ASA Report Slams States on Public Policy

Mon October 18, 2004 - Northeast Edition
Pete Sigmund

If you received a zero on an exam in grammar school, you were in deep trouble. Now some states have received it on a report card from the American Subcontractors Association Inc. (ASA).

ASA evaluated seven key public policy areas affecting subcontractors: prompt payment, pay-if-paid clauses, mechanic’s liens, payment bonds, retainage, indemnity/ additional insured, and bid shopping. It then combined these scores for an overall final score and grade.

Most states and the District of Columbia received zeros in some of the seven key areas. Forty-two, in fact, got zeros on pay-if-paid policies, 39 on bid shopping, and 17 on anti-indemnity policies. Others receiving zeros: New Hampshire on prompt payment policies, Pennsylvania on mechanic’s lien policies, and D.C. on retainage, the practice of holding back payments until certain milestones are passed.

All states except New Mexico then flunked (with Fs) the combined scores which graded each state’s total subcontractor policies. New Mexico got a D.

States were rated on a scale of zero to 100. From zero to 60 got Fs.

The highest 10 states in the combined scores were New Mexico ( 69, which was only two points from a C), California (57), New York (56), Oregon (52), Missouri (51), Arizona (49), Delaware (46), Florida (46), North Carolina (46), and Connecticut (45).

In the bottom 10, the District of Columbia and Wyoming received the lowest grades (14) followed by West Virginia (17), New Hampshire (19), Iowa (19), Colorado (19), Kentucky (20), Alabama (20), Virginia (21), and Vermont (22).

A Call to Arms

ASA issued “a call to arms to the construction industry” after releasing its report. The association declared that this research project shows that state public policies affecting subcontractors and suppliers “do not adequately address the needs of the construction industry.”

“The truth is that state public policies on payment assurance, subcontracts, risk transfer issues and bid shopping have failed construction subcontractors and suppliers, creating a risk-laden and low-profit-margin business environment,” said ASA.

Said ASA President Matt Glover, president of Glover Masonry Associates, Arvada, CO, “The issues that matter to construction subcontractors and suppliers remain distant from the minds of many legislators and other public officials, and the report serves as a call to arms to the construction industry to change that fact. ASA will use this report to urge reforms of payment assurance and other laws affecting subcontractors and suppliers throughout the country.”

New Step

Based in Alexandria, VA, ASA represents approximately 6,000 subcontractors, specialty trade contractors and suppliers in the construction industry. It regularly monitors state laws and regulations, as well as court decisions, impacting its members.

This year, it went a step further by inaugurating its grading system. First it surveyed 1,000 randomly-selected ASA members on the most significant and problematic public policy issues for subcontractors and suppliers. Focusing on the seven key areas, it then evaluated state laws and court decisions for its report card.

“We already had a great deal of information on our database from our long-term, on-going program,” ASA Executive Vice President Colette Nelson told Construction Equipment Guide (CEG). “We decided to use this data for grading each state. The goal of this inaugural study was to allow subcontractors and public policy makers to evaluate exactly where their particular states stood in respect to our model laws, and how they compare with other states. We’ll continue similar studies each year so that subcontractors and owners can measure their progress.”

’Monopsonist’ Problem

According the Nelson, the policies in question, and the low scores, result from the “monopsonist” (single buyer) problem, whether the monopsonist is an owner building the local convention center, or the postal service building a new post office:

“The contractor can’t negotiate with that public or private owner and be on an even playing field. No one else is building that convention center or post office, so the owner can say, ’If you want to do this, you have to take all my terms,’ which they frequently do. The general contractor or construction manager also becomes a monopsonist, telling the specialty contractors: ’You do it for me on my terms or you don’t do it.’ When policy makers mistakenly believe this is an even playing field, they are not receptive to the legal protections which these mostly small and mid-size businesses need in order to thrive, and feel that legislation isn’t necessary on issues like lien laws and payment bonds.

“Our contractors can’t negotiate better contracts because they are on a take-it-or-leave-it basis. We will distribute our report to legislators in each state to make them more aware of this.”

Commented Vincent Terraferma, executive vice president and chief operating officer of KSW Mechanical Services Inc., a mechanical contractor in Long Island City, NY (and also vice president of ASA), “Right now, it’s a situation where, if you want the job, you’re dealing with only one person. The states, and subcontractors in all the states, have a lot more work to do. We need to get bills passed to protect our rights. This study is a call to wake up and get moving.”

Are State Policies Fair?

Nelson said that ASA’s analysis indicates that state policies, including monopsonist approaches, are unfair to subcontractors.

“Even we were surprised at how unfair they [the policies] were, across the board,” she said. “When we started this process, we thought that we would have one or two Bs, a few Cs, a handful of Ds. We were realistic; we thought the rest would be Fs. However, once we compiled the data on every issue for every state, we were surprised at how bad the policies were in all states.

“I think these things have happened because of the assumption by policy makers that specialty contractors and subcontractors are working on an even playing field in their negotiations with other members of the construction team. Our call to arms is urging contractors and others to pursue reform legislation in their own states.

“We found that some states have done very well on a few issues. We would hold them up as role models except that even those states had serious problems with other state laws. Interestingly enough, when we had the preliminary results and started calling subcontractors, asking what they thought of these numbers, they kind of laughed at my naivete. They said they live with this every day and that they knew it was this bad. It reinforced to them the business environment in which they’re working. I hope it motivates them to go out and do something about it instead of just sitting there feeling sorry for themselves.”

Nelson said states were graded on their individual laws.

“New York, for instance, which finished third-highest (56), got some points because it has separate contracts, but didn’t receive any As in this area because the contracts don’t cover every trade. It has an excellent mechanic’s lien law, better than any other state, and does very well in the pay-if-paid area because it has a court case, which makes these clauses unenforceable. In other areas, however, New York doesn’t do as well and that’s reflected in lower scores. New Mexico, on the other hand, was only one point away from a C, so its contractors were very proud of themselves.”

Commenting on New York’s wide variation in scores, KSW’s Terraferma said, “In some areas, we passed the test; however, we flunked the course.”

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