fully herein, unapproved scope changes
practice may be difficult to achieve. If the
claimed event relates to additional used in the computations contained in
activities or expanded scope of work that this bulletin must have a reasonable
is readily identifiable and segregated likelihood of being approved as a
from the original scope of work, then change order, or have a reasonable
discrete cost accounts can be chance of being recognized as valid
established to capture the additional changes by a neutral or trier of fact.
costs of direct labor, purchase orders, or
subcontractor change orders. When many changes occur, the
Conversely, if the basis of the claim situation is further complicated and may
isacceleration within the same activity,
result in what is known as a cumulative
or changes affecting multiple work
packages, then the associated extra impact condition. This term has,
costs may not be captured from the perhaps, been best defined by recent
originally established cost accounts. decisions issued by the major boards of
Because separating the additional costs contract appeals and which are cited
may be difficult or impossible, the basis elsewhere in this publication (reference
for substantiating these costs must be How to Use the MCAA Labor Factors
accomplished by other means. herein). Two such definitions bear
repeating here:
Even with optimal planning and cost
control systems, contractors can still Direct impact is generally characterized
experience difficulty in capturing all of as the immediate and direct disruption
their discrete cost damages.Hidden resulting from a change that lowers
costs may occur with a significant productivity in the performance of the
number of changes to a projectand changed or unchanged work. Direct
such delay and disruption costs can impact is considered foreseeable and the
snowball and not be discretely disrupting relationship to unchanged
captured.The quantification of each work can be related in time and space to
change order will fail to identify the a specific change.
cumulative impact or ripple effect
associated with multiple changes. Cumulative impact is the unforeseeable
Thesewill have a negative disruption of productivity resulting from
compounding effect on construction the synergistic effect of an
productivity and are usually difficult to undifferentiated group of changes.
4
quantify discretely in the cost report. Cumulative impact is referred to as the
ripple effect of changes on unchanged
This bulletin will describe methods for work that causes a decrease in
establishing a reasonable recovery of

productivity and is not analyzed in terms foreseeable at the time the change
of spatial or temporal relationships. events are taking place.
This phenomenon arises at the point the It follows that cumulative impactsthe
ripple caused by an indivisible body on
destructive effects of multiple changes
two or more changes on the pond of a
construction project sufficiently overlap in scope on a construction project
and disturb the surface such that cannot be measured as the work moves
entitlement to recover additional costs forward, nor can such adverse effects
resulting from the turbulence be measured in individual changes in
spontaneously erupts. This overlapping scope. An estimator attempting to
of the ripples is also described as the forward price changes may not be able
synergistic effect of accumulated to foresee, let alone quantify, with
changes. This effect is unforeseeable reasonable accuracy the productivity
and indirect. Cumulative impact has also impacts to the overall project arising
been described in terms of the
from individual changes.6 Indeed, such
fundamental alteration of the parties
bargain resulting from the change. impacts may not be identifiable or
quantifiable until the end of a
The second paragraph of this board of construction project, when measured
contract appeals decision defines within the entire universe of change that
several key elements of cumulative was encountered during the
impact: 1) changes in scope that can construction process.
result in decreased labor productivity
can be undifferentiated (i.e., the loss of Another definition of cumulative impact
productivity cannot be attributed to a offered by a major board of contract
specific change); 2) the effects of such appeals is also instructive:
changes can ripple outward adversely
Among other things, impact includes:
affecting the base contract, or
inefficiencies due to overcrowding, over
unchanged work, as well as other or under manning, skill dilution, extended
change work; and 3) changes in scope overtime, shift work, and local and
that affect labor productivity need not be cumulative disruption. Local [or direct]
related spatially or temporallythey disruption refers to the direct impact that
need not occur in the same time frame changed work has on other unchanged
and/or in the same physical area of a work going on around it. Conceptually,
project. As a result of the inability to tie for purposes of this appeal, cumulative
the features of cumulative impact to a disruption: Is the disruption which occurs
specific event, time frame, or area of the between two or more change orders and
base work and is exclusive of that local
project, it is difficult, if not impossible, to
disruption that can be ascribed to a
capture the additional costs associated specific change. It is the synergistic
with a specific impacting event even effect.of changes on the unchanged
with standard project control and work and on other changes.
accounting systems being utilized by the
management team. While this bulletin is not intended to
serve as a legal treatise on the subject
Finally, in the third paragraph, the board of cumulative impact, it is frequently the
found that these ripples of inefficiency published decisions from the Boards of
flow from the changed work onto the Contract Appeals and the U.S. Court of
pond of the base contract, or unchanged Federal Claims that can provide some
work, as an indirect effect of the understanding regarding critical issues
changes. Since these ripples are an in the construction industry. It is
indirect result, they may not be apparent from these and other Board of

Contract Appeals decisions that there is Figures 1-A & 1-B
general agreement as to the existence
and effects of cumulative impact.
However, there is less agreement
regarding how to actually measure the
effects of cumulative impact. Addressing
this challenging issue in the construction
industry is the primary purpose of this
bulletin.
UNDERLYING CAUSES AND

NATURE OF CUMULATIVE
IMPACT
Cumulative impact occurs when multiple

changes in scope unforeseeably ripple
out to cause disruption and a loss of
productivity to changed work and,
potentially, to the base contract work
itself. However, it is understood in the
construction industry that some change
is inevitable on larger construction
projectsthe question is how much
change to expect. It is generally agreed
in the construction industryand
substantiated by researchthat projects
with multiple, unanticipated labor hour
changes often suffer a considerable loss
of labor productivity.
Thus it is important to establish what

general magnitude of change an
experienced contractor should expect
when bidding a construction project of
any size or complexity. Studies
conducted in the construction industry
by governmental agencies have resulted
in the data shown in Figures 1-A and 1-
growth can be evaluated based on
B regarding expected changes in scope
historical data available in the industry.
on construction projects.
Cumulative impact arises from multiple
From the data shown in Figures 1-A, 1-
labor-related changes (whether directed
B, and 1-C,7 it is clear that contractors
or constructive) being issued on a
should expect some amount of change
construction project. The more labor
on a sizable construction project.
intensive the project, the greater the
Obviously, the exact percentage of
impact that can be expected. This
contract growth is not foreseeable at the
impact may result from design changes,
time of bidding each individual project.
differing site conditions, third party
However, ranges of potential change
actions or inactions, weather, or other

Figure 1-C
causes that are not the responsibility of where a deductive change can be so
the labor-intensive contractor. disruptive that the number of labor hours
and costs actually increase despite the
Regardless of the source of the change, fact that the physical quantity of work
it is generally not the dollar value of the may be reduced by the change. This
change, or the number of executed situation must be evaluated on a case-
change orders, that are the critical by-case basis.
factors in determining whether change
may cause or contribute to cumulative Cumulative impact cannot be measured
impact. Rather, it is the number of labor on individual, discrete changes as each
hours that will be required to perform the change by itself may not have a
changed work. A change order significant impact. Usually, cumulative
presented to a mechanical contractor impact is best measured near, or at, the
could have significant dollar impact to conclusion of a project because its
the overall contract value, but could be adverse impacts do not dissipate until
all material and have little or no the project is completed, or is nearly
meaningful impact on labor productivity. completed.
Thus, it is usually the labor hours that
really matter when attempting to identify WAIVER LANGUAGE IN
and quantify cumulative impact. CONTRACT DOCUMENTS
Another characteristic of change, not This bulletin does not offer a
just of cumulative change, is that it can comprehensive review of the potential
be either additive or deductive. That is, legal obstacles associated with recovery
a given change may enlarge a projects of damages arising from cumulative
scope or reduce it. Many owners find it impact. However, it is important to note
difficult to accept, but research clearly that owners such as the federal
indicates that there are many instances government (e.g., GSA, VA) and many

local agencies and private developers In the alternative to executing payment
are including waiver language in the applications and change order forms
various contract forms (e.g., change that have comprehensive waiver
orders, payment releases, or in the provisions, the contractor may seek to
contract itself) that seeks to limit a bilaterally negotiate with the prime
contractors right to recover any costs of contractor or project owner alternative
change that are not expressly included language that will appear on the forms
in the executed change order. Recent themselves. Such alternative language
trends at the federal level suggest that a often seeks to preserve a portion of the
contractor must use extreme caution contractors rights to recover, at some
when executing any contract document, future date, unknowable (i.e.,
including the contract itself, if the unknowable at the time individual,
contractor expects to preserve its rights stand alone changes are priced and
to recover the cost of change (i.e., executed as change orders) impact
cumulative impact) that was not costs such as those arising from
included in the executed change order.8 cumulative impact.
Since cumulative impact is usually In the alternative, on projects where

quantified near, or at, the conclusion of cumulative impacts are expected to be
a project, by that point in time the substantial, and where the owner
contractor may have executed a host of refuses to alter the waiver provisions on
monthly payment application forms and the various contract forms, the
change orders containing some form of contractor may decide to accept
waiver language. In many cases, these unilateral change orders that pay for a
forms contain full accord and portion of the change but do not require
satisfaction language or other waiver the contractor to execute documents
provisions that may seriously limit, or that may waive the right to later claim for
even bar, the contractor from a unforeseeable or unknowable impact
cumulative impact claim arising from the costs such as those arising from
adverse effects of changes that have cumulative impact. Another option is for
been previously negotiated and the contractor to proceed with the
bilaterally executed. changed work without payment (most
contracts give the owner the right to
Before executing the original contract or direct the contractor to proceed without
any of the various contract forms, such a settled change order) while the parties
as monthly payment applications and address the change through the
change orders, the project management contractors dispute clause.
team should review these documents
with its executive management team The waiver of a contractors right to
and seek legal advice if deemed claim for cumulative impact costs after
appropriate. Executing such forms the execution of changes bearing full
containing the aforementioned waiver accord and satisfaction language is a
provisions, without an assessment of very serious financial and legal issue. It
long term risk to the contractor, is not is strongly recommended that
prudent project management. In mechanical contractors review all
general, the contractor should assume contract documents with competent
such waiver clauses are enforceable legal counsel prior to mobilizing on the
unless advised to the contrary by project and certainly prior to executing
competent construction counsel. any document that could potentially bar
the contractor from receiving full
equitable adjustment to its contract for

all forms of impacts, including the will apply the methodologies described
cumulative impacts of change. herein. Thus, before a statistical
approach is attempted, the claimant
THE MEASURED MILE ANALYSIS should attempt to prepare a measured
METHODOLOGY mile analysis that derives its data
directly from the affected project under
The measured mile method of study. The description of the measured
quantifying a loss of labor productivity mile methodology is provided in detail
on a construction project is considered a within this publication in the bulletin on
project-specific, empirical analysis How to Apply the Measured Mile
methodology. Productivity data is Method of Productivity Analysis.
collected on the project under study
comparing the production rates of There may be a host of valid reasons
similarly skilled workers installing similar why a measured mile analysis cannot
materials but under different conditions; be applied on a construction project that
productive (or partially productive) and is beset with multiple changes in scope.
impacted. The role of the analyst is to In order to prepare a measured mile
identify the causes of the reduction in analysis, there must be a nonimpacted
productivity between a less impacted or less impacted area or time frame in
and a representatively impacted area or which, or during which, the contractors
time frame on the project. The actual productivity can be compared
comparative production rate data with the contractors actual production in
produces the productivity loss an impacted area or time frame. On
quantification. many projects, change begins at the
outset of the project and continues
Since the measured mile methodology almost to the time of commissioning or
is a project-specific means to quantify a demobilization, thus yielding no
loss of labor productivity, it is highly unimpacted or less impacted area or
favored by courts and arbitration time frame for the comparison. On other
tribunals. The cumulative impact data projects, the labor tracking records may
provided in this bulletin are not studies not exist to perform a measured mile
of the productivity rates actually analysis. However, there are ways to
achieved on your companys project. modify the measured mile approach to
The graphic models presented herein accommodate some of the obstacles
were prepared under statistical controls often encountered with the lack of a less
to offer accurate predictions of impacted area or time frame, or with the
productivity loss given a set of lack of robust recordkeeping.
circumstances that existed on over 170
individual construction projects. Before any other type of productivity
quantification methodology is applied,
As will be described herein, the data the claimant should first seek to utilize
lines shown on the graphs have a good the measured mile method to quantify
fit as to their ability to statistically the loss of labor productivity. A
predict with reasonable accuracy successful measured mile analysis will
outcomes given certain input (i.e., the capture the vast majority of the types of
project data described in the examples labor inefficiencies that occur on
contained herein). However, the data construction projects. If a measured mile
collected to produce the curves shown analysis cannot be performed and the
in this bulletin were not prepared from project has been adversely affected by
the specific project to which the reader change, the methodology described in
this bulletin may assist the contractor

with the preparation of a loss of changes into one omnibus change
productivity analysis that is derived from order. Thus, it is not the number of
statistically reasonable project studies executed change orders, or necessarily
as will be described herein. the timing of the issuance of the formal
change order documents, that most
DEFINING SCOPE CHANGE adversely affect field labor productivity.
AND CHANGE ORDER It is the number of change labor hours
and their timing (in terms of when the
When reviewing the available literature work is actually performed) that most
on the subject of cumulative impact, the profoundly affects a contractors labor
terms scope change and change productivity.
order are frequently used
interchangeably when discussing the IDENTIFYING LABOR OVERRUNS
hours attributable to contract changes in IN THE CONSTRUCTION
scope.9 Change includes unapproved INDUSTRY
scope change labor hours and approved
change order hours, presuming these Labor overruns can have a variety of
unapproved changes will stand the test causes as their origins. One cause of
of scrutiny regarding their validity. labor overruns could be an inaccurate
Including labor hours arising from estimate. However, on projects fraught
questionable scope changes will reduce with a multitude of labor intensive
the contractors credibility and changes, labor overruns are frequently
potentially affect the inefficiency the result of cumulative impact. As
computations and estimates. noted, a simple labor overrun shown in
a labor production report is not
If scope change hours (which by necessarily an indicium of an inefficient
definition have not been formally project. Similarly, labor overruns on
approved as contract change orders) construction projects do not necessarily
are included in the contractors arise from inaccurate labor estimates. A
cumulative impact loss of productivity project which was based on an
computations, some special accurate, reasonable and carefully
considerations have to be made. If, reviewed labor estimate can have
during the process of vetting scope substantial labor overruns. Therefore, it
changes, the contractor withdraws a is necessary to investigate such labor
scope change and performs the work overruns carefully to ensure that the root
under its base contract, or the scope cause is not an inaccurate labor
change is determined by an estimate and is, in fact, the result of
authoritative tribunal or board to have labor inefficiencies caused by
been within the contractors base identifiable events on the project.
contract scope, the total change hours
must be adjusted accordingly in any of Labor overruns that result from an
the cumulative impact models that are inaccurate estimate usually arise from
presented in this bulletin. missed work scopes, such as material
and equipment items, not being
As will be discussed herein, the actual identified during the estimating process.
number of change orders issued on a As such, when it comes time to assign
project may not be relevant to the issue labor hours to material and equipment
of labor inefficiency. On some projects, items, the labor hours required to install
an owner may bundle many, perhaps items that were missed in the estimate
10, 20 or more, individual scope are not included in the total of labor

hours required to construct the project. Loss of productivity cannot be defined
Another possible source of an improper simply as actual labor hours for a
labor estimate is the labor factor(s) specific scope of work, minus change
utilized by the contractor as the hours, minus estimated hours, equals
achievable productivity on a particular inefficient labor hours for a particular
project and that will result in the scope of work. Consider that a
expenditure of the planned labor hours. contractor planned to install 40 linear
feet of 10 diameter ASTM A53
For instance, if an estimator applies a schedule 40 carbon steel butt weld pipe
0.65 MCAA estimating labor factor for and fittings in 8 labor hours. However, it
the installation of pipe, valves, and actually took 12 labor hours. The labor
fittings on a project because the field overrun cannot be ascribed to a loss of
forces are known to the estimator as labor productivity without the benefit of a
productive, and these forces become productivity cause and effect analysis.
unavailable when the project actually The overrun of 4 labor hours could have
commences, the actual labor forces may been caused by a bid error, an
only achieve a 0.75 or higher MCAA inherently less efficient labor force, or
estimating labor factor. While this the introduction of the ripple effect of
represents a form of labor inefficiency change to the project.
(i.e., the actual labor force was
inherently less productive than the When cumulative impact occurs, it is the
estimated labor force), such effect of multiple changes to the work
misassumptions in the estimating that causes the majority of the loss of
process may not constitute a claim for labor productivity, not each independent
labor inefficiency under most change itself. In such cases, it is usually
construction contracts.10 impossible to connect an individual,
single cause to a specific effecton a
When a project has been properly change by change basis. However, the
estimated in terms of quantities and the contractor still must prepare a cogent
original labor factors applied at the time narrative that provides the respondent
of the bid, and the project sustains a with a logical and factual basis for the
measurable labor overrun, then a contractors productivity losses.12 If the
condition resulting in a potentially cause can be identified as arising from
recoverable loss of labor productivity the impacts of multiple changes on the
may have occurred. Such conditions project and not from the contractors
should initiate a careful analysis of the self-inflicted acts and omissions, then
project by the contractors management the contractor should consider the
personnel. application of the studies and examples
contained in this bulletin to quantify the
A potentially recoverable11 loss of labor loss of labor productivity.
productivity condition is one that was not
caused by the contractor in its If the contractor is tracking its field
estimating, management of the project, erection labor by use of activity tracking
or other factors ascribable to the or cost account codes that divide the
contractor. Put another way, but for the project into identifiable segments, such
conditions that caused the as by buildings, floors, rooms, or site
inefficienciesconditions not caused by facilities, management can determine if
the acts or omissions of the mechanical the losses are project-wide or limited to
contractorthe mechanical contractors certain specific areas or time frames.
labor would have at least met the This sort of labor performance reporting
planned production rates. is discussed in much greater detail in

the Maintaining Control of Labor addition of unplanned resources
Productivity bulletin of this publication. brought on site to address the
Such contemporaneous labor tracking is magnitude of the changed work and
an important tool in forecasting their need to learn the project and
inefficient labor trends on a construction assimilate into existing crews;
project and can assist the management
team in their efforts to connect causes Concurrent Operations
with the effects in terms of lost labor congestion caused by the stacking
productivity. of the contractors own forces to
address the added change activities;
Once a contractor determines that its
crews have sustained a measurable Dilution of Supervision
loss of labor productivity, and that such redirection of field labor
losses are not solely the result of the supervisions attention from
contractors own acts or omissions, the managing base contract work to
contractor should seek to identify the solving change scope issuessuch
source(s) of the productivity loss, as preparing RFIs, directing crews
mitigate where practical, quantify the performing changed work and
losses, and, if appropriate, seek ordering of materials arising from the
recovery for those losses.13 changes; and
EVALUATING THE POTENTIAL Overtimeinefficiencies arising

PRODUCTIVITY IMPACTS OF from an unplanned overtime
CHANGES IN SCOPE schedule required to mitigate the
delaying factors arising from
What are the potential constituents of changes to the work.14
cumulative impact as we presently
understand them in the construction The aforementioned categories, taken
industry? In terms commonly used in the from the widely accepted MCAA table
construction industry, cumulative entitled Factors Affecting Labor
impacts arising from a multitude of Productivity herein, are among the list
changes can include, without limitation, of possible components of cumulative
the following components: impact. On a project with multiple
Stacking of Tradescongestion of changes, it can be difficult, or in some
unplanned trades simultaneously cases impossible, to segregate the
working in limited spaces; individual impact categories that caused
the loss of productivity arising from
Reassignment of Manpoweralso cumulative impact. Thus, the data
known as labor disruptionthe provided in this bulletin is presented to
startstop-restart condition frequently allow a contractor to estimate labor
resulting from the introduction of inefficiencies arising from cumulative
new scopes of work into the existing impact in a more holistic fashion based
labor plan, or the resequencing of on the manner in which the underlying
activities to accommodate the data was collected and analyzed.
introduction of other trades in an
unplanned fashion, or new activities In addition to reviewing the labor
(i.e., the scope change activities); tracking records and interviewing the
field supervision in its investigation, the
Crew Size Inefficiency and contractor should carefully assess the
Learning Curveresulting from the size, quantity in terms of labor hours,
and timing of changes in scope that

have been issued. As will be described planned to be fabricated, installed, and
below, the timing of changes in scope is piped until the middle of the second year
important in the evaluation of the of construction, such changes may have
impacts of those scope changes to the a negligible effect on productivity
base contract labor. Changes in scope because the influence of such changes
that are issued early in a project and can be assimilated into the normal flow
sufficiently prior to the planning, and rhythm of the work more easily.
coordination, fabrication, and installation
of the affected work can be expected to However, most changes in scope are
have less impact than changes that are not issued far enough in advance of the
issued in the heat of battle and while the planning, coordination, prefabrication,
affected work is about to commence or and installation of the work to allow the
is already in progress. The importance influences of the change to be managed
of the timing of changes has been borne into an efficient work flow. Most often,
out by the research performed by the contractors are deluged with changes in
researchers at the University of scope as the work affected by those
California at Berkeley and is changes is being installed. When
demonstrated by the data contained in changes in scope are identified and are
this bulletin. required to be performed during the
heat of battle, when the crews are
It is helpful for contractors to record ramping up or are at or near their peak,
when scope change work commences the effects of such changes in scope on
and is performed. While the majority of labor productivity can be devastating.
contractors do not code their actual field
labor to scope change or change order Figure 2 on the next page depicts the
account codes, in some cases it is temporal relationship between change,
possible to track generally when resource usage and a value known as
changes are directed or otherwise the Actual Contract Labor Hours
authorized to commence and when the (ACLH). The ACLH calculation and
changed work is performed.15 By consumption curve will be explained in
tracking when scope change work is the next section of this bulletin. The
performed, a bar chart can be compiled actual crew size is shown on the z axis
demonstrating the timing of the scope and, if desired, the planned labor curve
change work. Such charts can can be superimposed to show a contrast
temporally depict the concurrent nature between planned and actual. This is
of multiple changes on a construction optional, but potentially very helpful
project and aid in the preparation of a information to show how the craft levels
cumulative impact request for equitable responded to the addition of change
adjustment. work. On the line graph, the contractor
has plotted the dates on which scope
It is a generally accepted axiom in the change work actually commenced and
construction industry that the timing of was performed16 and the rate of
changes is important when considering consumption of the ACLH.
the potential effect of changes on labor
productivity. Changes that occur early in Figure 217 shows that certain scope
the project and which affect downstream changes (SC), or interchangeably,
activities may not adversely affect the change orders, were directed to
overall labor productivity. For example, if commence when the project was in its
a scope change/change order is issued early stages and when the crews were
near the outset of a two year project to at minimal levels. Assuming these early
modify piping on a vessel that is not changes allowed the contractor to easily

Figure 2: Example of Scope Change Timing Chart with Craft Level Curve
incorporate the new or changed work An important feature of the inefficiency

into its planning, coordination, study that underlies this bulletin is its
fabrication and installation steps, an measurement of inefficiencies arising
attenuated impact would be anticipated from the timing of the changes in scope.
as compared with changes issued
during the peak crew periods. However, The studies and resulting data that
as the contractor increases its crews underlie this bulletin (i.e., the University
and prosecutes multiple work activities of California at Berkeley Ibbs Study)
on several work fronts, changes could were evaluated to determine the effects
be expected to have a substantial and of timing of the changed work, as well
increased adverse impact on the as the effects of the magnitude of the
contractors labor productivity. It is the ratio of changes to the base contract
labor-hour intensity of the change in labor hours. In a following section of this
scope, and its timing, that are the bulletin describing the use of the Ibbs
important considerations regarding the cumulative impact curves, the manner
effects of the change on labor by which the user can categorize a
productivity. The actual dollar value of change as early, median, or late will
the change is not the determining factor be defined in detail.
as to its potential impact on labor
productivity.

CHANGE AND ITS QUANTITATIVE Forty-one percent of the sample projects
EFFECTS ON PRODUCTIVITY were design-build and the balance of
the projects utilized a design-bid-build
Despite the fact that change clearly has contract delivery system. Fifty-two
measurable and oftentimes adverse percent were fixed price (either lump
impacts on a construction projects labor sum or unit price) and 48 percent were
productivity, until recently there was little cost reimbursable projects. Eighty three
authoritative and reliable research into percent of the public projects were
the quantitative relationship between design-bid-build with a general
change and loss of labor productivity.18 contractor or construction manager at
This dearth of information led CII to fund risk and 17 percent utilized a design-
an extensive, two-year study led by build delivery system. Seventy six
Professor William Ibbs, PhD, a co- percent of the private projects were
author of this bulletin, and his University design-build, with 20 percent using a
of California at Berkeley research team. design-bid-build delivery system and 4
percent utilizing a hybrid contract
The study was funded by large, delivery system. Of the public projects,
sophisticated owners and contractors 65 percent were lump sum, 31 percent
and was reviewed and overseen by a were unit price and 4 percent cost plus.
balanced audience. The published Of the private projects, 53 percent were
results were endorsed by lump sum and 40 percent were cost
representatives of a majority of the plus. Eleven percent of the public
stakeholders in a typical construction projects were multi-prime as were 8
project. The Berkeley researchers percent of the private sector projects.
collected extensive amounts of data Fifty-seven percent were new,
from 172 projects and tested various greenfield projects and the balance
research hypotheses by sophisticated renovation or expansion projects.
statistical methods. Follow-up interviews
were conducted with the project The private projects in this database
participants to provide quality control on contained the following types of
the data and to understand the contexts construction:
of the projects.
Petrochemical . . . . . . . . . . . . . .27%
The projects ranged in size from $3.2 Power generation .. . . . . . . . . . .19%
million to $15 billion, with a median Heavy manufacturing . . . . . . . .16%
value of $62 million, and included both Light manufacturing . .. . . . .. . . .12%
domestic and foreign worksites. Ninety- Commercial buildings and
two percent of the sample projects were other types .. . . . . . . . . . . . . . . .26%
constructed in the United States. Sixty-
two percent of the sample projects Labor hour and labor, material,
consisted of private sector projects and subcontractor, and overhead cost data
the remaining 38 percent were public were collected for the projects at the 25
sector projects. Of the public sector percent, 50 percent, 75 percent, 80
projects, 31 percent were highway and percent, 85 percent, 90 percent, 95
bridge, 20 percent rail systems,19 percent and 100 percent completion
percent commercial and school points in the design and construction
buildings and 15 percent hospitals, with phases.
the balance consisting of airports and
canals. The data points representing each of the
172 total projects were analyzed and

plotted as can be referenced in Figure 3. As described above and as shown in
The curved line represents the best-fit, Figure 3, the data collected and
regression for the total projects under analyzed by the Ibbs Study research
study and the equation for that line is team were transferred onto charts for
represented by the mathematical use in the construction industry. From
expression shown in the figure. The R the extensive data that was gathered,
value19 is a measure of the line the research team identified three
goodness for fit for the universe of separate data curves based on the
projects in the study; R = 0.72 indicates timing of the issuance of changes in
a good fit. scope. The data presented herein
represent the estimated impacts to labor
Percent Change as used in this bulletin productivity when changes at a
is defined as: change labor hours20 particular level are issued early, at a
Actual Contract Labor Hours (ACLH). median point, or late in the project.
Actual Contract Labor Hours are the These terms, and the means by which
total number of actual payroll field labor projects are categorized as early,
hours minus change labor hours and median, or late models, are fully
minus all appropriate contractor defined and explained in a later section
adjustments. These adjustments would of this bulletin. The data resulted in the
include, without limitation, bid errors and following three curves.
contractor field mistakes. Examples of
such potential downward adjustments These two variables, percent change
will be provided later in this bulletin. and percent productivity, were
Figure 3

compared, as can be seen in Figures 4 In this portion of the Ibbs Study projects
A-C. Each of the data points in these were ranked as having change at an
figures represent a project in the Ibbs early, median point or late stage of the
study. The R values for the three project. As to the timing of change, this
curves shown in Figures 4 A-C are as study utilizes the total ACLH by
follows: 0.81 for the early timing curve, establishing the mid-point of the project
0.63 for the median timing curve and based on the actual utilization of one
0.76 for the late timing curve. All half of the ACLH, as depicted in Figure
provide for reasonable forecasts of labor 6 on the next page and as described
inefficiencies that can be expected at below.
various ratios of changes to adjusted
base contract hours. The Change Timing Designation Chart
in Figure 6 demonstrates how each of
Several points emerge. First, larger the three timing models is defined.
amounts of change result in greater loss Follow these steps: 1) compute the
of productivity. For instance, a project ACLH as described in this bulletin, we
with 20 percent change (measured on will call that labor hour number X; 2) by
the horizontal axis of the median curve) referencing payroll or other labor hour
results in a loss of labor productivity of data,21 determine when, in time, one half
approximately 25 percent. In other of X was actually expended, this is
words, the cumulative impact of known as the ACLH midpoint; 3) by
changes causes a reduction in the referencing change pricing folders, time
contractors planned productivity of sheets or other data, determine when
approximately 25 percent. change work was performed; 4) from
that data, determine how many change
Figure 4-A

hours were expended before, and after, percent of change hours expended prior
the ACLH midpoint; and 5) compute the to, and after, the ACLH midpoint.
Figure 4-B
Figure 4-C

Figure 5
By way of example, the ACLH on a the ACLH midpoint and late change
project was calculated to be 16,000 field means that about 70 percent of change
craft labor hours. The claimant would hours were expended after the ACLH
refer to payroll records to determine midpoint.
when 8,000 field craft hours had been
expended on the project. The date on Note that in most cases, 100 percent of
which 8,000 field craft labor hours had the ACLH hours will be expended before
been expended would mark the ACLH the project has been completed. That is
midpoint for the purpose of determining because the ACLH hours exclude
the timing categories of change. The various components such as bid labor
claimant would then determine when hour mistakes, field retrofit caused by
change hours were expended and from the contractor and the change work thus
that data, compute the percent of the ACLH will achieve 100 percent
change hours that were expended before all of the labor hours are
before, and after, the ACLH midpoint. consumed on a project. Also note from
Figure 6 that the ACLH midpoint will
Early change means that about 70 probably not match the midpoint of the
percent of change hours were expended overall project timeline measured by
before the ACLH midpoint, median other indices, such as billing values,
change means that about 50 percent of total hours consumed or work days
the change hours were expended before accomplished. This is to be expected.
As previously noted, 100 percent of the

Figure 6: Change Timing Designation Chart
ACLH will be consumed prior to the computations. They are represented to

actual completion of the project. be reliable estimates of productivity
losses when properly applied.
As can be seen in Figure 5, projects
with early recognition of change incurred Example No. 1: A project was planned
less loss of productivity than projects to utilize 16,500 field craft labor hours
with median or late changes. For (excluding non-working supervision). At
example, at 20 percent change, the the conclusion of the project, the payroll
late projects suffered about twice as reports show an actual expenditure of
much productivity loss as the early 30,000 field craft labor hours, excluding
projects. These curves reinforce the non-working supervision. Upon careful
notion that it is better to address change investigation it was discovered that
earlier in a project than to postpone there was a bid error of 1,500 field craft
resolution of the issues causing change. labor hours, errors in construction that
required 900 field craft labor hours to
EXAMPLES OF CUMULATIVE repair, and 500 hours were recorded via
IMPACT QUANTIFICATION T&M tickets. Moreover, the contractor
estimated that 5,500 hours were
Below are three examples of the use of expended on scope change work, other
the cumulative impact studies. These than the T&M time tickets noted above.
studies provide a basis to estimate a Based on the formula described above,
contractors loss of labor productivity the Actual Contract Labor Hours would
caused by cumulative impacts. The be computed as follows:
results gained from applying the Ibbs
Study are not represented to be precise

Total field craft labor hours actually The date at which 50 percent of the
expended on the project: . . . . . . 30,000 ACLH were expended (10,800 hours of
payroll labor expenditures out of the
Bid error: . . . . . . . . . . . . . . . . . . .(1,500)
total of 21,600 ACLH hours) is
Field errors: . . . . . . . . . . . . . . . . .. (900) considered the midpoint of the project
T&M ticket time: . . . . . . . . . . . . . . .(500) for purposes of assigning the proper
curve to the inefficiency analysis that
Scope changes/change order follows.
labor hours: . . . . . . . . . . . . . . . . .(5,500)
Actual Contract Labor Hours . . . .21,600 The next step would be to identify from
the actual records, or estimate if such
From the example above, it is clear that records are not available, the dates
the Actual Contract Labor Hours are not during which the change work was
simply the actual payroll hours; the performed. Also, the actual (or
ACLH value has been derived by estimated) labor hours of each change
reducing the actual payroll hours by must be determined utilizing payroll
various factors such as bid errors or reports, field records or an estimate. By
field retrofit. The factors will vary from determining change hours performed
project to project and must be before and after the mid point, the
determined by the contractors appropriate curve can be selected.
management team. Once the Actual
Contract Labor Hours have been In this example, it was determined that
computed, the timing of the labor approximately 74 percent of the change
expenditure must be plotted using the hours were expended by the midpoint,
payroll or labor performance reports. thus the first graph (early) on the curve
is chosen to calculate the impact to the
Figure 7 labor productivity.

Figure 8
From the formulas provided above: amount of labor hours being claimed as
Percent Change = Change Labor Hours cumulative impact inefficiency in
Actual Contract Labor Hours. Percent comparison with the total unallocated
Change = 5,50022 21,600 = 25.46% = labor loss on the project. From Example
26%. The percent change for this No. 1 above, a modified total labor hour
example is 26 percent. calculation would appear as follows:
From the example above, it was Total field craft labor hours actually
determined that the project sustained a expended on the project: . . . . . . .30,000
26 percent cumulative change impact.
Original estimate: . . . . . . . . . . . (16,500)
From the early curve on Figure 8 it can
be seen that 26 percent intersects the Bid error: . . . . . . . . . . . . . . . . . . .(1,500)
early curve at a productivity loss of Field errors: . . . . . . . . . . . . . . . . . .(900)
approximately 20 percent. A loss of 20
percent of the ACLH of 21,600 equals a T&M ticket time: . . . . . . . . . . . . . . (500)
loss of productivity of approximately Scope changes/change order
4,320 field craft labor hours. labor hours: . . . . . . . . . . . . . . . . .(5,500)
Special Note: When performing a loss Unallocated labor loss due to
of productivity computation from industry all causes: . . . . . . . . . . . . . . . . . . .5,100
studies, it is advisable to test the results
by way of a modified total cost Since the cumulative impact recovery
evaluation (in this case, labor hours are computed in this example was 4,320
substituted for the cost value). This will hours, there remains 780 hours of
allow the contractor to analyze the unallocated loss of labor productivity.

This unallocated labor loss can be Moreover, the contractor estimated that
explained in the contractors narrative as 4,000 hours were expended on scope
potential unclaimed losses caused by change work (net of the T&M ticket
the contractors own acts or omissions hours). Based on the formula described
(so as not to assert an otherwise perfect above, the Actual Contract Labor Hours
performance) or simply as an undefined, would be computed as follows:
and unclaimed, amount of lost labor
hours. Total field craft labor hours actually
expended on the project: . . . . . . .20,000
Example No. 2: A project was planned
Bid error: . . . . . . . . . . . . . . . . . . .(1,200)
to utilize 8,000 field craft labor hours
(excluding non-working supervision). At Field errors: . . . . . . . . . . . . . . . . .(1,000)
the conclusion of the project, the payroll T&M ticket time: . . . . . . . . . . . . . . .(300)
reports show an actual expenditure of
20,000 field craft labor hours, excluding Scope changes/change order
non-working supervision. Upon a careful labor hours: . . . . . . . . . . . . . . . . .(4,000)
investigation, it was discovered that Actual Contract Labor Hours . . . .13,500
there was a bid error of 1,200 field craft
labor hours, errors in construction that Once the Actual Contract Labor Hours
required 1,000 field craft labor hours to value is computed, the timing of the
repair, and 300 hours were labor expenditure must be plotted using
compensated by T&M tickets.
Figure 9

the payroll or labor performance reports. scope change hours were expended by
The date at which 50 percent of the the midpoint, thus the second graph
Actual Contract Labor Hours were (median) on the curve is chosen to
expended (6,750 hours of actual payroll- calculate the impact to the labor
supported labor was expended of the productivity. Note on this example that
total of 13,500 hours) is considered the the scope change timing has been taken
midpoint of the project for purposes of from field records or has been estimated
assigning the proper curve to the by the project staff. Further, the number
inefficiency analysis that follows. of field craft labor hours (actual or
estimated) has been determined for
The next step would be to identify from each change. Thus, at the time
the actual records, or to perform an approximately half of the change hours
estimate if such records are not have been expended, the contractor has
available, the actual performance dates expended approximately half of its
of the change work. Also, the actual (or Actual Contract Labor Hours.
estimated) labor hours of each change
must be determined. As described in From the formulas provided above:
Example No. 1, the timing component is Percent Change = Change Labor Hours
thereby computed and the appropriate Actual Contract Labor Hours. Percent
curve is chosen from the timing chart. Change = 4,000 13,500 = 29.6% =
30%.
As shown in Figure 9, it was determined
that approximately 50 percent of the From the above example, it was
determined that the project sustained a
Figure 10

30 percent change impact. From the Moreover, the contractor estimated that
median curve on Figure 10 on the 12,000 hours were expended on scope
previous page it can be seen that 30 change work. Based on the formula
percent intersects the median curve at described above, the Actual Contract
approximately 35 percent. A loss of 35 Labor Hours would be computed as
percent of the Actual Contract Labor follows:
Hours of 13,500 equals a loss of
productivity of 4,725 field craft labor Total field craft labor hours actually
hours. expended on the project: . . . . . . .40,000
Field errors: . . . . . . . . . . . . . . . . .(2,500)
Example No. 3: A project was originally
estimated to utilize 8,200 field craft labor T&M ticket time: . . . . . . . . . . . . . (1,000)
hours (excluding non-working Scope changes/change order
supervision). At the conclusion of the labor hours: . . . . . . . . . . . . . . . .(12,000)
project, the payroll reports show an
actual expenditure of 40,000 field craft Actual Contract Labor Hours . . . .24,500
labor hours, excluding non-working
supervision. Upon a careful Once the Actual Contract Labor Hours
investigation, it was confirmed that the are computed, the timing of the labor
bid was accurate and complete, errors expenditure must be plotted using the
in construction required 2,500 field craft payroll or labor performance reports.
labor hours to repair, and 1,000 hours The date at which 50 percent of the
were compensated T&M tickets. Actual Contract Labor Hours were
Figure 11

expended (12,250 hours of actual curve is chosen to calculate the impact
payroll-supported labor was expended to the labor productivity. Note in this
of the total of 24,500 hours) is example that the scope change timing
considered the midpoint of the project has been taken from field records or has
for purposes of assigning the proper been estimated by the project staff.
curve to the inefficiency analysis that Further, the number of field craft labor
follows. hours has been determined (from
charge records such as time sheets,
The next step would be to identify from contemporaneous field reports, or
the actual records, or to perform an estimated) for each change. Thus, at the
estimate if such records are not time approximately half of the Actual
available, the actual start date of the Contract Labor Hours had been
scope changes. Also, the actual (or expended, only 28 percent of the
estimated) labor hours of each change change hours had been expended.
must be determined. From this data Therefore, in the last half of the project,
applied to the timing chart, it can be 72 percent of the change hours were
determined if the change model is expended, making this example a late
early, median, or late. change project.
In this example from Figure 11, above, it From the formulas provided above:
was determined that only approximately Percent Change = Change Labor Hours
28 percent of the scope change hours Actual Contract Labor Hours. Percent
were expended by the midpoint, thus Change = 12,000 24,500 = 48.9% =
the third graph (late change) on the 49%.23
Figure 12

From the above example, it was likely that bid mistakes will be
determined that the project sustained a discovered before the actual fabrication
49 percent cumulative change impact. and construction phases of the project
From the late change curve within commence. In the past, usually the only
Figure 12 it can be seen that 49 percent way a contractor could verify an
intersects the late change curve at a estimate was to have the project team
productivity loss of approximately 61 perform a re-estimate of the project prior
percent. A loss of 61 percent of the to mobilization. That process is still
Actual Contract Labor Hours of 24,500 utilized by some contractors who are not
equals a loss of productivity of 14,945 fully adapted to the more advanced
field craft labor hours. technologies.
SPECIAL CONSIDERATION FOR When bid labor errors, even serious

PROJECTS WITH SUBSTANTIAL ones, are recognized at the outset of a
BID MISTAKE ADJUSTMENTS project such that the labor hours that
NOT IDENTIFIED EARLY IN THE were omitted from the bid are able to be
PROJECT SCHEDULE assimilated into the labor plan before
work commences, or very early in the
project, the labor productivity impacts
Todays computerized estimating and
should be mitigated to a greater extent.
BIM coordination processes that are
Certainly, the contractor will feel the
undertaken before a contractor
direct financial impact of having to
mobilizes on a project make it more
provide the labor hours that were
Figure 13

missed in the estimate; however, such Actual Contract Labor Hours . . . .26,500
estimating errors would not be expected
to diminish the contractors overall field As described in Examples 1 through 3,
labor productivity. the next step is to identify from the
actual records, or to perform an
However, if a serious labor estimating estimate if such records are not
error were to occur that was not available, the dates during which the
diagnosed early in the project and that change work was performed. This
required the expenditure of a material special example also requires the
number of labor hours in the midst of the contractor to know, or to estimate, the
project, the contractors productivity dates when the missed bid labor hours
would be expected to suffer in the same were added into the project schedule. In
fashion as if a change, or series of this case, the contractors bid error labor
unanticipated changes, were introduced hours are treated just as if those hours
into the project during the same were the result of change.
performance period. The contractor
would usually not be able to recover In this example, it was determined that
such losses from a prime contractor or approximately 50 percent of the change
owner. In cases where this type of bid hours and the missed labor hours were
error has been identified, it is expended by the midpoint, thus the
reasonable to treat this bid error in the median curve is chosen to calculate
same manner as a scope change or the impact to the labor productivity.
series of changes when preparing a
cumulative impact analysis.24 A revised formula can be applied in the
case of a major bid labor hour estimate
Example 4 offers an illustration of how a error that was not discovered until the
contractor might address the impact of labor to perform the missed work was
this type of bid mistake: actually required: Percent Change =
(Change Labor Hours + Bid Error in
Example No. 4: At the conclusion of a Labor Hours) Actual Contract Labor
project, the contractors payroll reports Hours. Percent Change = 8,000
show an actual ex penditure of 34,500 26,500 = 30.2% = 30%. The Percent
field craft labor hours, ex cluding non- Change for this example is 30 percent.
working supervision. This amount This percent represents the total loss of
exceeded the contractors labor plan by productivity caused by change and the
many thousands of hours. Upon a contractors bid error.
careful investigation, it was discovered
that there was a bid error of 2,500 field From the above example, it was
craft labor hours. Moreover, the determined that the project sustained a
contractor estimated that 5,500 hours 30 percent change ratio. From the
were expended on scope change work. median curve on Figure 13 it can be
Based on the formula described above, seen that 30 percent intersects the
the Actual Contract Labor Hours would median curve at a loss of productivity
be computed as follows: of approximately 38 percent. A
productivity loss of 38 percent of the
Total field craft labor hours actually ACLH of 26,500 equals a loss of
expended on the project: . . . . . . .34,500 productivity of approximately 10,070
total field craft labor hours arising from
Bid error: . . . . . . . . . . . . . . . . . . .(2,500)
the changes and the contractors bid
Scope changes/change order error.
labor hours: . . . . . . . . . . . . . . . . .(5,500)

The claimant must apportion the total data, the analyst is severely hampered
loss of productivity of 10,070 field hours in the use of the methods provided in
between the contractor and the this bulletin. Suggested steps will be
respondent, as follows: bid error of provided that may assist the analyst in
2,500 hours; 2,500 hours of contractor the use of the methods included herein,
caused impact 8,000 hours of total however, as an alternative, the
change = 31% to the contractors contractor should evaluate and consider
account. Similarly, 5,500 hours of scope the use of the MCAAs labor inefficiency
change hours 8,000 hours of total factors contained in the How to Use the
change = 69% to the respondents MCAA Labor Factors bulletin herein to
account. The allocation would therefore estimate the adverse effects of
be: 10,070 hours of lost production x cumulative impact.
31% = 3,122 hours to the contractors
account and 10,070 hours of lost For the purposes of this subsection, the
production x 69% = 6,948 hours to the following assumptions have been made:
respondents account. The contractor
would seek a recovery of 6,948 hours of The management team, including
loss of labor productivity caused by the project managers and field
cumulative impact but would not claim superintendents, are not available
the 3,122 hours of productivity impacts for interview or offer very limited
caused by its own bid errors that had to probative value;
be remedied in an unplanned fashion in
the midst of the project. This approach The superintendents diaries and
can also be used to address particularly daily reports are not available or are
sizable contractor installation errors that not useful;
require the contractor to introduce
significant, unplanned labor hours into Change order files do not provide for
the project during the course of temporal tracking of the change
construction to re-install or repair the order work;
installation deficiencies.
Basic payroll information is available
APPLICATION OF CUMULATIVE
IMPACT ANALYSES ON Given this difficult situation, the following
PROJECTS WITH VERY LIMITED steps are recommended:
PROJECT RECORDS
A first step would be to consider
Sometimes on a limited number of retaining a competent loss of
construction projects, events occur that productivity expert who can advise, in
severely reduce the factual data that very preliminary terms, on the prospects
analysts may rely upon to perform an of recovery given the limited data.
assessment of productivity. This Whether through an attorney or a
condition may rise from the failure to consultant, the contractor can catalogue
contemporaneously maintain anything the available project information to
but the most rudimentary payroll develop the best strategy for a
records, or, in other cases, the loss of reasonable recovery.
project records due to changes in the
management staff or computer systems. As the contractors team engages in the
With the inability to question members collection of all pertinent support for the
of the management team25 or to review preparation of the request for equitable
change files or other contemporaneous adjustment, subcontractors and vendors

may be polled for information to support Those same figures also yield another
the timing of change. The owner, piece of useful information. Inspection of
designer and, if one was utilized, those figures reveals that all the projects
construction manager may have key in this database which had 10 percent
information (which probably will have to change experienced a loss of
obtained through the discovery process) productivity. This is demonstrated by
by which the timing and scope of noting that none of the data points in
changes can be ascertained. Other those three figures were associated with
sources may be useful such as building a productivity index above 1.0. This
inspection and permitting authorities, means that not only did the contractor
progress photographs maintained by the have a productivity loss in the 4 percent
owner or architect, and even mapping to 10 percent range; it also means that
services. there is a high probability that such a
loss was incurred.
It is assumed for the purposes of the
extreme condition of a dearth of The discussion above has been focused
contemporaneous records, that the on a project with virtually no extant
change orders or change directive records beyond basic payroll
documents are available for review. A information. This discussion
reasonable estimate of the labor hours accentuates the need for the contractor
involved in each of these changes can to maintain contemporaneous change
be derived from the pricing information records that may include the initiating
by identifying or estimating the labor RFI, change proposals, photographs,
proportion of the change order and related correspondence, diaries or
dividing that labor cost by an average notations citing when change work as
hourly labor rate. If the description of the performed and all associated contract
change work does not identify when the modification documents. Generally, the
change work was performed, the more robust the recordkeeping, the
signature dates may be used to more compelling will be the resulting
estimate its timing. With this information, request for equitable adjustment.
the change work can generally be
determined to be of the early, average, SUMMARY AND CONCLUSIONS
or late variety.
Virtually all projects, even the most
This estimate of the change hours can comprehensively planned and designed
then be compared to the number of and carefully scoped, have change.
labor hours in the bid. (Adjustments Change can adversely affect labor
need to be made for any bid errors as productivity, which in turn can
discussed earlier in this bulletin.) substantially reduce or even eradicate a
Dividing the change hours by the bid contractors profit. Contractors deserve
hours yields a very gross percent to be timely and fairly compensated for
change value. For illustrative purposes change. While many owners are willing
and using the preceding formula, let us to pay the direct costs of project change,
assume that this projects percent often there is a resistance and
change is 10 percent. Depending on reluctance to pay for the impact costs of
whether the project experienced early, change. This resistance and reluctance
median, or late change, the loss of can arise from the contractors lack of
productivity would be between 4 percent documentation and the lack of proper
and 10 percent, which is useful citation to industry-accepted means of
information, as seen in Figures 4-A, 4-B, impact quantification. This bulletin has
and 4-C. addressed this latter issue through the

publication of a reliable method to The concepts of cumulative impact and
estimate labor inefficiencies arising from the timing in fluence of change have
cumulative impact. been accepted in in ternational
arbitrations as realities in the con struc
Contract change often results in tion industry. The Ibbs Study also had
disputes over the quantitative impacts of been published in peer-reviewed
the change, particularly the impacts on scientific journals.27
labor productivity. As previously stated,
those impacts are discussed in this Also, contractors should be aware that
bulletin and an approach to quantifying cumulative impacts may result in critical
these impacts is presented. This path schedule impacts. Labor
approach, developed by one of the co- inefficiency can cause growth in activity
authors of this bulletin, has been used to durations that may erode total float or
resolve numerous disputes and has impact the critical path. This bulletin
been accepted in mediations, does not deal with project delay. Your
arbitrations and in trial courts.26 That attention is directed to the bulletins
research clearly indicates there are entitled Time Impact Analysis
strong correlations between the amount Measuring Project Delay and How to
of change and the loss of productivity. Organize and Submit a Claim, which
The cited research indicates that the address potential project delay caused
timing of change is a key factor as well. by productivity impacts.
Figure 14: Sample Inefficiency Chart

for Readers Use29

As with all industry study applications, Review of all pertinent documents,
the results should provide for a such as the contract, executed
reasonable estimate of the damage change order forms, and monthly
not a precise computation. The payment applications, by the
contractor making a claim for cumulative contractors executive management
impact should perform an investigation and/or construction counsel to
of the facts, provide a narrative ascertain waiver risks, if any, for
explaining how the magnitude of change recovering cumulative impact;
adversely affected the labor
productivity28 and should apply the Ibbs Modified total cost calculation
data and resulting curves in a proper showing the unallocated loss of
manner. The finding in S. Leo labor productivity;
Harmonay, Inc. (cited in bulletin PD 2
herein) represents sound reasoning in Narrative of the contractors
this regard: reasonable plan to construct the
project within the labor hours
... courts have often recognized that the contained in its original, or revised,
extent of harm suffered as a result of labor estimate and a contrasting
delay, such as the loss of efficiency claim
description of what events took
at issue, may be difficult to prove. Thus,
courts have recognized that a plaintiff place to change that reasonable
may recover even where it is apparent planincluding comparative crew
that the quantum of damage is curve graphics, as-planned and as-
unavoidably uncertain, beset by built schedule analyses,
complexity, or difficult to ascertain, if the photographs of impacting conditions,
damage is caused by the wrong. pertinent daily reports and
correspondence, and other
Every project and every dispute should contemporaneous and relevant
be evaluated with the facts of the proofs of the impacting conditions;
situation in mind. Applying the approach
presented herein without careful regard Description of all adjustments that
to the actual circumstances that took have been made in the computation
place on the project could lead to errors of the contractors loss of labor
in the quantification of the impacts that a productivity including: estimate
project has incurred. However, if the errors, contractors field rework, and
contractor making claim for cumulative total change hours;
impact prepares a comprehensive
narrative report that describes the Change timing chart showing the
contractors reasonable plan for the actual or estimated start and finish
work, how that plan was disrupted and dates of the changes to the original
impacted by unanticipated change, and contract scope of work;
how the contractor estimated its loss of
labor productivity by properly applying Application of the cumulative impact
the methodology provided in this methodologies provided in this
bulletin, the contractor may improve its bulletin utilizing the appropriate
opportunity to amicably and equitably curves and calculations;
resolve its productivity loss claim.
Proof of damages as recorded in job
The contractor should consider including cost reports or other accounting
in the submission of its cumulative documentation and a summary of
impact change request the following damages that are sought as the
items:

contractors recovery in its request in the contractors control of the work taking place
for equitable adjustment or claim on a project is lamentable, but should not
necessarily bar the contractor from an equitable
document. recovery of its reasonable costs, subject to the
terms, conditions, and limitations set forth in the
By properly applying the methodologies contract documents.
described herein and by preparing a 4
A. Overcash and J. Harris, Measuring the
comprehensive narrative of the cause- Contractors Damages by Actual Costs Can it
and-effect nexus, a mechanical Be Done? The Construction Lawyer, Vol. 25, No.
contractor may enhance its 1 (2005), pp. 34-36.
opportunities to recover cumulative 5
The Construction Industry Institute (CII) is an
impact damages. organization comprised of more than 100 leading
owner, engineering-contractor, and supplier firms
that sponsor research into construction-related
_______________________________ topics. Founded in 1983, it has earned a
Prepared by Professor William Ibbs, PhD, reputation for conducting high quality, impartial
University of California, Berkeley and Paul research that enhances business effectiveness
Stynchcomb, CCM, PSP, CFCC of FTI and capital project sustainability.
Consulting with peer review performed by: 6
This bulletin focuses on inefficient labor hours;
Michael R. Cables, Executive Vice President however, losses of productivity can also affect
of Kinetics Systems, Inc.; Norman Escover, other facets of construction costs, such as
COO of Kinetics; Richard Freeman, equipment that supports the work effort being
Executive Vice President of Stromberg analyzed (e.g., cranes, welding machines and
Metal Works; Charles F. Mitchell, General excavation equipment for underground
Counsel of The Kirlin Group; and the installations). Thus, productive use of equipment,
members of MCAAs Education Committee. which is typically charged to the project in hourly
units, can also be adversely affected by
cumulative impact.
ENDNOTES 7
Figures 1-A through 1-C were extracted from
1 the publication entitled Construction Contract
Paraphrased from the Veterans Affairs Board of ModificationsComparing the Experiences of
Contract Appeals reported decision in the matter
Federal Agencies with Other Owners published
of The Appeal of Centex Bateson Construction
in 1986 by the Committee on Construction
Co., Inc. VABCA-4613 and 5162-5165.
Change Orders, Building Research Board and
2
The impact of the cumulative effects of multiple the National Research Council. As of the date of
changes on a construction project has been this publication, no more recent studies on the
described in one Board of Contract Appeals subject of expected change have been identified
decision as amorphous (i.e., all but invisible, by the authors.
lacking definite form, shapeless). Reference the 8
Reference Bell BCI Company v. United States,
Appeal of Centex Bateson Const. Co. Inc., 99-1
U.S. Court of Appeals, Federal Circuit No. 2008-
BCA 30153 (1998). 5087 570 F.3d 1337, 2009. For a related decision
3
At times the contractor will perform out-of-scope regarding cumulative impact following the
work that is not identified as such until late in the decision in Bell, reference Walsh/Davis Joint
project, when a major labor overrun has been Venture v General Services Administration,
identified and the contractors management team Civilian Board of Contract Appeals 1460, March
undertakes a detailed comparison between the 13, 2012.
base contract work scope and the work actually 9
Design development changes, a type of
performed on the project. This comparison can change common in design-build projects, are a
identify large quantities of labor expended on different type of change for which the design-
work not contained in, or contemplated by, the build contractor is responsible.
base contract but which was required to actually
10
build the project. A common example is labor An excusable delay to the commencement of
expended to install extra pipe and fittings not the mechanical contractors work, such as by a
shown on the contract drawings but which are differing site condition that delays foundation and
necessary to overcome design deficiencies such vertical construction, may justify such a loss of
as improperly coordinated drawings. Because the productivity claim based on an assumed,
labor was not associated with a change in the reasonable overall production rate.
contractors cost system, it was never submitted
for compensation as changed work. Such lapses

11
Recoverable is a term that can be highly Study) and was widely circulated in the
qualified or restricted by the terms and conditions construction industry. The Leonard Study found
of the contract. Many contracts attempt to limit, or that the cumulative impact of multiple changes on
eliminate, a mechanical contractors right to a construction project adversely affected a
recover labor inefficiencies. Such contract terms contractors labor productivity. This study also
should be the subject of a careful legal review. found that the timing of changes affected labor
12 productivity. This study was later criticized in
it is clear that demonstrating an overrun in several court cases, primarily for its manner of
labor and the existence of numerous changes data collection and statistical analysis. The study
without some evidence linking the changes to the utilized in this bulletin was carefully composed
overrun is insufficient proof of causation. Finally, and monitored in order to avoid, and then to
there must be some proof of a causal connection correct, those data collection and statistical
established showing that the undifferentiated analysis errors for which the Leonard Study was
group of contract changes affecting the changed criticized.
and the unchanged contract work resulted in the
19
loss of productivity on that work. Reference the The R value is known as the correlation
Appeal of Centex Bateson Const. Co. Inc., 99-1 coefficient and is used in statistical models
BCA P 30153 (1998). whose main purpose is the prediction of future
13 outcomes based on other related information.
Even if the contractor determines that all or a This value states the proportion of variability in a
portion of the loss of productivity has been data set that forms a statistical model, such as
caused by the contractor, it is still essential for regression analyses as utilized in the Ibbs
the contractor to identify the cause and to models. The R value provides a measure of how
mitigate the loss wherever possible. well future outcomes are likely to be predicted by
14
The contractor should differentiate between the model, thus within the range of 0 to 1, the
shortterm spot overtime required to address closer the value is to 1, the more likely it will be
immediate scheduling needs and long term and that the prediction will resemble the result.
unplanned overtime that can cause a substantial 20
In order to offer a more conservative
loss of labor productivity. Reference the bulletin inefficiency estimate, the labor hours contained in
entitled How to Estimate the Impacts of T&M tickets are not included in the percent
Overtime on Labor Productivity herein on the change computation for the purpose of this
subject of overtime inefficiency. bulletin. By virtue of the way T&M charge tickets
15
When the cumulative impact arises from are maintained, they usually have the direct
constructive changes that are not recognized inefficiencies embedded within the T&M entries.
until after their performance or, in some cases, We have taken the conservative approach of not
until the conclusion of the project, it may not be including these hours in the computation of the
possible to track the start and stop dates of the percent change value. However, if a significant
change. portion of the total change hours were recorded
16
on T&M tickets, this exclusion of T&M hours in
These change work start and finish dates the percent change computation may be revisited
should be as accurate as reasonably possible. As by the contractor, since the exclusion of a major
previously noted, the date on which a change portion of the change hours recorded on T&M
order is executed may be totally irrelevant to the tickets could unfairly affect the outcome of the
issue of labor productivity. A formal, executed labor inefficiency estimate.
change order may roll up dozens of individual 21
scope changes and may not be approved until For the purposes of this bulletin, field craft
very late in the project, thus shedding no light on labor hours should not include non-working labor
when the changed work scope was actually categories. Such non-working categories could
directed and performed. On some projects, an include superintendents, general foremen and
owner may never actually execute any change foremen, depending on the size of the project,
orders and may direct the contractor to perform local union requirements and custom and
added or changed work scope under the practice of the contractor.
applicable terms of the contract. 22
The change hour totals in the examples
17
ACLH shown in this figure refers to Actual included in this bulletin for the calculation of the
Contract Labor Hours. This value is not simply percent change value do not include T&M ticket
direct payroll hours; rather it is a computation of hours, as previously explained herein.
adjusted labor hours that is fully described in the 23
Note that the data points do not support a
Change and its Quantitative Effect on Percent Change value greater than 50 percent.
Productivity section of this bulletin. No extrapolation of the data lines should be
18
Over 15 years ago, a cumulative impact study performed to allow for Percent Change values in
was authored by Charles Leonard (the Leonard excess of 50 percent.

24
The claimant would compute the loss of labor
productivity arising from such types of bid error
and demonstrate, in its request for equitable
adjustment, that these labor hours were not being
claimed in the total labor hours sought in the
claimants recovery.
25
On some projects, the entire field office
management team is either terminated or
terminates employment, making the process of
fact finding even more difficult.
26
As of the date of this publication, there have
been no published decisions citing the study that
is the subject of this bulletin.
27
Evaluating the Cumulative Impact of Changes
on Labor Productivity an Evolving Discussion,
Dr. W. Ibbs and G. McEniry, Cost Engineering,
Vol. 50/No. 12, December 2008, Association for
the Advancement of Cost Engineering
International; and Ibbs, William (2005).
Quantitative Impacts of Project Change: Timing
Issues, Journal of Construction Engineering and
Management, ASCE, 131(11), November, 1219-
1223.
28
Construction productivity cases often mention
the need to establish the cause-and-effect
nexus, however the nature of cumulative impact
renders it virtually impossible to tie individual
changes to specific effects in terms of labor
productivity impacts. However, that does not
relieve the contractor from evaluating its
estimating, labor performance and documentary
records to demonstrate that the impacts were not
self inflicted and to offer a narrative that
describes the contractors plan and how that plan
was disrupted by the influences of multiple
changes on the project.
29
This chart is provided for the contractors use
in plotting Percent Change and the resulting
Percent Productivity. If desired, this chart may be
copied and inserted into the contractors request
for equitable adjustment to demonstrate the
plotting of the data.

Bulletin No. PC1
File: Purchasing
Bulletin
Purchasing for Profit
INTRODUCTION materials do not meet required specifi-
cations even though the contractor was
The mechanical and electrical assured at bid time that the quoting
construction industry is getting more vendor thoroughly checked out all
complicated every year, faced with rapid engineering requirementshe can often
escalation of material and labor costs, find himself in a position where he is
ever increasing and aggressive compe- facing tremendous additional costs to
tition from both union and non-union secure materials from an alternative
quarters, diminishing gross profit mar- source. Some of the risk in operating in
gins, and increased delays and diffi- todays construction market can be
culties encountered in attempting to eliminated or reduced by a more strict
meet construction schedules. and formal policy regarding the issuance
of purchase orders.
This bulletin is designed to help
you establish purchasing techniques A purchase order is a document
that help protect your business and with a front and back side. This does not
purchases. Before establishing your mean that it involves two parties,
purchase order system, decide who in although it most often does. The
your company can set up a vendor. It is purchase order form normally contains
important that all vendors be validated specific purchase information on the
by someone with ownership in the front side such as date of required
company. This not only protects you shipment, quantity of items involved,
from someone setting up a bogus description of items, unit price of the
vendor for his or her benefit, but allows items, etc. The second side is usually
you to know who your vendors are. Your the back of the purchase order that
vendor list should be made up of contains one or more pages of fine
reliable, financially reputable vendors. print intended to protect the contractor
should legal questions arise and
The supplier or vendor who fails resolutions of disputes become
to provide critical construction materials necessary.
in a timely fashion places the contractor
in a potentially explosive position. In PURCHASE ORDERS: THE FRONT
todays construction market, the prudent SIDE
contractor simply must pay more atten-
The front side is used by the
tion to contracts with suppliers of key
contractor to define what material he
materials. If a key supplier is unable to
needs and to protect his interests in the
deliver materials as promisedor
event a supplier fails to perform as
Copyright, Mechanical Contractors Association of America, Inc., Revised 2010
. 1
promised. The front side of the purchase Vendor name, address and contact
order is also a good place for the Ship-to address
contractor (purchaser) to limit its Quantities and unit types
exposure by taking exception to the
vendors quotation and the vendors
Description of materials
limitation of liability (language usually Line and total prices
included within the vendors quotation). Signature of both parties
In light of the fact that most vendors Number of submittals required
quotations are offered subject the Owner and maintenance manuals
vendors terms and conditions, stan- required
dard warranties, etc. the contractor
should consider incorporating the follow- Review each item for information
ing language on the front side of the on the front side of a typical purchase
purchase order: order for some dos and donts for
properly issuing the order so that the
PRIOR TO THE ACTUAL contractors position will be protected if
SALE OF THE ITEMS CONTAINED a vendor does not meet the require-
HEREIN, PURCHASER TAKES EX- ments of the construction project
PRESS EXCEPTION TO VENDORS schedule or the engineers specification
QUOTATION PERTAINING TO THIS data.
ORDER. ADDITIONALLY, PURCHAS-
ER TAKES EXPRESS EXCEPTION TO Contractors Name and Address
VENDORS LIMITATION OF LIABILITY All purchase orders should be
PERTAINING TO THE PRODUCTS ordered with the contractors name and
PROVIDED UNDER THIS ORDER. address printed prominently on the form.
This will speed the process of complet-
Please note that smaller ing the form and add uniformity to all of
contractors that do not necessarily the companys documents.
engage in larger volumes of annual
purchases may find it very difficult to Assigned Purchase Order Number
negotiate the above language into their There must be a unique number
purchase orders. However, we urge all for each purchase order to be matched
contractors to attempt to limit their with the vendors invoice(s). It is recom-
exposure; the language can always be mended that every vendor is to ref-
stricken. erence all correspondence and in-
voice(s) with this number.
The front side of a sample pur-
chase order (Exhibit A) contains several Project Name
categories of information such as: The project name printed or
written on the purchase order is required
Date of issue to identify quickly the vendor for the
Shipping terms (See Bulletin PC3 for project. This is also a double check with
FOB information.) the project number to make sure that
Payment terms the vendors invoice will be accounted
for with the right project.
Delivery date (call project manager
24-48 hours before delivery)
Project Number and Account Number
Contractor's name and address Every project is assigned a
Assigned purchase order number number that accounting will use to
Project name record each invoice properly for job
Project number and account number costing. It must be printed or written on

the purchase order. Most companies costs caused by the failure of the vendor
require an account number on the to meet the required delivery date.
purchase order to place invoice costs to
the correct job costing code. Shipping Terms
Dont think that shipping terms
Vendor Name, Address and Contact are not important! If you purchase
The complete name, address materials and specify that they are to be
and contact of the vendor must be provided F.O.B. Jobsite, the term
written or printed on the purchase order. means that the vendor will be
This identifies the other contracting responsible for filing any freight claims
party. or pursuing any loss or damage to the
goods which occur prior to the time that
Ship-to Address the goods arrive at the project site. If the
This will help you make sure the purchase order indicates that the
material or equipment gets to the right shipping terms are F.O.B. Factory,
place for use or temporary storage. then once the goods leave the shipping
dock at the factory, the vendors
Date of Issue responsibility for them ends, and the
Never issue a purchase order subcontractor will have to pursue freight
without a date, and have the vendor claims, insurance claims, or whatever
date his signature. By failing to include other means are necessary to recover
the date on the purchase order, a signif- lost or damaged goods. Any contractor
icant argument may result regarding the who has ever had the painful experience
purchase order date. Potential conflicts of having to file and collect freight claims
between the request for quotation, the or insurance claims on damaged or lost
vendors original quote, and later notifi- goods knows that it is an endless
cations by either party may be avoided procedure and one that can consume
by dating the purchase order and all literally hundreds of man-hours of time
other documents. and may still result in a frustrating
conclusion. Any time the subcontractor
Delivery Date can make the vendor responsible for
Every purchase order should be pursuing these claims, he should do so.
issued with a specific delivery date
required, if possible. You should try to The F.O.B. point also determines
avoid using vague statements of ownership of the products. Therefore, if
delivery requirements (e.g., as needed, a contractor accepts F.O.B. factory
when required, will advise, ASAP" or terms, that contractor owns the products
other catch-all phrases). If a vendor fails when the shipment leaves the factory
to provide materials in a timely manner loading dock. Conversely, if the con-
and places the contractor in a position of tractors purchase order stipulates
facing significant increased costs as a F.O.B. jobsite or F.O.B. delivery
result, the contractor must be able to destination, the contractor does not
show that a contract existed between own the goods until the products are
him and the vendor, and that the vendor signed for (after inspection and unload-
specifically agreed to a promised deliv- ing) at the point of delivery. In all cases,
ery date for the material. Statements the contractor should not unload a ship-
such as will advise provide a very ment until after the shipment has been
convenient loophole for the vendor and inspected for apparent shipping dam-
may mean that the subcontractor will not age. If damaged goods are discovered,
be able to legally recover the increased the contractor should note the damage

on the shippers bill of lading prior to lowest price, you may be tempted to
signing and accepting the shipment. issue the purchase order to indicate that
he provide his specific model of equip-
ment; i.e., Provide one Model XYZ-123
Items and Quantities Acme 500-Ton Chiller complete with
Unless the contractor is accessories as quoted in your proposal
absolutely certain of the quantity of dated January 1, 2002. This may turn
materials involved, he should avoid out to be a major mistake and cause the
specifying a specific quantity. For contractor significant problems. Sup-
example, if you are purchasing one lot pose the Acme chiller, which the con-
of grills and registers from the tractor has assumed will meet the speci-
manufacturer, you may find that stating fications, is not acceptable to the en-
the exact quantity of each of the items gineer. Then, in most cases, the Acme
involved presents a problem later. representative will be under no obli-
Suppose a vendor quotes quantities of gation to provide another manufacturers
air distribution equipment, which he piece of equipment or to meet plans and
believes the plans and specifications specifications since he only quoted a
require. If the contractor repeats these specific piece of equipment and thats
quantities on his purchase order and exactly what you purchased.
buys the same number of grills, regis-
ters, and diffusers that the vendor quo- On the other hand, it is possible
ted, then the contractor will have no re- to write a purchase order and to specify
course if it turns out that the quantities that the vendor Provide 1 each 500-ton
quoted by the vendor are not the same chiller in complete compliance with the
quantities required by the plans and plans and specifications attached. If
specifications. this method is used to describe the
equipment involved, the vendor, upon
On the other hand, if the con- acceptance of the purchase order, has
tractor issues the purchase order and agreed to pro-vide one chiller that meets
indicates that the vendor is to furnish the plans and specifications. If the Acme
one lot as required by the plans and 500-ton Model XYZ-123 chiller does not
specifications, then the contractor has meet the plans and specifications, then
sufficiently tied the vendor down to he is obligated to provide a 500-ton
providing whatever quantities of grills, chiller that does meet the plans and
registers, and diffusers are required by specifications. If you have any doubts
the construction documents. Normally about a suppliers equipment or mater-
there is nothing wrong with indicating ials meeting specification requirements,
the quantity required by the contract it is a good policy to write the purchase
documents. It is only in those areas of order so that the vendor recognizes that
purchase where the exact quantities he has agreed to provide equipment or
may be open to various interpretations materials to meet the specifications
from different individuals that the con- regardless of his personal interpretation
tractor should be careful to issue the of their requirement or regardless of his
purchase order calling for one lot as proposal.
required by the contract documents.
What about the vendors fine
Description of Items print on the back of his proposal? If you
Suppose you are bidding a job describe the equipment or materials to
that requires you to provide a 500-ton be purchased as one Model XYZ-123 in
absorption chiller. If a vendor quotes his accordance with your proposal, then
particular make of chiller and has the you have incorporated, by reference, the

vendors fine print from the back of his following: If the purchase order only
original proposal. This may be a serious indicates a lump sum, there may be
error since the vendors fine print may arguments in the future over the value of
specifically deny any responsibility for individual items on the purchase order. It
damages resulting from his inability to may be necessary to change, add, or
meet the specified delivery dates or to delete items from the purchase order at a
meet the specification requirements. future date. Therefore, it would be wise to
Therefore, it is a good idea to avoid indicate the unit prices for these items as
using phrases such as in accordance well as a lump sum total. When
with your proposal since you are purchasing materials that require a
incorporating language that may not be quantity discount, it is a good idea to
to your benefit. In cases when it is indicate the discount on the purchase
absolutely necessary to note a manu- order should the supplier later claim that
facturers model number on the pur- the price or discount of purchased
chase order, the suggested language materials has changed.
previously mentioned under the heading
PURCHASE ORDERS: THE FRONT Another reason to avoid issuing
SIDE on pages 1 and 2 (where the a purchase order that states furnish all
contractor takes express exception to in accordance with your proposal is that
the vendors quotation and any limita- suppliers prices may change during the
tions of liability) will help to ensure the contract term. If the suppliers proposal
contractor is not tied into the ven- clearly contains a statement indicating
dors/manufacturers terms and con- that his prices are subject to escalation
ditions (fine print). and final price is to be determined at
time of shipment, by referring to his
The best policy for purchasing proposal, you may have given the
materials is to tell the vendor that he is supplier a contract with an escalation
to provide one lot, or a specific clause, while at the same time agreeing
quantity of materials or equipment, in to provide the mechanical work without
accordance with plans and attached being able to escalate your material
specifications. You should attach a price.
copy of the pertinent specification
requirements to the purchase order so The contractor could state on the
that the vendor will be aware of the front side of the last page of the
requirements that must be met in order purchaser order:
for his equipment to be acceptable.
ALL PRICES, INCLUDING
Add warranty language to the UNIT PRICES, SHALL REMAIN
PO when odd warranty time frames or EFFECTIVE (WITHOUT INFLATION)
temporary usage are required. Also see FOR THE DURATION OF THE
bulletins Understanding Manufacturers PROJECT. THE QUANTITIES NOTED
warranties and Temporary Usage of HEREIN ARE APPROXIMATE AND
Equipment for additional concerns for THE PURCHASER MAY REDUCE OR
warranty issues for the PO. IN-CREASE QUANTITIES AT THE
UNIT PRICES NOTED AS MAY BE RE-
Pricing QUIRED. RETURNED PRODUCTS
There is no hard and fast rule ARE NOT SUBJECT TO RETURN/
about entering either a lump sum or RESTOCKING CHARGES.
individual unit prices on a purchase
order. The contractor about to issue a Additionally, at the time the
purchase order should think about the purchase is made, we suggest the

contractor obtain breakout pricing for paragraphs for the particular project
non-taxable items such as freight into the subcontract and list whether
(freight is non-taxable in some states) additional insureds are required.
and a breakout price for labor required
for startup and demonstration of the Signatures
products being purchased. The Make sure that your vendors and
contractor should indicate the freight suppliers sign and accept your purchase
amount on the purchase order, order before you accept and pay for any
especially if freight is non-taxable in the of their materials or equipment. It is best
state where the product is delivered, to to insist that the supplier sign and ac-
clearly define the exact amount of the cept the purchase order in your office
purchase order, including applicable the day you give him the order. If this is
sales taxes. not possible, then you should instruct
the supplier to sign and return the pur-
If the project is tax exempt, chase order and state that the purchase
attach the tax exempt certificate order is not considered to be valid until
provided from your contract with the PO, your firm receives and accepts the
and note on PO front that project is tax signed order. Your accounts payable
exempt. This will save you time with department should be instructed not to
vendor billing inconsistencies. pay any supplier or vendor unless there
is a signed and accepted purchase
Finally, review the completed order on file.
purchase order for accuracy.
If the purchase order is sent to a
Startup Subcontract supplier with the understanding that he
We suggest the contractor take will sign and return it later, then a policy
the breakout price for the startup (as or procedure must be instigated to
noted above) and include that portion of ensure that the signed purchase order,
the vendors responsibilities in a sep- when it finally returns to the contractors
arate startup agreement document office, has not been amended or
(refer to Exhibits C, D and E, attached, changed in any way that would become
for exam-ple startup subcontract doc- objectionable to the contractor.
uments). The contractor should have
insurance provisions in its standard Finally, a word about the tail
subcontract terms. Insofar as the that wags the dog. Many suppliers are
purchase order terms have no provision such large organizations that they are
for the vendor to provide insurance able to demand or insist upon terms and
when performing on site services, conditions on purchase orders that are
utilization of a subcontract to the not in the best interest of the contractor.
vendor for performing startup and The vendor may refuse to ship his
demonstration activities will further product without shipping terms of F.O.B.
protect the contractor from any injuries, Factory or he may refuse to accept your
including death, property damage or fine print that indicates that his failure to
other losses and/or damages caused by meet the promised delivery date will
the vendor. Without these insurance make him responsible for any resulting
requirements, the contractor is left cost incurred. In many instances, it will
exposed to possible damages caused be impossible for the contractor to force
by vendors performing activities on the the supplier to agree to a contractors
contractors job site. Make sure you terms or conditions. If this is the case,
transfer the contract insurance liability the contractor must simply recognize
limits and other contract pass through that he is accepting additional risk in

return for a lower supplier price, or he contractor in Louisiana. It is an
may be unable to find an alternative intelligent and effective investment of a
source of supply and have no choice but contractors effort and money to spend a
to accept this risk. couple of hours with a good construction
In many cases, purchasing attorney to develop adequate fine
based on the lowest dollar quoted print. The language should be updated
ultimately costs the contractor more every few years to comply with changes
money in the end. For example, if the in the law.
contractor has a prime contract on a
federal project and he chooses to
purchase a major portion of the contract
materials from a supplier who later
declares bankruptcy, the courts do not
view that bankruptcy declaration to be
an excusable delay. The contractor will
be held to the original completion date,
and the fact that the supplier went broke
will provide absolutely no relief for the
contractor. Purchasing based on low
dollar alone does not always make
good economic sense. Select suppliers
and vendors that will provide an
acceptable as well as economical
product. Careful attention to the
issuance of purchase orders to vendors
and suppliers will improve the
contractors chances of survival and
may make his life much more pleasant.
PURCHASE ORDERS: THE BACK

SIDE
The back side of a typical

purchase order (Exhibit B) usually
contains the fine print which protects
the contractor from non-performance.
However, do not neglect the back side.
It is extremely important. If a contractor
does not have fine print developed for
purchase order agreements, he should
do so as soon as possible. We have
developed a sample format for fine
print which a contractor could use in
working with a competent local attorney
for tailoring to the specific requirements
of the state in which he is operating.
Different states have different legal
requirements regarding contracts. What
may be an acceptable set of fine print
in the state of New York may not
provide adequate protection for a

EXHIBIT A
PURCHASE ORDER
YOUR COMPANY / MECHANICAL CONTRACTORS
[Address] [Phone]
TO: P.O. No._________ This number must appear on all invoices, shipping memos,
bills of lading and packages.
Order Date______________, 2___
Our Job No. __________________
Ship To:
___copies of operation, maintenance & installation instructions are Shipment terms F.O.B. PLEASE
required for the owner's use. Final payment will not be made until Freight Prepaid
after these instructions are received. DO NOT SHIP COLLECT ADD
Payment Terms Original Order Date required at job or sooner ____copies of submittals required.
STATE
Confirming order. DO Not before approval required before
NOT DUPLICATE shipment SALES TAX
SHIPMENT approval not required
ITEM QUANTITY DESCRIPTION Unit price Total Price
According to plans and specifications as prepared by

________________________________________,
dated _____________ including the following addenda and bulletins:
Even though your quoted price may

1. Our Order Number must appear on all documents and shipments. include freight, startup & other similar
2. Two packing slips showing P.O. # must accompany each shipment. nontaxable items, all invoices must be
3. This order shall not be binding until acceptance and return, within five days, of the itemized so that freight, startup & other
signed acknowledgement copy specifying the shipping date. Such acceptance is non taxable items can be identified.
subject to the TERMS AND CONDITIONS STATED ON THE FACE AND
REVERSE SIDE OF THE ORIGINAL AND ACKNOWLEDGEMENT COPIES (Total)
HEREOF, which seller agrees shall constitute the final and complete agreement
between purchaser and seller. Any modification of recission of this agreement
shall be ineffective unless in writing and signed by both purchaser and seller. (COMPANY)
4. Advise 48 hours in advance of delivery (telephone number). No delivery after 2:00 Your Purchase Order is Hereby Acknowledged and Accepted, including terms
p.m. and conditions stated on the face and reverse side hereof.
5. ____% of purchase price will be paid upon Purchasers receipt of approved Authorized Signature ________________________ _______Date_________
operation and maintenance data, spare parts, special tools and manufacturers We will Our Order
certificates. Ship on_____________________________ No. is _________________
Person Controlling This Order _____________________________________
Subject to the TERMS AND CONDITIONS STATED ON THE FACE AND REVERSE SIDE OF THE ORIGINAL
AND ACKNOWLEDGEMENT COPIES HEREOF.
8
EXHIBIT B
GENERAL CONDITIONS AND INSTRUCTIONS
1. Identification of shipments. The Purchaser cannot and will not be responsible for any material received unless each package, case, etc., is clearly identified on its outer
covering as to: 1. Seller 2. Purchase Order Number If Purchaser furnishes shipping tags for direct shipment to Purchaser's customer, Seller assumes responsibility of
nonacceptance of shipments by Purchaser's customer in the event such shipping tags are not attached to packages, case, etc. On shipments direct to Purchaser's customer
where no shipping tags are furnished, packages, cases, etc., must be marked as specified on face of order.
2. Boxing, Packing or Cartage. No charges for boxing, packing or cartage will be allowed unless stated hereon or later agreed to by this company in writing.
3. Invoices. Invoice showing Purchase Order Number must be mailed to the Purchasing Department of the Purchaser not later than the day following shipment, irrespective of
whether shipment is in part or in whole.
4. Inspection. The material or apparatus to be supplied against this Purchase order shall, at the Purchaser's option, be subject to inspection and test at the maker's works.
5. Rejected material. Rejected material shall be returned to the Seller at Seller's expense.
6. Time of delivery of this order is of the essence, and Purchaser reserves the right to cancel without cancellation charges all of any part of this order if not filled within the
specified time. exercise of such right of cancellation shall not be deemed a waiver of any other right reserved to the Purchaser herein, or by law, for any delay or failure to
deliver as specified.
7. No partial shipments accepted unless agreed upon by both parties.
8. The Seller agrees to comply with any and all federal, state, county and municipal and/or other local regulations, laws, ordinances and enactments of whatever kinds, applicable
at the time of sales or which may become effective during the period of construction or fabrication, shipping and/or installation (if installation is included) of the materials
comprised under this Purchase Order.
9. The price or prices of this order are not subject to change or any surcharges resulting from the imposition now or in the future of any sales taxes, federal, state, municipal or
otherwise, unless agreed to or requested by Purchaser.
10. In the event approval is not secured from the Owner, or if the Owner's order to the Purchaser is cancelled, cancellation of this order shall occur automatically, without
cancellation charges by the Seller, and no obligation of any description whatsoever, shall exist on the part of the Purchaser toward the Seller.
11. The contract price appearing on the Purchase Order is final as to payment for the material covered by the specifically listed items, as defined by the enumerated specification
paragraph numbers, with exceptions as noted, and there shall be no additions to or other modifications or such contract price except as such modifications may result from
actual change in the specifications. If such changes become necessary, any alteration of the contract shall be covered by separate order, which shall be issued to cover such
changes. Seller shall not proceed with changes affecting contract price without specific authorization in WRITING from the Purchaser.
12. Payment and discount periods shall commence only upon receipt of both the material and proper invoice or invoices at designations specified in this Purchase Order. The
Purchaser reserves the right to return to the Seller for correction any and all invoices containing error and/or not in agreement with this Purchase Order.
13. The Purchaser reserves the right to return to Seller at the invoice price all items which are regularly carried in Seller's stock.
14. Seller represents and warrants to Purchaser that all material and/or equipment rented, leased or purchased under this Purchase Order meets all standards of the Occupational
Safety and Health Act off 1970 and Construction Safety Act of 1969, as amended from time to time, and of applicable state and local laws, regulations, standards or
requirements pertaining to safety, as amended from time to time.
15. All material and/or equipment furnished under this order shall be guaranteed by the Seller against defects, and Seller agrees to replace without charge to Purchaser said
material and equipment, or remedy any defects, latent or patent, not due to ordinary wear and tear, or not due to improper use or maintenance, which defects may develop
within one year fro date of acceptance by Owner, or within the guarantee period set forth in applicable plans and specifications, whichever period is longer.
16. All material and equipment furnished under this order shall be subject to the approval of the architect, engineer, or any other party designated, and Seller shall furnish the
required submittal data and/or number of samples for said approval. In the event such approval is not obtained, the order is cancelled, with no liability on the part of either
Purchaser or Seller, unless the order is placed with the understanding that the material and/or equipment is to be supplied of the type and in such a manner as to meet
requirements of plans and specifications. In the latter case, Seller shall comply without further cost to Purchaser.
17. All material and equipment furnished hereunder shall be in strict accordance with plans, specifications and general conditions applicable to the contract of Purchaser with the
Owner or another contractor, and Seller shall be bound thereby in the furnishing of material and equipment under this Purchase Order.
18. Seller shall guarantee equipment covered under this purchase order to produce capacities or meet design specifications and function: (1) as called for in the plans,
specifications or addenda; and (2) as herein set forth; and (3) as published or warranted by the manufacturer for the equipment involved. In the event the equipment does not
meet the foregoing requirements, Seller shall immediately on notice replace same, or remedy any deficiency, without expense to the Purchaser; and further, Seller shall pay to
Purchaser all consequential loss or damage resulting there from.
19. The Seller hereby agrees to indemnify and save harmless the Purchaser for and against all claims, liability, loss, damage or expense, including attorneys' fees, by reason of
any actual or alleged infringement of letters patent, or of any litigation based thereon covering any article purchased hereunder.
20. Seller shall furnish all necessary lien waivers, affidavits or other documents required to keep the Owner's premises free from liens or claims for liens, arising out of the
furnishing of the material or equipment herein, as payments are made from time to time under this purchase order.
21. All prior representations, conversation, or preliminary negotiations shall be deemed to be null and void, superseded by the terms of this order, and no changes will be
considered approved unless this purchase order is modified by an authorized representative of Purchaser in writing.
22. In the event of default of any of the terms or conditions set forth herein, the Seller agrees to pay all costs resulting there from, including but not limited to reasonable attorneys'
fees.
23. This purchase order, when accepted by Seller, shall constitute a valid and binding contract.
EXHIBIT C
MECHANICAL CONTRACTOR START UP AND TRAINING
The Contractor herein DEMONSTRATION TO
Street Address CUSTOMER SUBCONTRACT
City, State and Zip Code
Telephone: (Thi s Subcontract is to be used
Facsimile: when the amount is less than
________________________)
Date: _____________________
Contract No. _______________
Job No. ___________________
SUBCONTRACTOR PROJECT
__________________________ _______________________
__________________________ _______________________
__________________________ _______________________
1. This Agreement covers the furnishing by the Subcontractor of all instructors and personnel, for t he complete start up, train ing, and
demonstration for the________________ , in accordance with the requirements set out on Attachme nt A attached h ereto and for the
price of $ _____________________________.
2. This Agreement is the entir e Agreement between the parties. All prior re presentations or agreements, whether written or oral not
incorporated herein, are supe rseded. For the purpose of t his Agreement, the word "Customer" refers collectively to th e General
Contractor, Owner and/or any other entity for which work is done directly or indirectly, in connection with this Agreement.
3. Subcontractor agrees to indemnify and save harmless the Contractor and/or Customer from any loss, expense, damage, or injury caused
or occasioned, directly or indirectly, from all fines, penalties or costs incurred b y Contractor or Customer, pursuant to the Occupational
Safety and Health Act of 1970, a s amended, and all federal, state and local construction safet y laws by reason of S ubcontractor's non-
compliance with those laws, or by reason of the conduct of Subcontractor, its employees or agents.
4. The Subcontractor agrees to indemnify, defend and hold harmless the Contractor and any party the Contractor is required to indemnify,
defend and/or s ave harmless under the Contract Documents and their re spective officers, directors, principals, agents and employees,
from and against any and all claims, actions, losses, expenses, damages, injuries, demands or any liability whatsoever, including, without
limitation, reasonable attorneys fees and other costs (collectively, the Losses), arising in whole or in part an d in any manner, from the
acts or omissions of the Subcontractor, its officers, directors, prin cipals, agents, employees or subcontractors, in the perfo rmance of this
Agreement. The Subcontractor shall defend and b ear all costs of defending any actions or proceedi ngs brought against the Contractor
and any party the Contractor is r equired to indemnify, defend and/or save harmless under the Cont ract Documents and their respe ctive
officers, directors, principals, agents and employees, arising in whole or in part out of any such acts or omissions, provided, however, that
the Contractor and/or Customer shall have the right to select counsel to conduct such defense. This indemnification shall be fu lly
applicable to all Losses even though such Losses ma y have be en contributed to, or ar e alleged t o have contribut ed to, some act or
omission of the Contractor. The parties acknowledge that the indemnification provisions contained herein are material inducements to the
execution of this Agreement an d are provided in consideration of the mutual pr omises, agreements and covenants contained herein and
other good and valuable consideration, receipt and legal sufficiency of which are hereby acknowledged.
5. The Subcontractor shall procure for the work, and maintain in force throug hout the project, Worker's Compensation Insurance,
Employer's Liability Insurance, Comprehensive General Liability Insurance and A utomobile Liability Insurance. The Subcontractor's
General Liability Insurance polic y will be endorsed to provide that the policy general aggregate is applied on a per project ba sis. The
Contractor, and all other entities so required by contract, and their directors, office rs, representatives, agents and employees shall be
added as Additional Insureds to all of the Subcontractors insu rance policies (except Workers Compensation). The Subcontractors
insurance shall apply on a primary non-contributory basis. The insurance of the Contractor and all other Additional Insureds will not be
called upon to c ontribute to any claims covered by the Subcontractors policies referenced in the certificate. Subcontractor shall have all
policies endorsed to provide a waiver of s ubrogation in favor of C ontractor and all other Additional Insureds. Subc ontractors Workers
Compensation coverage shall apply to all emplo yees including those engaged in operations a way from the project site. Subcontrac tors
Workers Compensation coverage shall al so cover Corporate Officers. The Subcontractor will furnish proof of insurance required under
this Article 5 in accordance with the Cont ractor's "Certificate of Insurance attached hereto as A ttachment B. The Subcontractor's
Comprehensive General Liability, Automobile Liability and Emplo yer's Liability shall be written with limits of liability not less than those
required of the Contractor under its Contract with the Customer, or as listed below, whichever is greater. The Contractor has the right to
withhold all pa yments under this Subcontract u ntil receipt of t he Subcontractors Certificate of Insurance, f ully executed by the
Subcontractors insurance company showing compliance with the provisions of this Article 5.
General Liability: $1,000,000 Each Occurrence

$2,000,000 General Aggregate Per Project
Automobile Liability: $1,000,000 Combined Single Limit Bodily Injury and P roperty
Damage
Workers Compensation: Statutor y
Employer's Liability: $1,000,000 Each Accident
$1,000,000 Disease - Policy Limit
$1,000,000 Disease - Each Employee
All of Subcontractors insurance policies shall contain a provision that the cove rage afforded t hereunder shall not be canceled or not
renewed, nor restrictive modifications added, until at least thirt y (30) days prior written notice has been given to the Contractor. The
Subcontractor waives all rights o f recovery against the Contr actor, Customer and such other pa rties as are req uired by the Contract
Documents, for losses within the scope of Subcontractor's insurance.
EXHIBIT C
6. In the event the Subcontractor delays in the performance of any of the provisions of this Agreement, or becomes bankrupt or insolvent, the
Contractor shall have the right to cancel this Agreement upon three (3) days written notice mailed or delivered to Subcontractor at its last
known address.
7. All diagrams, data, manuals, infor mation or samples, which are called for in the spe cifications, or which are reasonably necessary for the
proper completion of this Agre ement are to be furnished promptly by the Subcontractor in the quantity requested. This Subcontract shall
not be deemed completed and retainage will not be released until all operating manuals, test reports and other documents required herein
are furnished and approved.
8. Subcontractor shall provide a sufficient number of skilled personnel to maintain the progress required by Contractor. All p ersonnel used
and employment terms engaged in b y Subcontractor shall be acce ptable to the Contractor and will be such as w ill not cause nor, in the
judgment of the Contractor, th reaten to cause the disruption of operations of the Contractor, Custom er or any other laborer, materialman,
supplier, subcontractor or general contractor.
9. Invoices shall be accompanied by or be on a properly completed "Subcontract Requisition" form to be provided to Subcontractor b y the
Contractor. A 10% retention will be withheld until the date of completion.
10. Changes, extra work or deductions may be ordered in the work, and the agreed price adjusted accordingly. No such modification shall be
undertaken without prior written authorization by Contractor. In the event that Subcontractor pr oceeds without such written authorization,
it shall be deemed a waiver by Subcontractor of all claims for additional payment thereof.
11. Subcontractor shall comply with all federal, state, local and other laws, regulations and other such instruments pertaining to the project.
You are encouraged to employ minority workers in your labor forces and minority businesses in your procurement activities, and you shall
not discriminate in employment or procurement because of age, sex, race, creed, disability, color or national origin.
12. The Subcontractor is responsible for the safety and health of its personnel at all times. The Subcontractor shall not permit its personnel, in
the performance of this Agreement, to work in surroundings or under working conditions which are unsanitary, hazardous or dangerous to
their safety or health. The Subcontractor shall perform its oper ations under this Subcontract in accordance with the Contractors "Manual
of Uniform Rules, Regulations and Safety Requirements for Subcontractors Performing Work" and "Fitness for Duty Policy".
13. Subcontractor agrees to per form its work under this Agreement in accordance with a schedule to be provided b y the Contractor, which
schedule may be subject to change as working conditions require. The performance of the work by the Subcontractor in accordance with
such schedule is of the essence under this Agreement. Unless expressly modified or lim ited in this Agreement, the parties agree that all
representations, warranties, covenants and othe r obligations of Subcontractor sha ll survive the execution, performance, default and/or
termination hereof and shall continue thereafter and maybe even be enforced by Contractor or Customer.
14. All documents and other material generated by Subcontractor pursuant to this Agreement shall be considered, to the extent allowed by law, as works
made for hiring for Contractor (as defined under U.S. Copyright Law, as amended) and Contractor shall be deemed the sole and exclusive owner of all
right, title and interest therein, including, without limitation, any and all copyright and other proprietary rights relating thereto whatsoever. In the event
that any documents or other material does not qualify as a work made for hire, Subcontractor hereby assigns to Contractor for no additional
consideration, all rights, title and interest in and to such documents and/or other materials. It agrees to cooperate with and assist Contractor in applying
for and executing any applications and/or assignments reasonably necessary to obtain a patent or copyright thereon.
15. Subcontractor shall comply with the EEO Clause in Section 202 of Executive Order 11246 as amended, 41 CFR 60-250 and 41 CFR 60-
741, as amended, which are incorporated herein by specific reference.
SUBCONTRACTOR MECHANICAL CONTRACTOR
Accepted By: By:
Name: Name:
Title: Title:
Date: Date:
Project Name:
Owner Name:
Subcontract Agreement No.:
Subcontract Date:
EXHIBIT D
ATTACHMENT A
Subcontractor shall provide all required materials, labor, equipment, tools, supervision, etc.,
necessary to perform all start-up, commissioning, and training demonstration for the
in strict accordance with the Contract Documents inclusive of, but not necessarily limited to:
MANUFACTURERS REPRESENTATIVE AND COMMISSIONING OF SYSTEMS:
A. Provide the services of a competent factory trained Engineer or authorized repre sentative of the
manufacturer to instruct the Owner, inspect, adjust and place in proper operating condition the
.
B. Assist and supervise the Contractor in the formal commissioning of the during
overall HVAC systems commissioning.
C. Submit to t he Contractor a written report summarizing t he results of the commissioning and

performance of the .
MECHANICAL CONTRACTORS NOTE:
THIS IS A SAMPLE SCOPE.
MECHANICAL CONTRACTORS MUST REFE R TO INDIV IDUAL SPECIFICATION SECTIONS AND/OR

JOBSITE REQUIREMENTS FOR EXACT START-UP, TRAINING, DEMONSTRATION AND/OR
COMMISSIONING SCOPE REQUIREMENTS FOR EACH PRODUCT PURCHASED.
EXHIBIT E MECHANICAL CONTRACTORS Certificate of Insurance
Attachment B
START UP AND TRAINING SUBCONTRACTS - ONLY
This verification of insurance is not an insurance policy and does not amend, extend or alter the coverage afforded by the policies below. Notwithstanding any requirement, term
or condition of an y contract or oth er document with respect to which this certif icate may be issue d or may pertain, the insurance afforded by the policies des cribed herein is
subject to all terms, exclusions, and conditions of such policies.
Name and Address of Agency: Companies Affording Coverages:

Company Letter A:
Phone Number: ( ) Company Letter B:
Name and Address of Insured: Company Letter C:
Company Letter D:
Company Letter E:
Phone Number: ( )
This is to certify that the certificate holder can rely on the fact that policies of insurance and/or endorsements required to effect the coverages herein stipulated, are in
force at this time through the policy period as noted.
Limits of Liability in Thousands
Co. Policy Policy Policy Each
Ltr. Types of Insurance Number Inception Expiration Occurrence Aggregate
General Liability Comprehensive
X Commercial General Bodily Injury $1,000,000 $2,000,000
X Occurrence Property Damage $1,000,000 $2,000,000
X Comprehensive Form Combined Single $1,000,000 $2,000,000
X Premises-Operations Personal Injury Commercial $1,000,000
X Explosion/Collapse
X Underground General Aggregate $2,000,000
S A M P L E
X Products/Completed
X Contractual (Any Contract)
X Broad Form Property Damage
X Independent Contractors
X Personal Injury
Products-Comp/Ops Aggregate
Personnel & Advertising Aggregate
Each Occurrence
Fire Damage
Medical Expense
$2,000,000
$1,000,000
$1,000,000
$50,000
$5,000
Automobile Liability Combined Single Limit $1,000,000

X All Owned Autos Bodily Injury (Per Person)
X Hired Autos Bodily Injury (Per Accident)
X Non-Owned Autos Property Damage
Workers Compensation Statutory
Employers Liability $1,000,000 (Each Accident)
$1,000,000 (Disease-Policy Limit)
$1,000,000 (Disease-Each Employee)
Other:
Referenced Project/State:
General Liability (including Contractual Liability), and Automobile Liability Additional Insured Provisions: The Mechanical Contractor, its officers, agents, employees, volunteers, engineers and Owners and al l
other entities so required by contract are added as Additional Insureds with respect to "any" liability of the Additional Insureds arising out of or resulting from Subcontractor's or Vendor's operations performed for
the Additional Insureds, including, but not limited to: liability of the Additional Insureds for the general supervision of such operations. The Subcontractor's insurance shall apply on a pr imary non-contributory
basis. The insurance of the Contractor and all other Additional Insureds will not be called upon to contribute to any claims covered by the Subcontractor's policies referenced in the certificate. Subcontractor shall
have all policies endorsed to provide waivers of subrogation in favor of Contractor and all ot her Additional Insureds. Additionally, Workers Compensation Waivers of Subrogation and Waivers of Statutory Lien
Rights shall be provided to the Additional Insureds as respects Workers Compensation coverage. The General Liability policy shall be endorsed to provide that the general aggregate is applied on a per project
basis.
Name and Address of Certificate Holder: CANCELLATION: The policies of insurance described above have been amended by
endorsement so that the policies can not be canceled nor may restrictive modifications be a dded
THE MECHANICAL CONTRACTOR without giving thirty days prior written notice to the Certificate holder name to the left.
STREET ADDRESS
CITY, STATE ZIP CODE
Date Issued:
Signature of Insurers Authorized Representative
Copyright, The Mechanical Contractors Association of America, Inc., 1996, 2002

12
Bulletin No. PC 2
File: Purchasing
Bulletin
Purchase vs. Lease Considerations
INTRODUCTION TYPES OF LEASES
Leasing personal property, which in- Beyond this definition o f leasing, th ere
cludes jet planes, ocea n-going vessels, are additional variations available. In
railroad cars, computers, furniture, automotive leasing, th e lease can be
equipment, machinery, trucks, cars, either an open-end or a closed-end
cows, hogs, and the like, came into lease, a full-service lease or a net lease.
existence shortly after the end of World In equipment leases, it is eith er a
War II. By t he late 1950s, leasing was finance lease or an operating lease.
blossoming, and by the mid-1960s, it
was in full bloom. Today, leasing is an Under an automotive open-end lease,
established industry, which plays a the lessee is responsible to the lessor
major part in the econ omic life of this for an agreed upon va lue of the auto-
country. motive equipment at the expiration of
the lease term. Further, the le ssee
Before discussing leasing as a bu siness guarantees to reimburse the lessor
concept, it is wise to u nderstand some should any deficiency occur. In turn, the
of the terms used, such as: lessor guarantees the lessee a refund of
any amount collected over and a bove
Lessor, which denotes the owner of the specified residual value at the time
the equipment to be leased, an d the equipment is returned.
lessee, which denotes the user of
the equipment. A closed-end lease is one in which the
Renting is an arrangement whereby lessor assumes the responsibility for the
the lessor makes equipment a vail- value of the equipment upon its return,
able to the lessee. It m ay be auto- and no furt her charges are made other
motive or contractin g equipment, than damage, which is covered in the
leased on a long-term or short-term lease agreement itself.
basis to meet temporary require-
ments, emergency conditions o r A full-service lease is an automotive
peak load needs. lease in which the lesso r includes in his
Leasing is an arrangement whereby rental charge the cost of license, tax,
the lessor makes equipment a vail- safety inspection fe es, insurance
able to the lessee. The equipment (collision, comprehensive, and liability),
may be of the lessees own speci- and agrees to pay al l maintenance,
fications, for his use exclusively, and except for gas, washing and garaging. A
leased full-time on a year-round net lease is the furnishing of auto-motive
basis, as if it was lessee-owned. equipment to a lessee with no services

included. This lease may be either an Another advantage is b eing assured of
open-end or closed-en d lease. In fact, the predetermined cost of equipment
both a full-service and a net lease could and operations for budgeting purposes.
still be either open-end or closed-end. All companies have so me kind of bud-
get. However, accurat e budgeting of
A financial lease is the acquisition of transportation costs is more difficult
equipment without purchase. Under a when automotive equi pment is owned.
financial lease, the rent al payments are Repairs are not often anticipated, and
spread over a period u sually equivalent charges against a fleet are usually not
to the useful life of the equipment to the tabulated until possibly 10 days after the
lessee. The time is usu ally shorter than end of the month in which they occur. In
the total useful life of the equipment. leasing, the monthly p ayments can be
The lessee pays the le ssor a series of set up in t he budget, and even if the
payments, the amount of which exceeds lessee provides gasolin e and oil, aver-
the purchase price of th e equipment. In age mileage figures will permit a reason-
addition, during the term of the lease, ably accurate determination of the costs
the contract cannot be cancelled, and involved. At the same time, leasing elim-
the lessee is commit ted to continue inates the need for a multitude of re-
leasing the equipment for the full term of cords to support tax deductions.
the lease.
A leasing firm and an a utomotive dealer
An operating lease permits the use of can each make a good case for le ase
equipment without the risk of ownership. versus purchase cost s. The contra ctor
Operating leases are such that the les- can make a reasonable evaluatio n of
see, upon giving notice to the le ssor, what the costs mean by tabulating, for
can cancel the lea se and retur n the example, the costs of o wning and leas-
equipment. In this case, the le ssor is ing vehicles in the f orm of a ch art. It is
assuming the responsibility of ownership intended to be only a sample and not
because the lessee does not guarantee necessarily applicable t o all concerned.
any residual value collected by the Each contractor should tailor this chart
lessor. to his/her own accounting procedures.
VEHICLE LEASING EQUIPMENT LEASING
If a company wishes to lease vehicles, Profits are made by th e use of a ssets,

one should be aware that auto mobile not by own ership. The potential le ssee
leasing is sold on the basis of service should be reminded that the asset is still
rather than on cost of benefits. Many available to him/her, and the freed work-
lessees will not have an accurate record ing capital can be used elsewhere in the
of the actual cost of the vehicles and will most timely, effective and profitable
be inclined to make a snap judgment in manner. The leased e quipment brings
favor of ownership wit hout taking into its own retu rn in produ ction dollars. If a
consideration such items as full de prec- company must delay t he purchase of
iation costs or the cost of executive time equipment because of a strained capital
spent managing details. position, the benefits to be realized from
the equipment must also be postp oned.
The prime reason for conside ring In todays competitive market, it is es-
leasing vehicles should be the sential to replace worn out or obso lete
advantage of not having to make ca pital equipment. The increased efficien cy in
investment in automotive equipment. productivity may more than pay the cost
of the lease.

The tax ad vantage of leasing is pointed years, the accelerate d payments re-
out often. A true lease (without a pur- quired by t his plan act ually compound
chase option) has the advantage of a the problem, and the Internal Reve nue
rapid write-off of equipment costs. The Service views the accelerated cash flow
entire leasing cost may be deducte d as provisions as tax postponement d evic-
a business expense. If equipment is es.
leased for a 5- or 10-year period, the
leasing cost can be written off during the Another point to consider is that the
leasing period5 or 10 years. The courts are interpreting lease contr acts
Internal Revenue Service regula tions according to the intent of the par ties.
explicitly permit the tax payer to deduct This means that care should be taken
all lease payments that are ordinary and when drafting the contract to correctly
necessary to its business. However, this reflect the intent. The concept of intent
rapid write-off is not available if the must be se parated from the concept of
equipment is purchase d for use on an desire. While the parties may desire to
installment basis, sin ce the installments have their contract construed as a
are not le ase payments. Theref ore, lease, the terms of their lease may show
leasing might possibly result in tax that the real intent in the legal sense is
savings. Tax timing and cash flow may to negotiate a conditional sale.
not make leasing attra ctive for ce rtain
concerns. Purchase options should be examined
closely. Remember that equipment
These and all other matters concer ning helps make profits because it is used,
a lease sho uld be reviewed with a tax not because it is owne d. If a pur chase
counsel. (In certain in stances, it may option must be include d, it should be
also be advisable to get a ruling in based on the fair market value of the
advance from the Internal Revenue asset at the time it is believed the option
Service. This should b e checked also will be exercised.
with tax counsel.)
Rental agreements that cover a rela-
LEASING PROBLEMS tively short part of the expectant life of
the equipment involved, with a r ental
By way of caution, leasing doe s not cost that approximate s the price at
work for every company. As in any case which it co uld have been pur-ch ased
where it seems you ca n eat your cake (and where the leesee may continue to
and have it too, there are some con- use the equipment for an additional
ditions that would make leasing disad- period at a relatively nominal payment)
vantageous. Leasing is not good medi- might be held legally to be a sales
cine for a sick company. It does not help contract. Such a condition might a pply
a declining business because you must even though passage of title is not
be able to use co nserved capital expressly provided in the agreement.
intensively. This is an other example of where care
must be taken to assur e that the intent
In relation to an improved cash flow and desire of the parties are refle cted
situation, many leasing companies sell orrectly in the agreement. c
services, which offer merchandise on
short-term leases. The se feature lease
payments, which far exceed the de prec- SUMMARY
iation that would have b een allowed had
the asset been purchased. Instead of Although leasing may i mprove the
causing the least drain of cash in earlier appearance of a balance sheet,

companies should footnote their lease Please note this final word of caution.
commitments on their balance sheet. Have your regular counsel and a
These should show the firms lease competent tax counsel (if your
contracts that have an effect on the regular attorney is not well versed in
companys cash position for future tax law) and your independent
years. certified public accountant check all
aspects of your proposed lease and
One of the main advantages of le asing its resultant effects on your operating
from the lessees st andpoint is the cost. statement and balance sheet before
A lessee may determine that he can concluding any leasing operations.
finance equipment or o perate his fleet
for less co st than a comparable leasing
program. If this is true (i.e., the ad van-
tages of reduced cost of owning out-
weigh the previously stated advant ages
of leasing), then perhaps the contra ctor
may choose to own vehicles or e quip-
ment or he may elect to use both sys-
tems (i.e., own equipment and lease
vehicles).

Bulletin No. PC 3
File: Purchasing
Bulletin
FOB Terms
DEFINITIONS Note in par ticular the area of Fr eight

Prepaid vs. Freight Allowed; consider
Who assumes risk, claims, control, and these in your cash flow planning.
taxes? The shipping ter ms delineated in
your purchase order set the rules. Make Are you aware that when a shipment is
yourself aware of the advantages and FOB factory, you can ch oose the carrier
disadvantages of the various ship ping and routing regardless of who pa ys the
methods and terms available. The Uni- freight charges?
form Commercial Code, Section 2- 319,
establishes the terms and definitions. When equipment arrives damaged, are
you obligated to pay the seller? Con sult
Many contractors pref er to use FOB the terms of your purchase order.
jobsite to eliminate the liability for goods
damaged in transit. FOB FACTORY
The important terms to know are: (Manufacturers point of shipment)
FOB: Freight on Board Advantages

The buyer can select a carrier.
FOB Destination: FOB jobsite; FOB city The buyer may pa y the carrier an d
and state of: eliminate a possible mark-up on
freight.
FOB Point of Shipment: FOB factory; Freight may be nontaxable.2
FOB origin; FOB city and state; FOB
sellers point Disadvantages
Freight Allowed1: Shipments will move
The title pa sses when manufacturer
freight equivalent to the charges buyer
passes merchandise to carrier.
pays to the carrier. These charge s will
___________________________
be deducted from the total cost of the 1
In many cases vendors ar e actually quotin g and
goods when paying the sellers invoice. shipping equipment unde r the te rms FOB Factory-full
freight allowed meaning you are assuming title at
Freight Prepaid: Seller will pay trans- shipment, but prepa ying the freight. Ho wever, the
amount equiv-alent to the char ges buyer pays to the
portation charges to the carrier and that carrier will be deducted from the total cost of the g oods
buyer will remit the ful l amount of the when paying sellers invoice. The specific meaning
invoice without deduction of freight. should be obtained from the vendor.

Invoice date is effectiv e at time o f Disadvantages
placement on carrier.
Risk in shipment is borne by the Seller may include a mark-up on
buyer. freight.
Claims must be filed, litigated and Risk of shipment is borne by th e
settled by the buyer. seller.
Insurance: A good pro cedure is t o Damage claims, etc. , are the
responsibility of the seller.
check with your insurance agent
Freight may be taxable.
about your coverage on in-transit
Buyer may not select carrier.
material where title has passe d.
Buyer must trace shipment through
Many serious problems can arise in
seller.
the event of carrier bankruptcy,
refusal to p ay claims, etc. Special
In summary, know and understand the
coverage is available a t a nominal
freight terms and tax consequences. Do
rate. Also, problems wi th concealed
your homework carefully in the
damage may arise.
preparation of your purchase order.
Possibility increases of collect
Remember that, since it is the basic
shipments.
instrument, it will be int erpreted against
you, the maker. Therefore, be clear and
FOB JOBSITE explicit in t he definition of terms and
conditions.
(City, State, etc.)
Advantages
Title passes when equipment is de-

livered.
Invoice is d ue at time of receipt o n
jobsite.
___________________________________________________________
2
It is necessary to check with your local taxing authority
to determine if fr eight is taxable. Since man y states do
not tax freight, it is imperative to have the cost o f the
freight separated out.
EXAMPLE:
Quoted Price of Equipment $50,000
Less Freight and Delivery Charges 5,000
Net Taxable Cost of Equipment $45,000
Sales tax @ 5% ($45,000) 2,250
Add Freight 5,000
Amount Billed and Paid $52,250
In many cases vendors are actu ally quoting an d ship-
ping under terms FOB Factory-full freight allowed pre-
paying the freight.

Bulletin No. PC 4
File: Purchasing
Bulletin
Why Mechanical Contractors Should Be Paid for

Materials Stored On/Off Jobsite
There are valid reasons why mechanical proper storage, insurance and e xtra
contractors should be paid for materials handling of materials. Otherwise, time
and equipment purc hased early, al- targets cannot be met nor realist ic con-
though not immediately needed, and struction costs maintained.
why they should be paid in whole or in
part for the cost of storage, extra hand- The American Institute of Architects in
ling and insurance involved. 1974 recognized the need for a payment
policy on stored materials. The 1 976
Todays world of constr uction is fra ught revision of A-201, u nder paragraph
with problems of spiraling material and 9.3.2, provides for pay ment of off-site
equipment costs and related material storage provided certain conditions are
shortages. To assure substantial com- met. Therefore, it is b elieved that the
pletion within the contr act time for the AIA recognizes the problem and sub-
contract sum on an y job, certain equip- scribes to early purchase and storage of
ment and materials have to be ordered equipment and materials by the con-
well in advance of their incorporation on tractor.
the job. This is especially true for the
mechanical contractor whose work is At the first job conference, the mech-
more equipment-oriented than the anical contractor sh ould bring this
general contractor and most other matter to the attentio n of the ge neral
specialty contractors. contractor and the owner and request
written authorization for pa yment of
If a mechanical contractor is to complete stored materials both on and off the
the job for the contra ct sum and still jobsite. A w ritten procedure should
realize a profit in todays market, he be developed for pa yment that would
must purchase major equipment and include paid invoices, storage
materials as soon as he receives his receipts, insurance requirements,
notice to proceed. This can tie up need- inspection, etc.
ed working capital in a hurry, especially
on jobs of long duration. It is essential There are certain advantages to a
that architects and owners recognize the mechanical contractor having control of
need for early purchase of certain equip- where early purchase d equipment is
ment and materials. I t is imperative that stored, such as secur ity, proper pro-
the contractor be paid promptly for the tection from the elements, sufficient time
to check a nd ensure all com-ponents Every effort by the MCAA member
are included in the shipment, etc. The should be made at the local level to
owner has an equal advantage of have a clau se included in the General
eliminating or reducing costly delays Conditions of the specifications and into
caused by late shipments or the un- subcontract agreements.
availability of equipment. Accordi ngly,
the mechanical co ntractor should However, in sit uations where
neither have to bear the burden alone of equipment storage costs are not
storage costs, including insurance, nor taken into account by a contract
of the occasional extra transportation clause, the MCAA member should
and handling costs. not neglect to consider such costs
when preparing estimates.
In summary, the owner, architect and
general contractor should all be realistic Of course, members are prohibited by
about the mechanical contractors law from agreeing on what items of cost
material problems, since they affect total they will or will not include in estimates.
job progress. Each member must make such
decisions independently.

Bulletin No. QB 1
File: Quoting and Bidding Procedures
What is Indirect Job Cost?
INTRODUCTION and profit as long as everyone connected with

the job realizes exactly which costs are in job
Among the interesting aspects of the
costs and which are General and Administra-
Mechanical Contracting industry are the wide
tive charges. On any negotiated work, cost-
variations in methods used to get reimbursed
plus work, or time and material, there can be
for the many items that may not be classified
a great difference in your profit, depending on
exactly as direct job cost. The direct job cost
your method of arriving at your cost. However,
items, such as labor, materials, and subcon-
if you do not properly document your costs on
tracts, are usually well defined and, therefore,
the indirect cost items, you can easily be the
will not be discussed here.
low bidder and then proceed to lose money
In this bulletin, we examine items which on the job.
are often overlooked as job costs, but which
actually are; these indirect cost items include To discuss methods in charging the indi-
hand tools, equipment and truck rental, deliv- rect costs, you should first divide them into
eries, warehousemen, sheet metal and fabri- categories as follows:
cation shop expense, consumable and
expendable supplies, project administration, 1. Equipment & Truck Rental
guarantees, taxes, insurance, etc.
2. Consumable & Expendable Supplies
There are many valid reasons as to
whether these items should be classified as 3. Licenses, Taxes, Insurance, Guarantees,
General and Administrative cost or as job Legal, Recruiting and Finance Charges
costs. We will not attempt to argue either side
of the question, but your answer may gener- 4. Project Administration
ally depend on the market you are in.
5. Items related to Labor Costs
On hard money jobs, your method of
charging may not be a factor in the bid price 6. Safety & Drug Testing
1
Quoting and Bidding Procedures
EQUIPMENT & TRUCK RENTAL Sales and use taxes on materials and
If the equipment is consigned full time to equipment incorporated into the job and on
the job, you should charge a monthly rental to consumable and expendable supplies should
the job. be job costs.Taxes relating to labor will be cov-
ered in a following paragraph.
If the equipment is used part time or
hourly, you should charge a weekly, daily or Income tax and property tax would not
hourly rate to the job. be a job cost.
If your shop foreman or equipment fore- Liability or property insurance related to
man consigns the equipment to projects, he dollar volume should be a job cost.
should keep track of where the equipment is Insurances related to labor is covered in
used, and initiate the charge by recording the Bulletin IN 1.
time used on a time sheet.
Guarantee or warranty reserve, based
Division 1 of the Foreword to MCAA,
on dollar volume or other parameters the com-
Tool & Equipment Rental Guide gives a good
pany determines, should be a job cost.
definition of the items usually considered in
developing rental rates. All other costs asso- Legal and recruiting expenses would be
ciated with the equipment would be in the di- direct job costs when these expenses are di-
rect job cost. rectly related to the job.
An exception might be an hourly rate that Finance charges, normally a General
you would develop for temporary assignment and Administrative Item, could be a job cost
or for deliveries that would include the opera- when you can relate the charges directly to
tor or driver, fuel, maintenance, etc. the job.
CONSUMABLE AND EXPENDABLE PROJECT ADMINISTRATION

SUPPLIES
Personnel permanently stationed at the
Each contractor should develop his own jobsite are normally considered job cost. This
definitions of small tools and consumable and includes project manager, project engineers,
expendable supplies. A good place to start in purchasing, expeditors, payroll and billing
developing your definitions is the MCAA Tool clerks, secretaries, etc.
and Equipment Rental Guide, Divisions II and
III of the Foreword. Personnel not assigned to the jobsite
should be charged to the job in relation to time
Consumable and expendable supplies
spent. This is usually acceptable on the pro-
should be charged as direct job costs.
ject managers, project engineers, purchas-
ing, and expeditors. It may be more difficult to
LICENSES, TAXES, INSURANCE & divide up the time of the office staff and charge
GUARANTEES them to jobs, but certain cost-plus jobs that
Normal business licenses are usually demand extensive billing breakdowns and
considered as General and Administrative submittals of invoices should be charged for
costs. Any special license for a job, and all per- this type of service. It may be easier to charge
mit fees, should be a job cost. the personnel involved in billing and submit-
2 QB 1
Quoting and Bidding Procedures
tals and other related items if the personnel A. Drug Testing

can be physically stationed at the jobsite and 1. Cost for man to take test
in view of the owner. 2. Cost for test
When any of the above are charged into 3. Random Testing Cost
the job cost, their rate should include all fringe 4. Administrative Cost Associated
benefits, payroll taxes and insurances, auto- With Keeping Records
mobile expenses, etc. B. Safety
1. Cost For Safety Director
ITEMS RELATED TO LABOR COST 2. Cost to Give ToolBox Talks
The items listed below are usually con- a. Lost Productive Labor
sidered to be functions of labor costs.One way b. Handout Materials
to handle them is to program them into labor
cost and charge them directly into the jobs. C. Safety Orientation
1. Lost Productive Labor
Fringe Benefits
2. Handout Materials
Payroll Taxes and Insurance
D. Permits
Travel and per diem 1. Hot Work Permits
Hand Tool Expenses 2. Tank Entry Permits
3. Welding Permits
Fabrication Shop or Sheet Metal Shop
4. Lockout Permit
Expense
Further guidance in the allocation of job
Liability or Property Insurance
costs is found in the MCAA Accounting &
Premium Time Financial Management Manual.
QB 1 3
Bulletin No. SF1
File: Safety
Bulletin
Company Safety Programs
Introduction as it is to contractors whose companies

have retained full-time safety personnel.
Worker safety and health in the We recommend that you refer to this
mechanical industry has become a top publication for a more detailed look at
priority for mechanical contractors for a the development of a company safety
number of reasons, including: program.
our moral obligation to protect Basic Components of a Company

workers; Safety Program
increasing contractor liability;
increasing workers compensation All company safety programs should be
costs; tailored to the specific needs of each
increases in other accident related individual company. However, there are
costs; and ten basic components that should be
the growing demand by construction covered in every company safety
owners, general contractors, program.
construction managers, etc., that
contractors establish and implement 1. Corporate Safety Policy
comprehensive safety and health A corporate safety policy prescribes a
programs. course of action to reduce the number of
work-related injuries that occur within a
The information in this bulletin is drawn company. The policy should state the
from MCAAs Model Safety and Loss companys intentions regarding worker
Prevention Program, the best protection and establish the criteria to
publication available for mechanical be used to measure its overall safety
construction contractors who are performance. The statement should also
planning to develop company safety address the worker's role in reducing the
programs or revise existing programs. It number of job site injuries and illnesses.
helps the user build a program that Each worker should be provided with a
focuses on preventing the most copy of the policy statement and
common injuries and other dollar losses encouraged to read it carefully.
in the mechanical industry. The
publication is as valuable to contractors 2. Corporate Commitment
whose companies are not large enough Successful company safety and health
to support a full-time safety professional programs must have complete
commitment from the chief executive
Copyright, Mechanical Contractors Association of America, Inc., Revised 2001.
1
officer (CEO) all the way down to the 3. Worker Training Requirements
workers in the field. To get commitment Safety and health training provides
from managers and workers, the CEO workers with the information they need
must demonstrate his or her personal to protect themselves from job site
commitment to worker safety and hazards. Safety and health training is a
health. Suggested ways to demonstrate major key to keeping workers safe on
total commitment are: the job site. To be effective, training
must be:
The CEO should write a corporate
commitment letter and provide a Relatively short in duration;
copy to each manager/supervisor
and worker by including it in the Conducted during regular working
written company safety program. hours;
The CEO should take every Specific to the workers industry; and
opportunity to personally express to
the companys employees his or her As appealing as possible.
belief that worker safety and health
is the companys top priority. Training should include at a minimum:
At every company meeting, safety New worker safety orientation;

and health should be the first topic of
discussion. Weekly toolbox safety talks; and
In smaller companies, the CEO Task specific training as required by

should participate in new worker OSHA.
safety orientation training sessions
by describing the companys 4. Disciplinary Action
commitment to providing workers A disciplinary action policy is an
with a safe and healthy work established course of action to be taken
environment. This is also a good when workers fail to comply with safe
time to make it clear that the workers work rules and other company policies.
play a major role in helping the The policy is important because it:
company achieve its safety goals.
The CEO should take the time to Sends a message to the workers
describe the companys safety that unsafe acts will not be tolerated;
incentive program and disciplinary
action program. In larger companies, Provides employers with a defense
a senior supervisor or safety director against discrimination claims in
should deliver the same message. situations where workers must be
discharged for committing unsafe
The CEO should publicly recognize acts;
each worker who earns a safety
incentive award and should present Gives employers an affirmative
awards at a well-attended company defense against OSHA citations and
meeting. fines in many situations.
The CEO should start every large-

scale company safety meeting with a
brief report on the companys safety
performance.
5. Safety Incentives 7. Work Site Hazard Analysis
A safety incentive program has proven Before starting a new job the work area
to be an effective management tool to should be analyzed to determine:
heighten and maintain the awareness of
workers with regard to job site safety Whether one or more hazards
and health. Safety incentives: already exists; or
Help workers stay aware of safety Whether hazards will be created by

and health issues; work to be performed.
Make workers more likely to spot An example of an existing hazard would

safety and health hazards; be lack of oxygen in a confined space
that must be entered by a worker. A
Make workers more likely to address work site hazard analysis would
the safety and health hazards they determine the need for air sampling and
observe; other safe confined space entry
procedures so they can be planned
Make workers more likely to watch accordingly.
out for the safety and health of co-
workers; and An example of a hazard created by the
work would be hot work in an area
Help reduce the incidence of where combustible materials are stored.
fraudulent injury/illness claims. Performing hot work in the area creates
a hazard. Without the hot work there is
6. Substance Abuse and Drug no hazard. A work site hazard analysis
Testing would determine the need to remove the
Controlling substance abuse in the work combustible materials or isolate them
place is another key to preventing from the heat, sparks and slag before
workplace injuries. Workers who are work begins.
under the influence of alcohol and/or
drugs: Implementing work site hazard analysis
as a regular part of your safety program
Experience changes in the way they is not difficult to do. Most experienced
ordinarily think or approach supervisors and workers already do it to
problems; some degree without even thinking
about it.
Find it difficult to concentrate;
8. Accident/Incident Investigation
Lose their ability to make good Management conducts the investigation
judgments; of accidents and incidents that do not
result in worker injury so that
Experience much slower reflexes; procedures or work rules can be
established to prevent their recurrence.
Lose depth perception; and Thorough investigations help to
determine the cause and identify factors
Are four times more likely to be that lead to the accident/incident. More
involved in a workplace accident. than one supervisor should conduct the
investigation.
9. Modified Duty allow them to stay home collecting
A modified duty policy is designed to workers compensation benefits.
bring workers who are receiving
workers compensation benefits back to 10. Recordkeeping
work as soon as possible. Workers who The Occupational Safety and Health
are physically unable to perform their Administration (OSHA) requires
regular work tasks can usually perform employers to keep records of
less strenuous work tasks. For occupational illnesses and injuries. In
example, a worker with a low back some situations, employers must also
muscle strain could inventory materials report them to OSHA.
or answer telephones in a trailer or
office. In addition to MCAAs Model Safety and
Loss Prevention Program, MCAA has
By getting workers back to work as soon many new, user-friendly safety and
as possible, companies save a fortune health resources written or produced
in workers compensation expenditures. specifically for the mechanical industry.
It costs much less for companies to For information on these resources or
bring workers back on modified duty any safety topics or issues call MCAA at
with full pay and benefits than it does to 301-869-5800.
Bulletin No. SF 2
File: Safety
Bulletin
Emergency Procedures
Introduction Emergency Phone Numbers
Emergencies, disasters, acci- In case of emergency, call 9-1-1

dents and injuries can occur at any time, (if lives and/or property are in immediate
usually without warning. Knowing what danger).
to do and what not to d o in the event of
an emergency is your individual and Additional contacts:
corporate responsibility. This guid e is
designed to acquaint you and your em- Fire: ____________________
ployees with a plan for handling most Police: ____________________
kinds of emergencies and the actions Ambulance: ____________________
that should be taken to protect lives and Hospital: ____________________
property. Security: ____________________
Building
Being prepared for an emer- Manager: ____________________
gency will help minimize its worst Safety
effects, especially panic and confu sion. Coordinator: ____________________
At a minimum, you and your employees Poison
should know the answers to the follow- Control: ____________________
ing questions:
Safety Area:
1. Where are the exits? _______________________________
2. How will visitors and e mployees
with disabilities be evacuated? Evacuation
3. Are vital records protected?
4. Where is t he emergency plan, 1. If safe, secure vital rec ords and
and where are the emergency shut down electrical equipment.
phone numbers? 2. Proceed to your predetermined
5. If the building has multiple floors, exit or alternate exit in an orderly
who will serve as the emergency fashion. Close all doors as you
coordinator? leave.
3. The emergency coordinator
Regardless of the e mergency, should make sure all staff and
THINK BEFORE YOU ACT, and then visitors evacuate the area.
act quickly and decisively. 4. Assist employees and visitors
who are in need. If yo u are un-
able to provide assistan ce, notify
the Floor Warden or other Fire
emergency personnel of the
problem and location. For large fires:
5. DO NOT USE ELEVATORS.
USE THE STAIRS. 1. ACTIVATE THE FIRE ALAR M,
6. DO NOT OPEN DOOR S THAT alert others, move everyone
ARE HOT TO THE TOUCH OR away from the area of the fire.
IF SMOKE IS PRESENT. 2. LEAVE IMMEDIATELY!
7. If you cannot avoid smoke to exit 3. CLOSE D OORS to confine the
the building, stay low e nough to fire as much as possible.
the floor t o keep your head 4. CALL 9-1-1 as soon as possible
below the smoke level. to report the building address
8. Once outside the building, pro- and location of the fire.
ceed to yo ur designated safety
area and stay there. Follow in- For small fires:
structions of emergency person-
nel. 1. Alert others and mo ve everyone
away from the area of the fire.
Evacuation of Disabled Persons: 2. Use fire exti nguisher on the fire,
only if safe to do so.
Persons with disabilities may 3. Notify the f ire department that
need assistance to rea ch safety. Ex- the fire is extinguished.
plain the nature of the emergency and 4. If you are unable to e xtinguish
your plan to help them. If they are able the fire, fo llow procedures for
to proceed alone, offer to assist others. large fire (above).
Persons w ith Ph ysical Impair- If your clothing catches fire:

ments may or may not use a wh eel-
chair. If a person is in a wheelchair, 1. STOP!
move them to a safe area outside the 2. DROP!
building. Be aware that the person may 3. ROLL!
have special equipment, such as a
catheter, leg bags, braces, oxygen, When a fire alarm is activated:
prosthetics, etc.
1. Follow your Emergency
Persons with Visual Impair- Evacuation Procedures.
ments may need guid ance out of the 2. DO NOT USE ELEVATORS,
building. Explain the e mergency, who USE STAIRS.
you are and , as you walk, the direction 3. Leave your personal posses-
you are tu rning, and any obst acles sions.
ahead. 4. Proceed to the nearest exit.
5. Listen for emergency instruc-
Persons w ith Speech or Hear- tions.
ing Impairments may need help under- 6. Report to the safety area and
standing the emergency and how to wait for more information.
respond. Get their attention and write a
brief note explaining the situation and DO NOT RETURN TO BUILD-
what they need to do. ING UNTIL INSTRUCTED TO DO SO.

If trapped in a room: trical equipment such as com-
puters, copiers or other office
1. If the door o r door knob is hot or equipment and out lets that
smoke is visible, do not open. may be near flowing water.
2. If possible, place a damp cloth or 4. If the sour ce is inside the build-
towel at the base of the door (or ing, evacuate the building ac-
something to block the opening) cording to the evacuation
to prevent smoke from entering. instructions.
3. Close doors and win dows to 5. Do not reen ter the building until
contain the smoke. instructed to do so.
4. If available, place a cloth over 6. If the source is outside the build-
your mouth and nose to filter out ing, evacuate to the buildings
smoke. highest level or the roof, and
5. Stay low en ough to the floor to await further instructions.
keep your head below the smoke
level. Tornados
6. Do not ope n or break windows
unless necessary to escape. Even with modern, sophisticated
weather tracking systems, tornados can
Fire Drill develop quickly and move very ra pidly.
In areas of the country where tornados
It is reco mmended that the are common, commercial build ings are
coordinator schedule a fire drill at least usually equipped with shelters.
twice each year to be sure all employ-
ees are thoroughly familiar with fire When a tornado warning sounds,
emergency procedures. Before sche- proceed to the shelte r as quickly as
duling the first drill, the coordinator possible. Take a radio with you to keep
should brief all employees on the track of th e storms location. Do not
information contained in this bulletin. leave the building until the storm has
passed.
The coordinator should record
the amount of time it takes employees to If your building is not equipped
evacuate the building. The coordinator with a shelter, take the following steps:
should also check to see whether em-
ployees have reported to their design- 1. Go down to your buildings
nated area outside the building. basement or lowest level and
get inside a storage room or
Be sure the building is secure similar windowless area.
before instructing employees to return. 2. Protect yourself from f lying or
falling debris.
Floods 3. If available, turn on a radio to
track the storm and its status.
In the event of a flood, either 4. Do not leave the building until
from an inside or outside source, take the storm has passed.
the following steps:
Medical Emergencies
1. Notify the building supervisor.
2. To the extent possible, secure If a person is in need of
vital records. immediate medical attention, remain
3. If possible, shut off electrica l calm, and call 9-1-1. While youre
power. Alternatively, avoid elec-

waiting for assistan ce and, depending Hazardous Materials Spill-Release
on the victims con dition, take the
following steps. Mechanical, plumbing, and
mechanical service co ntractors use a
If the person is unco nscious, variety of hazardous su bstances in their
check his/her breathing and pulse. If work. You should have on file Material
neither is detected and a defibrillat or is Safety Data Sheets (MSDS) for each
available, apply it at once. If a defibril- hazardous substance used in your b usi-
lator is not available, and if you are ness. In th e event of a spill or rele ase,
trained in CPR (cardio pulmonary resus- make available the appropriate MSDS to
citation), clear the persons airway and the fire department or remediation team
begin recovery procedures. that responds to the incident.
If you are not trained in CPR, In the event of a sp ill or release

stay with the victim, call for help and of a hazardous substance:
stabilize the victim b y keeping him/her
warm. 1. Direct all personnel near the
incident to evacuate the area
If the person needs first aid, immediately.
take appropriate steps t o stabilize their 2. Notify the fire department.
condition until help arrives. 3. Notify the building manager.
4. Do not attempt to clean up or
If the person is seriousl y otherwise handle the spilled/
injured: released material.
5. Wait for th e fire depa rtment to
1. Remain calm. arrive and direct personnel to the
2. Do not allow the person to move location of the spill/release.
or be moved.
3. To prevent shock, keep the
person warm and eleva te his/her
legs if they are not injured.

Bulletin No. SF 3
File: Safety
Bulletin
Safety and Productivity: Does Improving One

Increase the Other?
Introduction
also improves along with its business. A
For many years, a popular mantra in construction safety expert put it very
business, particularly construction succinctly:
oriented businesses, has been safety,
safety, safety. And, for good reason. Those who work safely have higher
Companies that establish productivity, less worker turnover, and
comprehensive safety programs will less waste. Thus, the contractor who
reduce worker accidents and injuries, produces the best safety results should
and in so doing, the direct and indirect have the best bid, since it has numerous
costs associated with such incidents.1 competitive cost advantages. The safer
contractor will have lower overhead
Those costs can be significant. Direct costs, insurance costs, labor costs, and
costs are all costs covered by Workers also superior management methods and
Compensation insurance, which include work practices.
transporting injured workers, their
hospitalization, prescription drugs, and Additionally, contractors with bad safety
wage replacement. records are going to be recognized as
dangerous by the workers, resulting in
Indirect costs in construction are higher labor turnover. Turnover adds to
conservatively estimated to be 20 times the costs of the unsafe contractor,
the direct costs of accidents.2 These through increased costs for training,
include costs other than direct costs that increased production costs due to lower
cover the injured worker, the crew of the skill levels of his labor force, or
injured worker, crews in the vicinity, increased accidents. Research has
replacing the injured worker, damaged shown that newer workers have a higher
property, and administrative costs. rate of accidents on the job. Where
there is no process to gauge the full
Reduced costs are not the only benefit value of the strength of a contractors
that a company realizes when it process at project inception, the final
establishes a comprehensive safety tally will prove that it would have been
program. A review of the literature cheaper to hire the safer contractor. 3
indicates that a companys productivity

A Construction Users Roundtable study, quality management programs that
Improving Construction Safety achieved improved safety levels.
Performance, reinforced the above Although none of the companies studied
statement. It said, The high cost of for this relationship were in the
accidents gives owners as construction construction business, the benefits likely
users good reason to concern apply and the results are worth
themselves with the safety efforts of the exploring.
contractors they hire. Past research has
shown that accidents are, to some The Link Between Safety and
extent, controllable by all levels of Productivity
construction management. Reasonable
reductions in the frequency and severity The link between safety and productivity
of accidents would lower the $8.9 billion typically happens during the safety
cost of accidents by as much as $2.75 improvement process. To find hazards,
billion, or 8% of direct construction labor every aspect of a production process
payroll a year. must be examined, and in the process,
inefficiencies, obstacles, sources of
The study went on to say, One way that waste, and product defects are
an owner can carry out this uncovered that reduce productivity.
responsibility is to hire contractors who Thus, improved productivity and quality
have a record of good safety are by-products of the safety
performance. A prospective contractor improvement process, and vice versa.6
with a history of good safety
performance is more likely to perform For example, safety team members at a
safely in the future than a contractor Georgia Gulf plant in Delaware City, DE,
with a poor, or less-than-average, safety reported a common downward trend in
record. Furthermore, Contractors who both incidents and quality problems
hold their management accountable for when they began the Use Your Head to
accidents, as well as productivity, costs, Erase All Dangers program.5 Another
schedules, and quality generally have example is the Phelps Dodge copper
the best safety records.4 mine in Morenci, AZ, which, after
changing its management approach,
Apple Computer tracks time lost tripled its employee copper production
resulting from an employee injury and while reducing its injuries sevenfold.7
includes indirect as well as direct costs.
For example, an employee with an eye Kerry, Inc., a multinational producer of
injury goes to the hospital, goes through specialty food ingredients, established a
rehabilitation, and returns to work all at Safety Improvement Program (SIP) in
a cost to the company of $10,000. its Covington, KY, plant and achieved
Those are direct costs which detract significant gains in productivity. Existing
from the companys profits. Apples information was reviewed, priorities
Miller says, But we also incurred were set, target completion dates were
roughly four to five times those costs scheduled, and progress was evaluated
indirectlythrough loss of productivity, at six-week intervals. A joint labor-
hiring and training a temporary management safety committee was
employee, and so forth.5 established and management issued a
statement of safety commitment. Injury
The following provides several investigations were expanded to include
examples of companies that instituted near-misses and Job Safety Analysis
either safety programs that produced (JSA) was implemented. Employees
improved productivity, or established

selected the Top 5 Concerns, and an requirements.11
incentive program was introduced.8
The program produced significant
The results were startling. The improvements in productivity and safety.
injury/illness incidence rate decreased Over six years, injury frequency rates
from 51.2 cases per 100 employees decreased 67 percent from 8.31 cases
before the program to 9.6 after, an 81 per 100 employees to 3.07. The lost
percent decease. The lost workdays workday cases incidence rate also
incidence rate decreased from 417 per decreased 73 percent from 4.1 per 100
100 employees before the program to employees to 1.1. Productivity per
29 after, a 93 percent decrease. employee increased 24 percent. Total
Workers compensation costs decreased output almost tripled. There is now 100
from $0.67 per employee-hour to $.01, a percent on-time delivery of product.
99 percent decrease.9 Costs have decreased 20 percent over
five years.12
Pounds of product produced also
increased more than 20 percent while International Paint in Taipei, Taiwan, is
the operating budget increased less a manufacturing company with about
than one percent per year. Product runs 100 employees. In April 1995, it
increased from an average of 7.8 days instituted a health and safety program
to 16.1 days. The equipment on-line which included management
percentage increased from 80.1 percent commitment, training, engineering,
to 88.7 percent.10 enforcement, and incentives. A health
and safety committee was established
Another example is U.S. Enrichment to conduct hazard identification audits.
Corporation in Paducah, KY, a gaseous Two-way communication between
diffusion low level uranium enrichment workers and managers improved, and
plant employing 1,600 people. It is the line manager responsibility was
only U.S. producer of fuel for enhanced. By the end of 1997,
commercial nuclear power plants. occupational injury and illness incidence
rates decreased from 33.5 to 10.2 while
USEC developed a program called productivity increased from 100.8 kg per
Survive and Thrive, a modified employee-hour to 115.1.13
Japanese 5S program based on the
principle that a quality environment Common Factors of Success
brings improved safety and productivity.
Survive and Thrive emphasizes The fundamental prerequisite for
planning, good housekeeping, success common to all these cases was
standardization of work practices, commitment from top management.
communication, and discipline. Every Other essentials include establishing a
employee is expected to report clear plan of action and involving all
problems, which are reviewed and employees in the program.
evaluated daily and appropriate action is
taken. All employees have authority to Most of the companies began by
stop work if they identify a hazard or establishing baseline data. Three areas
detect a procedural error. USES has were usually covered: a review of
also established a joint labor- compliance with mandatory standards or
management safety committee to regulatory requirements; a review of
evaluate progress. A substantial capital injury/illness data for prioritization of
investment was made to upgrade problemsfrequency, severity, and
facilities to meet regulatory

cost; and a review of injury board], May 2002. (accessed from
investigations for causal factor http://www.irmi.com/Expert/Articles/2002/Pri
information. chard05.aspx.
4
Improving Construction Safety
Performance, (Report A-3), Construction
Then, hazards were identified by one or
Users Roundtable, Cincinnati, OH,
more of several means either by Reprinted July, 1990, p. 1
employees who were familiar with the 5
David Murray, Why Managers Buy In
processes and procedures, or by audits, to Safety, Safety + Health, September
or by Job Safety Analysis (JSA), or Job 1998.
6
Hazard Analysis. A. Hoskin, The Role of Safety in
Improving Productivity: Case Studies from
Enlisting participation and cooperation Six Countries, National Safety Council,
of all employees in the program USA (November 25, 2002), p 1.
7
followed. That occurred either through Integration of Total Quality
Management and Safety Systems, Center
the establishment of a safety committee
for Quality and Productivity Improvement,
(involving workers and management) or page 13 (accessed from
through the establishment of an http://cqpi2.engr.wisc.edu/cprc/background.
incentive campaign (i.e., reinforcement html)
of behaviors). 8
Ibid.
9
A. Hoskin, pp. 1-2.
10
Successful implementation of safety and Ibid.
11
health programs rested on several Ibid.
12
common factors including detailed plans A. Hoskin, pp. 3-4.
13
and objectives, assigned responsibility, Ibid.
14
A. Hoskin, p. 4.
and effective two-way communication.
In these cases, implementation of the
safety and health programs also
included engineering modifications to
equipment and facilities; written
procedures based on JSA; written
standards and guidelines; regulatory
compliance programs; and employee
training (on standards, procedures, and
guidelines).14
The key to making it all work is

continuous review, evaluation, and
improvement through observation of
safe practices and procedures, audits,
inspections, and monitoring of
participation at all levels.
____________
References
1
Jim Bifulco, Safety Saves Lives and
Dollars, from New York Construction News,
March 2001 (accessed via
http://www.totalsafety.org/nycnmar01.html).
2
Ibid.
3
Ron Prichard, Debunking the 13 Myths
of Construction Safety, International Risk
Management Institute [electronic bulletin

Bulletin No. SF4
File: Safety
Bulletin
Proactive Safety Approach
INTRODUCTION POSITIVE
Positive Awareness Coaching Positive stands for a proactive safety

Teamwork (P.A.C.T.) is a proactive attitude, focused on planning, rather than
approach to safety in the workplace. It reacting to, project safety issues.
developed from one companys dedication Through positive reinforcement of the plan
and commitment to making safety a top (i.e. rewarding execution through
priority. This guide will help your incentives), the program becomes self-
company develop a comprehensive safety sustaining.
plan or improve an existing one.
The first steps in implementing the
P.A.C.T. was developed by Nooter P.A.C.T. program involve an internal
Construction Company (Bensalem, PA) review of a companys existing safety
over a six-year period, beginning in 1996. incentive program to determine how it
The company designed the program to be could be strengthened to achieve 100
comprehensive and to involve all percent effectiveness. The plan should
employees, from top management down. take into account all of the levels of the
P.A.C.T. was to become an integral part companys safety program, its
of Nooters corporate culture. procedures, as well as basic benchmarks
(i.e. Zero Recordable Incidents). The plan
Most important, however, is that P.A.C.T. should also incorporate team-based
is effective. Before the program was awards to foster the teamwork concept.
initiated, Nooters Recordable Incident An important component is to reward
Rate was 6.7; by the end of 2001, the rate employees for safe behaviors when they
had dropped to 1.89. occur.
In recognition of its achievement, MCAA Finally, the company philosophy should

presented Nooter with the 2002 E. Robert revolve around positive reinforcement. A
Kent Award for Management key element behind the success of the
Innovation at MCAA 2003. In the spirit of P.A.C.T. program is that employees feel
the award, this bulletin describes the comfortable identifying safety issues
components of P.A.C.T. so that the without fear of retribution. Open
industry may benefit. communication between managers and
employees is, therefore, essential.

AWARENESS Surveys: Performed by craft
employees to foster continual
Awareness stands for a new mindset improvement in the P.A.C.T. process.
among all members of a project. This is Lessons Learned: After a project is
accomplished by educating project completed, the project team meets to
managers about the companys safety discuss safety procedures that worked
expectations. well and those that need improvement.
The resulting information is shared
Using the P.A.C.T. principals, Nooter with all company employees to
created a Performance Evaluation Table promote more effective safety
which assesses the teams overall procedures on projects.
participation in the program (see Exhibit Cooperative Committee: A monthly
A). Each row represents a specific review across all levels of
Performance Indicator crucial to the management and customers regarding
success of the overall program, and each the P.A.C.T. process.
Performance Indicator is weighted
according to its affect on the overall Foremen/supervisors evaluate the teams
process. The Performance Indicators are performance in each of the Performance
as follows: Indicators and scores are given indicating
proficiency. To obtain a score, the
Recordable Incident Rate: All injuries foreman/supervisor uses his/her best
that can be recorded. professional judgment in choosing the
Total Incident Rate: The total Performance Level that pertains to the
number of incidents, including minor proficiency achieved in each of the
injuries (i.e., such as those requiring Performance Indicators and then
First Aid). multiplies it times the weight assigned.
Near Miss Report: All possible The score provides a benchmark as
incidents. teams/individuals/projects develop their
Foreman Training: Evaluates the safety proficiency. The score also
foremen and how well they understand indicates areas where teams require
the P.A.C.T. process (See Coaching additional training.
below):
Craft Training: Evaluates the COACHING
employees on a specific project, their
initial, as well as continual, training Coaching is about improving the safety
throughout the project. skill sets of all project members. Through
Job Pre-Plan: Completion of two foremen training in hazard recognition, as
major documents Site Specific well as an effective job plan (also known
Safety Plan and Job Hazard Analysis. as a Job Safety Analysis (JSA), crew
Job Safety Analysis: This dynamic members learn how to identify job site
document is the heart of the P.A.C.T. hazards and prevent accidents. If a job
process and determines how well accident was to occur, foremen and
defined safety concerns are on a crewmembers are not only trained to
specific project. participate in incident investigations, but
Inspections: Indicates how often also are able to learn from them.
audits are performed on the process (it
is recommended that audits be This training is conducted by the project
performed weekly). superintendent, the onsite safety
representative, and the regional safety
manager. Before each job begins, all the

foremen receive this training and Inspections must be performed to
participate in the pre-job walk-through. maintain the integrity of the JSA. The
corrective action of the inspections of
The main points stressed during the both materials and personnel fall into
Foreman Training are as follows: the 3-Ts: Treat (fix the item),
Terminate (remove the item), and/or
Foremens role during the project Tolerate (warn the employee of the
hazard and take steps to mitigate
Lead by Example, such as complying
potential incidents until it can be
with all safety rules, procedures, and
eliminated). Sample
policies; report and correct unsafe
inspections/audits could cover the
conditions in the workplace; ensure
following:
employees report all incidents; and
- Fire protection
make sure injuries are treated
- Housekeeping,
promptly.
- Compressed gas
Hazard Analysis, which includes - Electrical
identifying hazards that the crew will - Rigging
encounter, hazards that the owner/ - Overhead crane use
general contractor can control, as well
as job specific concerns that should be Incident Investigation deals with the
addressed before the crew begins to JSA. However, this is where the
work at a job site. foreman can receive the proper forms
to record all of the facts associated
Job Safety Analysis, a dynamic with an incident. Team attitude should
document that reviews critical be to communicate all information.
activities to be performed on the job Defining fault is not the primary
site at any given time. The JSA is purpose of the Incident Investigation.
reviewed at the beginning of the shift,
as well as at mid-shift. It allows the
Emergency Response, which details
foremen to communicate to the crew
the companys emergency response
the hazards associated with the days
plan. At a minimum, it should include
activities and the controls that will be
the following:
used to eliminate or lessen the degree
of the hazard present. This process
- Shutdown all ignition sources;
ensures that the necessary measures
- Evacuate to primary meeting area;
will be put in place to protect the crew
- Immediate supervisor shall take roll
at all times during the workday. These
of crew present and report to
measures are as follows:
superintendent;
- Resume work once all is clear.
- Engineering, which looks at ways to
eliminate or reconfigure certain tasks
In summary, the foremen need to realize
to reduce possible hazard exposure.
the importance of their daily interaction in
- Substitution, which can the field. This is stressed through
recommend a lesser hazard emphasizing that the foremen must lead
potential process to the crew. by example, review any hazards present,
attempt to control or abate these hazards,
- Personal Protective Equipment, inspect the jobsite daily, keep accurate
which, as a last resort, protects the incident investigations, and have an
crew from the hazard itself. emergency response plan known to all
jobsite crew. By maintaining a safe work
environment using the P.A.C.T. approach,

the foremen will realize that the results of Contracts: From bid to turnover,
their actions will have a positive impact on were there any issues that needed
their project, the company, and most review?
importantly, will aid in reducing incidents, Scheduling: Was there full buy-in on
injury costs, and downtime. the overall plan of the project?
Accounting: Were cost controls in
TEAMWORK place and reviewed?
Field Service: Were tools orderly,
Finally, Teamwork stands for the ability to proper, and timely received?
improve the safety teamwork for all parties Rigging: Was the rigging performed
involved in a project. This is safely and without incident?
accomplished by establishing an onsite
safety communications committee that
works with all levels on a project to abate Execution: Overall, what aspects of
any hazards before work begins. the project (manpower,
communication, problem solving, etc.)
FEEDBACK/DEVELOPMENT were positive, and what aspects
needed more work?
To ensure continual improvement in Customer Review: What concerns or
safety performances, Safety Perception issues were effective? Where should
Surveys should be developed to elicit changes be made to improve
feedback from employees, customers, interaction with this customer?
and subcontractors. Completed
anonymously, participants can offer ADDITIONAL RESOURCES
honest feedback on a variety of topics
including:
As you develop or enhance the curriculum
for the safety training component of your
Knowledge and understanding of
companys P.A.C.T. program, consider
managements safety goals
using the safety training resources
Employee involvement available from MCAA. Visit
Communication of the safety message www.mcaa.org/store to download our
Corrective action when problems are latest catalog or sign in to the members-
presented only online store. (To obtain a password
Rewards/motivation to participate for the store, visit
www.mcaa.org/password.)
Moreover, in-house reviews of projects
complete the process by bringing out Management Methods Manual Bulletin
valuable learning points, re-emphasizing SF 1, Whats Involved in a Company
positive characteristics of the JSA, Safety Program.
reviewing and extrapolating better ideas
for the field, and communicating these
ideas back to the team while reinforcing
the team concept. Major topics of
discussion can include:
Safety: How effective were the safety

rules, JSA?
Quality: Did the process allow for a
better quality project?

Exhibit A
PERFORMANCE EVALUATION TABLE
Performance PERFORMANCE LEVEL Calculations

Indicators 0 1 2 3 4 5 6 7 8 9 10 Level Wt. Score
Recordable 0.99 - .89 - .79 - .69 - .59 - .49 - .39 - .29 - .19 -
Incident Rate >1.0 .90 .80 .70 .60 .50 .40 .30 .20 .10 0 10%
Total Incident 3.9 - 3.6 - 3.2 - 2.8 - 2.4 - 2.0 - 1.6 - 1.0 - 0.5 -
Rate >4.0 3.7 3.3 2.9 2.5 2.1 1.7 1.1 0.6 0.1 0 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Near Miss Report 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Foremen Training 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 15%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Craft Training 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Job Pre-Plan 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
JSA 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Inspections 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Surveys 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 10%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Lessons Learned 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 5%
10 - 20 - 30 - 40 - 50 - 60 - 70 - 80 - 90 -
Coop / TriPart Mtg 0 - 9% 19% 29% 39% 49% 59% 69% 79% 89% 99% 100% 5%
Total
Score 100%

Bulletin No. SC 1
File: Subcontracts
Bulletin
Suggested Subsubcontract Form

INTRODUCTION all upstream obligations to the
contractor and owner as may be set
In 2009, ConsensusDocs introduced the forth in the upstream contract
first industry-standard, lower-tier documents incorporated in to the
subsubcontract form. The Consensus subcontract.
725 form was revised in 2011, and is
attached for reference (CDS725). The Owner or Contractor Directed
CDS725 provides a fairly simple Change Orders:
agreement governing the lower tier The CDS725 does not discuss change
subsubcontractors work. The form is orders other than those directed in
short and is a much streamlined version writing by the subcontractor. A
of upstream industry subcontracts such subcontractor might therefore assume
as the ConsensusDocs 750 or the AIA the risk of directing its subsubcontractor
A401. The CDS725 is a good start for a to proceed with an owner or contractor
lower tier subsubcontract, but change, with no assurance that the
subcontractors must insure all issues subcontractor itself will be paid for the
important to them are covered. Below change order. If this is of concern, the
are some items which might be subcontractor may wish to include a
considered: separate section under the CDS725
Article 8 specifically addressing changes
Subsubcontract Documents: directed by the Owner or Contractor. For
The CDS725, Article 4 includes a example:
reference to Exhibit B, the list of
documents incorporated into the Notwithstanding the above, changes
subsubcontract by reference. This ordered, schedule changes or extra
exhibit should be carefully completed to work directed by Owner or
insure all necessary upstream Contractor shall be performed and
documents are listed. paid for in accordance with the
applicable terms of the agreement
Subsubcontractors Insurance: between Subcontractor and
The CDS725, Article 4 includes a Contractor including all rights of
reference to Exhibit E, the insurance dispute and appeal. Receipt by
requirements to be fulfilled by the Subcontractor of payment and/or
subsubcontractor (see attached). This schedule adjustments from
exhibit should be carefully completed to Contractor for such change orders,
secure adequate protection to the schedule changes or extra work is
subcontractor as well as to fulfill any and an express condition precedent to

any Subcontractor obligation to and hold harmless Subcontractor,
make payments to Subsubcontractor Contractor and Owner from all
or adjust the Subsubcontract claims, bond claims, encumbrances
progress schedule for the same. or liens arising out of the
performance of the
The subcontractor should verify that Subsubcontractors work. The
such clauses are permissible and Subsubcontractor shall, at its own
enforceable in the jurisdiction where the cost and expense (including
project is located. attorney's fees), defend all suits to
establish such claims, bond claims,
Specific Partial and Final Release encumbrances, or liens, and pay any
Forms: such claims or liens so established.
The CDS725 does not include a In the event of failure by the
requirement that subsubcontractors Subsubcontractor to comply with this
submit specific form releases as a requirement, Subcontractor may, at
condition to payment. The CDS725 can its sole discretion, pay such claims
be modified to include, as an additional or bond off any liens. All costs of
exhibit listed in Article 4, specific release such action, including attorney's fees
forms as necessary. This is especially incurred by Subcontractor shall be
important if the contractor requires the charged to the account of the
subcontractor to provide such forms Subsubcontractor.
from all lower tier subsubcontractors. An
example of such a clause might be Conditional Payment Clause:
inserted at the end of the third sentence There is no pay if paid condition
in Article 9.2: precedent clause in the CDS725. If
permissible and enforceable in the
Subsubcontractor shall furnish any jurisdiction where the project is located,
other lien releases, waivers, this may be a desirable modification to
affidavits or other documents as the CDS725 in order to clarify that
required by the Subsubcontract payments will be made to
Documents as set forth in Exhibit B subsubcontractors only after the
and/or as required to keep the condition precedent of the subcontractor
Owners premises free from claims, receiving payment from the contractor is
bond claims, encumbrances, or liens satisfied (for further discussion of pay if
of all materialmen, lower tier paid clauses, see the MCAA Methods
subcontractors or laborers. Manual Contract Clauses, LL 11).
Subsubcontractor shall also furnish
written releases, waivers, affidavits A sample condition precedent payment
or other documents in the forms clause to include in CDS725 in lieu of
attached as Exhibit___ from all the last sentence of Article 9.2 might be:
persons, firms, or corporations that
have furnished to the Actual receipt by Subcontractor of
Subsubcontractor, any labor, payment from Contractor for
services, equipment and materials, Subsubcontractor's work is an
whether on or for the Project. express condition precedent to any
Subcontractor obligation to make
Subsubcontractor shall turn its work payments to Subsubcontractor. Final
over to Subcontractor in good payment shall be due only after
condition and free and clear of all completion of all work, acceptance
claims, bond claims, encumbrances, by the Subcontractor, Contractor
or liens and shall defend, indemnify and Owner, compliance with all

Subsubcontract obligations and Potential Upstream Delay/Liquidated
Subcontractors receipt of final Damages:
payment from the Contractor, which CDS725, Article 13.2 has a place to fill
items shall be conditions precedent in upstream liquidated damages or other
to the making of final payment to delay damages information that might
Subsubcontractor. be important to flow-down to the
Subsubcontractor. Be sure to complete
More Detailed Warranty Provision: this article as appropriate.
Depending on the nature of the lower
tier subcontract, it may be prudent to The attached CDS725 presents a good
include a specific warranty clause. For option for lower tier subsubcontracts. It
example: is better than relying on verbal
agreements or signing the
Subsubcontractor shall furnish all subsubcontractors forms. The CDS725
warranties and guarantees and all may also be more practical than
other documents required by the modifying industry upstream subcontract
Subsubcontract Documents as set forms like the AIA A401 or the CDS750,
forth in Exhibit B for the especially for lower tier subsubcontracts
Subsubcontractor's work. The of limited scope and complexity.
Subsubcontractor shall protect the
Subcontractor, Contractor and the The information in this bulletin
Owner against any loss or damage should not be construed as legal
arising from any defects in material advice. A person should contact
or workmanship furnished by it their local counsel for specific legal
under this Subsubcontract for a advice regarding the information
period as set forth in the (1) plans, contained in this bulletin.
specifications and addenda, (2)
Subsubcontract Documents as set
forth in Exhibit B or (3) for a period
of one year from Final Completion of
the entire project, whichever is
greatest, and Subsubcontractor
agrees to replace any defective
material and correct any defect in
the its work when requested to do
so.

ConsensusDocs 725
STANDARD AGREEMENT BETWEEN SUBCONTRACTOR AND SUBSUBCONTRACTOR
GENERAL INSTRUCTIONS. These instructions are solely for the information and convenience of
ConsensusDocs users, and are not a part of the document. Gray boxes indicate where you should click and
type in your project information. The yellow shading is a Word default function that displays editable text and
is not necessary for document completion. Shading can be turned off by going to the Review tab, select
Restrict Editing button and uncheck Highlight the regions I can edit. In Word 2003 you will find this option
under the Tools tab, Options, Security tab, Protect Document button.
EMBEDDED INSTRUCTIONS are provided to help you complete the document. To display or hide
instructions select the button under the Home tab to show all formatting marks. Instruction boxes are
color coded as follows:
Red Boxes: Instructions for fields that are typically required to complete contract.
Blue Boxes: Instructions for fields that may or may not be required for a complete contract.
Green Boxes: Provide general instructions or ConsensusDocs Coalition Guidebook comments, which can
be found at www.ConsensusDocs.org/guidebook.
ENDORSEMENT. This document was developed through a collaborative effort of organizations representing
a wide cross-section of the design and construction industry. The organizations endorsing this document
believe it represents a fair allocation of risk and responsibilities of all project participants.
Endorsing organizations recognize that this document must be reviewed and adapted to meet specific needs
and applicable laws. This document has important legal and insurance consequences, and it is not intended
as a substitute for competent professional services and advice. Consultation with an attorney and an
insurance or surety adviser is strongly encouraged. Federal, State and Local laws may vary with respect to
the applicability or enforceability of specific provisions in this document. CONSENSUSDOCS SPECIFICALLY
DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. PURCHASERS ASSUME ALL
LIABILITY WITH RESPECT TO THE USE OF THIS DOCUMENT, AND CONSENSUSDOCS AND ANY OF
THE ENDORSING ORGANIZATIONS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT OR
CONSEQUENTIAL DAMAGES RESULTING FROM SUCH USE. For additional information, please contact
ConsensusDocs, 2300 Wilson Blvd, Suite 400, Arlington, VA 22201, 866-925-DOCS (3627),
support@consensusdocs.org or www.ConsensusDocs.org.
ConsensusDocs 725 Standard Agreement Between Subcontractor and Subsubcontractor - 2009, Revised 2011. THIS DOCUMENT
MAY HAVE BEEN MODIFIED FROM THE STANDARD LANGUAGE, and a report of modifications can be generated through the
ConsensusDocs platform. Purchase of the document permits the user to print one contract for each party to the contract within one project only.
You may only make copies of finalized documents for distribution to parties in direct connection with this contract. Any other uses are strictly
prohibited.
ConsensusDocs 725
STANDARD AGREEMENT BETWEEN SUBCONTRACTOR AND
SUBSUBCONTRACTOR
Job No.: [_____] Account Code [_____]
This Agreement is made this [_____] day of [_____], [_____] by the
SUBCONTRACTOR, [_____]
and the
SUBSUBCONTRACTOR, [_____].
CONTRACTOR: [_____].
PROJECT: [_____].
OWNER: [_____]
DESIGN PROFESSIONAL: [_____]
Notice to the Parties shall be given at the above addresses.
ConsensusDocs 725 Standard Agreement Between Subcontractor and Subsubcontractor - 2009, Revised 2011. THIS
DOCUMENT MAY HAVE BEEN MODIFIED FROM THE STANDARD LANGUAGE, and a report of modifications can be generated through
the ConsensusDocs platform. Purchase of the document permits the user to print one contract for each party to the contract within one
project only. You may only make copies of finalized documents for distribution to parties in direct connection with this contract. Any other
uses are strictly prohibited.
1. SUBSUBCONTRACT WORK Subsubcontractor shall perform Subsubcontract Work under the general
direction of Subcontractor and shall cooperate with Subcontractor so Subcontractor may fulfill obligations
to Contractor. Subsubcontractor to provide:
[_____] (Brief Description of Subsubcontract Work), as more fully described in Exhibit A.
2. SUBSUBCONTRACT AMOUNT Subcontractor agrees to pay Subsubcontractor for satisfactory and

timely performance and completion of Subsubcontract Work:
3. INSURANCE Subsubcontractor shall purchase and maintain insurance that will protect
Subsubcontractor from claims arising out of Subsubcontractor operations under this Agreement, whether
the operations are by Subsubcontractor, or any of Subsubcontractors consultants or subcontractors or
anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be
liable. Subsubcontractor shall provide Workers Compensation, coverage and limits of liability as set forth
in Exhibit E.
4. EXHIBITS The following Exhibits are incorporated by reference and made part of this Agreement:
EXHIBIT A: Subsubcontract Work, [_____] pages.

EXHIBIT B: Drawings, Specifications, General, Special, Supplementary, and other conditions,
and addenda. (Attach a complete listing by title, date and number of pages.)
EXHIBIT C: Progress Schedule, [_____] pages.
EXHIBIT D: Alternates and Unit Prices, include dates when alternates and unit prices no longer
apply, [_____] pages.
EXHIBIT E: Insurance Provisions, [_____] pages.
EXHIBIT [_____]: Other, [_____], [_____] pages.
5. SAFETY To protect persons and property, Subsubcontractor shall establish a safety program
implementing safety measures, policies and standards conforming to (a) those required or recommended
by governmental and quasi-governmental authorities having jurisdiction and (b) requirements of this
Agreement. Subsubcontractor shall keep project site clean and free from debris resulting from
Subsubcontract Work.
6. ASSIGNMENT Subsubcontractor shall not assign the whole or any part of Subsubcontract Work or this
Agreement without prior written approval of Subcontractor.
7. TIME
7.1. TIME IS OF THE ESSENCE Time is of the essence for both parties. The parties agree to
perform their respective obligations so that the Project may be completed in accordance with this
Agreement. The term Day shall mean calendar day unless otherwise specifically defined.
7.2. SUBCONTRACT PROGRESS SCHEDULE In consultation with Subsubcontractor, the

Subcontractor shall prepare the schedule for performance of Subcontractors work (Subcontract
Progress Schedule) and shall revise and update such schedule, in accordance with Subcontractors
project schedule requirements and as necessary, as Subcontractors work progresses.
Subsubcontractor shall provide Subsubcontract Work scheduling information and shall revise and
update as the project progresses. Subcontractor and Subsubcontractor shall be bound by the
Subcontract Progress Schedule. The Subcontract Progress Schedule and all subsequent changes
and additional details shall be submitted to Subsubcontractor reasonably in advance of required
performance. Subcontractor shall have the right to determine and, if necessary, change the time,
order and priority in which various portions of Subsubcontract Work shall be performed and all other
matters relative to Subsubcontract Work.
8. CHANGE ORDERS When Subcontractor orders in writing, Subsubcontractor, without nullifying this
Agreement, shall make any and all changes in Subsubcontract Work, which are within the general scope
of this Agreement. Any adjustment in the Subsubcontract Amount or time of performance shall be
authorized by a Change Order. No adjustments shall be made for any changes performed by
Subsubcontractor that have not been ordered by Subcontractor. A Change Order is a written instrument
prepared by Subcontractor and signed by Subsubcontractor stating their agreement upon the change in
Subsubcontract Work. If commencement and/or progress of Subsubcontract Work is delayed without the
fault or responsibility of Subsubcontractor, the time for Subsubcontract Work shall be extended by
Change Order to the extent obtained by Subcontractor, and the Subsubcontract Progress Schedule shall
be revised accordingly.
9. PAYMENT
9.1. SCHEDULE OF VALUES As a condition of payment, Subsubcontractor shall provide a schedule

of values satisfactory to Subcontractor not more than fifteen (15) Days from the date of this
Agreement.
9.2. PROGRESS AND FINAL PAYMENTS Progress payments, less retainage, shall be made to
Subsubcontractor, for Subsubcontract Work satisfactorily performed, no later than seven (7) Days
after receipt by Subcontractor of payment from Contractor for Subsubcontract Work. Final payment of
the balance due shall be made to Subsubcontractor no later than seven (7) Days after receipt by
Subcontractor of final payment from Contractor for Subsubcontract Work. These payments are
subject to receipt of such lien waivers, affidavits, warranties, guarantees or other documentation
required by this Agreement, Subcontractor or Contractor. If payment from Contractor for such
Subsubcontract Work is not received by Subcontractor, through no fault of Subsubcontractor,
Subcontractor will make payment to Subsubcontractor within a reasonable time for Subsubcontract
Work satisfactorily performed.
9.3. RETAINAGE Retainage shall be [_____] percent ([_____]%), which is equal to the percentage
retained from Subcontractors payment by Contractor for Subsubcontract Work. If the
Subsubcontract Work is satisfactory and the Subsubcontract Documents provide for reduction of
retainage at a specified percentage of completion, the Subcontractor's retainage shall also be
reduced when the Subcontract Work has attained the same percentage of completion and the
Contractor's retainage for the Subcontract Work has been so reduced by the Owner.
9.4. PAYMENTS WITHHELD Subcontractor may reject a Subsubcontractor payment application or

withhold amounts from previously approved Subsubcontractor payment application, in whole or in
part, as may reasonably be necessary to protect Subcontractor from loss or damage based upon the
following to the extent Subsubcontractor is responsible: (a) failure to timely perform Subsubcontract
Work, (b) properly pay subcontractors or suppliers, (c) promptly correct rejected, defective or
nonconforming Subsubcontract Work, or (d) third-party claims involving the Subsubcontractor or
reasonable evidence demonstrating that third-party claims are likely to be filed unless and until the
Subsubcontractor furnishes the Subcontractor with adequate security in the form of a surety bond,
letter of credit or other collateral or commitment which is sufficient to discharge such claims if
established.
9.5. PAYMENT DELAY If Subcontractor has received payment from Contractor and, if for any reason
not the fault of Subsubcontractor, Subsubcontractor does not receive a progress payment from
Subcontractor within seven (7) Days after the date such payment is due, or if Subcontractor has failed
to pay Subsubcontractor within a reasonable time for Subsubcontract Work satisfactorily performed,
Subsubcontractor, upon giving seven (7) Days written notice to Subcontractor, and without prejudice
to and in addition to any other legal remedies, may stop work until payment of the full amount owing
to Subsubcontractor has been received. Subsubcontract Amount and time of performance shall be
adjusted by the amount of Subsubcontractors reasonable and verified cost of shutdown, delay and
startup, and shall be effected by an appropriate Change Order.
9.6. WAIVER OF CLAIMS Final payment shall constitute a waiver of all claims by Subsubcontractor
relating to Subsubcontract Work, but shall in no way relieve Subsubcontractor of liability for
warranties, or for nonconforming or defective work discovered after final payment, nor relieve the
Subcontractor for claims made in writing by the Subsubcontractor prior to its application for final
payment as unsettled at the time of such payment.
10. INDEMNITY To the fullest extent permitted by law, Subsubcontractor shall indemnify and hold
harmless Subcontractor, Subcontractors other subcontractors, Contractor, Design Professional, Owner
and their agents, consultants, employees and others as required by this Agreement from all claims for
bodily injury and property damage other than the Subsubcontract Work itself that may arise from
performance of Subsubcontract Work but only to the extent caused by the negligent acts or omissions of
Subsubcontractor, Subsubcontractors subcontractors or anyone employed directly or indirectly by any of
them or by anyone for whose acts any of them may be liable.
11. SUBCONTRACTORS RIGHT TO PERFORM SUBSUBCONTRACTORS RESPONSIBILITIES AND

TERMINATION OF AGREEMENT
11.1. FAILURE OF PERFORMANCE Should Subsubcontractor fail to satisfy contractual deficiencies

or to commence and continue satisfactory correction of the default with diligence or promptness
within three (3) business Days from receipt of Subcontractors written notice, then Subcontractor,
without prejudice to any right or remedies, shall have the right to take whatever steps it deems
necessary to correct deficiencies and charge the cost thereof to Subsubcontractor, who shall be liable
for such payment, including reasonable overhead, profit and attorneys fees. In the event of an
emergency affecting safety of persons or property, Subcontractor may proceed as above without
notice, but Subcontractor shall give Subsubcontractor notice promptly after the fact as a precondition
of cost recovery.
11.2. TERMINATION BY OWNER Should Owner terminate the prime agreement or should
Contractor terminate the subcontract agreement, or any part which includes Subsubcontract Work,
Subcontractor shall notify Subsubcontractor in writing within three (3) business Days of termination
and, upon written notification, this Agreement shall be terminated and Subsubcontractor shall
immediately stop Subsubcontract Work, follow all of Subcontractors instructions, and mitigate all
costs. In the event of such termination, Subcontractor liability to Subsubcontractor shall be limited to
the extent of Subcontractor recovery on Subsubcontractors behalf under the subcontract agreement.
Subcontractor agrees to cooperate with Subsubcontractor, at Subsubcontractors expense, in the
prosecution of any Subsubcontractor claim arising out of Owner or Contractor termination and to
permit Subsubcontractor to prosecute the claim, in the name of Subcontractor, for the use and benefit
of Subsubcontractor, or assign the claim to Subsubcontractor.
11.3. TERMINATION BY SUBCONTRACTOR If Subsubcontractor fails to commence and

satisfactorily continue correction of a default within three (3) business Days after written notification
issued under section 11.1, then Subcontractor may, in lieu of or in addition to section 11.1, issue a
second written notification, to Subsubcontractor. Such notice shall state that if Subsubcontractor fails
to commence and continue correction of a default within seven (7) Days of the written notification, the
Agreement will be deemed terminated. A written notice of termination shall be issued by
Subcontractor to Subsubcontractor at the time Subsubcontractor is terminated. Subcontractor may
furnish those materials, equipment and/or employ such workers or subcontractors as Subcontractor
deems necessary to maintain the orderly progress of Subcontractors work. All costs incurred by
Subcontractor in performing Subsubcontract Work, including reasonable overhead, profit and
attorneys fees, costs and expenses, shall be deducted from any monies due or to become due
Subsubcontractor. Subsubcontractor shall be liable for payment of any amount by which such
expense may exceed the unpaid balance of the Subsubcontract Amount. At Subsubcontractors
request, Subcontractor shall provide a detailed accounting of the costs to finish Subsubcontract Work.
11.4. TERMINATION BY SUBSUBCONTRACTOR If Subsubcontract Work has been stopped for

thirty (30) Days because Subsubcontractor has not received progress payments or has been
abandoned or suspended for an unreasonable period of time not due to the fault or neglect of
Subsubcontractor, then Subsubcontractor may terminate this Agreement upon giving Subcontractor
seven (7) Days written notice. Upon such termination, Subsubcontractor shall be entitled to recover
from Subcontractor payment for all Subsubcontract Work satisfactorily performed but not yet paid for,
including reasonable overhead, profit and attorneys fees, costs and expenses. However, if
Contractor has not paid Subcontractor for the satisfactory performance of Subsubcontract Work
through no fault or neglect of Subcontractor, and Subsubcontractor terminates this Agreement under
this article because it has not received corresponding progress payments, Subsubcontractor shall be
entitled to recover from Subcontractor, within a reasonable period of time following termination,
payment for all Subsubcontract Work satisfactorily performed but not yet paid for, including
reasonable overhead and profit. Subcontractors liability for any other damages claimed by
Subsubcontractor under such circumstances shall be extinguished by Subcontractor pursuing said
damages and claims against Contractor, on Subsubcontractors behalf, in the manner provided for in
section 11.2.
12. BONDS Performance and Payment Bonds [_____] are/[_____] are not required of the
Subsubcontractor. Such bonds shall be issued by a surety admitted in the State in which the Project is
located and must be acceptable to Subcontractor. Subcontractors acceptance shall not be withheld
without reasonable cause. The penal sum of the Payment Bond shall equal the penal sum of the
Performance Bond.
13. CLAIMS AND DISPUTES
13.1. CLAIMS RELATING TO SUBCONTRACTOR Subsubcontractor shall give Subcontractor written

notice of all claims within seven (7) Days of Subsubcontractors knowledge of facts giving rise to the
event for which claim is made; otherwise, such claims shall be deemed waived. All unresolved claims,
disputes and other matters in question between Subcontractor and Subsubcontractor shall be
resolved in the manner provided in this Agreement.
13.2. DAMAGES If assessed against a Subcontractor, Subsubcontractor may be assessed a share of
the damages in proportion to Subsubcontractors share of responsibility for the delay for the following
liquidated or other damages as follows:
However, the amount of such assessment shall not exceed the amount assessed against
Subcontractor. Nothing in this Agreement shall be construed to limit Subsubcontractors liability to
Subcontractor for Subcontractors actual delay damages caused by Subsubcontractors delay. The
Subcontractor and Subcontractor agree to waive all claims against each other for any consequential
damages that may arise out of or relate to this Agreement, except for those specific items of damages
excluded from this waiver identified above.
13.2.1. SUBCONTRACTOR CAUSED DELAY Nothing in this Agreement shall preclude

Subsubcontractors recovery of delay damages caused by Subcontractor.
13.3. WORK CONTINUATION AND PAYMENT Unless otherwise agreed in writing, Subsubcontractor
shall continue Subsubcontract Work and maintain the Progress Schedule during any dispute
resolution proceedings. If Subsubcontractor continues to perform, Subcontractor shall continue to
make payments in accordance with this Agreement.
13.4. MULTIPARTY PROCEEDING The Parties agree, to the extent permitted by the prime
agreement or subcontract agreement, that all Parties necessary to resolve a claim shall be Parties to
the same dispute resolution proceeding. To the extent disputes between Subcontractor and
Subsubcontractor involve in whole or in part disputes between Subcontractor and Contractor,
disputes between Subsubcontractor and Subcontractor shall be decided by the same tribunal and in
the same forum as disputes between Subcontractor and Contractor.
13.5. NO LIMITATION OF RIGHTS OR REMEDIES Nothing in this article shall limit any rights or
remedies not expressly waived by Subsubcontractor which Subsubcontractor may have under lien
laws or payment bonds.
13.6. DIRECT DISCUSSIONS If a dispute arises out of or relates to this Agreement or its breach, the
Parties shall endeavor to settle the dispute. Within five (5) business days, Parties' representatives,
who shall possess the necessary authority to resolve such matter and who shall record the date of
first discussions shall conduct direct discussions and make a good faith effort to resolve such dispute.
13.7. MEDIATION Disputes between Subcontractor and Subsubcontractor not resolved by direct
discussion shall be submitted to mediation pursuant to the Construction Industry Mediation Rules of
the American Arbitration Association. The Parties shall select the mediator within fifteen (15) Days of
the request for mediation. Engaging in mediation is a condition precedent to any form of binding
dispute resolution.
13.8. Binding Dispute Resolution If the matter is unresolved after submission of the matter to
mediation, the Parties shall submit the matter to the binding dispute resolution procedure designated
herein (Designate only one):
[_____] Arbitration using the current Construction Industry Arbitration Rules of the American
Arbitration Association or the Parties may mutually agree to select another set of arbitration rules.
The administration of the arbitration shall be as mutually agreed by the Parties.
[_____] Litigation in either the state or federal court having jurisdiction of the matter in the location
of the Project.
13.9. COST OF DISPUTE RESOLUTION The cost of any binding dispute resolution procedure shall
be borne by the non-prevailing Party as determined by the adjudicator of the dispute.
13.10. VENUE The venue of any binding dispute resolution procedure shall be the location of the
Project, unless the Parties agree on a mutually convenient location.
14. JOINT DRAFTING The Parties expressly agree that this Agreement was jointly drafted, and that they
both had opportunity to negotiate terms and to obtain assistance of counsel in reviewing terms prior to
execution. This Agreement shall be construed neither against nor in favor of either Party, but shall be
construed in a neutral manner.
SUBCONTRACTOR: [_____]
BY:
PRINT NAME: [_____] PRINT TITLE: [_____]
SUBSUBCONTRACTOR: [_____]
BY:
PRINT NAME: [_____] PRINT TITLE: [_____]
END OF DOCUMENT
ConsensusDocs 725 Standard Subsubcontract Agreement
Exhibit E, Insurance Requirements
1. Commercial General Liability Insurance
$ [_____] bodily injury and property damage - per occurrence.

$ [_____] general aggregate.
$ [_____] products and completed operations aggregate.
$ [_____] personal and advertising injury limit.
Coverage shall include Premises and Operations, Completed Operations, Contactors Protective for
Subsubcontractor's/Vendors liability arising out of the hire of Subsubcontractors, per Project
Aggregate, Contractual Liability, Broad Form Property Damage. The Subsubcontractor shall maintain
completed operations liability coverage for one year after acceptance of the Work, Substantial
Completion of the Project, or for the time required by the subsubcontract Documents, whichever is
longer.
2. Additional General Liability Coverage - The Subcontractor [_____] shall/ [_____] shall not require the
Subsubcontractor to purchase and maintain additional liability coverage, primary to any coverage
provided by the Subcontractor. If required, the designated coverage shall be:
A. [_____] ADDITIONAL INSURED. Subcontractor shall be named as an additional insured on the

Subsubcontractor's Commercial General Liability Insurance policy for operations and completed
operations, but only with respect to liability for bodily injury, property damage, or personal and
advertising injury to the extent caused by the negligent acts or omissions of the Subsubcontractor, or
ConsensusDocs 725 Exhibit E Insurance Requirements - Standard Agreement Between Subcontractor and
Subsubcontractor - 2011. THIS DOCUMENT MAY HAVE BEEN MODIFIED FROM THE STANDARD LANGUAGE, and a report of
modifications can be generated through the ConsensusDocs platform. Purchase of the document permits the user to print one contract for
each party to the contract within one project only. You may only make copies of finalized documents for distribution to parties in direct
connection with this contract. Any other uses are strictly prohibited.
those acting on the Subsubcontractor's behalf, in the performance of Subsubcontract Work for the
Subcontractor.
B. [_____]. OCP. The Subsubcontractor shall provide an Owners' and Contractors' Protective Liability
Insurance ("OCP") policy naming the Subcontractor as insured with limits equal to the limits on
Commercial General Liability Insurance specified, or limits as otherwise required by the
Subcontractor.
Any documented additional cost in the form of any surcharge associated with procuring the additional
general liability coverage in accordance with this section shall be paid by the Subcontractor directly,
or the costs may be reimbursed by the Subcontractor to the Subsubcontractor by increasing the
Subsubcontract Amount to correspond to the actual cost required to purchase and maintain the
additional liability coverage.
3. Business Automobile Liability Coverage with a minimum limit of $ [_____] per occurrence to cover all
owned, hired, and non-owned automobiles.
4. Workers Compensation and Employer's Liability, including an all states endorsement and, where
exposure exists, Federal Employee Liability, U.S. Longshoremen and Harbor Workers, or Jones Act for
Statutory Limits and minimum Employers Liability Limits of: $ [_____] per accident / disease - policy limit /
per employee
5. Excess Liability following form or umbrella written with limits of at least $ [_____] per occurrence. Any
Vendor providing crane or hoisting services shall provide general liability limits (primary and excess) of at
least $ [_____] per occurrence.
6. Professional Liability Insurance shall be provided in the event the Subsubcontractor or its design
professional provides design services with minimum limits of $ [_____] per claim and a general aggregate
of $ [_____] for Subsubcontractor services. Deductibles shall be paid by the Subsubcontractor or its
design professional.
7. The Subsubcontractor shall obtain insurance coverage(s) in sufficient amounts and form to cover its
own exposure to loss for owned, rented, leased, or borrowed tools, equipment, machinery, or any of its
property. The Subcontractor and Subsubcontrator waive all rights against each other, the Owner,
Constructor, and Design Professional for damages caused by risks covered by the Project Builders Risk
policy, except such rights as they may have to the proceeds of the insurance and such rights as they may
have for the failure of the Owner or Constructor to obtain and maintain the Project Builders Risk coverage
in accordance with the requirements of the Subsubcontract Documents.
8. Required insurance policies shall prohibit coverage cancellation or expiration until at least thirty (30)
days after written notice has been given to the Subcontractor. Prior to commencement of the
Subsubcontract Work, the Subsubcontractor shall deliver to the Subcontractor certificates of insurance
acceptable to the Subcontractor, which acceptance shall not be unreasonably withheld. In the event the
Subsubcontractor fails to procure and maintain any insurance coverage required under this Agreement,
the Subcontractor may purchase such coverage as required for the Subcontractors benefit and charge
the expense to the Subsubcontracor, or terminate this Agreement.
END OF DOCUMENT.
ConsensusDocs 725 Exhibit E Insurance Requirements - Standard Agreement Between Subcontractor and
Subsubcontractor - 2011. THIS DOCUMENT MAY HAVE BEEN MODIFIED FROM THE STANDARD LANGUAGE, and a report of
modifications can be generated through the ConsensusDocs platform. Purchase of the document permits the user to print one contract for
each party to the contract within one project only. You may only make copies of finalized documents for distribution to parties in direct
connection with this contract. Any other uses are strictly prohibited.
Bulletin No. SC 2
File: Subcontracts
Bulletin
Indemnification Clauses
INTRODUCTION LIMITATIONS OF
INDEMNIFICATION CLAUSES
Indemnification clauses are often
included in subcontracts to transfer risk Certain indemnification clauses make
from the general contractor (GC) to you, the subcontractor liable for damages
the subcontractor. Basically, in that though it was in no way responsible for
context, indemnification means the causing them. Because of this, along
obligation of the subcontractor to with the perception that GCs often hold
reimburse the GC for damages arising an upper hand in subcontract
from future claims for which the GC is or negotiations, most states have enacted
may be held liable. statutes limiting the scope and/or
enforceability of construction contract
These clauses protect not only the GC, indemnification clauses. These laws are
but usually the owner and possibly commonly referred to as anti-indemnity
designers too, from the consequences statutes. Virtually every anti-indemnity
of accidents resulting in property statute is different, so it is important that
damage, personal injury and other you know the applicable rules in the
described liabilities. states where you work. One helpful
starting point can be viewed at
The indemnification clause presents a http://www.litmgmt.org/LMI/docs/2009-
tremendous potential danger to you, 10-28%20Subcontractor_Chart_of_Anti-
however, and you must recognize that Indemnity_Statutes_2009.pdf but be
the indemnification clauses in sure to check the current statute in your
subcontracts are typically not two- state.
way streetsthey work only against
the subcontractor. It is essential, Although there are several different
therefore, that before you enter your types of indemnification clauses, for the
subcontract, you know precisely the most part, you will encounter one of
losses for which you will be required to three types in your trade subcontracts.
indemnify others. These are sometimes described as:
Limited,
Broad form, or
Intermediate indemnification
clauses.
1
A limited indemnification clause is the obligation exists even if the
most favorable for subcontractors and subcontractor is not negligent or at fault
makes the subcontractor responsible for in any way and even if the loss is due
indemnification obligations only to the solely to the fault of others. This is the
extent the damage was caused by the harshest type of indemnification clause
negligent acts or omissions of the for subcontractors and is in fact void
subcontractor or those for whose acts under many state anti-indemnity
the subcontractor is liable.All states statutes.
allow limited indemnification provisions.
You will find this type of limited By entering a subcontract which
indemnity provision in both the AIA contains a broad form indemnification
A401 standard subcontract and the clause similar to the sample below, you
newer ConsensusDOCS subcontract, could be responsible for holding
form CDS750. Although some GCs harmless the GC from just about every
proprietary subcontract forms (GC possible loss contingency on the project.
subcontracts) may contain a limited Most state anti-indemnity statutes as
indemnification clause, most GCs discussed above prohibit broad form
choose to use either intermediate or indemnification clauses. A sample broad
broad form provisions (unless the same form indemnification clause is as
would be void or unenforceable under follows:
the anti-indemnity statute in the state
where the project is performed, if any.) The Subcontractor agrees to
indemnify and hold harmless the
A sample limited indemnification clause Owner, GC and any of their agents
might read as follows: and representatives against all
claims, damages, losses, expenses
The Subcontractor agrees to and attorney fees arising out of or
indemnify and hold harmless the resulting from the performance of
Owner, GC and any of their agents the Subcontractors work, because
and representatives against all of bodily injuries (including deaths)
claims, damages, losses, expenses sustained by any person or persons,
and attorney fees arising out of or or on account of damage to property
resulting from the performance of the including loss of use thereof,
Subcontractors work, because of whether such injuries to persons or
bodily injuries (including deaths) damage to property are due or
sustained by any person or persons, claimed to be due in whole or in part
or on account of damage to property to the negligence of Owner, GC or
including loss of use thereof, but only any of their employees or agents or
to the extent such injuries to persons any other person. It is specifically
or damage to property are due to the understood that this provision shall
fault or negligence of Subcontractor be interpreted as indemnifying
or those for whose acts the Owner, GC and any of their agents
Subcontractor is responsible. and representatives from their own
sole and/or partial negligence.
Broad form indemnification clauses
impose the entire risk of loss on the An intermediate indemnification
subcontractor even when the damage clause is similar to the broad form
was caused entirely by the GC, owner clause, but expressly excludes damages
or other named, indemnified party. The arising from the sole negligence of the
subcontractors indemnification GC, owner or other indemnified party.
Under this type of indemnification

clause, the subcontractor might be should exert strong efforts to persuade
responsible for all of the liability resulting the GC to eliminate the provision
from an incident where the GC or owner wherein you agree to hold harmless the
is 99% at fault. An example of such GC for losses occasioned by events,
clause is set forth below: acts or omissions over which you have
absolutely no control.
The Subcontractor agrees to
indemnify and hold harmless the Try to include specific language limiting
Owner, GC and any of their agents your indemnification of the GC and
and representatives against all others to losses arising out of the
claims, damages, losses, expenses performance of your subcontract that
and attorney fees arising out of or result from negligent acts and omissions
resulting from the performance of by you, your subcontractors, and others
the Subcontractors work, because for whose acts you are responsible.
of bodily injuries (including deaths) Another potential solution is to negotiate
sustained by any person or persons, a cap on your liability to be inserted at
or on account of damage to property the end of the indemnity clause: In no
including loss of use thereof, event shall the Subcontractors liability
whether such injuries to persons or hereunder exceed the sum of
damage to property are due or $ _________.
claimed to be to the negligence of
Owner, GC or any of their Regarding your sub-subcontracts, be
employees or agents or any other sure that you include, either expressly or
person. This clause shall not apply by reference a strong indemnification
where such loss, damage, injury, clause compliant with applicable state
liability, death or claim is the result of law. These lower-tier indemnity clauses
the sole negligence or willful must be at least as broad as the
misconduct of the Owner, GC and indemnification clause in your
any of their agents and subcontract with the GC. At a minimum,
representatives. the identical indemnification language
and requirements set forth in the
By entering into a subcontract with a subcontract between you and the GC
broad form or an intermediate must flow to your lower-tier
indemnification clause, you are agreeing subcontractors. Otherwise, you may be
to hold harmless the GC and others for held responsible to the GC for damages
damages resulting from their own arising out of that lower-tier subcontract
negligence. Barring the application of a that cannot be recovered from your sub-
state anti-indemnity statute, court subcontractor under the terms of that
decisions have held broad form and sub-subcontract.
intermediate clauses to be binding
despite their blatant inequity. CONCLUSION
WHAT CAN YOU DO TO MITIGATE Always review and understand the

THE EFFECTS OF AN indemnification clause presented in any
INDEMNIFICATION CLAUSE? subcontract form as well as the
applicable state law in the jurisdiction
If you are confronted with a proposed where the project is located. Seek
subcontract containing a broad form or outside counsel from insurance brokers
intermediate indemnification clause, and attorneys as needed to ensure your
negotiate a modification to that clause if understanding of what risks you are
possible (See Bulletin CT 9). You accepting. Always try to modify a

subcontract indemnification clause to
reflect a limited type provision as
discussed above so that you do not end
up paying limitless damages resulting
from the fault of others.
The information in this bulletin

should not be construed as legal
advice. Contact your local counsel
for specific legal advice regarding the
information contained in this bulletin.

Bulletin No. SC 3
File: Subcontracts
Bulletin
Comparison of Industry Standard Form
Agreements Between
General Contractor and Subcontractor
INTRODUCTION
Several industry organizations have severely one-sided provisions (for more

developed form agreements for use in information, see CT9). More than likely,
the construction contracting process. utilizing either an A401 or CDS750 form
The most commonly used form will yield terms and conditions more
agreement between prime or general favorable to a subcontractor than a GCs
contractors (GC) and subcontractors is own form.
the AIA A401 (A401). The newer
ConcensusDOCS 750 (CDS750), Both the A401 and the CDS750 are
however, is gaining popularity. endorsed by the MCAA, either directly
or through the MCAAs membership in
The A401 has been in circulation for the Associated Specialty Contractors
decades and underwent significant (ASC). While the forms are similar in
revisions in 2007. The CDS750 was many ways, each contains some
first released in 2007 as part of a large provisions that are better than the other
family of contracting documents from a subcontractors perspective. The
developed by a group of construction discussion below will highlight some of
industry associations and organizations, the similarities and differences between
including the MCAA. CDS750 was then these form subcontracts. Please note,
revised in 2011. Prior to 2007, the however, that when utilizing any form
Associated General Contractors of agreement, the parties should insure it
America (AGC) supported the AGC matches the industry original, or that
Form 650 Construction Subcontract. any modifications are mutually agreed
The new CDS750 is based in large part upon. And, be sure that all the fill-in-
on that prior form. the-blanks are completed by the parties.
While both the CDS750 subcontract and Note:

the A401 subcontract include relatively The abbreviation GC is used
fair allocations of risks, other proprietary throughout this article to reflect the
subcontract forms generated by upstream party with whom the
individual GCs can often be unbalanced Subcontractor is contracting. In the
in favor of the GC and contain some A410, this party is referred to as the
Contractor and in the CDS750, this

party is referred to as the Constructor. Contractor shall promptly report to the
Also, in the CDS750, the Architect any nonconformity discovered
architect/engineer is referred to as by or made known to the Contractor as
Design Professional. a request for information in such form as
the Architect may require. The
COMPARISON OF SPECIFIC Subcontractors obligations to comply
PROVISIONS IN THE AIA A401 with applicable laws, ordinances, codes,
AND CONSENSUSDOCS750 etc. are expressly limited to those
bearing on the performance of the
The Subcontract Documents: Subcontractors work.
A401: The terms and conditions that CDS750: The Subcontractor is

make up the A401 are found in the obligated to provide all work shown in
written Subcontract itself, the Owner/GC the Subcontract Documents or
agreement, any other documents reasonably inferable therefrom. Though
referenced in the Subcontract as making the Subcontractor must examine and
up part of the Subcontract and the AIA compare Owner-furnished Subcontract
A201 general conditions which are also Documents, the Subcontractor is not
incorporated by reference into the A401 liable for any errors or omissions
(to the extent they do not conflict with contained therein, unless the
the Owner/GC agreement). The GC Subcontractor knowingly fails to
must make available copies of all recognize or report a problem to the GC.
Subcontract Documents to the Further, the CDS750 states that the
Subcontractor prior to execution of the Subcontractor is not responsible for
Subcontract. verifying that the Subcontract
Documents are in compliance with
CDS750: The terms and conditions that applicable codes. However, elsewhere,
make up the CDS750 are found in the the CDS750 expressly requires
written Subcontract itself, the Owner/GC Subcontractor to comply with all Laws
agreement, any other documents (defined as applicable laws, ordinances,
referenced therein as making up part of codes, etc.) at its own expense, thereby
the Subcontract. The GC must provide potentially creating a conflict within the
copies of all Subcontract Documents to CDS750.
the Subcontractor prior to execution of
the Subcontract. Progress Payments:
Scope of Work/Code Compliance: A401: The A401 does not contain a

pay-if-paid provision (see CT 3), but
A401: The Subcontractor is obligated to instead, a pay-when-paid provision, as
provide all work described in the follows: The Contractor shall pay the
Subcontract Documents or reasonably Subcontractor each progress payment
inferable therefrom per the A201 no later than seven working days after
incorporated by reference therein. Also, the Contractor receives payment from
the A201 expressly states that the GC the Owner. If the Contractor does
(and therefore the Subcontractor) is not not receive payment for any cause
required to ascertain that the Contract which is not the fault of the
Documents are in accordance with Subcontractor, the Contractor shall pay
applicable laws, statutes, ordinances, the Subcontractor, on demand, a
codes, rules and regulations, or lawful progress payment (emphasis
orders of public authorities, but the supplied). Per the A201(incorporated by
reference into the A401) the Owner has

the express right in its sole discretion to and suitably stored on-site. Also, the
contact subcontractors directly and to Subcontractor can invoice for materials
issue joint checks to the Subcontractor and equipment suitably stored off the
and GC to help insure the Subcontractor site if approved by the GC. No Owner
is timely paid. Additionally, the approval is required.
Subcontractor can contact the architect
to discover information regarding CDS750: The CDS750 permits
amounts requisitioned by the GC on payment for materials and equipment
behalf of the Subcontractors work. suitably stored on-site or off-site,
provided all required supporting
CDS750: Similarly, the CDS750 does documentation is satisfactory to the
not contain a pay-if-paid provision, but Owner and the GC.
does contain a pay-when paid clause:
Progress payments to Subcontractor Retainage:
for satisfactory performance of the
Subcontract Work shall be made no A401: The A401 provides that the GC
later than seven (7) days after receipt by cannot hold a greater retention from the
the Constructor of payment from the Subcontractor than the Owner is
Owner for the Subcontract Work. If the withholding on behalf of the
payment from the Owner for the Subcontractors work. However, unless
Subcontract Work is not received by the modified by the contracting parties,
Constructor, through no fault of the there is nothing in A201 general
Subcontractor, the Constructor will conditions incorporated into the A401 by
make payment to the Subcontractor reference that requires any reduction of
within a reasonable time for the retainage prior to completion of the
Subcontract Work satisfactorily project.
performed.(emphasis supplied). The
phrase a reasonable time is somewhat CDS750: Again, the GC cannot hold a
uncertain when compared to the on greater retention from the Subcontractor
demand language found in the A401. than the Owner is withholding on behalf
Note that the AGC has maintained its of the Subcontractors work provided the
Form 650 for use by a GC wishing to Subcontractors work is satisfactorily
include a more onerous pay-if-paid performed. However the Owner/GC
provision in a form subcontract. Under agreement, CDS200, gives the Owner
the CDS750, upon Subcontractors discretion to release or reduce retention
request, the GC must provide on the work of specific subcontractors,
Subcontractor a copy of the GCs most and the GC must then, in turn, release
current payment application to Owner the same to that Subcontractor.
showing amounts approved or paid by Additionally, the CDS200 states that as
Owner on behalf of the Subcontractors between the Owner and GC, no further
work. Finally, although the CDS200 is retainage will be withheld by Owner
silent regarding the Owner issuing joint once the work is 50% complete,
checks to the GC and Subcontractor, providing a benefit to trade
the CDS750 permits the GC to issue subcontractors who tend to finish ahead
joint checks to the Subcontractor and its of the project as a whole.
lower tier subcontractors and suppliers.
Final Payment:
Payment for Stored Materials:
A401: As with progress payments, if
A401: The Subcontractor is to be paid the GC does not receive timely payment
for materials and equipment delivered from the Owner through no fault of the

Subcontractor or does not pay the not agreed on price, the Subcontractor
Subcontractor within seven days after must nevertheless proceed. Under the
receipt of payment from the Owner, final A201 for Owner-directed changes, upon
payment to the Subcontractor shall be the GCs request, the Architect will
made by GC upon Subcontractors make an interim determination for
demand. purposes of monthly certification for
payment for those costs and certify for
CDS750: The GC must make final payment the amount that the Architect
payment to Subcontractor within seven determines, in the Architects
days after the GC receives the final professional judgment, to be reasonably
payment from the Owner. Under the justified.
CDS750, if the Owner does not make a CDS750: Changes stemming from
timely final payment due to no fault of Owner directives will be processed in
the Subcontractor, the GC must notify accordance with the Owner/GC
the Subcontractor in writing and pay agreement. When a change not
Subcontractor its final payment within a stemming from the Owner is directed by
reasonable time. the GC, but the parties have not agreed
on the change order price, the GC is to
Interest on Late Payments: direct the change by way of an Interim
Directed Change entitling the
A401: Payments due, but unpaid, bear Subcontractor to an interim payment
interest from the date payment was due. equal to 50% of the Subcontractors
When the Owner fails to make a timely estimate of the change. Similarly, the
payment, the GC is to pay the CDS200 states that for Owner-directed
Subcontractor upon Subcontractors changes, if the Owner and the GC
demand, and interest on unpaid cannot agree on the change order price,
amounts due to the Subcontractor then the Owner must pay the GC 50%
should begin to accrue once of the GCs estimated cost. The
Subcontractor demands the same. CDS750 states that the Subcontractor is
not obligated to perform any extra work
CDS750: For late Owner payments, the impacting its cost or time without first
GC is obligated to pay the receiving from the GC a change order or
Subcontractor only the Subcontractors a written instruction that complies with
proportionate share of interest the GC the Subcontract.
actually receives from the Owner.
However, if non-payment is due to the Schedule/ Delay Damages:
GCs fault, interest begins to accrue on
the date payment was due but unpaid. A401: Time is of the essence in this
form, making delayed completion a
Changes in the Work: material breach of the Subcontract. The
A401 does not contain a no damage for
A401: The GC may direct the delay clause (see CT 9) and, therefore,
Subcontractor to make changes within the Subcontractor has a cause for
the general scope of the Subcontract, damages if the GC or Owner delays or
and the Subcontract sum and interferes with its work. Requests for
performance time will be adjusted extensions of time must be made
accordingly. Prior to commencing the promptly to the GC in accordance with
changed work, the Subcontractor must the Subcontract Documents. Liquidated
submit a written claim for price and time damages set forth in the Subcontract
adjustments. When the GC directs a shall be assessed against the
change in writing, but the parties have Subcontractor only to the extent caused

by the Subcontractor or any person or CDS750: The CDS750 contains
entity for whose acts the Subcontractor warranty exclusions similar to those
may be liable, and in no case for delays expressed in the A401. The
or causes arising outside the scope of Subcontractors warranty under the
this Subcontract. The A401 does not CDS750 runs from substantial
address the Owners liquidated completion of the Subcontractors work,
damages which may be assessed though there seems conflicting verbiage
against the GC. between the warranty provision and the
substantial completion provision.
CDS750: Similarly, time is of the
essence under the CDS750, and it does Indemnification:
not contain a no damage for delay
clause. The CDS750 contains a A401: Under the A401, the
provision stating that the Subcontractor Subcontractor agrees to indemnify and
is entitled to an equitable adjustment in hold harmless the Owner, GC, architect
both Subcontract amount and time for and architects consultants from
GC-directed changes in the time, order damages for bodily injury or property
or priority in which the Subcontractors damage (other than to the work itself)
work is to be performed to the extent the resulting from its performance, but only
same increase applies to the to the extent the damage was caused by
Subcontractors time and/or costs. If negligent acts or omissions by the
liquidated or other delay damages are Subcontractor or those for whose acts it
assessed against the GC, the GC will is liable.
assess the same against the
Subcontractor to the proportionate CDS750: The CDS750 indemnity
extent of the Subcontractors obligation is also one of comparative
responsibility for the delay. The GC is negligence making the Subcontractor
also entitled to recover from the responsible only to the extent the
Subcontractor other actual damages damage was caused by negligent acts
that the GC sustains as a result of the or omissions by the Subcontractor or
Subcontractors delay. anyone for whose acts the
Subcontractor is responsible.
Warranty:
GC Bonds:
A401: The Subcontractor warrants its
work to be free from defects (except for A401: The A401 requires the GC to
those inherent in the quality of the furnish on request, a copy, or permit a
Work), of good quality, new (unless the copy be made, of any GC bond covering
Subcontract Documents require or payment of obligations arising under the
permit otherwise) and in conformance Subcontract.
with the Subcontract Documents.
Excluded from the Subcontractors CDS750: The CDS750 requires the GC
warranty are damages or defects or Owner to furnish on request a copy of
caused by abuse, alterations to the any bond covering the GCs payment of
Work not executed by the obligations arising under the
Subcontractor, improper or insufficient Subcontract upon the Subcontractors
maintenance, improper operation, or written request.
normal wear and tear under normal
usage. As per the A201, the warranty
runs for one year from substantial
completion of the project.

Dispute Resolution: Consequential Damages:
A401: At the time of subcontracting, the A401: The GC and the Subcontractor
GC and Subcontractor select the mutually waive claims against each
method of dispute resolution they other for consequential damages arising
choose to utilize by checking the out of the Subcontract.
appropriate box in the form agreement
(i.e. litigation, arbitration or other CDS750: The GC and the
mutually acceptable method). If nothing Subcontractor mutually waive their
is selected, litigation is the default rights to recover consequential
procedure. However, as a condition damages against each other, but this is
precedent to the selected binding subject to certain express exceptions.
dispute resolution procedure, the parties The GC reserves its rights to pass down
must first submit to a non-binding to the Subcontractor: (1) liquidated,
mediation in accordance with the consequential or other damages that the
American Arbitration Associations Owner is entitled to recover from the
Construction Industry Mediation Rules. GC; (2) damages covered by insurance
The cost of such mediation is shared. required by the Subcontract. Also, the
Subcontractor must obtain similar
CDS750: If a dispute between the waivers from its lower-tier
Subcontractor and the GC involves the subcontractors.
Owner, the CDS750 mandates that the
dispute will be resolved in the same Temporary Facilities:
tribunal and forum as disputes between
the Owner and the GC. For disputes not A401: The GC is to furnish and make
involving the Owner, the GC and available at no cost to the Subcontractor
Subcontractor can select at the time of all of the GCs temporary facilities,
subcontracting either arbitration or equipment and services, except as
litigation. However, before proceeding to specifically noted in the Subcontract.
litigation or arbitration as selected, the
CDS750 dictates that the GC and CDS750: Allocation of the
Subcontractor should first undertake responsibilities for temporary services is
several non-binding efforts to resolve to be addressed by way of a separate
the dispute, i.e. (1) discussions between exhibit.
authorized representatives of the GC
and Subcontractor, then, if the issue is Information Regarding Owners
still not resolved, (2) discussions Ability to Pay:
between senior executives from each
party, then, finally (3) mediation in A401: Even without the Subcontractors
accordance with the American request, the GC must make available to
Arbitration Associations Construction the Subcontractor information that the
Industry Mediation Rules, unless GC has received from the Owner that
otherwise agreed. The CDS750 affects the Subcontractor. Although
contains detailed timing for all of these there is no obligation under the A401 for
steps. Each party bears its own cost for the Owner to provide financial
the non-binding steps. However, once information to the Subcontractor, the
the dispute reaches binding litigation or A201 (incorporated by reference into the
arbitration, the non-prevailing party pays A401) does permit the GC to obtain this
all costs and attorneys fees as information from the Owner, and the
determined by the adjudicator. Owner must provide the same as a

condition precedent of the GCs of payments actually received.
obligation to commence its A review of the A401 and the CDS750
performance. will quickly reveal that both agreements
will likely include a more reasonable
CDS750: The CDS750 states that, allocation of risk between the
unless prohibited by the Owner/GC Subcontractor and the GC than forms
agreement, upon the Subcontractors prepared by or on behalf of the GC.
request, the GC shall provide
information it has regarding the Owners CONCLUSION
ability to pay for the work. Under the
2011 updates to the CDS750, unless Although the above discussion touches
prohibited by the Owner/GC agreement, on many of the provisions contained in
the GC must automatically share with these form agreements, when using
the Subcontractor information it receives either of these forms, the Subcontractor
regarding any material changes in the should be aware of the full content of
Owner's financial ability to pay. If the GC each, in particular, the strict timing and
does not provide such information to the notice provisions. Insurance provisions
Subcontractor, the Subcontractor may should be reviewed by the
then request the financial evidence Subcontractors broker or risk manager
directly from the Owner or the Owners to insure compliance.
lender. The CDS200 permits the GC to
obtain financial information from the
Owner and, as provided in the A201, the
Owner must provide evidence of
financing as a condition precedent of the
GCs obligation to commence its
performance.
Liens:
A401: The A401 requires the GC to

provide the Subcontractor, upon written
request, information necessary and
relevant for the Subcontractor to
evaluate, give notice of or enforce
mechanics lien rights. There is no
express requirement in the A401 that
the Subcontractor provide monthly
partial lien waivers.
CDS750: The CDS750 allows the

Subcontractor to request from the
Owner through the GC information
necessary to preserve lien rights. The
CDS750 does require the Subcontractor
to provide claim or lien waivers as a
prerequisite to payment, but the
Subcontract prohibits the GC from
requiring unconditional waivers before
payment is received by the
Subcontractor or for amounts in excess

Bulletin No. TX 1
File: Taxes
Should You Elect Subchapter S Treatment?

Prepared by Ernst & Young LLP
INTRODUCTION ADVANTAGES
There are several advantages to making

In prior years, top individual tax rates
the Subchapter S election.
were lower than top corporate tax rates. This
differential in rates caused many to reconsider A significant advantage is that all income
the feasibility of having their corporations elect generated by the corporation is taxed only
to be taxed under Subchapter S, under which once, in the year that it is earned, to the share-
the corporations net income is taxed to its holders. A regular (Subchapter C) corpora-
shareholders at their rates (and in proportion tion pays tax on its income when it is earned,
to their share holdings), and is not taxed again and the shareholders pay a second tax when
to the shareholders when distributed to them. it is distributed as dividends, or as a liquidat-
ing distribution.
Currently, top individual rates are A second advantage is that losses of a
39.6%, while the top corporate rate is 35%. Subchapter S-corporation also pass through,
This shift in rates has caused S-corporations and may be claimed by its shareholders (sub-
to consider terminating their S-status and reject to certain limitations on basis, at-risk
vert back to C-corporation status. This bul- amounts and passive activity rules). C-cor-
letin will explore the advantages and poration losses can only be used to offset fu-
disadvantages of electing Subchapter S ture earnings of the corporation.
treatment, the qualifications to be met, and
the rules for making the election if you choose If income has been taxed to the
to do so. Subchapter S shareholders and was not dis-
1
Taxes
tributed in the year earned, it can be distrib- however, the taxable years continue to run.
uted tax-free in a later year. Unless the corporation goes back to
Subchapter C status, the NOLs could expire
An S-corporation is also less likely to be unused.
challenged on the issue of unreasonable com-
pensation paid to its employee/shareholders. The built-in gains tax is a corporate level
tax that applies to certain S-corporations fol-
S-corporations are not subject to lowing their conversion from C-corporation
Alternative Minimum Tax (AMT) or accumu- status.This tax may apply to corporations upon
lated earnings tax, where C-corporations are the sale of assets that had appreciated value
subject to both. at the time of the S election. The effect of this
tax is to double tax the built-in gain. It does
Furthermore, the basis in stock of the not apply to corporations that have always op-
shareholders is increased by the amount of erated as S-corporations or to assets held
income reported by the S-corporation, net of more than 10 years following the S election.
any distributions. This may decrease the
amount of gain realized upon subsequent sale Another disadvantage is that fringe ben-
of the stock. efits, such as accident and health plan ex-
penses, premiums for group term life
insurance and death benefits, for more than
DISADVANTAGES 2 percent of the stockholders may not be de-
ductible and are generally required to be in-
There are also disadvantages and po- cluded in the shareholders income as
tential pitfalls to the Subchapter S election, of compensation.
which you should be aware.
The principal disadvantage is that the HOW TO ELECT

corporations income is taxed to the share- To elect Subchapter S status, a corpo-
holders even if no cash is distributed, which ration must meet certain criteria for eligibil-
may leave the shareholder with insufficient ity, and must file a timely Form 2553 with the
cash to pay his taxes. IRS. The Subchapter S status is terminated
A second disadvantage is that most S- on the date it ceases to meet the eligibility
corporations must be or become calendar requirements,1 or it can be revoked by its
shareholders as of the first day of a taxable
year taxpayers. This eliminates some plan-
year.
ning possibilities of having dissimilar year-
ends of the corporation and its shareholders.
Criteria for Eligibility
One pitfall of the Subchapter S election
To be eligible to elect Subchapter S sta-
is that a corporation with unused net operat-
tus,2 a corporation:
ing losses (NOLs) from its operations prior
to the Subchapter S election has a limited 1. May have no more than 35 stockholders
number of taxable years to which those NOLs all of whom must be individuals (other
can be carried forward.It cannot use the NOLs than nonresident aliens) or estates, or
against its income in Subchapter S years; trusts described in Code Section 1361-
2 TX 1
Taxes
(c)(2). A husband and wife (and their es- before March 15 of that year, or if made later
tates) are counted as one stockholder for than March 15, as of January 1 of the next
this purpose,3 and an estate includes an succeeding year.6
estate in bankruptcy;4
An election will be terminated as of the
2. May have no more than one class of stock date the corporation ceases to be eligible
outstanding; under Code Section 1361.
3. May not be a member of an affiliated If a revocation or termination is effective
group, as defined in Code Section 1504, other than on the first day of a taxable year,
a financial institution, an insurance com- the corporation will have a split year, in which
pany, a DISC, or a former DISC; it will file two short year returns, one for the
Subchapter S period and another, as a regu-
4. Must be on a calendar year for tax pur-
lar corporation, for the remainder of the year.
poses (or get IRS approval to a different
business year); and
SUMMARY
5. Must not have more than 25 percent of
its gross receipts from passive income if The Subchapter S election is a very use-
it has accumulated earnings from prior ful tax planning option under some circum-
C years. stances. Under the current rate structure, the
decision to elect and/or remain an S-corp re-
Election Form quires a thorough analysis.
If a corporation is eligible, its stockhold- As with any tax election, however, all of
ers and officers may elect Subchapter S sta- the consequences of the election should be
tus by signing and filing a Form 2553. The considered. Moreover, the corporations ac-
election form must be signed by all of the tivities should be carefully monitored while it
stockholders, and by an officer on behalf of is a Subchapter S corporation, to be sure that
the corporation. The form should include the it does not become ineligible, and that con-
tax identification numbers, addresses and rel- tinued use of Subchapter S remains benefi-
ative shares of the taxpayers. cial.
The election is effective as of the first of
January of a year if it is filed on or before March
15 of that year, if the election is made retroac- NOTES:
tive and the corporation was eligible from 1. Internal Revenue Code (IRC)
January 1; otherwise, the election goes into 1362(d)(2)(A)
effect as of the next succeeding January 1.5
2. IRC 1361
An election can be revoked with the con-
sent of stockholders holding a majority of the 3. IRC 1361(c)(1)
stock. The revocation may provide for a spe- 4. IRC 1361(c)(3)
cific prospective revocation date. If no date is
5. IRC 1362(b)
specified, the revocation will be effective for
January 1 of a year if the revocation is made 6. IRC 1362(b)
TX 1 3
Bulletin No. TX 2
File: Taxes
Compensation Planning for Closely Held

Corporations
INTRODUCTION on any trade or business, including a reason-

able allowance for salaries or other com-
We all know the difficulties involved in pensation for personal services actually ren-
building and maintaining a successful, effi- dered. Section 162 thus allows corparations
cient, and competent organization. The suc- to reduce their taxable income by compensa-
cess of your company can, no doubt, be tion payments for services actually rendered.
attributed primarily to your individual efforts If an employee is also a shareholder, the cor-
as executives, efforts for which you are enti- poration would prefer to pay out its income in
tled to appropriate financial rewards. Unfor- the form of compensation, for which it may
tunately, many active business owners have claim a deduction, than as a nondeductible
become targets of attack on the issue of dividend payment.
whether their compensation is reasonable in
amount. Unreasonable or excessive com- The question of what constitutes rea-
pensation can be recharacterized by the IRS sonable compensation for the stockholder ex-
as a disguised dividend.The issue of whether ecutive in a closely held corporation is a
a corporate payment is compensation or a crucial question for the tax planner, who
disguised dividend has become one of the should take all steps necessary to prepare
most litigated tax questions. the corporation for the possibility of challenge
by the IRS. In this bulletin, we will discuss the
Section 162 of the Internal Revenue factors used by the IRS and the courts in de-
Code of 1954 provides that there shall be al- termining whether compensation is reason-
lowed as a deduction all the ordinary and nec- able, and provide some planning ideas to
essary expenses . . . incurred . . . in carrying avoid such challenges.
1
Taxes
FACTORS IN MEASURING REASONABLE idend payment. In Rev. Rul. 79-8, 1979-1 C.B.
COMPENSATION 97, the IRS states that the failure to pay divi-
dends is a very significant factor in this de-
In dealing with the question of de-
termination, but goes on to hold that a
ductibility under Code Section 162, primary
deduction for compensation will not be denied
emphasis has been placed on the question of
solely on that basis.
whether or not the amounts paid were rea-
sonable. There is no specific formula to be 3. Salary of Comparable Employees. If
used in determining whether a particular the compensation under review involves a
salary is reasonable or unreasonable; in- shareholder/employee, the treatment of its
stead, courts have examined the factual cir- nonshareholder or unrelated employees is
cumstances relating to the corporate officer significant. If a comparable employee re-
and his salary and decided each issue on the ceives substantially less than a share-
basis of the facts involved. holder/employee, the presumption is that the
The Internal Revenue Service and the excess is a dividend payment. On the other
courts have generally looked to the following hand, generous salary payments to all em-
factors in determining the reasonableness of ployees may indicate that the salary of a
compensation: shareholder/employee is appropriate.
1. Salary History of the Individual. The 4. Salary Scale of the Industry.

principal factor that draws the attention of an Probably the single most significant factor in
auditing IRS agent to a reasonable compen- a reasonable compensation case is a com-
sation issue is a sudden increase in the salary parison with compensation paid by other
of an individual, particularly in a year in which companies in the industry.2 An employer pre-
the corporation itself has suddenly prospered. sents a particularly strong case if he can show
If an employees worth to the business has that a competitor similarly situated pays as
been measured in terms of a given salary dur- much or more in salary to employees for sim-
ing prior periods, the IRS and the courts will ilar services.
want some explanation for any dramatic The MCAA Statistical Survey Report
change. At the same time, the fact that an of- provides collective data (reported anony-
ficer/shareholder has received a very small mously by MCAA members) on officers com-
salary in prior years when the business was pensation and may be extremely useful in this
growing does not mean that the salary must regard.
always remain small.1 For this reason, salary
5. Qualifications of Employees. If it can
adjustments should be made gradually and in
be established that the employee in question
accordance with contemporaneously docu-
is very highly qualified, a salary higher than
mented justification.
normal may be justified as reasonable. The
2. Dividend History of the Corporation. appropriate evidence for such a case would
Although the principal issue is whether a be proof that the experience, training, or skill
salary level is reasonable, a corporation that of the particular employee, or the extra efforts
generates significant profits and fails to pay he expends, justifies paying a salary at a
any significant dividends provides strong ev- higher level than might otherwise be ex-
idence that the salary is, at least in part, a div- pected.3
2 TX 2
Taxes
6. Contribution to the Success of the ument in the minutes of the corporation that
Business. In some situations, the services of an employees services had gone unre-
a particular key employee may be indispens- warded; or even better, that an earlier salary
able to the continued prosperity of a closely- wasnt paid, in order to justify a later deduc-
held business. If it can be demonstrated that tion when payment can be made.
the employee built up the business or was re-
sponsible for its growth or profits for reasons
other than his general employment services, COMPENSATION PLANNING
a larger than usual salary would be justifiable.4
Taking into account the factors outlined
7. Formality and Timing of above, it should not be difficult to bolster your
Adjustments. Compensation arrangements argument that compensation paid to an em-
for the principal officers of a corporation ployee/shareholder is reasonable in amount
should be considered and approved by the and should not be recharacterized as a divi-
Board of Directors early in the year and mem- dend.
oralized in formal, recorded resolutions.In the
case of a closely-held corporation, creation In setting salaries, use factors other
of formal board minutes is more easily con- than ownership shares of the business to
trolled by the parties, and is, therefore, of fix compensation. If salaries are dispropor-
lesser weight. However, the absence of any tionate to shareholdings, it is more difficult
formal corporate approval of salary arrange- to recharacterize any excess payments as
ments may be grounds for disallowing com- dividends.
pensation deductions. In particular, if A corporation that is profitable should
compensation is determined by use of a for- allow for profits and be prepared to pay taxes
mula, the formula should be memoralized in on its income; avoiding the impulse to pay out
the minutes prior to the time that services are all profits in the form of compensation.
rendered; otherwise, it may be subject to chal- Corporations should also pay dividends, at
lenge as having been created merely for the least in years when they are profitable, unless
purpose of soaking up the profits of the there are other reasons for accumulating
business.5 cash, such as expansion plans, which should
The timing of the corporate action is also be documented in the minutes.
important. If compensation is determined at It is always preferable to determine
or near the close of the year, at a time when salaries early in the year before the prof-
large profits are evident, the minutes will be itability of the corporation can have been de-
given much less significance. termined and to use formula clauses if
performance bonuses are reasonably neces-
8. Compensation for Past Services. sary to create incentives for employees. A
Compensation paid in a current year for prior bonus declared late in the year after the cor-
services rendered by the employee may be poration has determined its profits is easily
deducted even though that amount, when identified as a disguised dividend.
added to compensation for the current year,
exceeds a reasonable allowance for current Salary amounts, and the reasons used
services.6 Once again, it is important to doc- for setting them, should be spelled out in the
TX 2 3
Taxes
minutes of the directors meetings; prepared NOTES:

contemporaneously with those meetings.
Finally, electing Subchapter S status for the 1. Austin State Bank, 57 T.C. 180 (1971)
corporation may help to avoid questions of 2. Treas. Regs. Section 1.162-7(b)(3)
reasonable compensation because all the 3. Kennedy, Jr. v. Comr., 671 F.2d 167,
earnings of the corporation will be taxed di- 176 (1982)
rectly to the shareholders.
4. Elliotts, Inc. v. Comr., 716 F.2d, 1241,
With a little help in planning, the unrea- 1245 (1983)
sonable compensation issue can be avoided 5. Joseph Garrison, 52 T.C. 281 (1969)
altogether, or if it arises, can be substantially 6. Lucas v. OxFibre Brush Co., 281 U.S.
mitigated. 115 (1930)
4 TX 2
Bulletin No. TX 3
File: Taxes
Bulletin
How to Set Up Tax-Wise Corporate Minutes

INTRODUCTION seeking. And if you follow through by ex-
ecuting your transactio ns according to
A key factor in the tax planning the prescription laid do wn in the min-
of every corporation and its sh are- utes, you should have no tax problems.
holder/officers should be the corpo rate
minutes. If t hey are properly drafted to Of course, to have minutes, you
reflect actual intentions of the corporate must have a meeting. An alternative
directors and shareholders, the minutes available in most stat es is to adopt
can be, an d frequently have been, the resolutions by unanimous written con-
factor that tips the scales in the tax- sent of the directors; these are just as
payers favor during d isputes with the binding as resolution s adopted at a
Internal Revenue Service. meeting. Most important, howeve r, is
that the directors consid er and ratify the
Unfortunately, many closely held corporations activities and document
corporations act in a very informal their decisions in writing. At the very
manner. These corpora tions simply fail least, to accomplish th is purpose, you
to keep min utes or merely keep incom- should hold an ann ual meeting of
plete minutes of eve n an impo rtant directors with your attorney and your
corporate transaction. As a result, while accountant just before your fiscal year
many tax dollars have been saved end.
because the minutes reflected precisely
what was intended (and what in fact was IRS WARNINGS
done), many tax dollars have been lost
because the corporation did no t have If you say one thing in the min-
precise, contemporaneous corp orate utes and then do exactly the opposite,
minutes to show exactly what motivated the minutes will not save you. Further-
the corporate move. more, if you are too careless about
minutes, they may well hang you. In
WHAT TO DO effect, you may have talked yourself into
a deficiency.
Do not let it happen to you. Your
corporate minutes are within your con- Here are so me of the a reas that
trol. You can exercise that control to are particularly suscept ible to attack by
insure that they spell out your plans, the Internal Re venue Service. Care in
decisions and intentions so that they will drafting corporate minutes can pay val-
tend to pro ve the tax result you are uable dividends in the form of ta x sav-

ings if the Internal Revenue Service Corporate Dividends: If a stock
should challenge your transaction. dividend is declared, it is important to
specify that shareholde rs did not have
Executive Compensation: Is it the option t o receive cash; if they did,
reasonable? The minutes can justif y a the entire dividend is taxable. In any
raise by showing that prior compensa- case, it is important to note the record
tion was inadequate, or that competitors and payment date of the divid end,
would pay as much fo r the execu tives particularly if the p ayment date is
services, or that the services or skills of delayed until the following January.
the executive in quest ion were e xtra-
ordinary or of specia l value to the Charitable Contributions: A
corporation. It is also a good idea to corporation can take a deduction for
indicate if consideration is being given charitable contributions approved by its
for past services or re duced compen- board during the taxa ble year, if the
sation in pr ior years, when profits were payment is made within 2-1/2 months of
lean. Finally, if each ye ars salaries are the next year. The minutes should
fixed before the start of the new year, it specify when the contribution was ap-
is more difficult f or the Service to proved, to justify the earlier deduction.
characterize them as nondeductible
dividends. Reinvestment of Involuntary
Conversion Proceeds: Insurance pro-
Accumulation of Earnings: Are ceeds or condemnation awards are
they unreasonable? T he minutes can nontaxable if reinve sted in similar
show that the accu mulations were business property within two years. The
required for expansion, for working minutes can reflect the reinvestmen t of
capital, for additional bonding, or to the proceeds to augment the com-
carry the corporation throug h an panys reporting on its tax returns.
expected slow business period. The
minutes should reco rd the precise Wage Continuation and Med-
nature of the plans for which the ical Expense Reimbursement: To
retained earnings are required and not justify a deduction for wage continuation
just vague references t o future plans. payments (sick pay) a nd medical ex-
When the expansion is under-taken, the pense reimbursement without taxation
minutes should refer to the use of to the employees, the minutes must
previously accumulated funds for this show adoption of a written plan meeting
purpose. It is also p ossible to retain IRS requirements.
funds in anticipation of the compa nys
liability for deferred compensation Profit Sharing and Pension
arrangements, if any. Plans: The minutes must show the
adoption of any qualified d eferred
Corporate Reshuffles: Tax-free compensation plans, such as profit
or taxable? The minut es can substan- sharing or pension plan s, to assure the
tiate the existence of a business pur- deduction of company contributions.
pose by showing that the reorganization Additionally, if you ha ve a profit sharing
was undertaken to eliminate intercorp- plan, each years con tribution and its
orate obligations or to simplify the amount should be approved by the
corporate structure. I n addition, the board before year-end and reflected in
minutes can set forth th e details of the the minutes.
plan of reorganization, t hus establishing
that one existed.

CONCLUSION
There are many other situation s

where well-drawn minut es can be h elp-
ful. For ex ample, they can show the
abandonment of property, or where and
when title is intended to pass. Furt her-
more, they are particularly useful in
justifying a partial liquidation, or esta-
blishing the arms-length nature of
transactions between related persons.
Experience shows that delay is

the single most important factor that
stands in the way of adequate corporate
records. Once a corporate m ove is
agreed upon, the necessary background
statement and the r esolution itself
should be prepared immediately. The
language, of course, should square
precisely with the business and tax
result you want to ach ieve. If in d oubt,
call your attorney or accountant an d ask
them how best to d escribe the intended
action.
This bulletin is not intended to

be legal advice. A person should
seek local counsel for specific in-
formation regarding the information
found in this bulletin.

Bulletin No. TX 4
File: Taxes
Meeting the Requirements for

Travel and Entertainment Deductions
INTRODUCTION 3. The business purpose of the expense or

other item
For many years, deductions for travel and
entertainment expenses have been a battle 4. The business relationship to the taxpayer
ground between the IRS and taxpayers. The of any other persons entertained.1
tax law has tightened the substantiation re-
quirements and reduced the deductibility of A business entertainment expenditure is
some expenses. deductible only if it is directly related to, or as-
sociated with, the active conduct of the tax-
To help both you and your company to payers trade or business. To meet the
understand the rules, here is a quick review directly-related test, the taxpayer must have
of the current rules. more than a general expectation of deriving
income, or some other specific business ben-
MEALS AND ENTERTAINMENT efit, at some indefinite future time. In addition,
the taxpayer must engage in the active con-
Expenses for meals and entertainment duct of business with the person being enter-
(including meals and lodging while away from tained. Entertaining customers at a nightclub,
home) are deductible only if the taxpayer can ball game, theater, or show is deductible if it
substantiate them by adequate records or suf- meets the associated with test. To do so, it
ficient evidence supporting the taxpayers must directly precede or follow a bona fide and
statement with the following information: substantial business discussion.
1. The amount of the expense or item A taxpayer cannot deduct expenses for
2. The time and place of the meal or enter- meals and entertainment to the extent they
tainment are lavish or extravagant. An expense is not
1
Taxes
considered lavish or extravagant if it is rea- 1. The full value of meal or entertainment

sonable based on the facts and circum- expense is either included as compen-
stances. Expenses will not be disallowed sation to the recipient, or is tax-free under
merely because they take place at deluxe the fringe benefit rules.
restaurants, hotels, night clubs, or resorts.
2. An employer pays for traditional recre-
For taxable years beginning after ational activities, such as a yearly outing
December 31, 1993, new rules apply that re- or picnic for employees and their
duce the amount of deduction available for spouses.
meal and entertainment expenses. 3. Samples or promotional activities made
A meal expense is only deductible if there available to the general public.
is a substantial and bona fide business dis- 4. Expenses incurred for attending a ban-
cussion relating to the taxpayers active trade quet at which a speaker is present and
or business during, directly preceding or di- most of the guests are from out of town.
rectly following the meal.2 The only time that
the business discussion requirement does There is an additional limitation in the
not apply is in the case of an individual who case of luxury sky boxes at arenas or stadi-
eats alone while away from home overnight in ums.4 If a sky box is leased for more than one
the pursuit of trade or business. event, the amount deductible is reduced to the
face value of a non-luxury box seat ticket mul-
Under the new rules, a taxpayer can tiplied by the number of seats in the sky box.
deduct only 50 percent of the otherwise al- This amount is then subject to the 50 percent
lowable meal or other entertainment ex- limit. Additionally, any separately stated
penses.3 For example, if an individual spends charges for food or beverages are also sub-
$100 for a business meal that would be fully ject to the 50 percent limit.
deductible under the substantiation require-
Finally, as a general rule, no business de-
ments, the maximum allowable deduction is
duction is permitted for club dues paid or in-
$50. Expenses for taxes and tips are also sub-
curred in tax years beginning after December
ject to the 50 percent limit. However, trans-
31, 1993.This denial extends to business, so-
portation expenses to and from a business
cial, athletic, luncheon, sporting, airline, and
meal that are otherwise deductible are not
hotel clubs.5
subject to the 50 percent limit.
The 50 percent limit applies to costs of a TRAVEL
room that a taxpayer rents for a dinner or cock-
tail party, tickets to sporting events, and costs A deduction is allowed for ordinary and
of parking at an arena or stadium to attend an necessary travel expenses incurred by a tax-
entertainment event. Meals furnished by an payer while away from home in the conduct of
employer to employees on the employers a trade or business.6 Taxpayers are not away
premises are also subject to this 50 percent from home unless their duties require them to
limitation. be away from the general area of their tax
homes for a period substantially longer than
There are exceptions to the 50 percent an ordinary workday, and it is reasonable for
limitation; some of these exceptions include: them to need to sleep or rest. In some cases,
2 TX 4
Taxes
then, travel expenses may be deductible even current rules, unless the spouse is a bona fide
though the taxpayer is away from home for a employee of the company, there is little op-
period of less than 24 hours. portunity for deducting travel costs.
The following expenses paid or incurred
while traveling away from home ordinarily are CONCLUSION
deductible: transportation, lodging, tele-
phone, meals (subject to the 50% limitation), Under the current rules, it becomes in-
and laundry. The substantiation rules for creasingly important to maintain records to
travel expenses are similar to those dis- substantiate the trade or business deduc-
cussed earlier for meals and entertainment tions. Such deductions have always been a
expenses. prime focus of auditing by IRS agents. It is far
better to take the time to maintain adequate
records then to have to learn the hard way.
SPOUSAL TRAVEL EXPENSES
The 50 percent limitation on deductions
Both the Internal Revenue Service and for certain meal and entertainment expenses
the courts have been very restrictive in al- should not discourage anyone from incurring
lowing the deduction of expenses attributable expenses legitimately related to increasing
to the attendance of spouses at conventions their business. At the same time, it is now less
and meetings. The rules are even tighter for advantageous to charge it to the company
travel expenses incurred after December 31, under the current rules.
1993. The following three conditions must be
met for spousal travel expenses to be de- NOTES:
ductible: (1) the spouse must also be an em-
ployee of the company; (2) the travel of the 1. Internal Revenue Code (IRC) 274(d)
spouse must be for a bona fide business
purpose; and (3) such expenses incurred 2. Treas. Regs. 1.274-2(d)
would otherwise be deductible by the spouse.7 3. IRC 274(i)(2)
Under prior law, only the second condi- 5. IRC 274(a)(3)
tion, bona fide business purpose, was re-
6. IRC 162(a)(2)
quired. This provided some opportunity for
deducting the spousestravel costs. Under the 7. IRC 274(m)(3)
TX 4 3
Bulletin No. TX 5
File: Taxes
Bulletin
ESOP (Employee Stock Ownership Plan)
INTRODUCTION An ESOP is exempt from the re-
quirement that the trustees strive for a
The Employee Stock Ownership fair return on investments, at least to
Plan (ESOP) is an inn ovative planning the extent that it acquir es employer sec-
device allowing for tax-favored transfers urities.3
of stock ownership in a closely held bus-
B. Leveraged ESOPs. A lever-
iness, which received substantia l statu-
aged ESOP is one that is empowered
tory blessing under ERISA. In spite of
to borrow from third parties to purchase
numerous tax law cha nges since then,
employer securities. T he loan ma y be
most of which have cut tax benefits gen-
(and usually is) guaranteed by the cor-
erally, the ESOP retains nearly all of its
porate sponsor and is secured by the
advantages and has become even more
purchased securities, contributions, and
beneficial in some cases.
plan earnings; it canno t be a liability of
the ESOP itself.
WHAT IS AN ESOP?
PLANNING OPPORTUNITIES
A. ESOP Requirements. An
ESOP is a defined cont ribution deferred
A. Deductions for Employer
compensation plan which is qualified to
Contributions. As in the case of defined
hold stock in its corporate sponsor. Gen-
contribution plans, generally an employ-
erally, an ESOP is a stock bonus plan,
er may contribute to an ESOP and claim
except that (1) contributions are not nec-
as a dedu ction up to 25 percent o f the
essarily dependent on the employers
compensation paid or accrued by par-
profits, and (2) benefits are distributable
ticipants in the plan.4
in the stock of the employer.1
In the case of an ESOP, ho w-
Investments in an E SOP are
ever, the contribution can be made in
made largely or exclusively in emp loyer
the form of employer securitie s. Thus,
securities, which is common stock of
the employer can ga in a tax dedu ction
the plan sponsor that: (1) are registered
without expending casha subst antial
and publicly traded on a recognized ex-
benefit to any growing company.
change; (2) have voting and divid end
rights no le ss favorable than any other
B. Providing a Market fo r Insider
class of common stock outstanding, or
Stock. Stock in a close ly-held business
(3) is noncallable preferred stock that is
provides control over operations a nd an
convertible at any time into common
opportunity to share in the profits gen-
stock having such rights.2
erated. However, it is extremel y difficult
to sell to an outsider who does not

understand the business. Whe n a courage such sales.
stockholder seeks to wit hdraw from the
business, the most logical purchasers of For example, no gain is recog-
his stock are the corporation itself, other nized if a taxpayer sells employer secur-
stockholders, or key employees who de- ities to an ESOP if (1) after the sa le, the
serve to be rewarded (or need an incen- ESOP owns at lea st 30 percent of the
tive to st ay). Sometimes, however, total outstanding stock of the company;
these candidates do not have the f unds and (2) within one year after the sale (or
available to purchase the stock; more- three months prior to the sale), the seller
over, the funds they wo uld use for pay- purchases replacement securities
ment are af ter-tax dollars (income after (which can include publicly traded
federal and state taxes have been paid). stocks and bonds) of equal value. 7 The
gain is def erred until the replacement
The ESOP is a better purchase securities are sold or may be unrec og-
candidate because it uses funds that nized entirely if they are held until d eath
were deductible when contributed, but when their basis is stepped up. The
were not reduced by any taxes to the ESOP must hold the purchased employ-
ESOP. Thus, there are more fu nds er securities for three y ears to avoid an
available to make the purchase. More- excise tax.8
over, the st ock acquired by the ESOP
will be allo cated principally to those E. Create Employee I ncentives.
employees with the hig hest salaries and Employees who are constantly inter-
greatest senioritygenerally the same ested in getting a piece of the pie can
key employees you wished to be nefit be satisfied in knowing that, a s plan
anyway. participants, they are truly sharing in the
future growth of the company; more-
C. Provides Financing on a over, upon retirement, they ma y be paid
Deductible Basis. If an ESOP borrows to out in com pany stock and can r etain
purchase employer securities, it pays their interest.
back the loan from it s earnings and
company contributions. To the e xtent Since those with the highest
that principal payments on the loan are compensation and greatest seniority
made with company contributions, the benefit the most, empl oyees should be
company has finan ced the sale o f its encouraged to remain l oyal to the em-
stock on a deductible basis. ployer and to strive for incre asing
responsibilityall of which benef it the
To the exte nt dividends on em- companys operations.
ployer securities held b y the ESOP are
used to make ESOP loan payments, DISADVANTAGES AND CONCERNS
they will also be deductible to the em-
ployer.5 The company is also allowe d to A. Loss of Control. Whenever
deduct cash dividends paid with respect stock in a closely held business is trans-
to stock held by an ESOP, provide d that ferred to non-stockho lders, the prior
the ESOP allows participants to ele ct to stockholders have, to some extent, giv-
either receive the dividends in ca sh or en up som e control. Sales or contri-
reinvest them in the ESOP.6 butions of stock to an ESOP, in fact,
results in a minimal loss of contr ol. In
D. Provides Favorable Tax the first place, contribu ted stock rarely
Treatment to Sellers. One who sells exceeds one-third of the outstanding
stock to an ESOP will also enjoy tax stock; under most states laws, votes of
benefits specifically designed to en- at least one-third of the stock neede d to

have any meaningful say in corp orate D. Diversification. An ESOP
operations. Secondly, ESOPs closely must provide qualified employees
held businesses must allow their (those over 55 years old with at least 10
participants to vote the stock held in the years in the Plan) an o pportunity to di-
ESOP, but only on mat ters that require versify their plan holding s.12 The ESOP
the consent of share holders holding must permit these individuals to diversify
greater than a simple majority. On other at least 25 percent of their investment
matters, the trustees of the plan can during the six-year perio d when the par-
exercise the voting powers. Finally, any ticipant reaches age 55 (or, if l ater,
shares that are not a llocated to the when the participant completes 10 years
participants accounts ( such as recently of participation). Furth er, in the f inal
contributed shares or forfeited shares year of the six-year period, the percent-
held in su spense) may be voted by the age increases to 50 percent. For com-
plan trustees, who are probably the panies whose ESOP shares are not
principal stockholders. readily tradable, this provision will accel-
erate the Plans repurchase liability.
More problematic is that the
distributions to plan participants must be E. S-Corporations. Beginning in
distributable in the form of empl oyer 1998, S-corporations could sponsor an
securities. ESOP participants include ESOP without adversely affecting their
many employees not among the desired S-corporation status. However, there
key group. In general, such persons are restrictions, including, in the case of
are not a long-term problem because certain S-corporations whose stock is at
their current rights are limited to the vot- least 50 per cent owned by disqualified
ing rights outlined above. Upon retire- persons (i.e., related individuals), allo-
ment, few would prefer to receive stock cations under the ESOP may not be
in their old employer and nearly all elect provided to such persons.13
to receive cash inst ead. The ESOP
need only allow them to elect to receive Also, the f ollowing tax advan-
stock9 and the employer may impose a tages of C- corporation ESOPs do not
right of first refusal on any distrib uted apply to S-corporation ESOPs: The rule
stock to prevent sales to unfriendly third allowing deduction of contributions ex-
parties.10 ceeding 25 percent of contributions if
the excess is applied to ESOP-loan
B. Valuation of Employe r Secur-
interest payments, does not apply to S-
ities. Aside from the expense of insti-
corporations; the rule permitting deduc-
tuting the ESOP, the most troublesome
tion of dividends paid to ESOPs d oes
administrative cost is incurred in secur-
not apply to S-corporations; and the
ing an independent appraisal of its value
rules permitting sellers to roll over their
to determine the amou nt of the contri-
gain on sa le to an ESOP (if the ESOP
bution. Any closely-held corporate spon-
owns at le ast 30 percent of the total
sor must use an indep endent apprais-
outstanding shares of the comp any)
er11 to value the contr ibuted stock, and
does not apply to S-corporations. 14 On
appraisal fees can be quite high.
the other h and, the ea rnings of a n S-
corporation attributable to ESOP st ock
C. Securities Laws. Participants
are not currently taxed to the ESOP,15 so
interests in an ESOP, and the employer
that taxation on that income is e ffect-
securities it acquires, may be subject to
ively delayed until the employees ac-
the antifraud and registration provisions
count is distributed. M oreover, an S-
of the federal securitie s laws. Co mpe-
corporation ESOP does not need to give
tent counsel should be consulted to
employees the right to elect to t ake
avoid problems.

distributions in the form of comp any 3. Rev. Rul. 69-65, 1969-1 C.B. 114
stock; rather, an S-corporation ESOP
may distribute solely in cash.16 4. Section 404(a)(3)(A)
CONCLUSIONS 5. Section 404(k)(2)
The ESOP is a fair-hair ed child 6. Section 404(k)

of the Congress, and while many recent
legislative changes have reduced prior 7. Section 1042(a) and (b)
tax benefits, ESOPs have emerged less
harmed than most. 8. Section 4978(a)
As always, careful full consider- 9. Section 409(h)

ation of the benefits and disadvantages,
and reliance on experienced counsel, 10. Treas. Regs. Section 54.4975-
are necessary to make the most of the 7(b)(9)
planning opportunities, and to avoid the
pitfalls. 11. Section 401(a)(28)(c)
_________ 12. Section 401(a)(28)(B)

NOTES:
13. Section 409(p)
1. Treas. Regs. Section 1.401-1(a)(iii)
and (b)(2)(iii) 14. Sections 404(a)(9)(C), 404(k)(1)
and 1042(c)(1)
2. Section 409(I) of the Int. Rev.
Code (all section references are to 15. Section 512(e)(3)
the Code unless otherwise
designated) 16. Section 409(h)(2)(B)(ii)(II)

Employee Stock The ESOP proved to be the only
viable alternative because of the high
Ownership Plans degree of le verage involved. A trustee
now holds the shares of AZCO Inc. for
The following are e xamples of the plan wh ich is governed by ERISA.
Employee Stock Ownership Plans and the The ESOP takes the place of the former
experiences of those companies that estab- AZCO Inc. Profit Sharing Plan. As the
lished them. The Man agement Methods
debt in the plan is paid down, the equity
Committee is grateful to t hese companies
for sharing this information which may assist of the corporation increases.
other MCAA members in creating ESOPs.
Mark Loper, president of AZCO
AZCO Inc. Inc., reports the ESOP has worked well
P.O. Box 567 for the companys employees. A greater
Appleton, WI 54912-0567 percentage of the company earnings is
(920) 734-5791 going into the employees retire ment
account than was the case under the
In 1949, four individuals, includ- former profit sharing plan. Employees
ing F. John Barlow, founded AZCO Inc. have a tang ible stake in the compa nys
as a full service (A-to-Z) industrial, well being, which has made them more
mechan-ical contractor. Starting with a attuned to the details of the business.
pickup truck and set of t ools, Mr. Barlow
(also a former president of MCAA) built As the companys profits have
a strong regional construction and grown, so has the value of the sh ares
fabrication business. held in the individual participants ac-
counts. Each year, the trustee dire cts a
In 1998, with family members not third party appraisal of t he corporations
involved and not intere sted in the busi- value. AZCO Inc.s ma nagement team
ness, Mr. Barlow, at age 84, turned his has anticipated a couple of issues.
attention to selling the company t o the First, as t he companys emplo yees
management team. The original tax approach retirement, the ESOP may
basis for the corporation was quite low. face a long -term cash flow problem as
The potential capital g ains implications employees liquidate t heir AZCO Inc.
for Mr. Barlow were considerable. holdings. A repurchase obligation study
has been conducted fo r the ESOP to
After considering alt ernatives gauge the extent and timing of the
with a highly respected consultant issue. The manage ment team has
based in Appleton, Wisconsin, the man- already created an opportunity for
agement team settled on an Empl oyee participants to diversify their individual
Stock Ownership Plan (ESOP). Un der ESOP account. ERISA allows
ERISA, the proceeds f rom the sale of employees who have reached the age
the corporation stock must be invested of 55, or who have completed 10 years
in publicly traded domestic securities. In of participation in the plan, to dive rsify
exchange for holding t he replacement their accounts. A ZCO Inc. has
securities for three years, the se llers accelerated this diversification.
gain from the sale is deferred. Continu-
ing to hold t hese publicly traded shares The second concern addresses
until death results in the stepp ed-up the perception of an ES OP by pote ntial
basis for the owners estate, avoiding purchasers. AZCO Inc .s young man-
the gain tax altogether. agement team has a few years to an-
alyze its corporate structure in the event

an exit strategy would entail a sale to a two Tougher owners gave their 80 em-
third party. ployees several million dollars, about
one-third of the proceeds from the
Tougher Industries, Inc. companys sale. McKay said, I re-
P.O. Box 4067 ceived four thank-yous from th ose
Albany, N.Y. 12204-4067 employees.
(518) 465-3426
If he could do it aga in, what
When Don McKay co-purchased would he do differently? McKa y said, I
Tougher Industries, the company had would have sold 100% of the stock to
only 200 shares of stock. Over the the ESOP. Its the on ly way to go to
years, its value increa sed substantially avoid the hassles we encountered.
(at one point, the stock split 100 0/1).
About 15 years ago, McKay and the Murray Company
other Tougher owners started lo oking P.O. Box 9061
for ways to pull their equity out of the Rancho Dominguez, CA 90224-9988
company without compromising its (310) 637-1500
financial position.
Murray Company was a family-
They settled on the ESOP. owned mechanical contracting firm
McKay and another o wner decided to based in southern California that has
contribute 31 percent of their share s of been in b usiness for more than 90
Tougher stock to the ESOP, which is years. Whe n the owner started ma king
required by federal law if the seller is to plans for ret irement and the sale of the
avoid tax o bligations (the gain is not company, he discovered that the tax
recognized as taxable because the sold consequences of se lling a company
stock benefits the companys employ- (capital gains taxes) are formidable.
ees). Murrays CPA suggest ed the esta blish-
ment of an employee stock ownership
About three years ago, PSEG, a plan (ESOP) to ease the tax c onse-
utility company, appro ached Tougher quences of the sale.
with a purchase offer. PSEG wanted to
buy the whole company, including all the The process of est ablishing
stock, and was not int erested in r etain- Murrays ESOP began in the mid-1990s.
ing the ESOP. Since the stock h eld in By 1998, t he legal fo undation for the
the ESOP was to be liquidated, the ESOP was completed. Accordin g to
Tougher owners had to hire an inde- Rick Stafford, Murrays chief fina ncial
pendent appraiser to determine the officer, just getting that far t ook
stocks value. And, the liquid ation considerable time, effort, paperwork,
process had to be a pproved by the and legal costs. The process is
federal ERISA (Emplo yee Retirement complicated and requires specialized
Income Security Act) agency and the expertise in financial planning and tax
Department of Labor. That appr aisal law.
proved very costly fo r the Tou gher
owners. When the time came time for the
final step the sale of stock in the com-
To complicate the pro cess, the pany to th e employees the owner
buyer ordered its own independent wasnt ready. The ESOP was put on
appraisal of the companys value. And, hold indefinitely.
that process produced several claims
against the company. Ultimately, the In the spr ing of 20 02, after

Murrays owner became seriously ill, the company; and (2) within one year after the
senior managers decid ed to finish the sale (or three months prior to the sale), the
ESOP. Th at process began in early seller purchases replacement securities
April, and by May 31 (about seven (which can include publicly traded stocks
and bonds) of equal value. The gain is de-
weeks), Murray Co mpany was a 100
ferred until t he replacement securities are
percent ESOP. Stafford said, We got it sold or may be unrecogni zed entirely if they
done with the support of the bank, a lot are held until death when their ba sis is
of hard work and very long hours. stepped up. The ESOP must hold the
purchased employer securities for t hree
A year late r, Stafford said the years to avoi d an excise tax. (Management
company is still adjusting to the changes Methods Bulletin TX 5).
brought about by the ESOP. Staff ord
explained, Even thoug h an ESOP is a Stafford also offered a dvice for
financial instrument, it also transfor ms a companies beginning the ESOP
companys culture from the top down. process. First, do your homework, and
theres a couple of really good orga niza-
Management decisions no long- tions that p rovide excellent information
er just affect the owner or principals. All on ESOPs. The Nati onal Center for
the employees of the company are Employee Ownership, based in Wash-
affected, and that take s some get ting ington, D.C. is accessible online at
used to. www.nceo.org. Theres a small mem-
bership fee, but its worth it. The ESOP
Stafford has also observed Association, based in Washington, D.C.
changes in the employees work habits is another great source of inform ation
and attitude. The employees became (www.esopassociation.org).
owners almost overnight, and there was
no time allo wed to edu cate and inform Second, when you begin form-
them about what the changes would be ing the ESOP, find advisors with ESOP
and mean, he said. experience, whether theyre attorneys or
CPAs, he said. This is a very different
With hindsight and experience, area that n eeds specialized expertise.
would Stafford have taken a dif ferent The attorney whos worked for your fam-
route than the one his company fol- ily and yo ur business for years will
lowed? Definitely. We would have probably not be your b est choice, nor
allowed a lot more ti me to manage the will the CPA who does your taxes every
cultural changes, which are substa ntial. year. Hire the expert s to prote ct the
We also would have eased into the interests of both the owners and the
financial commitment over a much employees.
longer period of time.
Stafford concluded by g iving the
Federal tax laws allow this more Murray Companys ESOP experi ence
leisurely paced approach: positive marks. The E SOP allows the
company to go forward when the owner
. . . No gai n is recognized if a taxpayer sells is ready to retire and cash in his chips.
employer securities to an ESOP if (1) after Just be sur e to hire th e right advisors
the sale, the ESOP owns at least 30 percent and allow enough time for the plan ning
of the total outstanding stock of the and transition to occur.

Bulletin No. TX 6
File: Taxes
Bulletin
Preparing for a Sales Tax Audit

INTRODUCTION The best plan of action is to be certain
these transactions are properly handled
In the best of circumstances, state and even before you are subject to a sales
local tax audits of construction tax audit. Of course, you also want to
contractors eventually turn adversarial avoid paying taxes that are not required.
and are, therefore, not to be treated
lightly. It is best to be prepared, Consult with your attorney and/or tax
organized, and focused on resolving the advisor to help you prepare for the audit
issues with practicality and technical and negotiate a fair outcome, if
proficiency. To position yourself best, necessary.
you should know the process and the
rules. Once the audit process begins, be as
cooperative and accommodating to the
Areas typically troubling for construction auditor as possible. Your positive
contractor audits include the following: attitude may ease the process should it
become adversarial later.
1. Exempt purchases: Are they
really exempt?
2. Use tax: Did you pay the right THE SALES TAX AUDIT
jurisdiction or did you pay at all?
3. Leasing transactions: Is the The sales tax audit process occurs in
lessor or lessee responsible for three distinct phases. Each phase
paying the sales tax? requires you to understand the process,
4. Services: Should you have plan, organize, and know your rights.
charged a sales tax for services? The phases are as follows:
5. Repairs: What repairs are
subject to the sales tax? 1. Pre-audit
6. Fabrication: What part, if any, of 2. Field audit
the fabrication cost is sales 3. Post audit
taxable?
How you prepare/organize yourself for
The answers to these questions are not each step may be the key to the
necessarily addressed here, but are success or failure of an audit.
some of the issues you should plan on
addressing during your preparation for
an audit and/or during the audit process.

PRE-AUDIT Reverse Audits
Prior to receiving the audit notification The most effective tool for audit
from the state or local government, you preparation is the performance of a
should already have a plan on how to reverse audit. A reverse audit is a
effectively defend yourself. When the review of the companys purchases to
audit notice is received, make sure it is determine whether the sales tax has
detailed. It should address the been paid properly, and it can result in
following: the identification of inconsistent
treatment of purchases or errors
1. Type of audit (traditional or resulting in overpayment or duplicate
sample) sales tax payments. Due to time
2. Periods under investigation constraints or lack of understanding of
3. Commencement date the rules for construction contractors,
4. Documentation requested the sales tax is often paid erroneously.
Examples include certain exemptions on
A traditional audit involves the purchases or resale exemptions. The
examination of each and every invoice. reverse audit can often lead to a refund
This is a very tedious and time- of overpaid taxes, which is then applied
consuming process. Alternatively, to any impending assessment.
states may seek to utilize block
sampling, which involves the selection Exemption and Resale Certificates
of data that is used to represent the
population. Unfortunately, block Crucial, but often ignored, management
samples do not always reflect the entire tools for the audit are the exemption and
population. Hence, preliminary resale certificates. They can help you
knowledge of the population and the avoid tax assessments when used
sampling procedures are necessary to properly. The auditor will penalize the
better assess whether a sample audit company when they are not in the file.
should be utilized.
The taxpayer should examine the THE FIELD AUDIT

periods under audit to insure that the
period is within the statutory limitation. Audits arise either from 1) routine
The rule varies by jurisdiction, but the random selection, or 2) a triggering
range is typically 3 4 years. Also, if event. There are a number of issues
the auditor asks to extend the period of that are considered hot buttons for any
examination, proceed with caution. At particular state, which may trigger the
this point, your accountant or a tax examination. More common issues
professional should assess the case include the filing of a refund claim, the
before allowing any extension. Signing results of an audit of a competitor
the waiver could destroy any negotiating contractor (the tax office is focusing on
leverage that the company may have. similar businesses with similar
The waiver serves to extend the transactions) or the results of an audit of
statutory period of limitations. Any your general contractor customer.
professional experienced with sales tax
audits will be able to assess the The prevailing areas of activity reviewed
advantages/disadvantages of signing in an audit include:
the waiver.

1. Sales A random sample involves the process
2. Purchases of analyzing data through the process of
3. Fixed asset acquisitions selecting every nth document resulting
4. Exemption and resale certificate in coverage of the entire period under
files examination.
Sales are reviewed through an POST AUDIT

examination of the invoices to determine
whether a tax was due and charged. Once the field audit has been
Purchases are assessed by reviewing completed, several steps need to take
and determining whether the vouchers place.
indicate that a tax was paid or should
have been self-assessed (use tax). 1. Review assessments as well as
Fixed asset records are typically the auditors rationale from a
examined to determine what assets technical perspective. Are the
have been placed in service. Invoices conclusions reached founded in
are evaluated to determine whether the the law? Discuss clarifications if
appropriate tax was paid at the time of necessary.
purchase, whether self-assessed or an
exemption exists. This evaluation may 2. Discuss appeals process.
consider purchases for the purpose of Most states have an information
fabrication. As discussed above, hearing process wherein a
exemption certificates are the final area taxpayer, through
of review by the auditor. representation, files a protest to
the formal assessment. Finally,
Sampling a follow-up meeting is offered to
discuss any open issues.
The use of statistical sampling by states Negotiations and trade-offs are
in performing audits has gained available during this process.
popularity in recent years. When
employed properly, it can result in 3. Statute of Limitations.
efficiency. Sampling is flexible and, as a Remember that all states have a
result, it may be manipulated to reflect statute of limitations. This is the
an inaccurate representation of your time within which a complaint
business transaction. Hence, care may be filed. In most states, the
should be exercised in understanding time is 3 4 years and must be
the sampling method and you should be kept in mind when negotiating.
on the lookout for results that, may, in Although the state will discuss
fact, not be a fair representation of your your formal protest to the
transactions. assessment, it is the
responsibility of the taxpayer to
Block vs. Random timely file a complaint if he/she
disagrees with the assessment.
A block sample is a technical analysis of Be aware that oral
the audit periods activity that selects a representations by the agent
theoretically representative period to have no effect on the time limit.
reflect overall activity. Block sampling
usually reviews a month or a quarters 4. Closing conference and
transactions rather than the full period agreement. A closing
under examination. agreement is used to terminate
and dispose of the dispute

between the taxpayer and the product of lengthy negotiation on
state. It is most crucial as it several points.
closes out any open years. Being prepared and organized
Closing agreements are binding is critical as it shows the
on the parties as to the matters companys commitment to tax
agreed upon and may not be compliance. Your commitment
annulled, modified, set aside, or to tax compliance may be the
disregarded in any suit or audits most overriding theme for
proceeding unless there is a the success of the audit.
showing of fraud, malfeasance
or misrepresentation of a PREPARING FOR A SALES
material fact. This is a general TAX AUDIT
rule and varies by state. Closing
conferences are necessary to Exempt Purchases
discuss any adjustments,
negotiation points, or Exempt purchases do not
mathematical errors in the work require collection or payment of
papers. This is also the setting a sales tax. For example, some
to discuss interest, penalties, states may exempt materials
and the flow of any information. and supplies purchased for work
involving the U.S. Government;
state government; nonprofit
PRACTICAL OBSERVATIONS educational, religious, or
charitable organizations;
In conclusion, keep in mind the farmers, and other organizations
following: deemed exempt from sales tax.
The rules vary widely by state,
so contractors need to check the
In dealing with the inevitable
rules in each jurisdiction in which
audit, the best defense is
they work.
preparation. A reverse audit
performed by your accountant or Use Tax
tax professional will identify risk
Use tax was implemented in
issues as well as improve the
most states to complement the
compliance process.
sales tax. The difference
The right professional has the between the sales tax and the
technical expertise to dispose use tax is that the use tax is paid
of non-issues raised by the by the contractor when the
auditor. Your accountant or tax goods are consumed outside the
professional will also identify jurisdiction in which they were
potential refund claims that are purchased. For example, if a
available to offset any contractor buys materials in
assessment. Maryland to use on a Maryland
Treat the auditor with respect, job, the purchase is subject to
but segregate the auditor from Maryland sales tax. However, if
the accounting and financial staff the contractor buys materials
to minimize their communication from a supplier located in
without supervision. Maryland and has them
Keep your ultimate result in delivered to a Virginia job site,
perspective. Ultimately, the the contractor pays the tax to
conclusion of an audit is the Virginia.

_____________ _____________
Fabrications The Management Methods

Sales tax audits also address Committee gratefully acknowledges
issues of fabricators. A fabricator the contribution of this information
is a business that manufactures, by:
processes, or assembles property
for sale that becomes a Eric J. Purnell, JD, LLM and Tim
component for real property upon Cummins, C.P.A. of Aronson &
installation. Fabricators often also Company, Rockville, MD 20850
act as contractors and actually do
the installation. Fabricators
generally purchase materials for
resale and thus issue exemption
certificates to the vendors to avoid
paying sales tax on the materials.
Upon sale and installation, the
fabricator/contractor collects and
pays sales or use tax to the
jurisdiction in which the installation
occurred, even if the installation
resulted in a capital improvement.
The fabrication for sales or use tax
is valued at the price at which
similar items are offered or, if there
are no comparables, at the cost of
all materials used in the
fabrication. The fabricator is also
usually required to collect sales
tax on installation charges when
the installation does not constitute
a capital improvement. In those
situations in which a fabricator
sells products to others for
installation by the buyer, the
fabricator collects and remits sales
taxes based on the selling price.

Bulletin No. TX 7
File: Taxes
Bulletin
Estate Tax Planning and Succession

INTRODUCTION fails to understand the size of the estate
and potential tax obligation, and therefore
Every company, regardless of size, will the liquidity needs of the business or
face succession planning issues at some estate to meet the tax obligation. As
time. Many experts agree that three of reported by the United States
the leading causes of unsuccessful Congressional Budget Office (CBO) in its
succession are: (1) lack of a succession July 2005 paper entitled Effects of the
plan; (2) inability of the company to retain Federal Estate Tax on Farms and Small
key personnel after the owner exits; and Businesses:
(3) an insufficient personal estate plan.
critics argue that the tax may pose
This management bulletin will address a particular hardship for a small
the issues and possible strategies related business or family farm. If building
to estate planning and succession. (See up such an enterprise results in a
Bulletins CP 3, How to Get Out and Let taxable estate without enough liquid
Others In and TX 5, Employee Stock assets to pay estate taxes, heirs may
Ownership Plan, for discussion of other have to wholly or partially liquidate
succession issues.) the business or farm. Purchasing
sufficient life insurance might prevent
All property is subject to potential estate that problem, but the ongoing cost of
tax upon death. This includes property paying premiums would reduce the
such as: cash flow available to invest in the
enterprise.
Cash
Real Estate The business owner who plans
Personal Property successfully for estate issues will
Retirement Plans address techniques to reduce or
Investments eliminate estate taxes, and will provide
liquidity to avoid the forced sale of the
Revocable Trusts
company.
Tangible Assets
Annuities
ESTATE TAX HISTORY AND
Life Insurance (in some cases)
CURRENT STATUS
Business Interests
Taxation on estates and property
Problems arise for small business
transfers at death can be traced back to
owners, especially in small family-owned
ancient Egypt, as early as 700 B.C. The
businesses, when the deceased owner

first recorded tax was probably levied by semi-liquid assets (stocks, bonds and
Roman Emperor Caesar Augustus nearly annuities) and non-liquid assets (real
2,000 years ago, the Vicesina estate, business interests, etc.). Where
Hereditatium, a tax on succession and the liquid and semi-liquid assets are
legacies to all but close relatives. (The insufficient to satisfy the liquidity needs of
Estate Tax: Ninety Years and Counting, the estate, the business interest or other
Jacobson, Raub & Johnson). Although non-liquid assets will need to be sold.
there were many different taxes levied on Not only does such a forced sale alter the
estates at various times in U.S. history, company succession plans, but the
starting with the Stamp Act of 1797, the estate is unlikely to receive fair value for
modern federal estate tax was enacted the business, and the sale will result in
by the Revenue Act of 1916 to offset a loss of future income to the family.
decline in tariff revenues caused by
World War I. While the number of family businesses
being sold to provide estate tax liquidity
In 2001, sweeping changes were made is the matter of some controversy, the
to the estate tax laws. At that time the CBO estimated that in 2000, one-third of
top estate tax rate of 55% was applied to family business estates that qualified for
all estates over $675,000. The Economic the family business exclusion could not
Growth and Tax Relief Reconciliation Act pay the estate tax out of reported liquid
of 2001 (EGTRRA) provided for assets. (Effects of the Federal Estate
graduated increasing exemption amounts Tax on Farms and Small Businesses, a
along with graduated reductions in the Congressional Budget Office paper, July,
tax rate, resulting in elimination of the 2005).
federal estate tax in 2010. However
EGTRRA expired in 2011. Congress and STRATEGIES TO ADDRESS
the Obama administration agreed on a LIQUIDITY PROBLEMS
new federal tax rate of 35% with an
exemption on estates valued at less than There are two basic strategies to address
$5,000,000 through 2012. Without liquidity issues. First, either reduce the
further Congressional action, the rate will assets in the estate or shift the assets out
increase to 55%, and the exemption will of the estate. This can be accomplished
reduce to $1,000,000 in 2013. through the use of trusts and/or gifting.
Second, provide liquidity for the estate
Many states also have estate taxes. primarily through the use of life
Consult your tax advisor or attorney for insurance. These strategies are
the specifics. discussed in more detail below.
THE LIQUIDITY PROBLEM Trusts

A trust is simply a legal entity that lets
An estate will face specific liquidity needs you put conditions on how certain assets
in the immediate and short term. Among are distributed upon your death. A trust
those needs are estate administration differs from a will in that while a will deals
expenses, state estate taxes, federal with all the property distribution in an
estate taxes, and ongoing family income estate, a trust may only deal with certain
needs. The sources of liquidity for the property of the estate. Living trusts are
estate include the liquid assets of the set up during the persons lifetime.
estate (cash, life insurance, CDs, etc), Testamentary trusts are set up in a will
and go into effect after the persons
death.

Living trusts can be either revocable or Life Insurance
irrevocable. Finally, life insurance can be a cost
effective mechanism to provide liquidity
A revocable trust allows a person to for an estate. As mentioned above, an
maintain control over the assets and irrevocable life insurance trust is one
change the terms of the trust at any method. Life insurance is also
time. commonly used to back up buy-sell
An irrevocable trust transfers title in agreements, providing a company with
the assets to a beneficiary. A person liquidity to buy a deceased owner's
with an irrevocable trust cannot make shares from the estate. Again, expert
changes without the beneficiarys advice is necessary. There are many
consent, but the appreciated assets types of life insurance, and not all types
may not be subject to estate tax. Life will be effective in providing the type of
insurance purchased in an liquidity desired in specific situations.
irrevocable life insurance trust can
allow a person to provide tax free CONCLUSION
cash for liquidity to heirs by removing
the life insurance proceeds from the The estate tax implications for family run
taxable estate. businesses are considerable and
complex. This complexity is aggravated
Other more complicated types of trusts by the fact that the estate tax laws
can provide additional or alternative change often, and state estate tax laws
strategies. must also be considered. The estate
plan as a part of a companys succession
Credit shelter trusts are a mechanism plan must be carefully considered and
where a person by will bequeaths an updated at least every few years. While
amount up to the estate tax business owners may be frustrated by
exemption, then passing the rest of the cost of and time needed with lawyers,
the estate to a spouse tax free. financial planners and business
Generation skipping trusts allow a appraisers, this is unavoidable given the
person to pass assets tax free to existing tax system and potential
beneficiaries two generations implications to succession of the
removed (typically grandchildren). business. Ultimately the business owner
is well advised to use the same focus in
Gifting preserving the business assets as was
Another mechanism that can be used to used in building them.
reduce or transfer assets out of an estate
is gifting. Gifts are normally taxed to the This bulletin is not intended to
recipient at a rate similar to estates. provide legal or financial advice.
However there is an annual gift tax Please consult your attorney
exemption of $13,000 per individual and/or financial advisor for specific
recipient per year, and a lifetime gift tax advice regarding the information in
exemption of $5,000,000. In certain this bulletin.
situations, a planned strategy of gifting
can be an effective estate reduction
technique, but the gift tax laws are
complex and, like all of these strategies,
require financial and legal expertise.

Bulletin No. TC 1
File: Technology
Bulletin
Laser Scanning
INTRODUCTION
There are two types of scanners that a
Contractors have to produce plans for mechanical contractor may use: time of
numerous reasons, such as for review, flight and phase-based.
permits and construction, just to name a
few. More often than not, if your building Time of flight scanners offer better
was constructed in the latter part of the 20th accuracy for long range scanning (over 50
century, you may have PDFs or possibly feet)
CAD plans that you could use. But, what if
you do not have existing plans or CAD files Phased-based scanners offer better
on which to base your plans? What if you accuracy for shorter range scanning (under
are required to produce a Building 50 feet).
Information Model (BIM) in a retrofit
situation where no electronic plans exist? More often, phase-based scanning will
What if you need to measure pipes or work best for mechanical contractors.
ductwork that are 10 feet or more high and
there is no ladder? You can use the tried A scanner is not an x-ray machine or a CT
and true method with a tape measure and scanner. It cannot see through walls or
paper and hope you can reach all the ceilings. To see above the ceiling, you will
necessary areas. You could use a digital need to remove the tiles. It works on the
measuring device, but you may need help WYSIWYG (what you see is what you get)
depending on the size of the space. principle. Currently, scanners will not
However, if another person is not available produce much more than the points on
to help, laser scanning may be an option. objects it scans. You will still need to model
what you want from the points that you
LASER SCANNING WHAT IT IS collect. It is a very rapidly ever- changing
AND WHAT IT IS NOT technology that has limitless potential in
the future.
Generally, laser scanning is defined as a
controlled steering of laser beams followed
by a distance measurement at every ACCURACY
pointing direction. In essence, the Most of the manufacturers will offer
instrument emits a laser multiple times per accuracy to within 1/8 inch to 1/4 inch. In
second and associates a point on most cases, this accuracy is usually
everything it contacts. At the end of the sufficient. Depending on the settings you
scan, depending on the accuracy you choose and the objects that youre
choose, you may have a few thousand scanning, your accuracy may be better.
points to a few million points per scan.

CONDUCTING THE SCAN purposes. Key control points should be
established to have common reference
Running the scanner is the easy part. points for use in orienting your scans.
Once the scanner is set up and ready to Piping verification, stub up locations,
go, usually all that remains is to just push a ductwork locations, conduit locations,
button. The key is in the settings used for drains, and equipment can all be scanned
the scan and target placement. Each and placed against the construction model
manufacturer will have recommended to verify that components have been
settings that you will need to follow. placed correctly. Laser scanning can also
Targets are not necessary, but are usually be used to aid in completing as-built plans
recommended. once construction is complete.
REGISTRATION/STITCHING PURCHASE VS. RENTAL

Once scanning is complete, you need to Scanners are produced by a multitude of
register or stitch the scans together. The manufacturers for a wide range of prices
scanning manufacturer most likely will ($40,000 to $200,000), depending on what
have its own proprietary software for the type of scanner you need. However, some
registration. Depending on your scan and companies may choose to rent the scanner
the number of set ups and targets used, on an as-needed basis. That option,
the software may register it automatically however, can be quite tricky and very time
with minimal user input. You will need to consuming. The rental company will
learn the software to be able to work with usually rent the equipment on a daily,
the features that the software offers. This is weekly, or monthly basis. Prices vary by
one step most users do not consider when area. Be careful to check the availability of
they get involved with scanning. the registration software and who will be
doing the registration. Some companies
POINT CLOUDS may choose to purchase the registration
software, thereby avoiding the software
Once registration is complete, you can
rental issue. And, rental companies may
place your cloud in your desired software
offer to extend use of the software for a fee
of choice for modeling/drafting.
as well.
Most software manufacturers have their
own point cloud editing software. There are CONCLUSION
also third-party software vendors that have Laser scanning has been used in the civil
add-ons for purchase that work with most engineering community for several years.
modeling software. Just recently, the technology has been
used in the MEP construction industry. It
SCANNING USES has its benefits and uses, but it is not ideal
in every situation. Laser scanning can be a
Laser scanning is typically used for
very powerful tool for any mechanical
surveying existing conditions to assist in
contractors tool box.
documenting existing features. It could also
be used for construction verification

Bulletin No. TC 2
File: Technology
Bulletin
Electronic Tablet Use in Construction
INTRODUCTION APPLICATION SELECTION
Contractors are constantly looking for What once was called software is now
the most efficient and cost-effective way referred to as an application, or more
to get tools, materials and information to commonly in the world of mobile
the field that will result in the most devices, an app. The availability of
productive installation possible. In the apps is where you begin your research.
past 20 years, construction technology Everything you do will be colored by the
has played an important role in quality of the apps running on the
streamlining how we estimate, draw, device.
track, and ultimately execute projects.
Many of us can still remember when All but the most basic electronic tablets
computers stayed in the main office and will have some version of the essentials:
those in the field estimated, purchased, email, calendar and contacts. The ease
and drew our projects using pencil and of use, however, can vary greatly from
paper. The Renaissance began with platform to platform. What may seem
the calculator and radio, then came the powerful or cool to an IT manager
desktop computer and cell phone, may be cumbersome and counter-
followed by the laptop computer and intuitive to someone in the field. This
Blackberry, and now the electronic underscores the need to try the device
tablet and smartphone. with just one or two people to vet the
nuances of the device before a large
Correctly deployed, the electronic tablet scale deployment is undertaken. Since
has the potential to transform our the goal is productivity improvement, it
industry by providing men and women in is important to minimize frustration and
the field with information in real time. service calls.
Determining a deployment strategy is no
small task. It is imperative that Sometimes a very specific app becomes
decisions be made in a logical order to the primary mission of the device. For
avoid costly re-steps. example, if the client requires you to use
a drawing file, then a compatible app
In this bulletin we will cover: application may trump other decisions. Other
selection, hardware selection, and times, the app needs are more generic
connectivity requirements for the and several options are available..
effective utilization of electronic tablets Some apps are cross-platform (meaning
in the mechanical construction industry. they support multiple operating systems)
while others are platform-dependent.

Clearly, defining a list of apps you want various site-specific safety permits is
to use is the appropriate starting point. increasing. The ability to put these
documents in electronic form for easy
The following commercially available access by field crews can have a direct
apps are commonly used in our impact on field productivity. There are
industry. also a number of safety applications on
the market that allow you to input safe
Document Viewer behavior observations electronically and
Document viewers enable those in the roll them up to charts for identifying
field to view RFIs, drawings, change where to focus safety professionals to
orders, isometric drawings, etc. help avoid a safety incident. The
electronically, without the need to stop tablets webcam capability can aid in
work to check a physical mailbox in the providing incident documentation or for
jobsite trailer. The most important training purposes when an unsafe
advantage is the reduced time your condition is identified in the field.
supervisors spend walking from the
jobsite to the trailer. Workers receive Estimating
the documents immediately rather than Pricing change orders on a job can be a
when they check their mailbox. On time-intensive process. In many cases,
large jobsites where trailers are in a input from field crews is needed to
remote location, the time savings can be identify what parts were added. This
staggering. This option also allows you data is then presented to a PE or
to send the correct information to the estimator to plug into software or an
field in as close to real time as possible. Excel spreadsheet to generate a price.
This process can be time-consuming
Schedule Updates when estimates start to pile up. There
By using some of the commercially are some companies that have
available schedule applications, our field developed forms that price a change
crews can update a schedule in real order in the field, thereby reducing a few
time as they are walking the project steps out of the process and increasing
rather than taking notes and returning to accuracy. In cases when the estimating
the office to create and send the update occurs at a main office, the webcam
to the GC/owner. capability of the tablet can provide
additional back-up to justify a change as
Daily Logs well as better information for the
Creating a custom daily log thats stored estimating team, while saving the team
on a tablet (whether its an internal daily the time spent visiting the site.
log or one dictated by the GC/owner)
allows field crews to save time returning Calendar
to the office to hand off the log to office Time management is crucial to
staff for transmittal to the GC/owner. successful field supervision of a project.
With the click of a button, field crews Although many of us manage our
can transmit the document directly to calendar on our smartphone, the tablet
the GC/owner and office staff from the offers the same capability.
field.
Service Calls
Safety Data Tracking and Forms The tablet has also changed how many
Safety on the jobsite has come a long service companies do business today.
way in the last 10 years. The number of It has almost become a requirement to
GCs and owners requiring pre-task survive in the service industry. The
plans, safe behavior observations, and software and applications for the service

. 2
side of our business is ahead of the information that leads to early
curve compared to what has been identification of a problem can mean the
developed for the construction side of difference between a good job and a
the business. Applications in use today bad job. The tablet provides a way to
include: scheduling, equipment prepare updates in real time while
maintenance, employee and vendor supervisors are in the field and transmit
management, billing, inventory that data into a format that can be
management, and accounting. evaluated to determine whether the
project is on track or needs adjustments.
Material Management A camera can provide documentation
Ordering material directly from the field and verification of the status of an
to a vendor or your purchasing team is installation in case a potential claim is
much faster when using a tablet. It can filed.
reduce steps in the process and
provides an electronic history of what REMOTE DESKTOP
was ordered and when. Field crews can CONNECTIVITY
have direct access to stock levels and
backorders. Coupling the basic ordering There are times when the business
process with a receiving system that need is more specific than what can be
uses barcoding makes possible real- supported by commercially available
time material management, including apps. For example, if the project needs
what is left in stock when a job finishes. a specific method of productivity
tracking that interfaces with other
Construction Drawings/Isometrics business systems, it is highly unlikely
While it may not be realistic to that a suitable app can be found. In
completely eliminate large-size drawing such cases, a couple of options are
sets in the field, the use of a tablet can available: develop an app from scratch
reduce the need for them and allow or use a Remote Desktop Connection.
much quicker deployment of changes to
field crews. Tablets also help to reduce Creating an app from scratch is
the amount of re-work by capturing probably not realistic for the majority of
conflicts quickly. Tablets give companies. It would require a large
supervisors the ability to view and volume of work (and subsequent cost
annotate construction drawings in the savings) to offset the high development
field. This allows field crews to cut costs. The Remote Desktop
steps out of the process when turning a Connection, however, is a secure way to
conflict into an RFI or change order. A link remote users with the enterprise
tablet also aids in the coordination systems. The app simply connects to
process by preventing unnecessary the companys application server and
rework because field crews had not yet the users see a screen on their tablet
received the latest drawing revision. as if they were sitting at a desktop
The use of a webcam on a tablet can computer in the office. Most remote
provide additional support when trying to desktop apps can also be configured to
articulate a conflict in an RFI or change restrict access to a single application on
order. the server, thereby limiting what
information is exposed beyond the
Productivity Updates/Tracking firewall. Because security is controlled
The productivity of field crews is critical on the server side and data does not
to the success of a project. Gathering pass to the device, there is no risk of an
data on the status of an installation and information leak should the device be
turning that data into useable

. 3
lost or stolen. Furthermore, the sharing standard, although a few are not. Two
of information becomes automatic that are not universal but may be critical
because it is not local to the device. to your business are a USB port and
And, as your business systems change, memory capacity. If you share a lot of
you can immediately deploy the files using a USB memory stick, then a
upgrades to desktop, laptop, and mobile USB port is a necessity for your device.
users simultaneously. For businesses that rely on keeping a
number of large files (documents,
HARDWARE photos, movies, PDF files, etc.) on the
device, large memory capacity may be
The electronic tablet today comes in of great importance.
many shapes and sizes and a variety of
price ranges depending on your needs. Accessories
Some attributes to consider: The accessory market has become just
as relevant to the utility of the device as
Platform the hardware itself. Items such as
There are currently three primary external keyboards, waterproof covers,
platforms available for electronic tablets: GPS receivers, vehicle mounts, and
Windows, Android, and iOS (Apple). compatible printers can mean the
Deciding which platform is appropriate difference between a good and bad user
for your needs is important as it will experience with the device.
affect many other decisions. It is highly
recommended that you try out a Connectivity
configured platform fully with a single Connectivity is to the electronic tablet
user before making the platform what fuel is to the jobsite truck; without it
decision for the company. Small youre not going anywhere. There are
nuances that are not described in the three primary means of connecting your
product documentation can make a big device: 3G/4G cellular, WiFi, and USB.
difference in the users experience on The decision of which mode to employ
the jobsite. Remember: the majority of depends upon a number of factors:
tablets are designed to be consumer cost; availability; data security;
appliances, not business machines. application requirements; and timeliness
Functionality will not necessarily mimic of information.
that of your laptop, even for routine
tasks. 3G/4G Cellular
Cellular technology represents the most
Size versatile connectivity mode. Its a rare
Electronic tablets are currently available corner of urban America that does not
in four size groups: large phones, seven have coverage these days. If you can
inch tablets, ten inch tablets, and laptop talk on the phone, most likely your
replacement tablets. Your size decision device can also access data. While not
will be based upon the viewing needs of as fast as WiFi, 3G/4G data systems are
your user, your emphasis on portability, good at meeting the needs of an
ease of interface (small devices also average tablet user. The access does,
have very small touch keyboards) and however, come at a price; there is a
cost. premium for the initial cost of the device
and a recurring monthly cost for the data
Memory and Features plan. Heavy data users need to be
There are a tremendous number of aware of caps or penalties for exceeding
features available on the current array of the usage allowances under their data
electronic tablets. Most have become plans.

. 4
WiFi providing better information. Done
WiFi technology is currently the pinnacle wrong, it can be a source of frustration.
of wireless data throughput. Your Requiring a supervisor to use a device
applications will experience the least that doesnt function correctly can be a
amount of lag and, generally, the data is serious demotivator.
free from monthly usage limits. While
public WiFi is not available at most Security and Control
jobsites, a common strategy is to There is a wide variation in thought on
employ a WiFi hotspot at a central job how best to lock down a device. Do
shack or foremans trailer. These hot you allow employees to install their own
spots transform cellular technology into apps or does the IT department strictly
a local WiFi network where multiple control that? Do you allow employees
devices can share a common cellular to take the device home? What about
connection and, therefore, save costs. personal use rules? How much of your
High data demands, however, will enterprise is exposed just by turning the
struggle under a shared connection. device on? There are serious internal
policy issues that should be considered
USB and then discussed with employees.
For users who do not require a live The policies should be clear and
connection, USB connectivity is a valid universally enforced.
tool. If your device strategy is to simply
replace volumes of paper (company COSTS
manuals, forms, submittal data, etc.), a
one-time upload to a device at the start Devices are available for as little as
of the project may be sufficient. $150 for the most basic PDF reader to
as much as $2,000 for laptop
There is one more item to consider replacement tablets. The purchase
when it comes to connectivity and that is price is only part of the total cost to
Internet usage on the jobsite. Is your consider. The total fixed deployment
company a Theory Y company that cost will be the sum of the purchase
believes in empowering and trusting price, app cost, accessories, setup time,
employees to make the right decisions and training time. If your device uses a
or a Theory X company with a culture cellular data plan, count on an additional
of locking things down to keep people recurring $35-$50 per month depending
out of trouble? An Internet connection upon your carrier and region.
can be a valuable tool, but it can also
become a time waster if not managed Plan for a percentage of devices to
correctly. suffer field casualties. They are small,
slippery, and are sensitive to impacts,
ADDITIONAL CONSIDERATIONS moisture, and particulatesthe very
things we have in abundance at the
Employee Perception jobsite. Do your best to provide physical
Done right, the deployment of electronic protection and guidance to the user to
tablets can be a great motivator and keep the devices safe, but be aware that
even attractor when hiring employees. there will be casualties. Knowing that,
Its a great feeling to work for a keep a device or two in reserve. The
company that is willing to invest in the worst scenario is to get everyone
best tools possible, and tablets can be dependent on a device only to have it
part of this mix. The supervisors job break with a replacement two weeks
might not be easier, but he or she may out.
feel more effective or in control just by

. 5
Finally, consider the devices to be tools
with a finite life span. While a Miller
welder may last 20 years and a jobsite
truck 10 years, a mobile electronic
device may only last two or three years.
CONCLUSION
With labor costs now exceeding

$70/hour in some regions, it does not
take many hours saved to have a
positive return on your electronic tablet
investment. Successful deployment
requires deliberate analysis of your
goals and business needs. Be aware
that taking electronic tablets to the
jobsite is not a fail-safe process and
regardless of how well-planned your
efforts, there will be challenges in
getting it to work as desired.
Technology is still changing very rapidly;

what is a good solution today may be
obsolete six months from now. Be
prepared to be flexible and ready to
adjust your course as your needs and
the available resources change. The
only thing that is certain is that bid
competition will continue to increase and
the management of information
represents a significant potential for
improvement in field productivity. The
days of a paper construction project is
coming to an end. Everything from
plans to CAD files to material lists is
moving to an electronic base. Keeping
your field as close to this new
information source as possible is critical
to your success. Companies that figure
out how to do this well will enjoy the
advantage of bidding more aggressively
or retaining more profits on work
awarded.

. 6
Bulletin No. TC 3
File: Technology
Bulletin
BIM What Is It and

Is It Right for My Company?
Introduction companies. Many models are being drawn
in Revit, which for the mechanical contractor
Building Information Modeling, or BIM, is may not have sufficient libraries of piping
becoming a standard requirement in project and sheetmetal components that would help
specifications. BIM is a three-dimensional us with fabrication designs. There are some
design and construction model for additional third-party software programs that
coordinating trades and providing can be used to convert a Revit model into a
information about the equipment and spec-driven, trade-specific model that can
systems in the model. BIM can be very be changed and coordinated with all the
complicated or it can be reasonably simple. other trades to allow you to make fabrication
BIM requirements are often defined in the drawings from your 3D model.
bid or contract documents and are rarely the
same for every customer or project. When you use these third-party programs,
you can design a specified piping model
While BIM presents an additional cost to with all of the actual dimensions of the pipe,
any project, it can also provide real benefits. fittings and valves as well as hangers for
Once a company invests in the people and your system. You can also coordinate and
software required to provide 3D drawings run the model with other software programs
for a project, it must look at the whole to do clash detection with the other trades.
project and its delivery methods to see the
total value in BIM. Taking the Lead Early
If you decide to invest in this technology, It is generally a good idea for the
you need to understand how it can save mechanical contractor to take the lead on
money for you as a mechanical contractor. the 3D coordination effort, since the
mechanical generally has the largest
Making the Investment Pay Off equipment and services above the ceilings
and in mechanical rooms.
To reap the greatest benefit from BIM
technology, you must look at how to The BIM coordination starts early in the
integrate the available software products construction process, many months before
with your companys fabrication equipment the trades are onsite, in most cases. The
and your piping and sheetmetal installation team must decide where the coordination
methods. There are many programs on the will start as it coincides with the project
market that will fit the needs of various schedule. Equipment decisions must be
made and drawings must be based on the

final purchased items. Once you have areas Contractors by David E Quigley. This
that are fully coordinated, having sign-off publication, developed jointly by MCAA,
from the other trades is important so that NECA and SMACNA, is available through
you can use these drawings for MCAA.
prefabrication of hangers, pipe and
sheetmetal for the coordinated areas. Once you have made the decision to build
your projects this way, you will need to get
To get the greatest efficiency from these all of your project personnel on the same
efforts, the use of a robotic total station page. Project management, estimating,
laser or other similar products for locating all purchasing, pipe designers, fab shop
of your hangers and equipment corners will managers, foremen and tradesmen all need
save you a lot of time and money. In most to be brought together to understand how
cases, it can keep your crews from working the technology will be implemented for your
off of lifts or ladders while locating all of your company.
hangers from the floor or roof above and
using inserts when applicable. Installing Finding the right software and setting up
your projects in this manner can save a lot your piping and sheetmetal standards for
of time and reduce unsafe practices of BIM is the first step. Training your designers
drilling overhead from ladders or manlifts. to draw using the methods you use in the
With BIM and preplanning, seismic cables field and working with your installers will
and inserts can also be included on your help minimize mistakes when fabricating
drawings which will save you from doing this from the drawings.
at a later time.
Getting this to work is a collaborative effort
Using the 3D model for coordination to within the company, and its success
prefab as much as possible adds to the depends on all parties input. When this
quality and speed of construction, and effort comes together and is successful, the
yields a better final product. The model will entire company will benefit. Seeing how this
also reduce the jobsite manpower and technology improves field installation and
weather-related slowdowns. Performing the keeps your job on schedule improves
majority of this work in a shop environment morale and customer satisfaction. It will take
with heat, ventilation and fabrication an investment in time and dollars to get the
equipment before it is needed on the job will full benefit from this technology.
keep you from getting covered up by other
trades. So if one of your next projects requires BIM
coordination and you can implement it to the
The coordinated model will also help you level of shop fabrication and hanger layout,
evaluate such elements as prefabricating you will see that although BIM adds costs to
building risers, pump skids, coil connection the front end of the project, it cuts costs in
modules, steam pressure-reducing modules the field and in overall construction.
and ductwork assemblies.
Conclusion
Using your coordinated model to make your
prefab assemblies, you will see the most To be competitive in large projects, most
benefit from this technology. companies will have to embrace BIM
technology. If they want to be profitable on
Getting Started these projects, they will need to take it to
the level of fabrication. Companies will have
If this technology is new to you, begin by to decide to invest in this technology based
reading Achieving Spatial Coordination on the type of projects that they pursue.
through BIMA Guide for Specialty

Bulletin No. TE 1
File: Tools and Equipment
Cost and Control of Tools and Equipment
WHY WE NEED TO MAINTAIN TOOL Tool control can be broken down into
CONTROLS two sections:
Since tools represent an important per- Control of hand tools (usually items cost-
centage of operating costs, you have a large ing under $300).
stake in maintaining control of their distribution
Control of tools and equipment costing over
and use.The word control implies both phys-
$300 and carried as a depreciable asset.
ical and accounting methods used to protect
and account for tools and equipment. Aside The factors affecting major both equip-
from occasional cases of recovery through in- ment and small tool costs are similar. The
surance, few contractors carry significant in- more important factors are discussed in de-
surance, and collecting for stolen, lost, wasted tail in the following paragraphs.
or spoiled tools is usually a waste of time.You
cannot protect yourself against such losses
unless, in one way or another, you provide a CONTROL OF THE ORIGINAL COST OF
method to control this valuable asset.The con- TOOLS
tractor must ensure that the following guide-
lines are implemented: When a contractor decides to purchase
a tool, he seeks to buy it at the lowest price.
Use equipment efficiently
He also selects a tool or piece of equipment
Use of assets economically on the basis of its operational efficiency and
suitability for a particular purpose.
Prevent hoarding of equipment by jobs
When it comes to the more frequent or
Reduce duplication of purchasing by office
almost constant purchase of small tools,
and field personnel
equipment, and supplies, you should estimate
Obtain maximum tool life the items needed for the coming year.
1
Tools and Equipment
Quotations are then solicited from various 2. A job copy should be prepared on all
suppliers. Blanket orders are placed and the purchase orders and materials contracts
items are drawn on an as needed basis. Up bought for a specific job.
to 25 percent savings can be realized over the
3. Terms of purchase should be printed on
more usual method of buying individual items
the purchase order. It is here that ship-
when needed.
ping instructions, terms of payment, war-
ranties, and the liability for legal fees in
the event of litigation should be covered.
The Accounting Departments Role in
Accounting procedures to be followed at
Tool Control
the time tools are received are built around ei-
As with physical control, accounting con- ther a receiving memo, the receiving copy of
trol begins with purchasing. Tools and equip- the purchase order, or the buyers copy of the
ment may or may not be bought specifically vendors delivery memo. The separate re-
for a job, depending to some extent on the size ceiving memo takes more time, but provides
of the job. In either case, they do not usually the greatest degree of protection.
appear on the materials budget. On smaller Many contractors, however, prefer to rely
jobs, they usually come from warehouse stock solely on the buyers copy of the vendors de-
and are normally controlled by the stock or livery memo. Using the vendors delivery slip
warehouse budget. takes the least time, but it is the most vulnera-
Tool and equipment costs are generally ble to error and fraud. It is almost too simple for
included in a bid as part of the operating over- warehousemen to merely sign the vendors de-
head. This cost is stated in terms of a per- livery ticket without counting or checking the
centage of labor and will run an average of 2 load or, in fact, without even checking the de-
percent of labor. When actual consumption livery memo to see that the goods received
exceeds the percentage allowed, it usually compare with the items listed. This practice is
means that there is a loss or theft on a scale an invitation to regular delivery people to short
that requires investigation. the loads and sell the missing items for their
own profit. This kind of loss is thrown into in-
We pointed out earlier that accounting ventory where it is hard to detect.
control on tools must start with purchasing.
Whichever form is used, it has the effect
This requires some qualification. Although
of telling the accounting department that
purchasing policies can readily be coordi-
goods have been delivered to the company
nated with accounting control, the procedure
and are now the companys responsibility. If
may not lend itself to such control without an
the goods go directly to a job, they will be
unreasonable amount of detail.
charged to that job. If they go into warehouse
There are three points at which coordi- stock, they must be accounted for there.
nation should be considered, regardless of A recommended minimum receiving pro-
the accounting method used. They are: cedure would involve these steps:
1. Purchase orders should be priced at the Unloading tools at the job or the ware-
time purchase is made. house.
2 TE 1
Tools and Equipment
Counting or measuring to determine the most effective method of identification, since

quantity delivered. it is almost impossible to cut the brand off lad-
Inspecting the condition of the items de- ders, tool boxes, or other items. Our last sur-
livered. vey shows a majority of the respondents
prefer this method over the use of painted
Checking the delivery receipt to determine markings which are relatively easy to remove.
that the items signed for are the same as Some suppliers will imprint your company
the items received. name on electrical cords, screw drivers, ham-
Once tools reach the warehouse, the ac- mer handles, etc. at little or no extra charge at
counting procedures and record-keeping vary the time of purchase.
a great deal. Much of the variation depends
Many electrical tools come with a one
upon the extent to which accounting control
year warranty, branding or engraving these
is applied to warehouse stocks.
tools with the month and year purchased, i.e.
Theoretically, proper accounting would 7/95 will make warranty claims easier to
require a perpetual inventory utilizing one of process.
the standard inventory methods. As a practi-
Good supervision remains the best de-
cal matter, the cost of a full perpetual inven-
fense against tool loss, theft and mis-use. An
tory far exceeds its value to the business.
employee on site should be designated as the
Many contractors merely charge all pur-
responsible person for ordering the tools
chases to cost at the time they are received
needed and verifying the need before dis-
and make no further attempt to account for
pensing tools. He should demand that broken
them. Then they rely solely on physical con-
tools be returned before replacing them. It is
trols to prevent loss.
also important to know the location of tools on
site to reduce duplication.
TOOL MAINTENANCE, WEAR AND TEAR
AND THEFT
Theft and the Elements
Wear and tear, thefts and losses account
for approximately 40 percent of your yearly in- Theft and spoilage caused by exposure
vestment in tools. Based on a spot survey of are easier to control in a yard or warehouse
several local mechanical contractors with an- than at the jobsite. Since on-site conditions
nual volumes ranging between $750,000 and vary widely, each must be handled according
$20 million, this staggering percentage aver- to the particular situation.
ages out whether calculated individually or To test the efficiency of the physical pro-
collectively. tection given your tools and equipment, you
should be able to answer the following ques-
Physical Control tions:
Personalizing tools is the first in a series Are they stored where the weather cannot
of steps that will help to physically protect hurt them?
them against theft. All tools, equipment, tool
Are they easy to steal?
boxes, and tool kits should be painted, sten-
ciled or branded. Branding is probably the Are they worth stealing?
TE 1 3
Tools and Equipment
Do you have an adequate system to de- those which are ready to be sent out on a job.
termine and control such losses? No tools should be repaired on the job. On-
the-job repairs not only take the time of the re-
pairman, but also the time of people who
Have a Well-Kept Warehouse
should be performing other tasks.
Another checkpoint in physical control is
a well-kept warehouse or yard. It is not un-
usual, in the absence of such a facility, to find Repairs and Rentals
that tools are being purchased while identi-
Some companies repair all tools. Other
cal items lay unused in the warehouse. An
companies have determined not everything is
experienced warehouseman should know
worthy of repair. Any item, such as a worn out
whether or not he has a given item merely by
18-inch wrench, is thrown away. It is much
looking. With an adequate accounting record
cheaper than having it repaired, since labor
and requisitions, you have the basis for the
costs are greater than a new 18-inch wrench.
cost of tools and equipment. However, ac-
counting methods are not a substitute for When a job is completed, all equipment
physical control. is returned to the shop. Equipment is never
taken directly from one job to the next. There
Ideally, a good storage area should be they are checked, repaired, rebuilt, replaced
enclosed. Doors or gates through which any and repainted before being shipped to other
items are received and removed should be in jobs. Rental equipment and scaffolding is re-
full view of the warehouse office. All doors and turned when they are no longer needed at the
gates should be supplied with locks and keys jobsites. It is the responsibility of the superin-
should be carefully controlled. As an added tendent to send all power equipment back to
precaution, locks should be changed from the shop when not in use. Superintendents
time to time. All official keys should be must also remind job foreman not to hoard
stamped with the words, Do Not Duplicate. equipment.
Similar items should be kept in the same One method of getting this message
section of your warehouse or yard. When this across is to convince the job foreman that this
is not possible, a bin card or some other record equipment is being rented to his job on a
should indicate that there are other items of weekly or even daily basis, and that it will in-
that kind at another location. crease the cost of his job if this equipment is
When used tools come in from jobs, they standing idle.Only job shacks, job trailers, and
should be inspected and listed, with usable job trucks are moved from one job to another.
items being stored immediately. Any item that Classes should be organized and fore-
requires cleaning, repair or salvage should be man and mechanics should be properly in-
placed in a separate area where salvage work formed and instructed in the proper use and
can be performed. Before they are stored, all care of tools and equipment. This not only
power tools and extension cords should be provides for the most efficient use of these
cleaned and checked to make sure they are items but also minimizes down-time due to
ready for use. If repairs are needed, they unnecessary repairs. Proper service and lu-
should be made before the tool is placed with brication or preventive maintenance is the
4 TE 1
Tools and Equipment
most effective and least expensive way of en- Contractors find it useful to employ a tool
suring long, productive use of tools and repair tag.This tag allows the person who dis-
equipment. covers a problem to explain it to the tool man-
ager in writing.
Negligent Use A simple red tag with wire is effective for
identifying defective tools, (see Exhibit 1) In
Here is a cost that is almost impossible this system, no tool would ever return to the
to evaluate, but a cost neverthelessand it shop for repair without a tag attached.
can be a substantial one.The previous items
deal with keeping obvious costs minimized Defective tools found on the jobsite by
and under control. Most of the systems men- OSHA inspectors will often be cause for a ci-
tioned lead to efficient use of tools and tation. Tagging defective equipment and its
equipment. Inadequate repair and mainte- prompt return to your repair facility will:
nance records and inadequate systems for 1. Protect your workers from injury caused
tool maintenance and repair may well result by defective tools.
in long work delays at a crucial moment on
a job. Not being able to locate a piece of 2. Protect you from possible citations for un-
equipment promptly may result in the in- safe or defective tools.
ability to use that equipment at time of crit- 3. Provide more productive up-time by re-
ical need. Even knowing where a tool or pairing tools and equipment in a timely
piece of equipment is may not be enough manner.
unless the mechanical condition of the item
is also known. Rules to Follow
Too much stress cannot be placed on the To summarize, there are four rules that,
importance of proper lubrication, cleaning, if followed will insure successful physical
adjustment, etc., in the field by the operating control of your tools and equipment.
personnel. If you are charged for something, be sure
Preventive maintenance programs, faith- you receive it.
fully followed, guarantee the most efficient Once you have it, store it where you can
use. Manufacturers invest thousands of dol- find it.
lars in providing operating and maintenance
Make sure it is safe from theft and weather.
bulletins with all tools and equipment.
Contractors can realize a commensurate re- When you release it, be sure you know who
turn by following manufacturer instructions. took it, what he took it for, and whether he
has a right to have it, and check to ensure
A record-keeping system containing the
it is on-site.
history of each major tool and piece of equip-
ment is worth the investment.
MANUAL TOOL CONTROL SYSTEMS
In the case of repairs, it is important that
problems with hand tools or small equipment Keeping track of tools and equipment,
be communicated accurately to the tool and exercising better tool cost control should
manager. be neither expensive nor complicated. An ef-
TE 1 5
Tools and Equipment
fective tool identification and control program system, the boxes are numbered and the
revolves around a simple record-keeping sys- stock of tools checked each time a workman
tem which essentially does two things: returns the box to the warehouse.
1. It provides basic data at a glance on a Sometimes tool boxes are controlled in
given piece of equipment or tool. much the same way as hand power tools. With
hand power tools, one of the simpler and more
2. It alerts your accounting department on
practical controls is an equipment location card.
how and where the tool is to be charged.
Proper use of a record-keeping system Essential to any adequate system of con-
develops internal cost-consciousness, trol is a physical inventory. It may be taken on
and lowers tool losses. an annual basis, but more often it occurs con-
tinuously throughout the year. When a type of
Tool Control Using Magnetic Boards item reaches the minimum inventory figure
that has been set for it, and the warehouse-
The simplicity and usefulness of a tool man is preparing a requisition to replenish his
record-keeping system makes effective use of stock, he makes a physical count of the items
several magnetized boards and tags, using on hand. If an adjustment is necessary, he ei-
them specifically to control location and flow ther makes it in his own record or prepares an
of major tools, machines and equipment. adjustment memo for the accounting depart-
In this system, a magnetic tag is pre- ment. Then the only bins to be counted at
pared for each piece of equipment, identified years end are those which have not been
either with the equipments serial number or counted during the year.
by a company-assigned number.
Tags of different colors are coded for Using A Card Index System
each job, with such headings as IN SHOP, Some contractors use a card index sys-
IN SHOP FOR REPAIR, OUT FOR RE- tem for each tool and piece of equipment,
PAIR. As each tool is moved, its correspond- and believe that this system minimizes tool
ing tag is moved on the board to indicate its shortages.
new location.
In this method, a contractor keeps all
It is a very simple system to set up and equipment, power and measured tools on indi-
maintain. Keeping the board current is the out- vidual index cards.This card index is kept in the
side superintendents responsibility. He can shop superintendents office where he is in com-
tell at a glance where each tool is located and plete control of all outgoing tools and equip-
whether it is available for use. ment.All hand tools are entered daily as ordered
in the various job tool boxes. One person must
Tool Control using a Bin Card Inventory be responsible for this task at all times, prefer-
System ably an employee on a permanent basis.
In most cases where a running inventory Index card entries should bear the job
is kept, it is kept on bin cards by units only. name and number, the tool being used, the
Tool boxes stocked with all the required tools date the equipment is sent out, and finally,
are sometimes furnished to workmen. In this who is using it. Return of equipment or power
6 TE 1
Tools and Equipment
tools from job to shop is checked off on the For those contractors doing time and ma-
index card. terial or cost-plus work, and for those who de-
sire this information for more detailed cost
When a job is completed, final check off
control systems, operational costing of tools
of the index system will indicate whether there
and equipment is required.
are equipment or tool shortages. The foreman
is immediately notified of these shortages by These costs consist primarily of:
the shop superintendent who is the key person 1. Cost of transporting to and from the
who must keep track of and communicate his jobsite
awareness of shortages. A reliable shop su-
perintendent often revisits a large job with the 2. Cost of connecting and disconnecting
foreman or field superintendent after the final 3. Cost of oil, fuel, and electric power
job pickup. This can result in the recovery of 4. Cost of stand-by labor.
many hundreds of dollars of lost or misplaced
tools at the jobsite. As a further aid to identifi-
COMPUTERIZED TOOL CONTROL
cation and control, it is possible to set up Gang
SYSTEM
Boxes. These boxes are painted, numbered,
and permanently etched. Large tool and equipment inventories ne-
cessitate the use of a computerized data base
Equipment Record Card System to track tool locations and usage history. Many
different over-the-counter programs exist
Another method is a record card system. which can be used to establish a database for
The card is legal size, printed on both sides tracking the location of tools and equipment,
and divided into four sections: vital statistics along with whatever other useful information
(type of article, size, price, age, rental rates, you may wish to compile about a particular
etc.); inventory record; repair record; and a piece of equipment, such as its maintenance
rental income and service record. or usage history.
Information recorded at the top of the Each piece of equipment is assigned a
card describes the equipment, its specifica- control number, using whatever system of num-
tions, purchase price, estimated life, depreci- bering is most convenient for the given volume
ation, duration of service and pro-rated daily, of equipment, and this number is entered in the
weekly and monthly rental rates. Also computer along with relevant data about the
recorded is information designed to simplify item, such as serial #, manufacturer, model,
identification of the equipment. Owners No. date of purchase, replacement value, etc. A
is the number to be painted on the equipment, similar list of the active jobs is prepared, and
using any system the owner may employ. each piece of equipment is associated with the
Mfg.s No. is the serial or model number as- job at which it is located. Shipping memos are
signed by the manufacturer. Of added inter- generated in the shop when equipment is sent
est is dates of inventory and repair. The to a job or is returned from a job, and these are
inventory record portion of the card shows an- processed on a regular basis. The result is a
nual depreciation and inventory value of a par- database which can be used to generate re-
ticular piece of equipment. The repair record ports on the location of all equipment, or the
pinpoints date, type and cost of repair. specific equipment located at a particular job.
TE 1 7
Tools and Equipment
SEE EXHIBIT: house transfers, and other documents provide

#2 Rental Equipment Master List data on units received, disbursed, and trans-
ferred, together with dates and prices.This in-
#3 Rental Picking/Packing list formation is entered into the computer.
#4 Rental Days Used Report The software can then produce a record
#5 Monthly Rental Invoice of charges and credits for tools and equipment
sent to, or returned from jobs. It can also pro-
#6 Location of Rental Equipment vide, in a matter of minutes, a fully priced and
Aside from the value of being able to lo- extended warehouse inventory.
cate any piece of equipment from among a large Small tools can be handled in a similar
inventory, a computerized database of the manner, but it is better to keep a separate in-
equipment inventory is an invaluable tool for ventory of these items. A practical rule of
keeping maintenance records on time and ma- thumb of charging out small tools to jobs is to
terial jobs, and to help in the accounting process charge the jobs and credit the inventory for 90
for the generation of revenue from equipment percent of new value when they are taken out.
rental. Complex programs can be purchased or On their return, credit the jobs and charge the
written which will not only track the location of inventory for 50 percent of the same value.
the equipment, but will calculate the length of New tools are charged to small tools inven-
time a particular piece of equipment spent on a tory. Any difference between the perpetual in-
job site. This information, coupled with rate inventory kept on this basis and the physical
formation, is used by the program to calculate inventory at the years end would go to an ac-
charges to the jobs, and generate invoices.This count for unabsorbed small tool cost which
information can be generated automatically would be incorporated into general overhead.
from the relatively simple entries of the dates If the unabsorbed cost varies too far from ac-
that an item leaves and returns to the company tual as determined by an annual inventory, the
shop. Systems are available that will not only percentage can be adjusted.
help keep maintenance records, but will assist
in tracking equipment costs to whatever level of One useful byproduct of computeriza-
detail is desirable.Work orders for regular main- tion is the ability, on large jobs, to furnish the
tenance can be generated automatically based jobsite purchasing agent or warehouseman
upon criteria that can be established in the pro- with tab runs of the central warehouse in-
gram. Any number of routine accounting and ventory. With such information at hand, job-
maintenance record keeping tasks can be site personnel can tell at a glance whether to
made easier by using an efficient and informa- buy an item or order it from stock. This pre-
tive database as part of your equipment control vents duplicate buying and accelerates the
procedures. turnover of inventory.
The development of computer software
programs has changed the economics of The Future Is Now
priced and extended perpetual warehouse in- New computer based systems are now
ventories. In a typical installation, each item available that can give you the ability to main-
in the inventory is given a stock number. tain tool and equipment inventories using the
Receiving memoranda, requisitions, ware- universal product code, more commonly
8 TE 1
Tools and Equipment
known as the bar code system. This system There is a constant contest between the
requires each item to be labeled with a bar expense involved in maintaining control and
code and then scanned with a hand-held scan- the savings that can be realized.Also stressed
ner, located at all distribution points. Company is the urgency of tool control, with the word
Inventory, Job Status, Job Rental, Destroyed control referring to both physical and ac-
or Lost Tools, Transfer and Monthly Tool Cost counting methods aimed at protecting and
Reports are available with this system. logging tools and equipment.
From the material presented above, we
CONCLUSION believe that it should be apparent that me-
Few mechanical contractors have as chanical contractors who make full use of the
much control over their tools and equipment control methods available today will gain a
as they would like to have. considerable competitive advantage.
TE 1 9
Tools and Equipment
10 TE 1
Toolsand Equipment H
Exhibit #2
Rental Equipment Master List
Page #
Date Last Revised
Rental Equipment # on Rate cost Total Replace Replace

Equip ID Description/ Hand Each cost Each Total
Serial Size
lMake
/Model
1 0 325
I
A22-004 2 HP Air 175 319 319 325
.
Compressor
A22-014 2.5 HP Air 1 1 300 400 400 500 500

Compressor
A22-I 00 10 HP Elec 1 1 300 00 2500 2500

Air Comprs
B22-045 Gang Box - 60 53 70 700

*
42000 700 42000
Cabinet
B22-059 Work Bench

- Rolling
11 0 116 1165
I 12815 1165 12815
B22-109 Cabinet, 26 0 60 600 15600

600 15600
Tool I
C62-150 Pipe Carrier,
Grasshopr
5 5 150 550 7150 550
I
7150
TE 1 11
E!El Toolsand Equipment
Exhibit #3
Rental Picking/Packing List
Page #
Job #
Customer # Invoice #
Attn:
Qty Rental ID Description Serial Make Model Rental

Date

1 A22-O04 2 HP Air Compr L032595 Speedaire 2/1 0/96
3 B22-059 Work Bench 23176 knaack 59 2110/96

Rolling
1 P62-093 FSE Tube 4696 2/1 0/96

Squaring Mach
2 P63-024 Tube Partner & 5188 Wachs 4sf 2/1 0/96

Facer
1 P62-154 Tube Partner & 790027 572 2/1 0/96

Facer
1
1 W42-128 Welder, Ord 73871 3/4 Cap 750 2110/96
1 W42-201 Welder, Ord 2855 l% Cap 1500 2/1 0/96
12 TE 1
Toolsand Equipment
Exhibit #4
Rental Equipment Use
Page # Days Used Report for Period:

2/01/96 thru 2/29/96
Unit # Invoice Description Date Actual Inv Days Days Expected

Serial Rented Return Qty Used Calc Return
Date Date
/422-1 00 3442 10 HP Elec 211/96 2/1 3/96 2 12 24

Air Compr
B22-045 3485 Gang Box - 1/3/96 2 29 29 4/96

Cabinet
B22-059 3454 Work Bench 12/1/95 1 29 29 4/96

- Rolling
B22-109 3448 Cabinet Tool 2/1 2/96 2/20/96 1 8 8
C62-150 3472 Pipe Carrier 2/3/96 2/5/96 1 2 2

Grasshopr
TE 1
E?l Toolsand Equipment
Exhibit #5
Rental Invoice
Page # Report for Period:

2/01/96 thru 2/29/96
Job #
Discount:
Unit # Invoice
II
Description Monthly
Base
Rate
SiTE
B22-045
H22-100
F22-050
II 3485
3453
I 3468
I
Gang Box - 70
Cabinet
Rotohamr,
small elec
I Desk
I
I
I 35
90
29
29
I
1/3/96
113196
T 2
1
140
90
35

F22-051
S22-080
I 3469
II 3455
I Chair
Saw,
Portaband
I 10
I
100
T
29
18
1/3/96
2/5/96 2/23/96
2/23/96
2
1
20
21
60
T
V32-005 3531 Vacuum 120 3 2/9/96 2/12/96 1 12
Cleaner -
Clean
Room
I
i I
Total Net Amount
w
14 TE 1

Tools and Equipment
Exhibit #6
Current Location of Rental Equipment
Page # Report for F wiod:

2/01 /96 thrl 2129/96
Job # Job Name Rental ID ! QtY I Description Rental Date I
4250 IBM Site #2 W42-050 1 Welder, Ord % 2/8/96 I

.
4266 HAL Site #3 W42-051 1 Welder, Ord % 1115195 I
4267 AT&T Site #42 W42-052 1 Welder, Ord X 12}3195
W42-053 1 Welder, Ord % 12/20/95
W42-054 1 Welder, Ord % 1/6/96
W42-116 1 Welder, Ord % 2/8/96
HzE-
4191 I Baby Bell
W42-117
W42-I 18
W42-119
1
1
Welder, Ord %
Welder, Ord %
Welder, Ord %
11/5195
12/3/95
1/6/96
I
TE 1 15
Bulletin No. TE 2
How to Cost Corporate-Owned Equipment
Equipment and tools are part of the cost company, a central system can be set up and
in the day-to-day operation of any business. administered as a separate department, or it
Too often they are not given the consideration can be administered by an individual with
they deserve as a direct job cost. In addition other corporate duties.
to labor and material expenses, a special ef-
fort must be made to recover the expenses of By determining the true cost of the day
equipment and tools as part of the true-cost to day use of tools and equipment, additional
picture of each job. corporate profits may be realized.
Intracompany rental charges are ar-

rived at by totalling the expense of equipment
CENTRALIZED EQUIPMENT CONTROL ownership, which would include deprecia-
A system for centrally controlling corpo- tion, garage labor, licenses, property taxes,
rate-owned equipment is based upon collect- insurance, parts, tires, and administration
ing and distributing costs via intracompany salaries, as well as other operating costs of
rental charges to jobs and departments. The the vehicle, machinery or equipment on an
charges are determined by the amount of time annual basis. This total is then broken down
each piece of equipment is required for com- into monthly rates for each piece of equip-
pleting a job. ment, and charged as it is used by a job or
department. These rates are adjusted annu-
One advantage of a central system is a ally to compensate for expense changes.
reduction in the waste associated with idle
equipment. By using a central system, this The following are the steps used in es-
waste is eliminated through a more compre- tablishing a costing rental rate and the sys-
hensive utilization of equipment throughout tem for job reporting from which you would
the company. Depending on the size of the accumulate the equipment costs per job:
1
Tools and Equipment
I. Asset C. Add adjusted purchase price

to total life expenses and di-
A. Machinery and Equipment
vide annual cost by anticipated
B. Trucks and Autos
months of use for average
II. Annual Costs monthly cost.
A. Maintenance and Repair An example of this system:
1. Service A company purchases a piece of
2. Tune-up equipment for $6,000. As its replacement
3. Tires value, to protect against inflation, add 10 per-
4. Oil cent or $600. For its salvage value, deduct 15
B. Interest percent, or $900.Thus, the adjusted purchase
price is $5,700.
1. Based on purchase price
years of life at prevailing inter- To figure annual cost: Estimate 10
est rate on unpaid balance. percent for repairs, or $600. Interest, at 7 per-
cent, comes to $420.1 Figure 4 percent for in-
C. Insurance surance, at a total of $240. Add license and
D. License and Taxes taxes, at 2 percent, or another $120, and the
E. Administrationcost of salaries for
purchase, supervision of mainte-
nance, licensing, disposal, and job 1
The interest percentage referred to in the above ex-
assignment. ample is based on the assumption that the unit will be
paid off within the equipments anticipated 6-year life
III. Establishment of Salaries for Purchase, span. Assume interest rate is 12 percent on unpaid bal-
Supervision of Maintenance, Licensing, ance. A simple computation is as follows:
Disposal, and Job Assignment.
PURCHASE
A. Asset Purchase Price 1st Annual $6,000 $ 720 interest @ 12%
Reduction 1,000 on $6,000
1. Add to purchase price a
factor for inflation for re- 2nd Annual $5,000 $ 600 interest @ 12%
placement cost. Reduction 1,000 on $5,000
2. Deduct from purchase
3rd Annual $4,000 $ 480 interest @ 12%
price a factor for salvage.
B. Annual Expenses
4th Annual $3,000 $ 360 interest @ 12%
C. Anticipated Life Years
D. Expected Months of Use in a
Year 5th Annual $2,000 $ 240 interest @ 12%
IV. Costing or Intracompany Rental Rate
6th Annual $1,000 $ 120 interest @ 12%
A. Purchase price plus replace- Reduction 1,000 on $1,000
ment factor, less salvage value.
B. Annual expenses multiplied by -0- $2,520
anticipated years of life. $2,520 divided by 6 = $420 annual interest cost.
2 TE 2
Tools and Equipment
administration cost to do all this at 3 percent, B. Job Reporting

for another $180. 1. By foremans time sheet
a. List total equipment on
The total annual cost is $1,560.
job
Anticipated life of the equipment is 6
b. Indicate which is in use by
years; figure 6 times $1,560 equals
showing numbers of
$9,360.
hours in use.
Combining the adjusted purchase price C. Accumulation of Cost
with the annual cost over the next 6 years, 1. From weekly personnel time
add $5,700 and $9,360, for a total of sheets
$15,060, as the total cost to recover over 2. Incorporate equipment cost in
that 6-year period. monthly progress reports and
division Profit and Loss state-
This piece of equipment is getting more ment.
costly by the moment. Break down this fig- This method of calculating equipment
ure: divide $15,060 by six years, for an an- cost is solely for the purpose of estimating
nual cost of $2,510, or a cost of $280 per and job costing of job-related expenses.
month, rounded off. Corporate and any other divisional overhead
expense must be added along with profit to the
Using 4.33 weeks per month, that figures cost rate. The only taxes not accounted for in
to $65 per week, or $13 per day. In an 8- the costing rate would be a retail sales tax ap-
hour day, the cost is $1.65 per hour for a plying to the state in which the equipment is
piece of equipments use. being rented.
A final word on costing of equipment to
V. Job Equipment Costing projects: some mechanical contractors
charge equipment to the negotiated contracts
A. Assignment from Stock or Yard
but disregard this procedure as a needless
Storage
formality on hardmoney contracts.Thus, true
1. Job Request equipment costs remain buried in unab-
sorbed indirect job costs. The obvious conse-
a. Location quence of this practice is understatement of
b. Anticipated use period true job costs with possible or likely error in
c. Type maintenance & ser- future estimates which ignore real cost of
vice required equipment.
TE 2 3
Bulletin No. TE 3
Vehicle Maintenance Program
PREVENTIVE MAINTENANCE check, tire inspection and a review of the ve-

Whether you operate a large or small hicles general condition is a good practice.
fleet, the equipment in it must be maintained Any problems noted are called to the atten-
if you are going to get a profitable return on tion of the proper person who then evaluates
your investment. Probably in smaller fleets their importance and need for repair. (See
preventive maintenance is more critical than Exhibits A and B, Vehicle Check/Repair
in the larger ones. An operation with only a Requests).
few vehicles depends on these units to keep
Oil and filter changes, lubrication, and all
it in business. Downtime is critical to any op-
other inspections and/or repairs should be
eration, but more so when there is not a sub-
performed in accordance with the manufac-
stitute or replacement unit on hand. The
turers prescribed intervals for each vehicle.
operation that has just enough vehicles to get
the job done can be seriously impaired by an Several things in addition to preventive
extended period of unscheduled downtime. maintenance affect the cost of maintaining
Contractors find that good maintenance and operating your fleet of vehicles. These in-
pays in the long run. Vehicles that are kept in clude: tire inflation, loading and weight distri-
peak working condition are available whenever bution, and operator habits. Periodic training
they are needed.Except for unpredictable emer- sessions can be held with the vehicle opera-
gencies, you will not be inconvenienced by lost tors to remind them what happens when rpm
time as a result of poor maintenance practices. limits are exceeded, an engine is consistently
lugged, a clutch is ridden or gauges are ig-
BASIC REQUIREMENTS nored. Fuel economy can be improved by
For most vehicles, a weekly walk- reduced idling time on engines, keeping en-
around inspection of the unit with emphasis gines tuned, keeping air/fuel filters clean, and
placed on battery inspection, water level, oil avoiding jackrabbit starts.
1
Tools and Equipment
RECORDKEEPING manufacturer? Is the operator abusing the

equipment? Are we repairing the unit as effi-
A well-designed maintenance record- ciently as possible? All these questions and
keeping and report system can be an effec- many more are of concern to the management
tive cost-saving tool. It is ideal to keep of a company that values the dollars of in-
individual, detailed records on each vehicle. vestment it has made in a fleet of vehicles.
This helps to control the costs involved with
repair and maintenance of these vehicles. Certainly no piece of paper, no statisti-
There is a need to have a grasp on such costs cal study or report ever maintained a vehicle.
to assure satisfactory performance of a vehi- It is necessary, however, for those involved in
cle at the lowest possible cost. fleet maintenance to understand the impor-
tance of this phase of running an operation
A review of vehicle records will substan-
and to place it in the proper relationship to
tiate preventive maintenance jobs on specific
other management skills.
components. Most of the data for putting to-
gether the start of a preventive maintenance
program will be in hand when you start closely FIXED COSTS/VARIABLE COSTS
examining repair bills or records. A good pre-
ventive maintenance program tries to antici- Take a look at your operation. Determine
pate failure and replace a component whose where to devote your greatest attention. First
number is up. determine which cost items are subject to the
greatest improvement and over which you can
Any reporting or recordkeeping system in exercise some significant degree of control.
a maintenance activity can be considered ef-
fective only if savings accrue to the company Such items as vehicle depreciation, inter-
as a result of its existence. Effective and ac- est on investment, taxes, registration fees and
curate reports can help pinpoint repetitive re- permits, administrative salaries, building and
pairs, provide a historical life of components, office overhead and insurance premiums rep-
identify nonproductive vehicles and provide resent costs of a generally fixed nature. While
management with scheduling tools. Put to- subject to some movement, they rarely have
gether, these can result in better control of the much effect on changing the bottom line totals.
costs associated with operating and main- Those cost items subject to large fluc-
taining a large number of vehicles and more tuations and over which a significant degree
accurate evaluation for investment decisions. of control can be exercised are those usually
A company may have many thousands of referred to as vehicle running costs. It is in
dollars invested in its equipment, and expen- the cost areas of fuel, shop labor, parts and
ditures must be made over the life of a vehicle tires where controls can and must be em-
to keep it running efficiently. Dollar costs of ployed.
equipment have increased over the years, and
the contractor must concern himself more and REPAIR OR REPLACEMENT
more with his expenses against a unit of equip-
ment. Is the operating cost, in his judgment, In deciding between repair or replace-
outweighing the value of the vehicle? Is the ve- ment, the considerations to be weighed by the
hicle performing to all levels promised by the management include the following:
2 TE 3
Tools and Equipment
1. The length of time the equipment will be 6. Should equipment be replaced instead of
used. repaired?
2. The job the equipment is expected to do.
CONCLUSION
3. Will the equipment be worth repairing? A well-balanced preventive maintenance
4. Will the equipment perform economically program is far less costly both in time and
after repair? money than running the risks of breakdowns
on the road, which many times involve ex-
5. Resale value of equipment after repair. pensive repairs.
TE 3 3
Tools and Equipment
EXHIBIT A
VEHICLE CHECK REPAIR REQUEST
4,000 MILE CHECK
Date: __________________________________ Mileage: _______________________________

Unit #: _________________________________
PART I
( ) Change engine oil and filters Qts. added ______________________________

( ) Check tire tread depth Depth _________________________________
( ) Check radiator coolant level Qts. added ______________________________
( ) Check anti-freeze to 30F Qts. added ______________________________
( ) Check radiator and heater hoses
( ) Check drive belts
( ) Check for fluid leaks
( ) Check battery
( ) Check exhaust system
( ) Check for loose wheel lug nuts
( ) Note any accident damage
( ) Note overall condition
( ) Check for driver suggestions
PART II
( ) Check brake adjustment

( ) Check clutch adjustment
( ) Check accessories and lights
( ) Grease driveline and suspension Location: _______________________________
( ) Check tire inflation pressure Mechanic: ______________________________
4 TE 3
Tools and Equipment
EXHIBIT B
VEHICLE CHECK REPAIR REQUEST
12,000 MILE CHECK
Date: __________________________________ Mileage: _______________________________

Unit #: _________________________________
( ) Change engine oil and filters (Oil sample)

( ) Chassis lubrication
( ) Fluid levels
( ) Brake adjustment (check for worn linings)
( ) Check for fluid leaks
( ) Inspect clutch and clutch adjustment
( ) Check for loose components
( ) Check steering linkage
( ) Check shock absorbers
( ) Check tire tread depth
( ) Check springs and suspension
( ) Check radiator and heater hoses
( ) Check drive belts
( ) Check exhaust system
( ) Clean battery connections
( ) Check accessories and guages
( ) Safety equipment mounted and complete
( ) Check for engine oil leaks
( ) Check fuel pump
( ) Check air cleaner for restrictions and vacuum systems for leaks
( ) Check alternator with guage ____amps ____ voltsMechanic: ______________________________
( ) Check all lights Location: _______________________________
TE 3 5
Bulletin No. TE 4
Bulletin
Contractors Equipment: A Guide to Better

Security
Recent news stories tell a grim story POOR SECURITY AFFECTS

about theft and vandalism in the EVERYONE
workplace. Construction sites are no
exception. Remember, when job sites have
inadequate security, contractors and
Security on construction sites their subcontractors are exposed to:
should be a major concern for all
contractors. The total losses due to
theft and vandalism on construction Theft by employees, and the public
sites continue to be a major resulting in loss of material and time
concern. Industry wide figures are delays to procure replacements.
not available, but CNA losses have
been hundreds of millions of dollars Vandalism by employees, former
over the last decade. employees, local gangs or children.
While you may not be able to keep Arson or accidental fires caused by
professional thieves from stealing your vandals, vagrants or children.
property, you can make it extremely
difficult for them and virtually impossible Injuries or fatalities to children who
for amateurs. wander onto an unprotected
construction site.
The layout of a construction job site and
its corresponding security plan often THEFT COSTS YOU IN MANY
make the difference between controlling WAYS
losses and suffering costly thefts. A job
site without guards, fencing, adequate Some contractors ignore job site theft or
lighting or controlled exits makes a very decide not to take action against it. They
easy target. simply add stolen property cost to job
costs. These direct costs can be
There is no perfect security program substantial - as much as 3-5% of the job
because job sites in different locations cost, according to one estimate. But
require different protective measures. there are also some significant indirect
costs of job site theft:

When stolen tools aren't available, Get Help From Law Enforcement
delays inevitably occur and productivity
Well before you break ground or move
drops.
in your equipment, you should meet with
officials of the appropriate law
Contractors sometimes buy cheap
enforcement agency.
tools to cut theft losses. These tools
may be too shoddy to steal, but they
You may want to give them the details
also negatively affect productivity
of your construction project, type of
because they work poorly, wear out
construction, work schedule, project
quickly and break.
starting time and the expected date of
completion. Names and phone numbers
When theft is rampant at a job site,
of key personnel and contact
employees' tools are likely to be stolen.
information during non-working hours
Some union contracts hold employers
are also essential.
responsible for theft of employees' tools.
Keep the police posted on such things
Employer-tolerated theft hurts
as delivery of critical material and
employee morale. Honest workers don't
unusual job site activities that might
like working where theft is ignored. Poor
require their special attention. Tell the
morale leads to poor productivity and
police how your equipment is specially
friction. Management is seen as weak
marked for identification.
and ineffective.
Ask the local law enforcement agency to
Even if you are willing to endure the
conduct a crime prevention survey of
direct costs of theft, you may want to
your site. If you are going to use security
consider the indirect costs.
personnel, it is sometimes good public
relations to hire off-duty law
GENERAL GUIDELINES FOR enforcement personnel.
IMPROVING SECURITY AT YOUR
CONSTRUCTION SITE Speak Out on Theft!
Make Job Site Security a Joint "Everybody is doing it. The company
Venture doesn't seem to mind."
Ideally, responsibility for initiation and That's likely to be the rationale for theft,
funding of a good vandalism and theft even among usually honest employees,
prevention program should be shared by when an employer doesn't clearly state
the general contractor and opposition to theft and act to prevent it.
subcontractors, since each has You may assume employees know you
exposure to substantial loss. oppose theft, but they may believe you
don't care if you don't take specific
The subcontractor is normally not in a antitheft steps. Consider the following:
position to stipulate what security safe-
guards are necessary for the protection Conduct meetings and give handout
of his equipment unless an agreement materials to let employees know you
has been made with the general expect honesty on the job site.
contractor.
Explain your policy on the "gray areas"
A good program can be developed in taking scrap lumber or cut-off pipes,
the early stages of the construction personal use of company vehicles or
project which will involve both in sharing "borrowing" tools for overnight or
the cost and responsibility. weekend use.

Ask employees to report theft to also interested in your efforts to ensure
management via a phone number that their safety.
they can use after hours and on
weekends. SUGGESTIONS FOR
SAFEGUARDING YOUR JOB SITE
Many would-be thieves will be deterred
by the knowledge that someone can Organize Your Storage Area
turn them in anonymously. But before
acting on anonymous tips, discuss the A well-organized storage area on the job
case with your lawyer. site should include the following:
Encourage Security Suggestions An efficient receiving area that

From Your Employees confines material to a specific area.
Employees can play a vital pan in A security fence, at least eight feet in
reducing losses of small tools and height, enclosing the entire storage
materials by constant surveillance of area.
your job site. In preventing vandalism
and theft, they can work with you as well Lighting after daylight hours.
as work for you. Watchmen should also be considered.
Many small day-to-day losses must be Locked enclosures for storing small
paid from profits. Don't be afraid to let high-value items.
your workers know that they could
be fired if they are caught stealing. Most Mark Equipment
labor contracts contain a clause listing
dishonesty as one of the just causes for One of the first things thieves do after
which you may fire an employee. they steal equipment is to remove the
plate on which the manufacturer has
Prosecute those who steal to let other listed the model and serial number.
employees know that you mean Even if you are absolutely certain the
business. machine belongs to you, positive proof
is a legal requirement to reclaim it. Keep
Involve Neighbors in Watching Your written records of all vehicle
Job Site identification numbers on equipment,
and keep a color photo of each unit.
Neighbors and their children can Maintain an accurate inventory.
become efficient watchdogs of your
project during evening hours and on Use a hardened steel punch or etching
weekends if you solicit their help in a tool to duplicate the serial numbers in at
friendly way. least two places, one obvious and one
hidden. Record the locations and the
Contact neighbors in the immediate numbers. Post warning notices on
area around your job site. Don't machines advising that all VIN's have
overemphasize your concern about been recorded. If your equipment is
stopping crimes, stress the ways you stolen and recovered in another town or
are promoting safety so their children state, police can trace ownership back
won't be tempted to play in the area and to you and you can make positive
get hurt. identification.
While they may be sympathetic to your Consider painting equipment a

security problems, your neighbors are different color to aid in identification.

Mark the tops of cabs or ROPS to aid equipment and supplies. Equipment that
in aerial identification. cannot be fenced should be disabled at
night and on weekends. Removing keys
Immobilize equipment by removing the is not enough. Switch-jumping is as
rotor or lowering the blade or bucket. easy on equipment as it is on
Remove the battery and electric starting automobiles. From a liability and safety
system, particularly when equipment is standpoint, all hazardous materials
not used daily. (poisons, solvents, flammables and
explosives) should always be fenced.
Install anti-theft devices such as fuel
cutoffs, hydraulic bypasses, track locks, Although some protective fencing, such
hydraulic arm locks etc. as that used on a downtown
construction site, is made of plywood, it
A good inventory control, with a "check is wise to consider the use of an
in and out" system for tools issued to occasional section of chain-link fencing.
employees, could save your project from This not only provides a better
excessive losses. Not all thefts are from opportunity for surveillance at off-duty
the outside. Permanently mark company hours by security patrols and police, but
tools and keep a record to whom they also offers a view of your construction
are issued. Lock gang boxes and supply project to the general public.
sheds at all times.
Fenced-in areas should be "flushed" at
Prevent arguments over who owns a the close of the workday to make sure
tool or piece of equipment by making no unauthorized vehicles remain to be
available inexpensive die stamps or used later for removing tools, equipment
etching tools to employees so they can or supplies.
mark their own identification on personal
property. Post signs warning outsiders of security
guards, watch dogs and alarms. Use
Use Fences to Control Losses and signs and decals on equipment to offer
Prevent Accidents rewards for information leading to the
arrest of thieves or vandals.
Pay special attention to the fences on
your job site. They can be purchased or,
All construction property, whether it is
in some areas, leased as needed.
fenced or not, should have adequate
signs with lettering large enough
Fencing around the entire site or around
to be read at a distance. These should
storage areas and trailers will help
be posted at gates and on all sides of
control entrances and exits from the
the job site. Signs which give warning or
area.
information about any marking of
equipment with identification numbers
Fencing focuses all access through one
will deter thieves and discourage
or two points, making control easier.
vandalism.
Limit the number of gates and keep
them guarded or locked when not in
Secure Tools and Equipment
use.
Make sure storage sheds or fenced
Remember, a fence without strands of areas are used to properly secure all
barbed wire can be easily scaled by tools and equipment. Keep cabs on all
thieves and vandals with minimal risk. vehicles locked and remove ignition
On highway construction, fencing may keys when not in use. Use metal shields
be practical only round job site trailers, on equipment windows where practical,
storage sheds or compounds for and lock oil and gas tank caps. Disable

machines with hidden ignition cutout Spot-check materials and equipment
switches. Most losses are directly traced frequently, and do not allow empty
to carelessness by employees. cartons to accumulate, since they may
be used to take supplies off the project.
RELEASE KEYS TO Supervise all trash removal so that
SUPERVISORY PERSONNEL valuable tools or materials cannot be
hidden in containers and removed from
Controlling keys is an essential element the job site.
of limiting access to designated areas.
Key issuance must always be based Make Lighting Work For You
on actual continuing need and not on Lighting as a crime deterrent is a priority
convenience. Limit the number of in any plans to combat theft and
persons to whom responsibility of "key vandalism. Adequate night lighting is
control" is given. also recognized as a significant
deterrent to acts of "casual" or "impulse"
Keep up-to-date logs listing the type of crime.
keys issued, to whom, on what date and
for what purposes. Keep all unissued Prior to job start-up, temporary lighting
keys under lock, and keep extra keys to should be in place and plans should be
a minimum. made to expand its coverage as the job
progresses. Consider renting lighting
Change your locks periodically. systems if company-owned systems are
Considering the potential losses not available. Regardless of the fixtures
involved, this simple act is well worth the used, the office trailer, material storage
time and money. Extra-security locks, yard and equipment storage area should
such as those having changeable be illuminated. Critical areas should be
combinations, may be the answer. visible from the most heavily traveled
road bordering the site. A good lighting
To prevent unauthorized duplication, system can also be spotted during the
"plug" keys with a rivet through the bow daytime by would-be thieves who might
as a means of preventing alignment be casing the area.
needed for machined duplication.
The small cost of overnight lighting is
Monitor the Receipt of Deliveries smart business since it tells law
A standard procedure for checking enforcement agencies that you want to
material on and off the job site should help them protect your property and cut
be established and followed. down crime in the area.
Floodlight the perimeter of areas where
One person should be assigned to vehicles and equipment are stored.
maintain a tight inventory control of all Direct lights so they do not blind security
materials and tools delivered, signing for guards, police or the general public, and
each delivery only after carefully use enough lights to eliminate dark
checking the invoice for shortages. spots or shadows.
Critical material should not be stored on Report Theft and Vandalism Promptly
the job site any longer than necessary. No matter how small the loss from theft
Whenever possible, the delivery of high- or vandalism, report all incidents to law
value material or items known to be in enforcement officials. The information
critical demand should be timed on an you supply to them promptly may save
"as needed" basis in conformance with your job from a repeat visit or
your construction scheduling. discourage the vandals or thieves from

striking other construction projects. Don't allow employees to park on the
job site or next to a fence where tools
Accurate information will accelerate the can be handed to accomplices. A clear
possible recovery of your equipment or zone should be maintained adjacent to
apprehension of vandals. Make sure all fencing.
your company has an effective incident
report form and a complete record of Use proper locks on tool boxes and
model and serial numbers of all trailers. Limit the number of people who
equipment assigned to your project. have keys, and change locks frequently.
Also, keep in mind that accurate and Don't use stock padlocks with a widely
timely notification of loss must be made duplicated key series.
to [your insurance companys] claims
department. POLICE GIVE ADVICE ON
CONSTRUCTION THEFT
For your convenience, the form on the
following page can be used as a Law enforcement officials have
duplication/master form for a self audit identified the following common
of construction equipment and job site characteristics in construction
security. equipment theft.
CRIME PROOFING YOUR JOB A buyer for the stolen equipment

SITE and/or material is usually identified
before a theft is perpetrated. Therefore,
The most effective crime prevention the thief sets out to steal a specific piece
activities are often the simplest and of equipment or materials that have
least expensive. Here are some steps to immediate cash value.
help reduce theft:
Thieves will case a job site three or
Follow your company's rules in dealing four times, at different hours of the day,
with employees who steal. Dealing before the theft is carried out. This
consistently with employee theft will allows them time to determine the
discourage further theft. contractor's routine and to identify the
security measures at the job.
Use an on-time delivery system.
Arrange for deliveries when you need Most thefts occur in the evenings
the materials, not before. Don't let (usually within 30 - 45 minutes after
valuable items sit on your site to tempt work is ended for the day) and on
thieves. weekends.
Mark all equipment with an Many thieves will not attempt an

identification number and your company equipment or material theft if they
name and logo. Urge employees to cannot enter the job site, load the goods
mark their own tools. Without and be completely clear of the location
identification, police cannot prove a tool within five to ten minutes.
is stolen and cannot prosecute
suspects. ________
This bulletin was reproduced from a
Advise subcontractors of your CNA publication with CNAs
schedules. Don't allow them to make permission. MCAA gratefully
deliveries after working hours. acknowledges CNA for its
contribution to the Management
Methods Manual.

consult with your companys attorney
For more information, please call CNA before deciding how to proceed in any
toll-free at (866) 262-0540 or visit specific situation.
www.cna.com/riskcontrol.
The content of this publication is
The information and suggestions protected by CNA Copyright 2005
presented in this document should not Continental Casualty Company. All
be construed as legal advice. Please rights reserved.

CONTRACTORS EQUIPMENT SELF-AUDIT
I. EQUIPMENT IDENTIFICATION Yes No
Is a current equipment inventory list maintained?

Does this inventory list provide:
- date of purchase?
- serial and model number?
- location of identifying numbers on equipment?
II. JOB SITE PROTECTION
Is there a need for a watchman service?

Are operator cabs locked when not in use?
Are operator cab windows protected against breakage?
Are operating control panels covered/secured?
Are fuel and oil caps locked?
Are ignition locks provided and used?
Are batteries or rotors removed when equipment is left unattended for
long periods of time?
Is equipment corralled overnight?
Have you notified local law enforcement of your job site location and
requested to increase patrol?
Have the operators been instructed to look for signs of tampering or
vandalism?
III. KEY CONTROL
Has a competent person been assigned the responsibility of controlling

key security?
Are keys removed from equipment daily?
Have you identified a secure place for keys to be stored during
non-use periods?
Are all keys accounted for daily?
IV. YARD SECURITY
Have you provided fencing for high-valued equipment?

Are gates locked and checked each night?
Is adequate yard lighting provided?
Have you posted signs to discourage vandalism and theft?
V. GENERAL
Have you explained your company's policy on borrowing tools for

overnight/weekend use?
Have you explained your company's policy on taking scrap lumber,
copper, piping and wiring home?
Have you solicited help in a friendly way from nearby neighbors to watch
your job during nonworking hours?
Bulletin No. TE 5
Bulletin
Temporary Usage of HVAC Equipment

Introduction
Todays building owners need to understand The return side of the system is
the risks involved in using permanent HVAC extremely vulnerable since it is
systems to provide temporary heat and/or under negative pressure during
air conditioning during construction. operation. Be sure to protect all
intake related parts of the system,
Owners should consider using temporary whether outdoor air grilles, ceiling
heating, cooling and dehumidification plenums, transfer vents, etc. to
equipment specifically designed to be used ensure contaminants are not
for climate control during the construction entering the mechanical system.
process.
Seal all return system openings with
The construction document should define plastic. It is recommended that you
the requirements for temporary use or photograph the sealed equipment to
permanent equipment. Often, permanent document your procedures.
equipment is not designed for early start-up
conditions, filter change and equipment When there is a lot of debris at the
cleaning, and the associated costs should site, that portion of the system where
be clear in the bid and plan documents. work is going on should be
dampered off. If the whole site is at
Consult your builders risk insurance policy risk, the entire system should be
for guidelines regarding temporary usage of shut down and protected.
HVAC equipment. Management Methods
Bulletin IN 10 may also provide useful It is preferable not to use the
information regarding these policies. permanent mechanical system, but if
it is required to be used, temporary
The following provides a summary of filters should be added to all
requirements of the SMACNA IAQ (Indoor appropriate grilles, intakes, etc.
Air Quality) guidelines for an occupied These filters must be maintained
building under construction, 2007, throughout their operation and then
Chapter 3: replaced at the end of the project.
HVAC equipment must be protected DO NOT USE THE MECHANICAL

from dust and weather. ROOM FOR STORAGE.

Increase filter efficiency, if contaminants. Do not forget to
necessary, and use activated filters rebalance the system, if necessary.
if there are odor problems.
LEED Considerations
When systems are off, all diffusers
and outlets should be sealed with As a mechanical contractor on a LEED job,
plastic and protected. it is important to take time to consider the
latest LEED NC version, which provides
On existing duct work, professional points for preventing contamination of
duct cleaning is sometimes building systems and materials during the
necessary. construction process.
Source control is an important LEED requirement impacts the mechanical

method to keep contaminants out of contractor in at least the following areas:
a building. For the mechanical
contractor, this typically means 1. An indoor air quality (IAQ)
mandatory use of low volatile management plan must be adopted.
organic compound (VOC) caulks, The contractor should receive a
adhesives, sealants, cleaning fluids, copy of this plan before bidding on
etc. This would also include welding, the job to determine its
which could be more problematic. responsibilities. As the contractor,
you may or may not be asked to sign
Pollution sources may be exhausted off on the plan, but have a copy
through local, portable exhaust signed and dated by the architect-
systems. engineer or the general contractor in
case changes are made and you are
Portable air cleaners may not notified. In some cases, you
sometimes be required. may even be asked to provide your
own procedures on how you keep
Items that give off VOCs can be the mechanical systems free from
controlled by enclosing or sealing. contaminants.
Pathway interruption is often used to 2. Credit 3.1 requires you to meet or

keep contaminants from spreading exceed control measures as
through a worksite. This can involve recommended by SMACNAs IAQ
the mechanical contractor when the Guidelines for occupied buildings
HVAC system is needed to under construction, 2nd Edition 2007,
depressurize the work area. Take Chapter 3. The SMACNA Guideline
care to protect the system when it is addresses HVAC protection, source
used in this way. This might mean control pathway interruption,
extra filter changes and even duct housekeeping and scheduling.
cleaning due to heavier air flow.
3. Credit 3.1 states that If permanently
A recommended exhaust rate for installed air handlers are used
negative pressure for this guideline during construction, filtration media
is 10% greater than the supply air with a Minimum Efficiency Reporting
rate. Value (MERV) of 8 shall be used at
each return air grille, as determined
Whether using positive or negative by ASHRAE 52.2-1999. Replace all
pressure, always remember to filtration media immediately prior to
protect the system from occupancy.

if something goes wrong during
3. This credit discourages the temporary HVAC system operation.
temporary operation of
mechanical systems, if possible. Recommend that mechanical
contractor define responsibility for
4. You may also be responsible for the cost for temporary operation of
keeping logs, whether you purchase HVAC systems during construction.
the system or not, of filtration media. This to include labor and utilities.
You will need to list the
manufacturer model number, menu Recommend that mechanical
rating and location of all filters and contractor exclude responsibility for
verify they were replaced prior to duct cleaning if required prior to
final occupancy. permanent system startup (see item
5 above.
5. If duct cleaning is required after use
of the systems, two documents that
should be reviewed for assistance
(1) The SMACNA publication, Duct
Cleanliness for New Construction
Guidelines, and (2) Fact Sheet on
HVAC Duct Cleaning published by
the National Institute of Health
(www.ors.od.nih.gov/sr/dohs/
Documents/HVACDuctCleaning.pdf)
can both be very helpful.
Other Considerations and

Recommendations
Review the bid documents to

determine who will be responsible
for operation of the equipment
during construction. Certain
geographical locations might require
union tradesmen to operate
equipment.
Operation of the equipment during

construction might have an impact
on the equipment manufacturers
warranty start date. Clarify this in
your bid and/or negotiate this with
your equipment manufacturer.
Contractor might need to purchase
extended warranty depending on
length of time that equipment will be
used in temporary operation.
Recommend that mechanical

contractor clarify liability for damage

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MECHANICAL CONTRACTORS

ASSOCIATION OF AMERICA, INC.

Mechanical Contractors Association of America, Inc.

The duplication, reproduction, storage in a retrieval system, exhibition, dissemination, or

Mechanical Contractors Association of America, Inc.

The material contained in this manual is intended as a business reference. It is

MCAA wishes to thank the many members of the Management Methods

ACCOUNTING AND FINANCE

AF 1 Labor Burden 1996

BF 1 Business Forms 2002

CO 1 How to Identify and Manage Change Orders 2014

Please refer to Change Orders, Productivity, Overtime (#M3) for revised

CT 1 Construction Contract Proposal for Cost of Work Plus a Fee 1996

CP 1 Strategic Planning 1996

EDUCATION AND TRAINING

ET 1 Business Writing for Success 2010

ES 1 Rule Of Thumb Parameter Estimating 1996

FB 1 Factors to Consider in Establishing a Piping Fabrication Shop 1996

HR 1 How to Find, Hire, and Manage Student Interns 2015

IN 1 Insurance Punch List 2012

JM 1 Team Management In Construction 2002

JV 1 Joint Ventures 2014

LR 1 Labor Relations 2012

LL 1 Protecting Lien Rights 2012

LG 1 Business and Politics 1996

MI 1 5 SsRoad to Improvement 2004

MK 1 Fundamentals of Marketing Your Own Services 1996

OT 1 How Much Does Overtime Really Cost? 2014

Please refer to Change Orders, Productivity, Overtime (#M3) for revised

PD 1 Maintaining Control of Labor Productivity 2014

Please refer to Change Orders, Productivity, Overtime (#M3) for revised

PC 1 Purchasing for Profit 2010

QUOTING AND BIDDING PROCEDURES

QB 1 What Is Indirect Job Cost? 1996

SF 1 Company Safety Programs 2001

SC 1 Suggested Subcontract Form 2012

TX 1 Should You Elect Subchapter S Treatment? 1996

TC 1 Laser Scanning 2013

TOOLS AND EQUIPMENT

TE 1 Cost and Control of Tools and Equipment 1996

Labor burden is best described as the b. Fringe Benefits

Copyright, Mechanical Contractors Association of America, Inc., 1996

b. Tools and Equipment e. Clean Up

d. Travel and Subsistence When Not Detail Drawings

Credit Policy Criteria

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 1

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 2

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 3

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 4

A subcontractor should be bound to you Federal and state government construc-

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 5

Copyright, Mechanical Contractors Association of America, Inc., Revised 2002. 6

INTRODUCTION ining past and future project billings, cost,

Copyright, Mechanical Contractors Association of America, Inc., 1996

Figure 1. Cash Flow Projections 2. How does a contractor predict exactly

and come to an agreement prior to preparing chargingafinancefee,butonceyourealize that

2. Challenge the Architects Changes 5. Include the Contract Payment

The primary goal of cash management

CONCLUSION ceipts and disbursements and fixed dis-

ESTIMATE ACTUAL ESTIMATE ACTUAL

Cash balance beginning of period

Contract accounts receivable receipts

Other cash receipts