You’re about to purchase a piece of property or buy a business, and you’ve done your research. But have you remembered to do your environmental due diligence to uncover any environmental conditions attached to the property?
These conditions can be big or small, but you need to make sure that you know about them before completing the transaction. Doing so can help protect you from any liabilities associated with the conditions and allow you to address or minimize these issues from the outset.
“You can run into project delays if you find an environmental issue that you hadn’t planned for,” says Eugene P. Schmittgens Jr., of counsel with the litigation and environmental practice groups at Greensfelder, Hemker & Gale, PC. “If that happens, that’s going to result in a delay. You need to take time for this due diligence to find any problems and determine if a deal still makes sense or if you need to walk away from it.”
Smart Business spoke with Schmittgens about doing environmental due diligence in transactions and why environmental conditions may not mean the end of the road for your deal.
What environmental due diligence do you need to do before completing a transaction?
The first step in performing proper due diligence is a Phase I, which is a study of the property by an environmental professional. This helps identify conditions that may exist on the property that could lead to liabilities. No business or property is the same, but the requirements for performing a Phase I are specifically spelled out. While a proper Phase I contains the same elements, every approach to an environmental condition is different, based on what you’re trying to accomplish in the deal.
The Phase I is also very limited in scope and only addresses whether there’s been a potential release of a contaminant or petroleum product on the property. It won’t address if there’s asbestos, mold or lead paint in the building, which you also need to know about before a renovation project. The Phase I also won’t identify whether someone has a proper air or water permit or if the waste operation is handled properly. If you are purchasing an ongoing business that may require permits, you must request this additional review because it is outside the scope of a Phase I but still can impose liability on the purchaser.
If you do find an environmental condition, you may need to perform a Phase II investigation. This is invasive sampling of the property to figure out whether contamination exists. This is like throwing a dart at a dartboard you may or may not hit your target. So just because you didn’t find anything during sampling doesn’t mean there isn’t any contamination; you might have to do several iterations to find it.
What are some key things that need to happen when doing environmental due diligence?
You need to put your team together before entering a transaction to help guide you through the process. You need real estate and/or corporate attorneys, together with environmental lawyers. Then you need technical people, including a consultant who is familiar with the area and the state’s voluntary cleanup program to help you make good business decisions and understand the risk involved.
These people can help you understand what makes those liabilities exist under environmental law and how to avoid them. You can solve a lot of problems early on by using this team.
You also need to determine the future use of the property or business, because that will affect whether a recognized environmental condition will cause a major problem. For example, if you want to put in a development that includes a day care center, your requirements for remediating the property will be different than if a factory were going in.
What is CERCLA, and how does it affect businesses?
CERCLA is the Comprehensive Environmental Response Compensation and Liability Act, or Superfund, which was passed to address primarily abandoned contaminated properties. This made owners of contaminated property liable for the cleanup of these sites and provided for retroactive liability, so anyone with dealings on the site could be liable. This had a lot of people scared that they would buy property and not know it was contaminated, and then have to pay to clean it up.
A number of amendments have been made to the original law, and Congress has given up some Superfund liability if people purchase the property and address the contamination. This may involve remediating the property in a voluntary cleanup program. This allows the contamination to be addressed depending on the best use of the property.
How can you prepare for the liabilities and costs associated with environmental conditions?
To a large extent, people are afraid of properties that may have environmental conditions. But you need to break the issue down into the simplest terms what will it cost to address this, plug those costs into the pro forma and determine whether the deal makes sense. The problem with environmental matters is that we see big news stories about companies incurring millions of dollars to clean up a problem on property purchased.
You need to think of environmental problems as just another piece of the business transaction puzzle and have your team help you walk through this and understand the real risks. The risks can be significant, but some are not so big as to make you walk away from a deal.
Eugene Schmittgens Jr. is of counsel with the litigation and environmental practice groups at Greensfelder, Hemker & Gale, PC. Reach him at (314) 345-4776 or email@example.com.
Even if your company does not currently deal with unions, passage of the Employee Free Choice Act could have a negative impact on your business.
The EFCA would amend the National Labor Relations Act, changing the way in which companies are unionized and requiring a new strategy for dealing with unionization and employee relations. And because any business with two or more workers can be unionized, you could be subject to the requirements of the bill should it pass.
“The EFCA was initiated to make organizing easier,” says Mary Beth Ortbals, a member of the labor and employment practice group at Greensfelder, Hemker & Gale, P.C. “Disadvantages of it include the elimination of secret ballots, an expedited election process and binding arbitration in the event that both parties are unable to reach an agreement.”
In preparation for the bill’s possible passage, you need to stress communicating with your employees now to educate them about your position on unions.
“You need to establish a union avoidance plan before the Act is voted on,” says Dennis Collins, chair of the labor and employment practice group at Greensfelder, Hemker & Gale, P.C. “You need to communicate to employees your position on unionization and the potential risk factors in advance of a union organizing campaign.”
Smart Business spoke with Ortbals and Collins about the Employee Free Choice Act and how to prepare for its possible passage.
What is the Employee Free Choice Act?
The proposed act has three provisions. The first authorizes a card check procedure, where a union can be certified without a secret ballot election if 51 percent of workers sign authorization cards supporting the union. There may be a compromise bill to retain the secret ballot election, but this would require quick elections and mandatory arbitration.
The proposed act also puts further restraints on businesses, with triple back pay to employees who are discriminated against or terminated while involved in union organizing activities or in the time leading up to the first union contract. It also imposes penalties — up to $20,000 per incident — on employers that engage in willful or repeated unfair labor practices.
It takes away the rights of the company and the union to agree or not agree to collective bargaining agreement provisions if the first labor contract is not reached within 120 days from the start of bargaining. Instead, an arbitrator will establish matters such as wages and benefits for the first contract, which will be in effect for two years. You then will no longer be able to say no to the demands of the union.
How does a card check procedure negatively impact a business?
This procedure could take away the right of an employer to require that workers vote in a secret ballot election to determine whether they want to be unionized. The union can be certified without an election if more than half the work force signs authorization cards.
You may have no idea that a union is trying to organize your work force until after the union obtains authorization cards from 51 percent of employees. This does not give you an opportunity to present your views on unionization before your business is unionized. A signed authorization card is valid for one year, so this gives the union a long time to collect cards.
A compromise has not been reached to remove the card check provision from the bill. Some efforts have been made to reach a compromise because of the opposition to the elimination of secret ballot elections, but the AFL-CIO has not signed off on this compromise.
Do business leaders still have reason to worry about the EFCA, even if the card check provision is dropped?
Yes. If the card check procedure is dropped, there will, in all likelihood, be a provision granting unions the right to force fast elections — within five to 10 days — after 30 percent of workers sign authorization cards. Now, union campaigns typically run for two months. This time frame gives you little opportunity to communicate with workers regarding your stance on unionization.
Another possible condition that may be included in the compromise bill is a requirement that union organizers be allowed access to workers at your office location. This would be a further intrusion on management’s rights.
Another compromise provision would bar you from holding work-time meetings to present your views on unionization. These alternatives take away a level playing field and disrupt business operations. However, the EFCA, as proposed, requires mandatory arbitration, and an outsider would then impose an employer’s wages and benefits for the first two years of the agreement.
How can you prepare for the possible approval of this act?
You need to establish a union avoidance plan and inform workers about your view on unionization. Employees need to be educated on the tactics unions will use to impose unionization on a company without an employee vote. Make sure employees also understand that signing a union authorization card is the same as a vote for the union.
Even if the card check provision is removed from the final bill, the fast-track election compromise provision would only give you several days to communicate your stance against unionization to workers. The compromise bill may also prohibit you from requiring workers to attend these meetings.
Dennis Collins is chair of the labor and employment practice group at Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2648 or firstname.lastname@example.org. Mary Beth Ortbals is a member of the labor and employment practice group at Greensfelder, Hemker & Gale, P.C. Reach her at (314) 516-2646 or email@example.com.
Every industry needs to reduce costs in this economy. Therefore, it is essential for organizations to approach this demand in a forward-looking manner, no matter the urgency placed on immediate results.
Risk management tools and practices provide a company with the opportunity to identify areas where improvements can be made, ranging from the coverage held by a firm to its staffing practices, says Patrick M. Lawton, strategic account manager and vice president for Aon Risk Services Central Inc.
“By taking thoughtful and strategic steps forward, you will secure a determined grip on your firm’s future and position your business for continued success,” he says.
Smart Business spoke with Lawton about how companies can identify the areas that need to be fixed and how they can fix them.
In these tough economic times, how can companies meet the needs of a recessed economy?
Organizational and operational priorities are being driven more than ever by the current difficult economic issues. Cost reductions in all aspects of a company are at the top of the list. Three key byproducts of the recessed economy are:
- Organizations are struggling with reduced product demand, high costs and limited access to capital.
- The cost of credit will be high for the near term as economists suggest the credit market will remain tight.
- Most economists believe that corporate profits will decline in aggregate by as much as 50 percent for the year.
Operating in such an environment, companies have little choice but to cut capital spending and reduce the cost of sales. Indeed, recent surveys show a significant number of organizations plan to continue to aggressively manage both costs and staff in the months ahead. Although experts have varying thoughts on how long this downturn will last, most are in agreement that we are not out of the woods yet.
Unfortunately, many companies address these challenges too late in the game, often by drastically implementing only one solution. Instead, they need to strategically integrate these various components, so costs are optimized and managed in an appropriate and realistic fashion. Having a plan in place prior to instituting change is critical.
What are some of the critical factors companies should consider while implementing a plan?
The keys to a successful cost reduction initiative include, but are not limited to, the following:
- Alignment with organizational strategy: Focus on the organization’s mission and values with an integrated approach across human resources, operations and risk management.
- Legal defensibility: Follow established internal policies and adhere to local statutory issues at any given location affected by the strategies.
- Risk mitigation: Identify hidden risks, such as unplanned attrition, sabotage, workers’ compensation and disability claims.
- Metric-driven approach: Continuously monitor exposures and opportunities in a cost-effective manner. Constantly review newly reported losses and changes in property exposures as the minimum.
Ongoing sustainability recognizes and quantifies exposures such as accidents and disabilities associated with your organization’s workplace, while addressing new and ongoing claims and anticipating future liabilities. Additionally, the incorporation of a standard planning approach to review future decisions in anticipation of change, coupled with ongoing risk assessment, will support the organization’s goals and interests. This is easily accomplished with the engagement of a specialized advisory service and senior executive-level facilitators.
With these mitigation strategies firmly in place, you’ll benefit from maintained sustainability in the following ways: stabilized productivity; ability to meet continued customer needs or expectations and, therefore, satisfaction, loyalty, revenue and cost of sale; retention or transfer of outstanding employees; management and control over employee morale; and minimized disruption of benefits to current disabled workers.
Predictive analysis projects future impacts and estimates future liabilities through statistical analysis. In order to allow an organization the flexibility to consider a number of options in deciding how best to manage costs, it is useful to engage in actuarial analysis. By reviewing historical losses, trends and expert opinions as to future considerations, you accrue for future balance sheet liabilities.
How can a well-designed plan help mitigate the risks companies face?
A well-designed plan will support significant value creation for the organization, delivering a sustainable approach to ensure that resulting workers’ compensation and disability claims costs are handled proactively, grievances are minimized, productivity is not negatively impacted and customer and shareholder confidence is maintained.
Specific to the above facts, data supports that an organization may have increased costs of 30 percent in workers’ compensation alone. This does not consider productivity issues, unplanned attrition and other costs directly affecting the balance sheet in various ways. Therefore, it is imperative to plan for the cost reductions by incorporating all aspects that may prove costly or that were previously not contemplated as a cost. By benchmarking an organization’s data against its peers, it quickly becomes evident where the firm is thriving and where some additional attention may be required.
PATRICK M. LAWTON is a strategic account manager and a vice president for Aon Risk Services. Reach him at (314) 854-0734.
But one shouldn’t assume that this calm, easygoing personality means he takes a laid-back approach to running his business.
When the decision was made to merge Leer’s company, Arch Mineral Corp., with one of its fiercest competitors, Ashland Coal Inc., in 1997, Leer was all business.
“Six months is an outside time, I want it done faster,” says Leer, explaining how long he expects a merger to take from start to finish. “I don’t want to have a problem if the integration team of some particular group is sitting there saying, ‘The guy in the corner office is crazy. We can’t get it done in that time frame.’ In fact, in some ways, I even want that kind of tension going on. The teams have to have people bond from both sides.”
The reason for this particular merger was relatively simple: As coal markets continued to evolve from regional operations to more of a singular national market, the two companies were beginning to do more harm than good through their competition.
“There were obvious duplications of overhead,” Leer says. “To meet the requirements that we felt were necessary to be successful in safety and environmental performance and in meeting the market needs that were growing ever more sophisticated, that size and breadth of resources was going to allow you to be much more competitive in the world than staying a regional company.”
While the merger made sense on paper, there was still the matter of how to physically and culturally merge two separate businesses into one organization that would be stronger. Leer says that it takes a lot of effort to make such a large-scale consolidation work. But experience has taught him that the faster you do it, the better your chances are of being happy together.
“Integrations that take more than six months start to destroy shareholder value,” Leer says. “If people can speed it through, it’s difficult. It’s hard work and it’s a 24-7 approach for a period of months. But it ends up allowing you to get the real value that drove you toward the acquisition in the first place.”
By not being afraid to push his people beyond their limits, Leer now leads a 4,200-employee, $2.9 billion company that produces more than 100 million tons of coal each year. Here’s how he did it.Keep it moving
Leer took the first step toward reducing the opportunity for conflict in the merger of Arch Mineral and Ashland Coal by creating integration teams. These small units of two to four people would work on bringing the companies together department by department.
The size of the teams was very much intentional.
“I didn’t want the teams to be so large that they had to have a meeting to schedule the next meeting,” Leer says. “Both corporations had systems and methods that had been successful. As we were trying to merge them, I didn’t want to get into long, drawn-out discussions with, ‘We did it this way,’ or, ‘We’ve always done it this way.’
“By keeping the teams small and keeping the teams with very tight time frames, we set up a dynamic where instead of arguing about which way was the better way, it was more like, ‘We need to get this done. Let’s pick a method here because this crazy son of a gun in the corner office expects us to be done on Tuesday. There’s no way we can be done on Tuesday.’ That helped speed up the whole integration process.
“It really puts pressure on the teams to get to the heart of what they should be doing, as opposed to focusing a lot of time, attention and resources on peripheral issues and things that aren’t as important.”
In this particular case, Leer had worked in both companies and had a good knowledge of the people who could step up and get the job done in the quick and effective manner he was looking for.
“You really want to put the stars on the integration team,” Leer says. “By their very nature being the stars, they are almost always driven, self-motivated and focused on getting their tasks done. I don’t find that motivating those teams is hard. They’re probably moving faster than with me looking over their shoulder.”
Finding the people to serve on these teams is usually not as hard as you might think. In fact, you can actually do more harm than good by thinking about these choices too much.
“Your own people will know, often better than you as you go down through the organization, who gets the job done and who maybe is not as effective at getting the job done,” Leer says.
“Sometimes in moving quickly, you will make the wrong choice or make a mistake. You just have to say, ‘I’m willing to do that.’ That has a cost to the organization, but the cost of moving slowly and letting some of the best people, those stars, drift away and get captured by a competitor is more costly than having to go back and re-slot somebody or make other changes six months or a year after the merger. It just is too hard and takes too much time to get to know everyone.”
Follow the same philosophy in selecting a person to head up the consolidation effort and serve as a point person for any related questions. Make sure this person is not you.
“That way, there is at least one contact point that if nothing can get resolved by the integration teams, it comes to somebody who is intimately involved in the daily guts of trying to integrate two organizations,” Leer says. “Heck, I’m not knowledgeable on whether we should use XYZ or ZYX software. You need somebody who will be working very hard because they do have their day job. But you have to make sure you’re still running the organization and the company while you’re doing all this.”
That doesn’t mean you can’t check in on the integration meetings and see how things are going.
“Spend time walking around,” Leer says. “Stop in at an integration team’s meeting or even with an individual team member and ask them, ‘How’s it going? What are the problems? What are the issues that you are facing? Is there anything insurmountable that we can address at a higher level and put more resources on?’”
Ultimately, your job is simply to make sure things continue to get done.
“I don’t mind that they have long, drawn-out discussions as they try to resolve their issues,” Leer says. “But I have a tight time frame. It’s coming to decision time. You could spend a day coming to a decision point but come to the decision point. Don’t sit there and say, ‘We’ll defer this until three weeks from now.’”Make changes fast
A major move such as a corporate merger obviously can create a lot of anxiety. Employees need to know as soon as possible what their role will be in the new company or if they’re not going to be part of the future.
“The faster you do the integration and communicate to employees what their future is, whether it’s a good future or one where they are not going to be involved in the company, the fairer and better it is for everyone involved,” Leer says. “You really have to focus on how you bring the two companies together. What are the social issues of bringing the various personnel together? How would all the minds be organizationally structured? Those tend to be very intense conversations.”
In almost every merger or consolidation, there is that point of wondering who is going to stay and who is going to leave. That uncertainty can be poison to an organization and it’s why time is of the essence in making decisions.
“You try to get those communication points out as fast and as quickly as you can,” Leer says. “An old boss of mine told me, he says, ‘What you have to understand is the first word in merger is me. Even if their future is we’re going to go through the transition and there is going to be a severance for you, people may not like that answer, but they can respect it and deal with it.’ What the human can’t deal with is the uncertainty. Our view is to try to communicate everybody’s future as fast and as quickly as we can.”
You’re better off making the moves quickly and making a few mistakes.
“If you get 90 percent correct, go back and correct the last 10 percent if you realize you made a mistake,” Leer says. “That’s a much better approach than trying to get 100 percent of every move decided and then saying, ‘We need more time to decide what we’re going to do here,’ and then letting things drift on for six months.”Sell the plan
You spent a lot of time figuring out whether to merge with another company and analyzing figures and charts and making projections. That same approach to making the move is the one you need to take in selling it to your people as things start to happen.
“You have to go through the rationale and be convincing,” Leer says. “You have to be prepared to explain your strategy. You don’t have to get into all the numbers, and often, the numbers might be confidential. But you have to get into why we are doing this and why we are moving forward with the transaction and what it means to the overall health of the organization. And it’s not just the employees.”
You need to take the position that you are looking to earn the trust of the people you’re speaking to.
“You need to listen as much as you talk,” Leer says. “Take questions afterwards. If you don’t know the answer, say you don’t know the answer. Say, ‘We don’t know that,’ or, ‘We’ll get back to you.’ Don’t try to dodge things or buffalo somebody. It’s kind of like the voting populace. I think the voters are much smarter than the politicians give us credit for. An open, honest dialogue is what you are striving for.”
Sometimes, it doesn’t even hurt to have an employee ready to ask a question to help break the seal.
“Sometimes people are reticent to ask the CEO a difficult question in a large group like that,” Leer says. “See if you can’t use other techniques to get it going.”
Think about your audience and plan accordingly in terms of how you present yourself. But focus primarily on the message you are looking to deliver.
“My personal style is I like to be out in front and not behind a podium,” Leer says. “But some people like a formal, written speech.”
By being out in front with his people, Leer has led Arch Coal to continued revenue growth, reaching $1.9 billion in 2004 and $2.9 billion in 2008.
The key is to always be clear in laying out your expectations of what you want to see happen. It’s also important to know when to rest.
“Everybody is going to feel stress and tempers are going to get a little short,” Leer says. “You just keep pressing to move through it, and once you’re done, you pull back a little bit and say, ‘The last three months have been darn intense.’ So you try not to load another acquisition two months later.”
How to reach: Arch Coal Inc., (314) 994-2700 or www.archcoal.com
This economy probably has your company facing heightened risks risks that you might not be prepared for and that could ultimately cripple your business.
The global economy is the No. 1 risk businesses say they face today, according to the Aon 2009 Global Risk Management Survey. But the survey points out that less than 66 percent of respondents have formally reviewed their major risks or have plans in place to deal with them, including the economic downturn.
Now is a crucial time to have a detailed risk management program in place. After all, budgets are tight, you’re looking for savings and managing risk can directly influence your bottom line.
“A company who manages risk will in two ways affect their bottom line,” says Ric Peña, regional executive, North Central region, Zurich North America. “One, they will retain losses if a company has a large deductible and they manage the risk. … On the other side of it is, if a company manages risk (and) is able to control their losses over the long term, their insurance premiums will be better than as opposed to if they don’t manage their risk.”
Hiring an in-house executive to focus on risk may financially be out of the question. But a good insurance broker can help you put the puzzle pieces in place, starting with the questions that will lead to true solutions.Identify potential exposure
Like anything in business, a true commitment to risk management starts with the company’s leadership. Set aside time for your organization’s key players to sit and outline the different risks you might face, such as financial, property and casualty, and legal.
There are a number of assessments you can do such as risk mapping or enterprise risk management depending on the amount of detail and commitment you want your program to include. Regardless of what direction you are going, you should include your insurance broker in the conversation. Odds are his or her experience, benchmarking data and outside eye will lead to valuable questions. A good broker has dedicated risk management and claims services and will go through a checklist that will bring your risks to light.
Once your risks have been identified, your broker can help you develop a strategy to quantify your risks and determine whether you should mitigate or transfer the risk.
“All companies should have a risk management process,” Peña says. “When they come to an insurance company to control the risk or hedge against the risk, that’s where I come into play. So I basically offer one of many solutions that they can purchase or, basically, solutions that they can put into place to manage that risk; insurance is just one of many.”
The process is fairly systematic, but it’s also continuous. A true risk management plan involves constant monitoring. It’s worth the effort to work with your broker to match a timeline of monthly musts with your plan. Especially in volatile times like today, your company could face different risks than it did six months ago.Review risks
Your risk analysis is a great guideline for your specific needs, but there are a few areas of coverage the economy has made more relevant.
“There’s always increased risk when the economy isn’t performing as well as it could,” says Nicole Latimer, agency field executive, Northeast St. Louis, State Farm Insurance. “Beyond the usual risk of business downturn, business owners also need to be aware of any special hazards posed by their specific geographic area or their specific political environment.”
Business interruption and trade credit insurance are two areas to review. If a client can’t pay or your operations are halted, how will those scenarios affect your balance sheet if you’re already strapped for cash?
Insurance executives are warning that desperate times produce desperate people. If you’ve decreased your work force or plan to, keep in mind workers’ compensation and employee discrimination claims tend to rise in a down economy, as do employee crime and cyber theft. Now might be a good time to evaluate directors and officers coverage, employment practices liability insurance, crime insurance, cyber insurance and workers’ compensation coverage.
“We know that the current condition of the economy is causing people and businesses to reconsider spending in an effort to identify areas where they can limit their expense and perhaps reduce costs,” Latimer says. “Business leaders should understand that failure to properly and adequately protect their full range of assets poses great risks to the organization’s odds of successfully rebounding from an unexpected financial crisis.”Find cost-saving solutions
Insurance is one line item that hasn’t been immune to budget cuts. But before you start scaling back coverage, keep this in mind: We’re still in a soft commercial insurance market meaning insurance is a cheap form of risk capital.
A 2009 benchmark survey by the Risk and Insurance Management Society Inc. shows a lower average in premiums contributed to a 9.4 percent drop in the average total cost of risk per $1,000 of revenue.
If you’re worried about the size of your insurance allotment, call your broker now, review your contracts and review your risks. You don’t have to wait until your renewal in order to find savings or renegotiate your contract. Just remember, before you can responsibly lower costs, you need the details of what you are and aren’t covered under.
“What we like to do is we like to sit down with our clients, and if they’re trying to reduce premiums as opposed to not buying insurance, we talk to them about restructuring their program so they can buy higher deductibles in order to get those costs down,” Peña says. “It means they’re retaining more risk and hopefully they’re doing the right things from a risk management perspective.”
Immediate savings can be found by passing risk to others, such as tenants or vendors. You also can play around with increasing deductibles to lower premiums or scaling back nonmandatory insurance. If the latter two are options, first weigh whether you can financially assume the risk or if the cost of managing the risk is cheaper.
One of the only ways to decrease the costs you can control is by reviewing your claims. You should have regular claims review meetings with your broker to see where prevention methods can be put into place. Your insurance carrier can help with loss control, such as safety training. Some brokers say clients recently have seen cost savings of 20 percent.
Part of the answer is building a long-term relationship with your broker and even carrier. Share with them details of your operations. Invite them to tour your facility. The more your broker understands your business, the better he or she will be able to provide holistic advice. And a lasting relationship with an insurance carrier can mean more flexibility and negotiation.
“In building a relationship with one solid agent, that agent will know and understand your business, and as your business changes, your relationship with that person can continue to grow,” Latimer says. “There’s also an advantage that as the marketplace changes and the agent knows of those changes, they can be proactive in getting in front of the client with things that the client may not know about, but they can be concerned with.”
Construction projects are typically among the largest, most complex financial expenditures companies undertake. They can be time consuming and expensive, with most projects containing overcharges of 1 to 2 percent.
Your organization can recoup some of that money or avoid overcharges completely by performing a construction audit, which will also help you develop a control system to save costs on future projects.
“A construction audit will give you some additional financial controls around one of your largest capital expenditures,” says Dale Helle, construction audit practice leader at Brown Smith Wallace LLC. “It’s an independent, third-party review. Project investors value this independent look to make sure their money is being spent wisely.”
Smart Business spoke with Helle about how organizations benefit from construction audits, whom to involve and how to deal with contractors during the process.
How can an organization with a significant building project benefit from a construction audit?
A construction audit can help set the tone of the project by establishing oversight. Involving an experienced construction auditor in the contract stage often results in increased savings through cost avoidance. Early involvement yields more savings than a stand-alone, closeout audit. Bringing an auditor in during the contract stage will also help you determine that your risk and rights under the contract are being protected.
Many organizations may not have experienced professionals internally who have the construction expertise to lead an audit. With a construction audit, you look at contract terms, identify overcharges, suggest how to better manage risks and examine your control procedures to make sure they’re functioning properly. These audits keep all parties honest.
The process doesn’t just benefit the business owner. The construction company often benefits from the audit as well. A construction audit assures you that the financial piece of the project is being well managed and monitored, which strengthens the relationship between the business owner and the construction company. When you perform audits, costs are verified and the cost structure is reviewed. This can significantly shorten the closeout period, the time from when the project is substantially completed until the contractor receives final payment. A shorter closeout period saves you and the contractor a lot of time, money and effort. A well-managed and controlled project also results in fewer conflicts. So, there’s less need for negotiations at the end of the project, helping to avoid litigation.
How can business leaders determine if a construction audit is right for their organization?
You need to look at the project size and duration, as well as contract type. There is greater risk, but also greater opportunity for savings, in a cost based contract. Construction audits are suggested for projects with fewer than three bidders, low fees or a fee based on percentage of the cost.
Other indicators include projects over budget, change orders in excess of 10 percent, no reconciliation of job cost to invoices, self-performed work, shared saving clauses, and large contingencies and/or allowances. Audits are also suggested for high-profile or high-risk projects. You should also review the results of previous audits.
Another important consideration is the owner’s experience with construction projects. If the owner only builds something every 10 years, his or her experience level is not high. You should also look at your experience with the contractor. If you have none, it’s typically a high-risk project.
Using the same contractor for five or six years can also increase your risk. Who knows better how to get around your internal controls than somebody you’ve been working with for years? There are a lot of factors that go into getting an accurate risk profile.
Why do you need to involve an auditor?
While the construction manager and owner’s representative look at the financial aspects of the project, their roles differ from that of an auditor. Consider the construction manager’s role. He or she is focused on the project, the schedule, the contractors and construction methods. That person also focuses on financials but from the contractor’s point of view.
If an owner’s representative is involved, this person tends to focus on managing construction resources, advising the owner on construction methods and procedures, and assuring adherence to the architect’s plan and schedule. He or she also reviews the contractor’s payment request to determine if it’s reasonable.
What the auditor brings is focus on strengthening financial controls over the process. He or she audits financial transactions to ensure compliance with contracts and works with the owner’s representative to manage the whole process. The auditor looks at the project cost structure, which includes subcontractor costs, purchase order costs, relationships between contractors and contract compliance.
Can a company benefit by auditing previous construction projects?
Going back to try to recoup money can be hard to do once the retainer has been paid out. If you can audit before you lose that leverage, your recovery will be much greater.
You can also go back and review the procedures and internal controls for a project. That can help strengthen your process and construction department for upcoming projects.
Where does a cost segregation review come into play?
During a construction audit, you’re looking at the underlying cost structure of the project. If you know you’re going to do a cost segregation study at the end of the project, you can definitely obtain synergies and maximize ROI by having the audit team perform the cost segregation work at the same time.
Dale Helle is construction audit practice leader at Brown Smith Wallace LLC. Reach him at (314) 983-1338 or firstname.lastname@example.org.
New executive compensation regulations have been implemented for banks and financial institutions that received money through the federal Troubled Asset Relief Program, or TARP. Now, those tougher rules on executive compensation are spreading to public companies, and leaders need to make sure they know about them.
“You need to make sure your management team, board and compensation committees are aware of these rules,” says Phil Stanton, firm officer and manager of the Corporate Practice Group at Greensfelder, Hemker & Gale, P.C. “They affect a number of decisions regarding compensation that may have previously been made without approval of the compensation committee or executive officers.”
Smart Business spoke with Stanton about the differences between new and existing regulations, their legal ramifications, and how banks and other companies are affected.
What are the changes in executive compensation regulations, and how do they impact banks and other businesses?
Most banks became involved through the Capital Purchase Program, a TARP subprogram, in which the Treasury invested in a bank’s preferred stock. There were a number of strings attached to that money, including restrictions on executive compensation.
These included prohibitions on severance payments and bonus payments and other restrictions on compensation of highly paid executives. These financial institutions were also required to let their shareholders vote on a so-called ‘say on pay’ proposal, where shareholders must approve the overall executive compensation package at a company’s annual meeting.
Once President Barack Obama came into office, the discussion broadened to executive compensation at nonbanking businesses. Recently, the Securities and Exchange Commission announced its intent to create new rules to change the information that public companies must disclose about their compensation.
These new rules may also include a ‘say on pay’ proposal for all public companies as well as requirements that are not part of the TARP rules, such as disclosures about the use of compensation consultants. Congress has also talked a lot about broad new executive compensation rules as part of a Shareholders Bill of Rights. Business leaders are understandably concerned that these changes would include outright compensation caps, but the Obama administration does not, as yet, support this.
What legal ramifications are associated with the new regulations?
One requirement for TARP participants is that CEOs and CFOs must deliver certifications to the Treasury concerning compliance with the executive compensation rules and also file these with securities filings if the bank is publicly traded. Those certifications expose executives to civil penalties if incorrect. It remains to be seen what, if any, additional penalties the SEC may impose in connection with its own regulations.
How do these regulations affect private companies?
Most of the TARP-based rules apply to any bank that took money under the TARP program, whether publicly traded or privately held. For instance, all participating banks must file certifications about their compensation process.
All banks that took public money are limited in how bonuses may be paid to executives, etc. However, private banks have been given some flexibility in that they do not need to have a separate compensation committee. The full board may perform the function that a compensation committee performs for a public company. Privately held companies other than banks should not be affected by any of the regulations we are discussing.
Do the regulations apply to banks that did not take TARP money?
There are not a lot of new regulations for banks that haven’t taken TARP money, but they do need to be aware of the existing restrictions on golden parachutes and equity compensation in case they find themselves in a troubled condition. Also, a general overhaul of financial regulations at the federal level has started and could include more compensation reform.
The administration also created an executive ‘compensation czar,’ who can issue recommendations or provide guidance for any financial institution. There’s some uncertainty, though, about how much power that office will have.
How can a business leader become educated about new and future regulations?
Executives and directors at banks and publicly traded companies need to pay close attention, whether through information from the press, law firms or state banking associations. These regulations come out quickly, and many at the federal level became effective immediately, without allowing for a comment period.
Banks and publicly traded companies will have to deal with these rules for several years, even after the recession ends. Banks can get out of some of the most restrictive requirements by giving back TARP money, but paying back TARP money to the Treasury can be tricky. You have to work with regulators and get approval that you’re in good shape without the money. There will be more changes for all public companies and banks, either from the SEC, the new executive compensation czar or financial overhaul.
Phil Stanton is a firm officer and manager of the Corporate Practice Group at Greensfelder, Hemker & Gale, P.C. Reach him at (314) 345-4738 or email@example.com.
DRS Sustainment Systems Inc.
Born: St. Louis
Education: St. Louis College of Pharmacy, bachelor of science in pharmacy; Southern Illinois University, MBA
What was your very first job?
I’m a registered pharmacist. I made the decision in high school, and the idea was that I wanted to go into a profession that helps people, but then also one that had a program I graduated from and could be licensed in.
To me, medicine was a natural. I certainly enjoyed math and chemistry, and I did very well there. I actually worked a number of opportunities while in school. I worked in retail pharmacy, a hospital pharmacy, and I worked in a lab.
Ironically I worked as an office boy for this company at 17 years of age through college. When I graduated, I was offered an opportunity to stay with this business or pursue my pharmacy career and I elected to pursue this business and work part-time as a pharmacist.
What is the best business advice you ever received?
Find a job that you like and never work a day in your life.
Whom do you admire most in business and why?
I look at our current chairman, Mark Newman, as one of the best businessmen for having taken a family business and grown it into a $3 billion company and having sold it to be part of a $22 billion company (DRS was sold to an Italian company, Finmeccanica S.p.A., in 2008.) Having watched for a very limited time from my vantage point, Mark is probably one of the best I’ve seen.
Until you learn to delegate, your company’s growth will be limited, says Shri Thanedar.
“A common misconception is I can do it better than someone else can and I can do it quicker than somebody else can,” Thanedar says. “It may be so, but when you do somebody else’s job, there’s nobody there to do your job.”
It’s a lesson that the CEO and chairman of Chemir Analytical Services Inc. learned firsthand. For years, he relied on his own determination and independence. Growing up poor in India, Thanedar arrived in the U.S. to get his doctorate in chemistry with only $20 in his pocket. In 1990, he bought Chemir for $75,000, running it with two employees. Since then, the pharmaceutical company has grown to 400 employees and posted 2008 revenue of $60 million.
He says that to grow your business, you have to share all aspects of your business with employees, show them that their opinions count and allow them to make decisions.
Smart Business spoke with Thanedar about how to empower employees to make decisions that will help your business succeed.
Share the business background. A lot of times, especially private companies don’t have to disclose their sales and their profitability. We make it a point to let all of our employees — not just the top management, not just the key employees — we let every employee know about our profitability and know about our sales so there are no secrets.
They don’t need to come to me and ask questions because I have this special knowledge or information that they don’t have. One of the first things I do is let them know what I know.
We look at our business as a game, and if you don’t know the rules of the game, it’s very difficult to play. Same way, if you don’t know what the score is, then you don’t know if you’re winning or losing.
We make sure that we educate our employees. We make sure that they all understand how the business is doing, what makes the business successful, why our clients come to us, what our current sales are, what our sales are in the last three months, how many price quotes we have given out to potential clients, what percentage of those price quotes get accepted, when they don’t accept a price quote why do they not buy from us.
All the information I have gets communicated.
Let employees know that their opinions count. Recently, we had a meeting of our team leaders of the company. I said, ‘Imagine today is Jan. 25, 2012. Also, imagine I was gone for three years. I was kidnapped, I was gone, and I just got released from my captors, so I don’t know anything about your company. Now tell me, what did you do, what sales were? How did you come here?’
I took them in the future and got them thinking. They said, ‘Oh, we achieved all of our goals. We were at $120 million in sales.’
I said, ‘Tell me how you did it.’
We had a two-hour brain-storming session, and I wrote it down, everything that they said. It became very obvious for everyone this is really what we need to do.
It’s part of delegating; it’s part of letting people know that their opinion counts. The job isn’t just putting them in a pigeonhole and saying, ‘This is all you do.’ Get them to think like an owner; give them responsibilities.
It’s very tempting to jump in and do it yourself. The key thing here is, give those responsibilities away, give the authority away and communicate that you’re going to accept their decision.
It’s a very open culture. It’s a culture where information is shared. It really doesn’t matter where the idea came from.
Teach employees to make their own decisions. It is very, very important that you let people make mistakes. They have to feel that if they fail, if they make a mistake, that I will understand and I will accept.
I tell them that unless two or three times out of 10 times if they try something and they don’t fail, then they’re not trying hard enough.
It’s trusting people and giving them the authority. Not just giving them the responsibility, but giving them the authority to make decisions to think (things) through.
Often, if they come to me and say, ‘What do you want me to do about this?’ business owners love to be in that situation. It makes them feel good that people come to you and then they have all the answers. It is so much better if we don’t really try to do that because then people stop thinking and they just want to rely on you.
If I approve something or say, ‘This is how it should be done,’ then they’re off the hook because then I become responsible for the success of that idea or that approach. Usually when someone comes to me with a problem, I ask them, if they were in my shoes, what would they do? Almost always they come up with really a good solution to the problem. Once they tell me that, I say, ‘Well, I agree with you … go implement it if you’ve got a good idea.’
(If it’s not a good idea), I keep asking them. ‘How else can we solve it? I don’t really know what exactly can be done here; give me some parts.’ So I work with them until they come up with a position.
How to reach: Chemir Analytical Services Inc., (314) 291-6620 or www.chemir.com