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Chad and Matt dive right into the question of the day: Why is growth necessary for construction companies? Growth means many different things, and they start by clarifying that growth doesn’t always mean higher revenues—sometimes, it means developing process and adding stability. Meanwhile, other times, it has everything to do with increasing revenue and profits. Either way, central to the need for growth is the fact that great people want to have something to strive toward; with grow comes opportunity. In the X vs. Y section, Matt and Chad argue about whether you should show your team your org. chart. We hope you enjoy and learn how to grow your business effectively through this month’s episode. Subscribe to be notified when new episodes are released on Spotify, YouTube, Apple Podcasts, or LinkedIn. If you’re looking for more ways to engage with the wider construction community, check out our affiliate podcast, The Morning Huddle Construction Show, hosted by Chad Prinkey, Well Built Construction Consulting and Stacey Holsinger from Steel Toe Communications. Tune in every Tuesday morning at 9 A.M. EST on LinkedIn Live for discussions with A/E/C experts, advancing the construction community. 0:00 What is the "Well-Built" series? 2:00 Check-Ins! 8:55 How do you get started into creating growth for the long term? 16:15 Why is it important to maintain growth? 20:46 How does revenue growth tie into growth for other parts of the business? 28:30 Should we share our future organization chart with our staff? 39:05 What are we reading and what are our biggest takeaways? 42:25: Check us out at Well-Built Consulting.com! Thank you to our sponsors! Well Built Construction Consulting https://www.wellbuiltconsulting.com/ Steel Toe Communications (Digital Marketing for Contractors) https://www.steeltoecommunications.com/ Katz Abosch (Tax, Audits and Accounting) https://www.katzabosch.com/ Lawrence Law (Legal Challenges for Contractors) https://lawrencelawllc.com/ Sandy Spring Bank https://www.sandyspringbank.com/ Genesis AEC (Full Service Architecture, Engineering, Construction in Life Sciences) https://www.genesisaec.com/ Marsh McLennan Agency https://www.marshmma.com/?utm_source=... Construction Links Network: https://constructionlinks.ca/ For additional episodes and information visit: http://www.themorninghuddleconstructionshow.com/ Follow us on LinkedIn: https://www.linkedin.com/company/82318299/admin/dashboard/ Subscribe to our weekly e-newsletter for the latest updates: https://lp.constantcontactpages.com/sl/Ro2QrVt/Themorninghuddlepodcast?__cf_chl_tk=9S8PSaN6zCOUNBhPtHXE.qk8HWtzxNNluBDlsEYhZkg-1726511898-0.0.1.1-8361

In this episode, Michael Fortinberry, co-founder and COO of Protiv, discusses whether it's time to rethink the hourly pay system in the construction industry. Together, we'll explore innovative compensation models to boost productivity and efficiency, offering valuable insights for those looking to improve workforce performance through new pay structures. 6:28 Guest Intro: Michael Fortinberry Protiv.com 7:30 Close the Gap Between In-Person and Zoom Calls 11:08 Performance Models 12:06 Innovating Compensation 14:17 Shaping Company Culture: Numbers Based 17:07 Who are you when you are at your best? 18:42 How well do you know your people? 20:06 Merit Based Compensation Structures 22:09 Connecting Labor Budget: Getting Your Crew to Understand the Goals 23:18 Stop with the 1099s. 24:42 Incentives and Bonus Structures 25:59 Goals for Incentive Programs 26:28 Transparency 27:30 Creating New Ideas to Get the Job Done 29:40 How the Software Works 37:50 Case Studies and Examples 41:00 How Bonus Structures are Paid Out Thank You to Our Sponsors: Well Built Construction Consulting https://www.wellbuiltconsulting.com/ Steel Toe Communications (Digital Marketing for Contractors) https://www.steeltoecommunications.com/ Katz Abosch (Tax, Audits and Accounting) https://www.katzabosch.com/ Lawrence Law (Legal Challenges for Contractors) https://lawrencelawllc.com/ Sandy Spring Bank https://www.sandyspringbank.com/ Genesis AEC (Full Service Architecture, Engineering, Construction in Life Sciences) https://www.genesisaec.com/ Marsh McLennan Agency https://www.marshmma.com/?utm_source=... Construction Links Network: https://constructionlinks.ca/ For additional episodes and information visit https://www.themorninghuddleconstructionshow.com/about Subscribe to our weekly e-newsletter for the latest updates. https://lp.constantcontactpages.com/s...

In this episode, we dive into the captivating world of Employee Stock Ownership Plans (ESOPs) with our guest, Ben Nichols, President of Harkins Builders, Inc. With over two decades of experience, Ben sheds light on the inner workings of Harkins' ESOP, dispelling myths and highlighting its role as a robust accountability and culture-shaping tool in the construction industry. We explore the tax benefits, recruitment strategies, and value-maximization tactics employed by Harkins, showcasing how being an ESOP isn't just a retirement plan but a key to empowering employees and building lasting wealth. Tune in for an engaging conversation as Ben passionately advocates for broader adoption of the ESOP model and shares Harkins Builders' success story beyond traditional retirement planning.

For any business, cash is crucial to health and success. Employees and vendors must be paid, or the whole thing comes to a halt. Contractors, in particular those who must purchase materials for installation, face a high-risk environment dependent on their customers’ timely pay. Scott Peper from Mobilization Funding has a front-row seat to the unique cashflow challenges faced by contractors, and he joins The Morning Huddle to discuss the topic and share strategies for maintaining a healthy cash position.

Most construction companies recognize opportunities to improve their business. Few have a track record of capitalizing on those opportunities and driving positive change. In the fast-paced environment of designing and building, companies become accustomed to their problems and focus on getting their work done instead.

In a first for The Morning Huddle, host Chad Prinkey will become a guest and share his experience driving organizational change as a consultant for the construction industry over the past 15 years. We’ll discuss why companies get stuck and what employees and executives can do to get better today.

The spaces we occupy for our work can make a world of difference in profitability. Our guest, Nitin Govila, is the head of Sales and Marketing for global textile manufacturer Serge Ferrari. Their materials are integral to a wide array of construction products, ranging from acoustical panels to PT concrete. He’ll share insights on constructing workplaces with sustainability and profitability in mind from the start.

Virtual design and construction (VDC) as a tool for building better spaces is quickly becoming the norm, but our guest for The Morning Huddle's 47th episode, Darren Young, believes in taking things a step further.

What if your VDC efforts were aimed at reducing waste, creating scalable and resilient technical frameworks, increasing data quality, and leveraging opportunities to generate new revenue?

Join us as we discuss aligning proven VDC technology with compelling business goals to build a better future!

Join The Morning Huddle for a timely discussion about laws governing how we hire and pay our construction workforce.

Workers are misclassified as 1099 when they should be legally W-2. Subcontractors are hiring labor subs to augment their workforce or, in some cases, to replace them altogether. These labor subs have a varying level of commitment to following the law, and now their prime subs and GCs are on the hook for their mismanagement.

Millions of dollars of penalties have been paid by contractors in the Metro DC region. Attorney General Karl Racine's office appears to be committed to pursuing more wage theft infractions in the city.

No matter where you live, take the time to hear from Hillary Ghent about how Davis Construction has reacted to the heightened focus on this issue and the recommendations they have for the entire subcontracting community to achieve compliance in a manageable way.

Transcript:

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00:01
Speaker 1
All right, it's morning huddle time. Good morning. I'm not saying it works. I wish you God speed, Godspeed with all of that. I think that's really nice. You know, I'm not sure what kind of success you're gonna have with that today because the world, my friend, has changed. Right. A lot of American construction workers, they have different needs. They have completely different needs.

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00:22
Speaker 2
These awards have a huge, like, criteria that you have to fill out and they usually have a community service or community.

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00:32
Speaker 3
You know, the most productive with a high performance value. And, you know, sometimes it's 11 o' clock at night.

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00:41
Speaker 1
Funny, isn't it? Yeah, not for me.

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00:44
Speaker 3
Not for me.

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00:44
Speaker 1
At 11 o' clock, I am guaranteed to be snoring.

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00:47
Speaker 2
So.

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00:57
Speaker 1
It's morning huddle time. Good morning. I'm Chad Frinke. I'm here with Stacy Holzinger, as always, and our guest, Hillary Gent. Stacy, how are you this morning?

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01:06
Speaker 2
I'm doing good. How are you guys?

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01:09
Speaker 1
Doing good, Doing well.

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01:10
Speaker 3
Thanks for having me.

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01:12
Speaker 1
Thank you so much for joining us, Hillary. So Hillary is in house counsel with Davis Construction, James G. Davis Construction here in the D.C. metro area. Hillary, tell us just a little bit about Davis, terms of like location, size, yada. Give us a little bit of background on the company that you work with.

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01:36
Speaker 3
Sure. So Davis is a general contractor. We're based mainly in the D.C. metro area. Our office is in Rockville and we do work in the Northern Virginia, D.C. maryland area. We also have a Philadelphia office. We're about 400 or so employees and we've been around for more than 50 years. And yeah, awesome.

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02:00
Speaker 1
Certainly in this area, known for doing some of the best looking and highest quality award winning projects. And so kudos to, you know, James G. Davis and all the work that you guys do. I think, you know, also lots of my friends and clients, you know, in the specialty contracting community have really positive relationships with Davis by and large. So you're doing something right overall when you can have a whole bunch of work and subcontractors like you.

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02:31
Speaker 3
Well, that's great to hear and certainly value our partnerships with subcontractors.

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02:36
Speaker 1
And we are going to get into some subcontractor chat today in terms of some of the stuff that we're dealing with. But before we do, I just give a little bit of background. Hillary, how long have you been with James G. Davis and exactly what is your role in that environment?

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02:55
Speaker 3
Sure. So I've been with Davis eight years. I am in house counsel. So one of two attorneys that we have at Davis. Before coming to Davis, I worked at a small construction litigation firm. I worked on a big case for Davis, so got to know our general counsel, my boss now and some of the people at Davis and had an opportunity to come work in house at the end of that case about eight years ago. So in my role, one of the main things I do is contract related. I negotiate and deal with all of our prime contracts so with the owner and then manage subcontractor issues. I work on compliance like for example, wage theft that we're talking about today and just try to hold Davis's hand through all of our various legal issues that come up.

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03:44
Speaker 1
Awesome. So, so let's start to pivot toward our topic today. So wage theft, which is something that you have been kind of, I don't know how willingly I'll be interested in that, but thrust into the public eye here in the past few months, I've certainly gotten a chance to actually see you speak about this and hear you speak and see you speak about this and it's part of what really, you know, Drew, Stacy and I to having you on here because it's, it sounds like just like a, I don't know, ho hum legal issue. It's not, it's big and multifaceted and complicated and so Stacy, you know, I'm going to put you in your role as per usual engaging with the audience here on chat.

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04:39
Speaker 1
But let's make sure that we take some specific questions from, from our audience on, you know, ways to navigate some of these changes. And I should also make sure that I'm giving Hillary the space to provide a legal disclaimer which is yes, Hillary is an attorney, yes, she is an attorney specifically for Davis. But Hillary use the specific language that should be used in this situation to.

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05:09
Speaker 3
Make sure ye just basically I'm not an expert employment lawyer. So you know, I know enough to be dangerous and probably put my foot in my mouth a little bit here. But you know, anyone that has specific questions related to your company and your employment issues, you should really seek out a expert employment lawyer, which I am not.

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05:30
Speaker 1
So very good. All right, good. So there's the legal disclaimer. With that said, we're going to have the opportunity, I think, to talk about, you know, if you have specific questions, we should talk about them. Just understand they're not legal advice and that you should seek legal advice specifically from your attorney. All right, good. Let's, let's get rolling, Stacy. We'll see you in a bit.

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05:51
Speaker 3
See ya.

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05:53
Speaker 1
So, Hillary, I think one of the things that drew me so much into this topic was the fact that the way this law is being, I don't know if there's been a, you know, fundamentally a change in the law or really just an enforcement of a law that's been in place for quite some time, but that the change that it would really kind of force or that it is forcing in the industry is, it's pretty seismic. So take a moment, if we can, and just describe a little bit what is wage theft as it relates to, you know, the construction industry and maybe answer that question about is this a new set of laws or these laws that have existed, you know, how, what's happening right now?

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06:47
Speaker 3
Sure. So wage theft is really just a failure of an employer to pay amounts that are legally due to their employees. So that could be, you know, if minimum wage is $15 an hour and you're paying a worker $10 an hour, you're stealing $5 an hour, you know, from that worker that they're legally due. Failure to pay overtime is another common example. And then another area of focus, I think by the jurisdictions is failure to provide paid sick leave. So I think in the construction industry, one of the main ways that this becomes an issue is in the context of worker misclassification. So for an independent contractor, so the things I just mentioned, you know, overtime, minimum wage, sick pay, that all implies applies to employees.

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07:45
Speaker 3
So the workers working for an employer that are classified as employees, an employer does not have to provide those same things to an independent contractor. So, and the other big difference is withholding taxes. So for an employee, the employer is required to withhold and pay taxes for their employees. Not so for independent contractors. Independent contractors are obligated to file and pay their own tax returns. So the issue really comes up in the construction industry where a company hires somebody as an independent contractor, but that worker works legally, qualifies as an employee, and so should be paid minimum wage over time, sick pay, have their taxes withheld, et cetera.

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08:35
Speaker 1
Yep.

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08:36
Speaker 3
So in the construction industry, long standing industry practice has been to classify workers as independent contractors when legally under, you know, long standing legal principles, they should be properly classified as employees. So that hasn't changed. I think what has changed more recently in the wage theft context is the enforcement of the issue and the roll up of liability from the company that itself is misclassifying its workers to a higher tier subcontractor all the way up to the general contractor. So in. This is recent, in the last couple of years. This exists in D.C. maryland, Virginia and not every state across the country, but it's, you know, continuing to roll out in jurisdictions across the country. So states or jurisdictions themselves are creating laws flowing up that liability and then also giving the workers themselves.

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09:45
Speaker 3
It's not just enforcement by the government agency, they're also giving workers them that ability to seek remuneration up the chain, not just from the company that hired them as well.

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10:00
Speaker 1
Excellent. So that was a phenomenal description. I think. You know, I've been around this now for at least six months where I've been doing lots and lots of research and reading about. I think you just put it so extremely succinctly and I think. Can I just repeat back to you in simple terms how I understand it and then you make any corrections?

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10:23
Speaker 2
Sure.

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10:23
Speaker 1
I think what you're saying is that there. So the first question perhaps is am I actually hiring an independent contractor or is this person qualified, legally qualified to be a W2 employee? And the answer to that I think in most cases now is if that person is out on your job site. Right. If that person, if that person is working for. If that person is working for a company on a job site that they are in most cases legally classified, you know, qualify to be W2 at this point. Not.

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11:06
Speaker 3
Yeah, generally if they're doing the work of your business. So like for example, if you're a painting company and you've got your own employees that are out there painting and you need some additional labor and you go to a, you know, a lower tier and you say, I need some additional labor and they come out and they're painting, then those people, generally speaking should be qualified as employees, not as independent contractors.

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11:32
Speaker 1
If they come out to, if they come out to fix the painting company's trucks, then that would be a subcontractor. Right. That. Or sorry, that would be an independent contractor. That would qualify as that. But if they come out the paint, they're doing the work of the company. Okay. So that's one classification. And, and I think that has been, you know, a hard fought discussion, but one that's largely settled law at this point. Yeah, it's.

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11:59
Speaker 3
Yeah. And I mean it's not that you can't ever have somebody legally qualify as an independent contractor. I think just in the industry, the reality is that generally speaking, if you have somebody out there doing the same work that your company is doing, they should be classified as an Employee.

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12:19
Speaker 1
Yeah, I heard in one of the forums that I sat in on, I heard the speaker who's an employment lawyer say, say guys, if there's somebody working out on the job site doing the work of your company, they really need to not be an independent contractor at this point. That's just something you need to be, you know, as a general rule be thinking about. So then the next piece of this is the as you said, long standing norms. And I think I found in different market sectors it's more, you know, common than in others. So in wood frame multifamily as example, it's really common that, that the vast majority of the subcontracting community is using very few of their own in house labor, if any. And they're really leveraging third party, right.

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13:13
Speaker 1
A lower tier subcontractor that was really there to provide the laboratory on that job. And so that's been their business model. You know, that's been, it's really been the way that they've been running things for a long time. So all of a sudden the ability to not just punish the lower tier subcontractor for violating wage theft by, you know, and again, how does that happen? Paying people a piecework that maybe doesn't ultimately add up to minimum wage. Whoops, that person worked slow. So it didn't add up to minimum wage. Paying people piece work and they are putting in 12 hour days and it doesn't add up to minimum wage plus at least overtime. There's another opportunity. Right. So, so exactly as you described it.

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14:03
Speaker 1
But now these companies, these entire companies who, you know, this electrical contractor who has very few actual electricians on their team, but mostly just kind of employs, you know, management level folks, project managers, estimators, and then you know, maybe foreman and superintendents, they, how are they supposed to get these people out on their project? You know, how are they supposed to staff their projects when they don't actually have internal staff? So you as Davis, why did you make the decision to start, you know, kind of requiring that your subcontractors do this? And, and I'll say you're pretty early on in that, right? Like it's, they're not every GC is, has embraced this idea. Why did, why did Davis say guys we're not just going to let the law handle this, we're going to handle this, we're going to write it into our contract?

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15:01
Speaker 3
Well let me just clarify one thing. You said it's not that you can't use labor subcontractor. You don't have to. You know, we're not saying that, you know, a company has to have everyone on their payroll. If you use a labor subcontractor, their workers need to be properly classified.

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15:23
Speaker 1
Thank you. And that's something that I should have said that I'll take 20 seconds and clarify that for me. What I'm, what I'm specifically talking about is a norm that has been created where those labor subcontractors tend to pay their employees as independent contractors, and that the prime subcontractor who hires that subcontractor is doing nothing wrong by hiring that subcontract. By hiring that labor sub. But now that prime subcontractor, as well as the general are liable for that. For that labor subcontractors, wage theft violations, if they should occur, which they probably are like, occurring. Just, just based on the fact that they're misclassified.

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16:11
Speaker 3
Yeah. Yeah. So why did David, you know, why is Davis doing this? I think several reasons. One, you know, the flow up of liability. It's, it's added risk to Davis. So there's that. There's the fact that not only is there added liability, but it's massive added liability. So it's not just the amount of the wages that weren't paid, it's three times the amount of the wages that weren't paid, plus other penalties and things like that. Then there's the fact that this is continuing to be enforced. You've seen, you know, other general contractors have been targeted by the D.C. attorney General. Davis and every other general contractor in the area has been sued civilly for this issue. And if you haven't yet, you will. So, you know, there's a lot of legal focus, legal reason for this.

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17:14
Speaker 3
And then there's also, you know, we've been hearing clients asking about it. We've had clients say, you know, we're hearing about this wage theft issue. We want all the workers on our job sites to be paid correctly. You know, what are you doing, Davis, to ensure that they're being paid correctly? And there's the, you know, the moral aspect on our end as well. You know, you're working on a Davis job. The workers that are working hard should be paid appropriately. So, you know, there was a lot of different factors. This issue has been, you know, kind of bubbling for a couple of years, and we've made a push in the last year to really make this an area of focus for us corporately.

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17:58
Speaker 3
We've, you know, we rolled out a new subcontract exhibit that doesn't really say anything different than what our subcontract has already said. Yeah, I mean what it says is you have to comply with employment laws which you know, you're already legally obligated to do that regardless of whether Davis or any general contractor tells you and you need to maintain records to show compliance. And then if there's not compliance and you know, Davis gets tagged for something that was caused by you or your lower tier, then you're, you are responsible to Davis for that. So you know, that's what the rider says, which is pretty much what the subcontractor already says. Just expand it a little bit. And then, you know, like I said, it's been an area of focus for our company.

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18:44
Speaker 3
So we've updated our pre qualification form to you know, ask some questions about how do you, as a subcontractor that's going to work on a Davis project, how do you hire people, what do you do subcontractor to look at your lower tiers and how they're classifying their workers. So you know, we can, that gets factored into pre qualification for working on Davis jobs. And this is really a top down issue at Davis. You know, we, this is coming from, you know, the very top at Davis that this is an important issue for us. We've rolled out company wide education as well.

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19:26
Speaker 1
So I, I, I, you know, like it or not, the stepped up enforcement and this rollup clause, right, that they're, that, I mean it's really creating change and I applaud you guys for not waiting to be, you know, not waiting for this to be a problem but instead, you know, working to get out in front of it. You're not alone, but you are leading in that area. So what does this mean fundamentally to the industry and to your subcontractors? What, what do you imagine happening and what are you already hearing? This is, you know, it's relatively new, but you have been doing it. What, what's, what's the feedback so far?

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20:15
Speaker 3
So through abc has held a couple of seminars on this issue. One kind of, you know, targeted to general contractors, another to subcontractors. And then we had sort of a joint session, you know, for everyone to sort of talk about. I think the hope, the goal is that the whole industry, you know, moves in a new way to no longer misclassifying workers on the job sites, having the workers be paid the legally due, you know, benefits and payment that they're entitled to. But I think it's a difficult issue. It's been long standing industry practice, as you said, you know, people built their business model and you know, in a different way. And so it's a big ship to turn. But we are trying, I think, you know, sort of step one is education.

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21:12
Speaker 3
I think not, you know, mal intent or not, I think there's a lot of people out there doing things that this is the way it's always been done and they, you know, they think that it's normal and they don't necessarily know that there's anything wrong with the way that they have been doing business. Certainly, you know, there are bad actors out there, but there's probably a lot that didn't appreciate the issue. So trying to get the education piece out there and hope that as more people understand the issue, you know, there's change.

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21:48
Speaker 1
I think, you know, it bears calling out the elephant in the room with the whole why people have been 1099. Right. Like overall and certainly not, you know, hard and fast rule. Right. But overall, isn't it fair to say that the majority of the labor subcontractors who are 1099 ING people and who are the potential root cause. Not, you know, I'm not saying they have been doing things wrong.

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22:20
Speaker 3
Right.

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22:21
Speaker 1
But they're the potential root cause of these wage theft issues. The reason these people are 1099 is because they can't be W2 that in fact they're an undocumented worker class. That the entire construction industry, certainly in our region and I can only imagine in other regions across the country has become completely dependent on to perform the work in the field, which is again, it's an undocumented, primarily Latin American workforce that is 1099 because they don't have legal status in the US when you think about that, what is, you know, what are companies actually able to do to get into compliance here? What, what are you know, how do you navigate that? Hey, everybody now has to be W2. You know, all these people throw up their heads and say, like, how do I w to somebody that isn't documented? What do I do?

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23:28
Speaker 3
Yeah, well, there's two pieces to it. One is, you know, by law, a, you have to, you can only hire people that are legally authorized to work in the U.S. so that's one way to put people on W2. You know, obviously, I think it's known, as you said, in the industry, there's undocumented workers. And that's just not going to happen, that everybody is going to be legally authorized to work in the industry. So the other way that I understand that, you know, companies have worked towards the W2 compliance, not necessarily legally authorized to work in the US compliance, but is that the workers can get an ITIN, which is an individual Tax Identification Number, and that issued, that can be issued to an undocumented worker.

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24:25
Speaker 3
And that allows the employer to withhold taxes for that and pay taxes for that worker and also gives the workers themselves certain benefits. Like, for example, in many states having an. It allows you to get a driver's license and open a bank account and send your kids to the local schools and things like that. So what we are seeing, some of the companies that are working to solve this wage theft issue, they have converted to ensuring that all of their workers have these itins. They are all paid W2 and, you know, taxes withheld and paid. And so, you know, that is one way towards dealing with the misclassification and wage theft issue.

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25:23
Speaker 1
Yeah, man, this, the labor force, that takes a leap of faith for the, for that worker, right. For that worker to have the guts to put themselves on the radar if they're currently undocumented. I, I, you know, I don't, I know you're, I'm, now I'm putting you in a situation, you don't have answer to this question. But my, you know, this is as I start to imagine what this is going to look like at scale, so that, not only does Davis do it, but that, you know, and the handful that have already done it, you know, made the same kind of move to say, hey, this is how we're doing it moving forward, folks. And if you're not in compliance with this, then you're out of compliance with us. There's going to have to be a sea change with those employees.

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26:18
Speaker 1
Now, do you think that there's a strategic advantage for the subcontractors who don't comply, you know, on projects, obviously they're not going to win work with Davis, but in other environments, you know, where somebody isn't. So let's say subcontractor A is working really hard to get all of their, you know, labor subs on W2 and make sure that everybody is doing things in this really official and legal capacity. Subcontractor B is gambling. Do you think there's a strategic advantage for subcontractor B in the short term. Oh, did I. Sorry.

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27:00
Speaker 3
So from what we've. You were a little delayed chat.

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27:06
Speaker 1
Oh, my fault.

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27:07
Speaker 2
We can hear you. You're good.

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27:11
Speaker 3
Okay, good. From what I have heard from the subcontractors that we work with that are putting measures in place to ensure their lower tiers are complying, some of the challenges that they have faced are having the workers say, you're going to make me get an ITIN and withhold my taxes. And I don't want to deal with that. I'm going to go, you know, work for another company that isn't going to do that. And so the hope is that the more part of the change here is that if everyone is requiring the ITIN process or making sure that everyone is paid W2 as opposed to independent contractor, that there's not going to be the other company to go to that's not doing it. You know, that's not requiring that.

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28:06
Speaker 3
That everyone will require that, you know, level the playing as far as, you know, an advantage for the people that are doing it right from. Again, what I've heard from our subcontractors is, you know, yes, there's an aspect of it that is more expensive and that, you know, the worker who was making $20 an hour without taxes withheld, they still want to get their, you know, at the end of the day, net $20 an hour if you're going to withhold taxes. So you're having to increase their what they were paid hourly. But, you know, they have seen some efficiencies in, you know, now I'm paying attention to when everyone clocked in and when everyone clocked out.

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28:50
Speaker 3
And you know, I'm seeing the actual hours worked on the job site and maybe I was overpaying before, you know, for paying for hours that weren't actually worked. But now, you know, I know you were there from, you know, seven to three or you know, whatever it is. And, and that's what your paycheck is for. So, you know, we. That benefit.

‍ ‍

29:15
Speaker 1
So. So one thought that I have on this is that, you know, maybe the, the subs that continue to kind of be on the wrong side of the law here will have a strategic advantage once until that general contractor ends up getting nailed for a lawsuit because they hired that subcontractor and that subcontractor was using labor brokers that hadn't gone through the process of securing ITINs vetting their employees, yada, yada. And, and so, you know, it's, they might be lower this time, but once that, you know, once the treble damages and the fines come in and, you know, everybody's, you know, written a seven figure fine, you know, check what you thought you saved went away really fast.

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30:08
Speaker 1
And, and so it speaks to what you're saying, Hillary, about the whole idea that we're, we're trying to, it needs to be kind of a movement and people do need to get on board with this. And it's happening, it's absolutely happening, particularly in the district. I imagine that it's going to be happening outside the district. I already know I have clients that are in the southwest and that are in the south, where it's starting to happen in those markets. This is going to be more than just a localized issue. And I know it already is a localized issue. You know, you look at New York City, you look at, you know, down in Florida, I know that they're enforcing this in Miami. So anyway, we have a couple of questions here.

‍ ‍

30:52
Speaker 1
And I know, Stacy, you're a trooper, you, but you're super under the weather today, so I don't want to make you overdo it. So I'll. All right, you got, you want to take a shot at Ike's?

‍ ‍

31:06
Speaker 2
Well, you can take a shot at Ikes. I think that's more in your. And then I'll get to Josh.

‍ ‍

31:11
Speaker 1
All right, very good. So, so Hillary, Ike Casey, who is the president of the associate, the ASA, right. The American Subcontractor association in D.C. he asked a question where he said, I understand someone Maybe in the D.C. aG's office has hired 40 Spanish speaking people to visit construction job sites to entice workers to file claims. Do you know if this is true and if so, what do you recommend to your subs to address this? And I'll maybe just add like a couple of seconds of clarity for the audience on this.

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31:49
Speaker 1
The idea would be that if you can, as Hillary mentioned, if the individual on the job site actually has the ability to go and file claims themselves and you're able to identify somebody that, who says, yes, I'm not being paid appropriately, then that person can, you know, go to the boss or, I'm sorry, can literally go to a lawyer. Right. Or in file suit against the people who've hired them, thus, you know, starting to snowball this situation. So that would be theoretically the motivation of the DCAG's office, if in fact they're Hiring Spanish speaking people to go out, visit job sites and say, hey, how you being paid? And hey, you know, that's illegal and you can file a suit. So there's a little bit of detail for the audience on it. But Hillary, back to the question. I've not heard this.

‍ ‍

32:43
Speaker 1
Have you heard this?

‍ ‍

32:45
Speaker 3
I have not heard that either. Yeah, I haven't heard that. I wouldn't be surprised if that was true, but I haven't heard that. And I think at least from the civil service civil lawsuit side, where the workers themselves are filing lawsuits, putting aside the ag, it's really a plaintiff lawyer's dream because just need to convince someone you're going to get what you weren't paid times three. And you can sue your direct employer, you can sue the person above them and all of them are jointly and severally liable and they have to pay your attorney's fees. So it's a plaintiff's lawyer's dream. And I'm surprised that there haven't been more lawsuits than there already are on this topic. But I guess as far as what do we recommend that subcontractors do?

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33:41
Speaker 3
I mean, I think if the, you know, if the jurisdiction is entitled to send people to the job sites, there's not a whole lot that can be done about that. So I guess my recommendation would be make sure everyone's being paid correctly and then you don't have a problem.

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33:58
Speaker 1
Yeah, I was just going to say I think that the way that they're setting this up is that the only way to do this is to get in compliance. You've got to get in compliance. And, and so if you're not, you're, you are going to be a target, particularly inside Washington, D.C. but definitely, you know, also in Maryland and also in Virginia. But, you know, for sure, you know, if, as if we needed more reasons, as if subcontractors needed more reasons to be afraid of working in D.C. there's another. So. All right, Stacey, I think we have one or two other questions.

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34:39
Speaker 2
Josh was curious. How are contractors vetting the labor brokers?

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34:47
Speaker 1
That's a good question.

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34:48
Speaker 3
So I don't know. Yeah, I don't know what, I don't know personally what, you know, many different subcontractors are doing. I know, you know, some of the ones that we've talked to, they sort of have trusted brokers that they work with that they've, you know, put them through training and sat down and said, you know, this is what we are going to require of you know, if you want to work with us. And so it's really kind of establishing that relationship and having that education and those discussions. I've also heard this is one thing that Gilbane, I believe is doing is they have expanded their pre qualification process beyond just their first tier subcontractors. They've started pre qualifying the next tier down.

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35:34
Speaker 3
So I'm not sure what that process looks like, but that is something that another general contractor is doing as far as looking at this issue.

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35:44
Speaker 1
I love that. That's great. That's. And that's a really interesting thought that the general contractor is taking on that extra step. I wonder what that looks like in terms of actual overhead and enforcement and how plausible that's going to be to, you know, how sustainable that'll be at scale and whether, you know, I'm sure Davis is looking at it saying how's it going? Should we be doing something similar?

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36:10
Speaker 1
But you know, I think frankly in the short term, while the violations would, I mean again, this is anecdotal, I don't have hard stats, but I just know, I just know that it's a staggering number of companies that are currently out of compliance on this that I would say if, you know, in the short term it probably does pay to be hyperventilated, vigilant and just, you know, really not in a putative way, but really in kind of like. And I know this is a part of what you talked about as well, right? It's about helping your subcontractors to figure this out. And it's about the subcontractors helping their labor subcontractors to figure this out. And it's about everybody kind of pulling together and doing it, you know, in lock step.

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37:01
Speaker 1
Ike said something in response which I thought he said, you know, but the employer spends a ton of money defending him or herself. Right? So he said, good answer. But, but the, you know, back to this thought of the AG having 40 Spanish speaking people out there trying to drum up lawsuits. I'll just say that one of the things that's on my mind is if I were a labor subcontractor or if I were a subcontractor, prime sub, I might, you know, proactively brand on and message on how we are solving this problem, you know, kind of, you know, putting it out there in the public sphere, being really proactive about like branding and marketing my business on. We are, you know, super proactive about making sure that our subcontractors are this and that, our employees are that and we never, you know, misclassify.

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37:51
Speaker 1
It's not going to be, it's not going to be like a, you know, a defense against all. But I think, you know, if you can brand your company in a way where the AG's office or whoever. Right. Looks at you as one of the good guys, you maybe do deflect some of the pressure, you know, that way. So anyway, good guys, I think we're, we're over on time and I, I knew that would happen, but you know, fascinating conversation. Stacy, do you have any other follow on questions?

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38:26
Speaker 2
I don't know if we could sneak this in real quick, but just to follow up with Joshua, he was also curious what happens if one of the non compliant employees gets injured on the job?

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38:38
Speaker 3
Well, I'm well in my wheelhouse there. I mean, I would think workers compensation would kick in, but I'm not sure how that works. If you've got somebody misclassified, if that's another hole there, I, I don't know the answer to that question.

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38:58
Speaker 1
We had a guest, we had a guest last year, Oscar Garcia. Who is he? He owns a consulting firm that really helps companies to, helps contractors to make it a more Latin American friendly environment. You know, inside the, in one of the things that he said without hesitation, he said, you know, a lot of it gets swept under the rug. A lot of it is, it's, you know, vastly underreported the number of incidents that happen to undocumented misclassified workers. And it's a part of what, you know, people need to be vigilant about and look out for, is that, you know, the safety of that community is really tied into all of this. Right.

‍ ‍

39:51
Speaker 1
So, so without question, Josh, you know, solving this problem, while it's a huge pain in the butt and a very legitimate one for the people who are trying to say, like, man, this totally changes my business model and I don't know how to navigate this. I think short term pain, long term, it's going to be a big win for the industry. I really do think that through this process we become a more humane, better place to be for employees, regardless of their background. And I'm again, you know, kudos to Davis, kudos to you, Hillary, for, you know, fearlessly participating in the public square here and trying to, you know, help people through what is a very painful process.

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40:45
Speaker 1
But, but you know, hopefully one that creates positive change in the industry, which is, you know, Again, I don't know if that's the motivation from the AG's office. I think the motivation might be tax revenue. But there's a, but there's a. You know, the side benefit is maybe it becomes, like I say, a happier, more humane place for people to work.

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41:06
Speaker 3
So, yeah, certainly the hope.

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41:09
Speaker 1
All right, awesome. Hillary, any final words before we part?

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41:14
Speaker 3
I don't think so. Thank you all for having me and giving us a platform to continue the conversation. You know, as you said, Chad, I think it's a really important issue. And Davis is certainly not perfect. You know, we haven't, we don't have the silver bullet. We're, you know, we're still trying to figure it out too, but you know that we appreciate the opportunity to continue to spread the message and hope that catches on.

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41:36
Speaker 1
So, yeah, keep making those honest, good faith efforts. That's, that's all anybody can do. That's all anybody can do. So good for you. Thank you so much. And, and you do officially win the award for the most beautiful actual background. Well done. Here, here. Oh, Hillary, if people wanted to reach out to you, how would be the best way to do it?

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41:59
Speaker 3
Sure, It's H G H E N t@davis construction.com.

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42:06
Speaker 1
All right, great. H LinkedIn. Yeah, or on LinkedIn. Okay, good. So either place@davis construction.com or on LinkedIn. So h gent@davisconstruction.com or LinkedIn. Thank you, Hillary. We appreciate you. We'll see you soon, I'm sure.

‍ ‍

42:23
Speaker 2
All right.

‍ ‍

42:24
Speaker 1
All right, Stacy, let's talk a little bit about next week and what we have coming up. Before we do, I wondered if you have a steel toe Communication marketing tip of the week.

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42:37
Speaker 2
Sure. I wanted to talk a little bit about repurposing content. I get a lot of questions. People run out of ideas on what to post about. Think about, you know, any webinars that you did throughout the year. That's a great place to find little nuggets of information or go to your YouTube channel, really review any of your analytics to see what key points people are, you know, looking at your videos and cut them down into little clips. Same with any other channels that you're working on. Review your content every three to six months and repurpose, repost things that people already find popular. Just, you know, work smarter.

‍ ‍

43:24
Speaker 1
Stacy, that tip is so smart, but it also stresses me out and makes me realize that I probably need to hire you. You okay? It's like I don't have the time to do that, but it's great. And I. I totally agree. So next week we have Greg Stone, who is another attorney, actually, funny enough, not planned, but Greg's actually going to be on talking about something that I didn't know was even a thing, which is intellectual property. Right. Intellectual property in the construction industry. And. And, you know, there are so many things that we haven't even, you know, considered as contractors and, you know, that are means and methods and specific strategies that we've been using to create efficiencies and things like that in our business.

‍ ‍

44:09
Speaker 1
Some of that stuff actually might be protectable intellectual property information that you can keep employees from leaving and taking and bringing to your competitor and things along those lines. And yet it is one of the spaces where the fewest intellectual property support is in place. So Greg is going to talk about some of the things that you can legitimately do. So first off, how to identify what intellectual property you have, and then second, what you can legitimately do to protect that intellectual property as a construction business. It should be, at the very least, a conversation where you learn a ton and I'm sure, very interesting as. I'm sorry, entertaining as well, because Greg is hysterical and he's a really great guy. So I look forward to. To that discussion. Stacey, anything else before we wrap up?

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45:02
Speaker 2
Yes, I did want to announce that we got Amy Marks, the queen of prefab, to our show, and she'll be joining us October 25th. So excited for that.

‍ ‍

45:13
Speaker 1
That is going to be awesome. Yeah, that was like. It was like a negotiation between our people and her people. It was.

‍ ‍

45:20
Speaker 2
They all just went to the big auto desk conference, which I heard was great.

‍ ‍

45:25
Speaker 1
So that. That will be fantastic. So that's in a couple of weeks, so keep tuning in, folks. Be live, check us out. If you can't check us out live, catch us wherever you catch your podcast. And you know what, do us a favor and tell somebody this week about the morning huddle. Help to spread the word and, you know, help us to. To try to create this, you know, maintain this platform where. Where people can talk about positive change that they're bringing to the industry. We'd really appreciate it.

‍ ‍

45:54
Speaker 2
Thank you.

‍ ‍

45:55
Speaker 1
See you.

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45:56
Speaker 3
Have a great morning.

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45:57
Speaker 2
See you.

‍

As we weather the highest economic inflation since the 1980s amidst continued construction demand across many sectors, everyone is now faced with the question, "how do we handle cost escalation from contract to project completion?"

Specialty contractors are feeling deeply exposed as they produce estimates today with prices that may be completely irrelevant tomorrow. Owners, of course, want price certainty in a totally uncertain market. Companies caught on the wrong side of this issue are risking devastating losses, and some companies are considering bowing out of the market right now rather than gamble on what seems like losing odds.

Michael Wagner, a construction attorney at Seyfarth Shaw LLP, joins The Huddle to talk about how contracts can protect everyone involved so we can move forward with confidence and keep America building.

Transcript:

‍ ‍

00:00
Speaker 1
We need to get back to work. And work is one of the ways that we contribute to this country. That we grow our gdp, we grow our tax base, we contribute to each other effectively. We help finance our national security, our homeland security, our infrastructure. I had key employees that really wanted to be leaders in the company, but.

‍ ‍

00:19
Speaker 2
They didn't want to have any ownership responsibility that way.

‍ ‍

00:23
Speaker 1
So I just had to start researching out and figuring out, well, how do.

‍ ‍

00:27
Speaker 2
I market my company?

‍ ‍

00:28
Speaker 1
Go to your local school board for one hour twice this year. And if you can have even just 10 or 15 employers show up and do that at the same school board every single month, there's two contractors filling out a little card to give your 30 seconds at the podium that says, I need your help and we have great jobs. Eventually they will hear you. But if everyone just did two hours a year, that's how we change this. Stacy, how you doing this morning?

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00:51
Speaker 3
I'm doing great.

‍ ‍

00:52
Speaker 2
She loves it. I ask the question every time, she's.

‍ ‍

00:55
Speaker 1
Like, I'm fine, dude, just a little much. And I say to that owner, I said, see, you're not willing to invest in yourself. You're not going to invest in yourself. You're going to invest in companies you have no control over, whereas your company you control. And you don't have the confidence to pour the money into that. When things are busy and they're looking for their GC friends to sit down and negotiate a project on a GC.

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01:21
Speaker 2
And a fee and they're more excited.

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01:22
Speaker 1
About building the project and then all of a sudden the model, the market swings and now the developer market is going to go out and they're going to hard bid the same project to two or three different PCs. And that's where it starts going down. It's morning huddle time. Good morning. Chad Prinke here with Stacy Holzinger and our guest, Michael Wagner. Stacy, how are you today?

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01:53
Speaker 3
I'm doing great. I had a great Easter with my family. We went to Holland Ridge Farm and it's the biggest flower picking farm, I think in the US it was all tulips. There was like 8 million flowers. It was really cool experience, really cool thing. Yeah.

‍ ‍

02:12
Speaker 1
Did you have happy kids picking flowers?

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02:14
Speaker 3
Yes. And the weather was beautiful.

‍ ‍

02:18
Speaker 1
That's, that's the dream that's living. That's wonderful. Where were you that the weather was beautiful?

‍ ‍

02:23
Speaker 3
Well, I think it was called Cream Ridge, New Jersey. So that day was beautiful.

‍ ‍

02:28
Speaker 1
But, Saturday was the day.

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02:30
Speaker 2
Yes.

‍ ‍

02:32
Speaker 1
Yeah, because Sunday got cold, man. I was like, we did a whole outdoor thing with my family, and I was wearing, like, a scarf, you know, that's. And it takes.

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02:42
Speaker 3
Winter is never ending, for sure.

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02:45
Speaker 1
Michael, how are you today?

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02:47
Speaker 2
Good. Chad, how are you doing?

‍ ‍

02:48
Speaker 1
Doing real good. Thanks for having me. Thanks. Absolutely. Welcome this morning. So how was your Easter?

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02:54
Speaker 2
It was good. Yeah. Had the Easter egg hunt with my two and a half year old, so that was fun.

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03:00
Speaker 1
That is fun. Yeah. They're. They're like, amazed at the simplest hiding spaces at that. It's kind of like me. I'm about. About the same, so. All right, well, good. So today we have a pretty exciting topic, at least for me and the people that I hang out with, which is we're going to be talking about, you know, real fair and sustainable solutions to escalation. And right now in the construction industry and depending on. When you're listening to this, it's pretty much, you know, always relevant to some extent, but right now, in particular, materials escalation is just through the roof. And it's on everybody's mind. Everybody's worried about it. And so bringing in Mike, who is a construction attorney for Safe Worth and Shaw. Did I say that right? Safe Worth or.

‍ ‍

03:51
Speaker 2
Yes, Seifarth Shaw.

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03:53
Speaker 1
Seifarth, but he's a construction attorney based in Washington, D.C. represents general contractors, subcontractors and developers. So he's got a really multifaceted view of what's going on, the solutions that are being come up to resolve this, some of which Mike is actually employing himself and thought that this would be a really valuable conversation for our audience. So as always, guys, engage. Make sure that you're asking your questions, that you share your comments. If you're watching us live here, we want to make sure that we're capitalizing on the fact that you're here and get some of your questions answered. Stacy will bring you back with around 10 minutes to go to bring some of those things to the front, while right now Mike and I dive into the conversation.

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04:45
Speaker 3
All right, see you guys in a bit.

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04:47
Speaker 1
See you soon. Thanks. So. So, Mike, first off, just give us a little bit more background on yourself. So I, I described what you do and who you do it for. Anything else you'd give us to kind of help. Help us to see who you are and what your background is?

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05:06
Speaker 2
Sure, yeah. So I'm a, as you said, construction and government contracts attorney here at SEIFARTH Shaw in D.C. been practicing about 10 years now. You know, prior to my career as an attorney, you know, I worked for a general contractor in the D.C. area. I did that in law school and then a year after I graduated from law school. But I've grown up around the construction industry. My dad was an electrical contractor in the D.C. area as well, so grew up helping him in the summers, moved in the office, did project management, accounting. So our conversations at the dinner table were about the projects you were working on and the change orders he was working on at a time. So just been around it my whole life.

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05:54
Speaker 1
Really. That. Yeah. You. No question, you've been around it your whole life.

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05:58
Speaker 2
Yeah, that's.

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05:59
Speaker 1
I. My construction story. And some of the audience has heard this. My construction story is I was a laborer for my brother who owns a construction company. I was a laborer for my brother from the time I was 15 to the time I was 23. And I started to like, I gathered a whole bunch of skills. But note I said a laborer for that entire time. I, I got precisely as good as a first year apprentice in like several different categories.

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06:27
Speaker 2
Right.

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06:28
Speaker 1
Just enough to know I wasn't cut out for it. So. So yeah, runs. Runs in the family as well. I can, I can relate. So. Okay, here we are as we're recording this. It is April 19, 2022. We are in the midst of the highest levels of inflation that we've seen since the 80s. Economy wide and specifically in the building industry. We're experiencing a very acute intense and we have been actually for several years now. Price escalation, volatile price, your cost market for materials. How did we get to this level of inflation and price escalation?

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07:18
Speaker 2
Yeah, I think, you know, I will say that, you know, inflation and escalation has been around. You know, I think here though, it's a heightened awareness that we're looking at and really COVID 19 and the pandemic brought a perfect storm which has created this pricing volatility. You have labor issues, restrictions, supply chain problems, you have a downturn in manufacturing, and then transportation and logistical problems. All of that's come together at one point, at one time, which has really created that perfect storm. And that's why we're seeing the volatility in the market.

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07:59
Speaker 1
Yeah, it is a perfect storm. It seems like no matter what topic you talk about in that list, there's a damn good reason contributing to why we are where we are. And that by itself would be challenge enough, but when you start stacking things, it's. It's really. You created this perfect storm. I do wonder though. And, and you don't. If you don't have a comment on this, it's okay, I'll just. This is just my own crazy theory, but I do wonder to what extent organizations are capitalizing on the market conditions and the plethora of reasonable excuses for high prices to go ahead and jack their prices up and create excess profits. Because I'm seeing the feedback from the market in terms of profitability in 2020 and 2021 particularly, were wildly profitable years for a lot of organizations.

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09:02
Speaker 1
So profits didn't suffer, prices went up, and somehow the market stomached that price, you know, Escalation.

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09:11
Speaker 2
Yeah, yeah. And I definitely don't have an insight to what the manufacturers are doing. You know, if they are experiencing these problems, it seems that many of them are, or whether, you know, they are taking advantage of new market conditions.

‍ ‍

09:24
Speaker 1
Maybe a little column A and a little column B. I mean, it could.

‍ ‍

09:27
Speaker 2
Be a little bit both.

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09:28
Speaker 1
Right. I'm not gonna suggest that everybody's making stuff up. I don't think that's occurring. But I do think that I'm not hearing of anybody that is complaining about losing money on that side of the aisle. And in fact, I'm hearing some very opposite stories. So at any rate, you. One of the things that's funny you said price escalation, it's been around, you know, this has been happening for quite some time. Why haven't we been talking about price escalation and contracts on any mass scale? Because I will tell you that the conversation I'm having over and over with my contractor clients, particularly trade contractor clients and members of our peer groups, which give us a really good insight as to what's going on in the industry.

‍ ‍

10:16
Speaker 1
They're regularly saying, is anybody able to secure some sort of, you know, safety net for cost escalation and contracts? And that if I had a, you know, a graph for how frequently that came up from over the past 12 months, it's. It peaked probably two or maybe two or three months ago, where it started to be, you know, the dominant discussion in our peer groups. How are you dealing with cost escalation? Why hasn't it been at the forefront until recently? I mean, obviously it's worse than it has been, but what did it used to, what does it normally look like?

‍ ‍

11:01
Speaker 2
Yeah, so, I mean, you're always going to have, in certain instances, I think, people building price escalation into their contracts in some way. You know, when I was looking at this topic, one thing I found interesting is that a lot of the form documents that we use, you know, such as the AIA or American Institute of Architects form documents. They do not have price escalation qualities. And the only one that I was able to find actually before this was Consensus Docs 200.1, which is actually an amendment to deal with price escalation in a construction contract. So I think it is just the heightened awareness at this point. I mean, like you said, it has been around. Tariffs cause price escalation all the time.

‍ ‍

11:50
Speaker 2
For example, when there was a change from, to the Biden administration, the current administration, November 24, 2021, we had a double on the tariff, an increase on the tariff for lumber coming out of Canada. So that was, you know, that's not necessarily caused by the pandemic, but it was caused by a government agency raising the tariff on that.

‍ ‍

12:16
Speaker 1
I did not realize that.

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12:18
Speaker 2
Yeah, correct. So, you know, those types of actions are always going to be taking place. But again, I think I go back to the heightened awareness with the pandemic.

‍ ‍

12:31
Speaker 1
So, so, but what you just said about the fact that standard industry documents, whether it's aia, which is probably ubiquitous. Right. When it comes to construction docs, contracts don't have escalation addressed in any of them. So no wonder this is something everybody is, you know, discussing is how do you deal with this? Because there actually hasn't been a standard for dealing with this up until now. I guess that the method for dealing with this up until now has been suck it up and absorb the risk. Raise your prices at the time of bid if you think prices are going to be higher. Lower them if you think prices are going to be lower. And sometimes you win, sometimes you lose. And I think that's kind of been the norm. But what should we be doing about our current circumstances?

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13:21
Speaker 1
What do we do about price escalation now?

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13:23
Speaker 2
Yeah, so I think what you were just describing was the undisclosed contingency that without the standard form clauses or custom clauses for price escalation, contractors are putting contingencies that they're not disclosing to the owner or the upstream entity.

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13:41
Speaker 1
Also known as just raising your prices.

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13:43
Speaker 2
Yes, correct. So that doesn't bring much transparency into pricing. And at that point, the owner is really not getting an accurate price. They don't know what exactly is going on there, what the actual price of the materials or equipment that are being incorporated into the project. So you know what we've been coming up with, there's a number of things and you can be very creative in your approach. The first is to sit down with the owner or the Subcontractor, sitting down with the contractor and coming up with, you know, a disclosed contingency, we're going to set aside money ahead of time to deal with this risk that prices are going to go up. And so that is one way to sit down and negotiate is to set, you know, set the dollar value.

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14:32
Speaker 2
It does have its downside, because what if you don't cover the price escalation? So you've got to kind of come up with a fair number and. And there's got to be some dialogue and transparency into the. The costs.

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14:47
Speaker 1
Yep. And you're using this term transparency, and I want to call that to people's attention because if there's another comment that we get from our subcontractor, peer groups or roundtables, it is that there's generally nervousness about transparency. This thought that I don't really want people knowing my costs. I really don't want to open my books. But where does the transparency need to flow? Does it need to flow from the specialty contractor through the general contractor, all the way up to the owner? You know, how would you recommend that transparency flows and then also make the case for transparency?

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15:31
Speaker 2
Yeah, I think it has to go start from the bottom up. The suppliers who are actually sending in this equipment or pricing the equipment and materials, they have to, of course, provide it to the sub, and the sub needs to pass it up to the general contractor and ultimately to the owner. And I think the case for transparency is that in many instances, number one, the owner could ultimately find out, if they really wanted to, by doing math or calling around to the supply houses to figure out what the actual cost of these materials are running on a day. Right.

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16:10
Speaker 1
It's not as if it's a secret.

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16:12
Speaker 2
Yes. Yeah. So they could ultimately, if they really wanted to figure out what the markup is on top of those materials. The other thing is, I think the construction business, it's all about partnership. You all have to be working together, pulling in the same direction to make a project successful. And to the extent that transparency in the cost, you can do that and share that and everybody is winning, I guess would be the term. That's what ultimately you want. And then the third for the case of transparency is many of these contracts, such as a cost plus with the gmp, they're going to have audit rights or you're going to have to demonstrate your costs anyways.

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17:00
Speaker 2
So, yeah, the owner is going to be able to go in and look at the books or look at the invoices, look at the ledgers and figure out exactly what that cost is.

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17:14
Speaker 1
So the analogy that I would use here, thinking about what you're describing, is it depends one's mindset. If you are a home run hitter and you're focused on swinging for the fences, you'll hit some home runs. Yeah, but home run hitters, as any good baseball fan knows, home run hitters tend to also strike out a decent amount. Their averages tend to be a little like we had the Mark McGuire hitting.219 with 55 home runs, you know, kind of thing. It's, it's either a home run or a strikeout, and there's really not a whole heck of a lot in between. If that's your mentality, if that's where you're coming from, you're probably not even really interested in having this conversation about price escalation, right? Cost escalation and contracts. You're probably saying, look, I'm here, I'm making bets. I don't want the transparency.

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18:03
Speaker 1
I'm looking to find ways to win. And I think I'm smarter than the market. I think I can read what's coming down the line, and I'm comfortable with that risk. I'm a home run hitter. That's, that's kind of my mentality. If you'd rather get on base, then you're, then you probably, you know, if you have that mentality where, you know, a single, a walk, you're double here and there. If that's your mentality, then you're probably not going to be feeling nearly as uncomfortable about the idea of transparency, because when you open your books, you're not. You're, you're going to be feeling comfortable about showing the profits that you're making because that you think they're reasonable, you think they're fair, you know, that different type of stuff. So I'm not, then, seriously, I'm really not judging between the two.

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18:55
Speaker 1
But I do think that home run hitters do some interesting things to the overall market. And it's probably the reason that owners are hesitant to, you know, offer contingency clauses and go down this road because there's usually somebody willing to gamble.

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19:17
Speaker 2
And it really does come down to your risk profile. Are you going to be the person who's going to increase their, your, their price, you know, put a large markup in it, or do you want to try to negotiate things out and see where it ends up? You know, it's all about balancing the risk. If you have a high risk profile or a low risk Profile. There's multiple ways to approach it.

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19:38
Speaker 1
So, so what do you see going back to. So, so let's say that we're tailoring the rest of this discussion really around the person that's just trying to get on base, the person that's trying to make a reasonable profit doesn't want to get killed in the market. And I do know these folks, man. I, I, I know trade contractors right now that are like finishing up work that they priced in 2020. They're getting no help and they're losing money on every project that they priced in 2020. They're bringing it home right now. And what they're really looking for is for just somebody to, you know, help to cushion the next ones. They're not, they're not looking to swing hard the other way or hit home runs. They just need to get on base for those people.

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20:25
Speaker 1
When you're, when you get into contract negotiations themselves, what advice would you have if you were trying to approach this topic of establishing material escalation clause?

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20:39
Speaker 2
Yeah, so I think you need to request a sit down request, you know, sit down and negotiate with who? With whoever you're contracting with. So for example, the subcontractors need to sit with the general contractors and general contractors need to sit with the owners and let them know what's going out there with the pricing that we're seeing, what's increasing, you know, what's going down where the market is at the time of contracting. And that's going to kind of guide your conversation on what can be done. You know, I think the first step would be to talk about the contingency and then, you know, I think the second step is to go for a price escalation clause. And there's multiple ways that you can approach the price escalation clause.

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21:27
Speaker 2
You know, you can set it based on, you know, a percentage increase or you can, you know, set it based on time or a combination of both, which would be a temporal approach. So when I'm talking about percentage increase, you know, what the contract provision could say, you know, the contractor is going to own the price increase up to 10% and then from there the owner is going to carry the burden. So, so it's a risk sharing scenario.

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21:54
Speaker 1
Based on the percentage and there's an expectation that I'm going to have to demonstrate, I'm going to have to prove that my cost went up, that is going to be able to be audited.

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22:05
Speaker 2
Correct.

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22:06
Speaker 1
Therefore they're going to be able to See what my hard cost on my materials were for that.

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22:11
Speaker 2
Yeah. And that's where the transparency comes in. You're going to have to provide those invoices.

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22:16
Speaker 1
Yep. And on the flip side of that, it seems to me, you know, nobody can have it all one way. So. So is there. Is there a. A feature in this escalation discussion where if the materials cost goes down by 10%, then the. There's a savings that gets split up? Like, is that, you know, how does that work?

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22:43
Speaker 2
That's. Yeah, you can be as creative as you want. There could be, you know, if it's going to be an increase, you know, that's to the benefit of the contractor in a way, but also there could be a benefit to the owner of the pricing going down. And you can build that into the contract that if there's a savings, you know, there could be an adjustment based on the pricing going down.

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23:07
Speaker 1
Excellent. Got it. Okay, good. So that's a really tangible action item. So again, I keep focusing on the. On the specialty contractors because I think they're the ones that they shoulder the burden of buying the materials. So that for the most part, obviously, you know, there are exceptions to that for that group. How would you respond to the person that says, I asked the GC if they'd be willing to sit down. They said, no can do.

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23:34
Speaker 2
I really think you need to push for it and go, you know, go back to the table as many times.

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23:39
Speaker 1
As possible as possible because have I contracted yet? Is this all. This is all prior to me going to contract?

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23:46
Speaker 2
Yeah, right.

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23:47
Speaker 1
This is all prior to me going to the contract. So. So again, if I'm going to challenge, I'm going to push back on that and just. And sort of say, if I'm a subcon. If I'm a, you know, specialty contractor, I'm saying, well, they're gonna. My competition's willing to do it. They're gonna say, you know, fine, give it to me. I'll handle it. So. So I'm running this kind of risk, you know, again, I'll put it back in your court. How would you respond to that?

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24:10
Speaker 2
I mean, what I would say is, you are not going to get the accurate pricing is the fact, you know, okay, if you want to do it that way, I'm going to put in a large contingency that's not going to be disclosed to you, and that's not good for anyone involved, including the owner who is building this project or, you know, providing the financing.

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24:30
Speaker 1
And I think that's the big message that we're sending across is that you have two choices here. Choice number one is that you deal in a world where you're getting artificially inflated prices to cover, you know, material increases that everybody's got to protect against. And if. And if you want to buy that way, fine. You don't know what the actual prices are, and your priority is just cost certainty. I don't want to pay a penny more than what I said I was going to pay up front. That's one approach that you can take if you're the buyer. The second approach that you can take is I actually just. I just want to pay what is. What is reasonable and fair inside the current parameters of the market so that if costs do go up, I'm comfortable moving up with that number.

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25:15
Speaker 1
But I think if I were a buyer, the only way I'd be willing to do that is if costs went down. I got to participate in that as well.

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25:22
Speaker 2
Sure. Yeah, I. I think that's. That's right. And that. That is striking a nice balance. It's, you know. You know, if the pricing goes up, yes, we'll give you enough. A certain adjustment after a certain period of time or a certain percentage, but also, we're looking for the benefit of the pricing going down.

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25:38
Speaker 1
All right. Awesome. I cannot freaking believe that we're as far along in this show as we are already. We're getting close to the end here, and I want to make sure that Stacy has a chance to pass along some of the questions we've got.

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25:53
Speaker 2
Okay.

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25:55
Speaker 3
So do you have any clients now, any success stories that you can share of how they resolve this?

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26:02
Speaker 2
Sure, yeah. Yeah. I won't names, but, you know, we've seen a lot of contingencies that have been successful. Disclose contingencies. We've seen a lot of price escalation clauses. One thing I'm specifically thinking about was a specific material. What we did on the escalation was it was a temporal approach based on time. And what it says is the contractor will take the first six months. They're buying that in their price. After that, then the owner will participate in providing a price increase for the material or escalation. And what we also put in there was basically, if the contractor, however, delays the project, then they do not get the price escalation. So that was. That was a give and take there. It was a fair. You know, you're not entitled to the price increase if you delay the project because you're putting yourself into the.

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27:13
Speaker 2
The time period in which prices are going up.

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27:16
Speaker 1
So, so I think, make sure I understand what's happening there. I, what I think you're saying is the contractor said, look, I know what this material is going to cost for the next six months, so I'm on it for the next six months. Or, you know, roughly, I know what it's going to cost for the next six months. So I'm willing to take that risk because my price represents what it would take over the next six months. If we're done six months from now, great, we're good. But if we're, if we go into month nine, the next three months, if the material cost is higher than what I bid it at, you're going to need to cover the balance of that.

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27:51
Speaker 1
And then the owner's pushback or, you know, a counterbalance to that is simply to say, fine, but if the reason that we're on month nine is because you didn't have the manpower to get to where we needed to get to, then it's going to shift back to you. My, my only question here is, was that between, was that a specialty contractor?

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28:12
Speaker 2
So that was an owner, general contractor relationship.

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28:15
Speaker 1
Okay, got it. They were the prime. Correct on that project. Okay, got it. I was just going to say, you know, the only thing that could get dicey is, okay, what if the GC owns the delay in that kind of deal and the, in the specialty contractor had cut that deal. So does the risk now shift to the GC or they now write the check or how does that work?

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28:36
Speaker 2
So you're saying between the g. If this relationship was between the GC and the sub. Is that right?

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28:43
Speaker 1
That's right. Yeah. Because, but in a, in a GMP cost plus type of contract where, you know, ultimately that's the owner's money, you know, kind of thing, how would that work?

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28:58
Speaker 2
Yeah, so I think that's right. I mean, what you would have is you would need to flow that provision down to the subcontractor as well. So if, you know, say the general contractor flowed that provision that he had with the owner down, the subcontractor would equally be responsible for complying with that provision and the delays. So then it kind of the battle becomes between the sub and the general contractor in that instance.

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29:29
Speaker 1
What percentage of projects do you think are going out right now? Obviously, I think it depends on the market segment big time. Right. I think, I think wood frame residential is getting much, much fewer of these kinds of contract escalation clauses than maybe infrastructure kind of project. But what's your gut feel for what percentage of contracts are going out right now with some sort of materials escalation built in?

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29:57
Speaker 2
I think most, I would say the majority.

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30:00
Speaker 1
Wow.

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30:03
Speaker 2
You know, I. Going to infrastructure. I did see material escalation on concrete. So it is present and I think given the volatility in the market, people are willing to negotiate at this point.

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30:19
Speaker 1
So what I'm really hearing you say is this is not an unreasonable ask for anybody in the chain. This is not an unreasonable conversation. And to your point, when I said, hey, if somebody says no can do, you're like, yep, push double down. Because it is not unreasonable for you to be asking about this and trying to have the conversation.

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30:39
Speaker 2
I, I don't think so. And I'll go back to that partnership working together for the project.

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30:47
Speaker 1
Right. At the end of the day, do we want, when nobody wants to hurt each other coming in toward the end, maybe some people will start feeling like they want to hurt each other, which is a whole other topic for a whole other show. But you know, at that upfront stage, you know, building contracts that right out of the gate, you know, put us at odds. It's a huge mistake.

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31:07
Speaker 2
Sure. Yeah, I agree with that. I mean, you always want to, you know, you want to protect yourself in a contract, but also, you know, there should be some type of risk sharing.

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31:19
Speaker 1
Awesome. Stacy, time for one more.

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31:24
Speaker 3
So how can we handle escalation depending on the contract type?

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31:31
Speaker 2
So escalation depending on the contract price type. I think it's always going to be, you're going to always have the same options on, I would say on a cost plus, you're probably going to have more options. And that's where you know, you're going to get into more of the contingencies and allowance. You could even use allowance to cover the price escalation. But I mean, most contracts you're going to be able to build in a price escalation clause, you know, force majeure clause, sunset provisions, delay clauses. You could even go with an early release of materials or a direct buy where the owner's purchasing the materials early on and storing them. And then you have your phase construction that you could use as well. So I think regardless of whether the contract type, you're always going to have those types of provisions available to you.

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32:28
Speaker 1
Awesome. Awesome. All right, great. We are up on time and I, I know for sure that if we had folks watching this who were, you know, whether they're regardless, specialty contractor, general contractor, owner, developer, there are real takeaways that I think you provided and really appreciate that. Mike, you're a smart guy and if I needed a construction attorney, I would definitely turn to you. Despite the fact that you're a CAPS fan.

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33:02
Speaker 2
No, no. Very good.

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33:09
Speaker 1
Mike. Any final words before we wrap up and Stacy and I just kind of walk through what's going on next week.

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33:16
Speaker 2
You know, just if I can answer any further questions, you know, I can give my contact information and people are welcome to reach out.

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33:24
Speaker 1
Absolutely. Yeah. Here, here. I, I actually, I don't know how useful this is, but look Mike, up on LinkedIn, it's Michael E. Wagner on LinkedIn. Michael E. Wagner Jr. That is on LinkedIn. He's accessible there. Very responsive. I noticed. And if you know Michael, any other way that you'd have people contact you, would you have him start here?

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33:46
Speaker 2
Yeah, I start there. Also, My email is me wagnercifer.com and I'm at 202-828-5392.

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33:57
Speaker 1
Awesome. Thanks. Appreciate it. Mike. Thank you so much for being here. Stacy, let's talk a little bit about what's going on next week.

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34:04
Speaker 3
Okay, so we have Molly Cape from M Tech joining us and Maury Peterson from Rebuilding Together Montgomery. And we're going to talk about community service and how that helps our partnerships with GC subs and how we can use the materials and our resources just to help our local communities and build relationships.

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34:29
Speaker 1
Awesome. Great discussion. I think so much of the discussions that I have with my clients right now revolve around employee retention, engagement, happiness, things along those lines. It is not a natural connection for a lot of people to think about how they can involve their company and community service, how that might actually help with employee engagement retention. But it absolutely does and I look forward to digging into that with that and more with Maury and Molly. So that'll be a cool kind of group discussion next week. So thank you, Stacy, for all of your help in making sure that we have fantastic guests every week and that our guest question or sorry, our viewers questions get a chance to get answered. Anything to say before we wrap up?

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35:22
Speaker 3
Nope. I hope everyone has a great rest of the week and I hope you join us Tuesday. We'll send out an email hopefully sometime tomorrow just to let you know a recap of this episode and then who's on next week.

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35:38
Speaker 1
Excellent. Yeah, make sure that you register in advance. And hey, if you don't want to be trying to follow LinkedIn and you know, check, check our posts to find out when the next show is and get registered. Just shoot Stacy an email with your email and she will get you on our weekly list. That is the easiest possible way to make sure that you stay plugged into this and that you don't miss an episode that you want to miss. So. Or sorry, that you don't want to miss. I'll talk to, I'll talk to you guys all later. Thanks so much, Stacy. Have a good one. Audience.

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36:14
Speaker 3
See you guys.

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36:15
Speaker 1
Yeah, Bye. Bye.

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