Who will replace China – and what will be the damage of COVID-19?

The imposition of countervailing and antidumping duties on Chinese tiles

On May 4, the U.S. International Trade Commission confirmed that Chinese exports of ceramic tile are causing injury to U.S. ceramic tile manufacturers. As a result of this decision, U.S. Customs offices were to begin collecting tariffs ranging from 562.52% to 689.5% for countervailing and antidumping duties. 

In effect, we can expect that U.S. Customs will not collect tariffs from Chinese tile imports because with such high tariffs no importer will consider buying ceramic tiles from China.

In 2018, tile imports from China to the United States were about 690 million square feet, 31.5% of total imports (2,197 million square feet). In June 2019 the U.S. Department of Commerce announced preliminary duties on Chinese tile imports, and by October 2019 such imports were down almost to nothing. As a result of these actions in 2019, tile imports from China were 434 million square feet, 37% less than in 2018. Chinese imports made up 21.2% of total U.S. tile imports by volume in 2019. This was down from 31.5% in 2018, and represented China’s lowest share of U.S. imports since 2008, as shown in the chart on the previous page, produced by Tile Council of North America (TCNA).

Prior to COVID-19 – projecting tile consumption in the U.S. in 2020 at the same level as in 2019 – we expected that the exit of Chinese tile imports from the American market would generate a supply shortage of about 690 million square feet of tiles.

U.S. shipments vs. imports

About 30% of tiles entering distribution channels in the United States are shipped by local factories, while 70% are imported, according to the U.S Consumption of Ceramic Tile chart, compiled by TCNA, below.

In 2019, U.S. manufacturers operated at about 75%-80% capacity, supplying 864 million square feet of tiles to the American market. We expected that working at full capacity these factories would have been able to ship an additional 275 million square feet of tiles, leaving a shortage in the market of 415 million square feet. Such a large amount of tiles would have to be replaced by imports.

In the United States, there are over 600 companies that import tiles. As a result of the tariffs on Chinese tiles, many importers who bought in China began increasing their imports from countries that already sell large quantities of tile to the United States, such as Spain, Italy, Brazil and Turkey. The largest importers from China began looking for tile among low-price countries such as India, Taiwan and Malaysia with the potential of making up the shortage of tiles in the U.S.

Due to the fact that finding foreign suppliers with the right products takes time, prior to COVID-19, we expected shortages of supplies, price increases, and loss of market share to competing flooring products such as LVT, which is not affected by tariffs and quite popular among consumers. 

The effect of COVID-19

COVID-19 destroyed all previous projections. Both new residential housing construction and residential remodeling are in sharp decline. In normal times, about two-thirds of ceramic tile shipments are directed to these two sectors of the tile market. In the first quarter of 2020, due to the lack of imports from China, imports of ceramic tile were 422 million square feet, almost 15% lower than in the first quarter of 2019 (496 million square feet). This was before the impact of COVID-19. 

In 2020, the effect of COVID-19 may reduce the demand of ceramic tile by over 30%, leaving many importers and distributors with large quantities of unsold tiles in stock. Many will try to sell at discounted prices. Hopefully, construction will fully resume in most states in remaining quarters of 2020, but the damage to the economy will be felt in 2021. 

At this time, there is a lot of uncertainty, and we will have to wait until the present emergency ends to be able to have a clearer view of the market. 

How to Manage and Motivate Telecommuting Workers

7 Leadership tools to inspire and supervise a remote and local team

Globally, over 70% of professionals work remotely at least one day a week according to International Workplace Group, IWG. In the US, 40% of all workers toil away from the organization’s sites some of the time on a regular basis, an increase of 173% since 2005 (Global Workplace Analytics). The current coronavirus contagion concerns have significantly increased this statistic. How do you keep your widespread team collaborating, motivated and productive? Having managed business in 120 countries at the same time, I’ve learned much about how to lead, collaborate, and coordinate with a diverse and remote team.

The tools and skills needed to lead a combined local and remote team productively and happily are easily and economically accessible now. The technological tools have significantly improved since I first started managing workers in different locations and time zones, but the most important factor is still the same — you as the leader.

Ultimately people work for their manager and then secondly for the organization. If you establish clear goals, treat people equitably, ethically and have a meaningful product/service, your team will be more likely be effective, motivated and loyal. Below are 7 tools that have proven to be useful in managing a mixed local and remote team.

1. Establish clear goals. Share the project, division and company’s goals in clear and consistent ways. The entire team need to know what the targets are. They should have an understanding of why the goals are important and how they relate to organization’s mission and purpose. Equally consequential is sharing how how they and their work fit in the goals and mission.

2. Maintain regular virtual face to face communication. There is no substitute for face to face meetings. Schedule electronic individual and team meetings where the participants can see and interact with each other. The members have to feel that they are part of a team. Virtual face to face meetings provides the nonverbal cues that more fully express what words often leave out. The bonus of visual meetings is that they minimize the multi-tasking and reduced attention that may occur in a non-visual event.

3. Develop mentors/mentorship relationships. A powerful way to strengthen cross connections, knowledge and accountability is to develop a mentorship program for workers. Everyone can benefit from a mentoring program. The mentees learn, are inspired by people who have gone before them, and feel seen. Mentors also learn from teaching/mentoring, they are rewarded by being able to share their experience and wisdom, and gain insight into the perspective of the newer entrants into the business.

4. Share information and files. A crucial aspect of any organization, especially one in which some members are not able to gather relevant information in person, is to communicate well. Maintain an online system of sharing of files, updates, news and any tweaks in strategy. There are many private and public virtual networks that a company can use to ensure that every member has access to the information they need to accomplish their tasks well and feel engaged.

5. Respect each other’s time. When time zones and different schedules are involved, it is easy to forget that some team members may have other commitments when you are working, like sleeping. Plan meetings and call times to minimize disruptions. Send out a clear agenda in advance and request each member come to the meetings prepared so that the meetings are time and productively effective.

6. Copy relevant parties only. Virtual teams grow easily with a number of people being copied on matters that may not concern them. Include parties involved in the specific project and leave off people who are not working on the aspects being discussed. Otherwise the mass of electronic communication reduces the effectiveness of the messages and buries people in unneeded mail.

7. Show them that you care. Everyone wants to feel that they have a purpose and are valued. How you communicate, listen and follow through with your team sets the stage for how they feel about their work, the team, the company, themselves and of course you, as their manager/leader. Have regular touch base sessions with each team member; acknowledge their accomplishments, coach them on how they may improve, and share your higher perspective about the project(s) and organization. Pay attention. Be real, honest and human. When people work remotely, they need human connection and one to one communication to feel involved and to know how they are performing.

Working remotely is a rapidly growing trend. As a leader it’s your privilege and responsibility to guide and manage your team so that they are performing to their potential, and to feel fully engaged so that you and your team are happily aligned and creating the best functioning organization for today and the future. Happy telecommuting!

Virtual meeting tools, prompted by shelter-in-place rulings, become the future norm for business interaction

As part of their normal business practices, commercial contractors are required to attend weekly status meetings, contract reviews, change orders, etc., but with the advent of COVID-19, an increasing number are now going to the airwaves, so to speak, to communicate with their colleagues and employees. 

What aspects of this video meeting process can be carried forward into the future, after the pandemic is over? In what ways are contracting and industry executives currently using video conferencing and online connection services such as Zoom, BombBomb, GoToMeeting, Google and Microsoft 365 Teams, and what are their thoughts on utilizing these services moving forward?

Shannon Huffstickler, Schluter Systems

According to Shannon Huffstickler, social media community liaison, Schluter Systems, using video conferencing (VC) has currently become a key part of doing business. “I typically communicate with our customers in the online forums or private messages, but with everyone feeling a little isolated currently, I’ve been using VC to create a space where we can have an intimate, live interaction that allows for an even more connected feeling than usual.”

Before the current situation, Huffstickler noted, virtual meetings were usually one-on-one. “I haven’t had need to do much beyond a video call with a single customer in the past, although Schluter has always used VC for internal meetings where face-to-face is not efficient or practical.”

The advantages, she noted, include the aforementioned intimate interaction, which is more productive because the conversation occurs efficiently in real time rather than awaiting return replies. “The disadvantages: not all customers understand or can use the technology easily,” she said. “Also, many are uncomfortable being on camera and don’t participate freely as a result.”

Christopher Walker David Allen Company

Christopher Walker, Vice President, Northeast Region, David Allen Co., and current NTCA President, has said his company has relied on Microsoft Teams as its go-to for intra-company meetings, “This service was always available to us but it has found a new and increased following,” he said. “I’m conducting some phone interviews this week to eliminate exposure or people coming into our ‘closed’ environments. I’ve asked the potential candidates to download the Teams App on their devices.”

Like Huffstickler, Walker did not rely heavily on these types of services in the past. “I would traditionally use conference calls or short person-to-person contact,” he explained. “Now we have people from the same location conferencing from their office most significantly so that we can share screens and update/present information to the group without violating the social distancing standard.”

Martin Brookes, Heritage Marble & Tile

At Heritage Marble & Tile in Mill Valley, Calif., the company has adopted Google Duo to communicate as a company. Martin Brookes, founder and president, has been attending many webinars regarding the Paycheck Protection Program and felt that they have given, for the most part, “sufficient information to guide me through the process.” 

He noted he recently attended an NTCA webinar that had record attendance. “I see this continuing for the foreseeable future,” he said. “This is good news in the uncertain times we are living in. Social distancing has its challenges and people are just looking for ways to keep social given that their regular channels have broken down. It’s important for mental health to do this and feel connected to a community of some kind. I believe NTCA provided this. I posted a video in the NTCA Members Only Facebook group when the PPP was released and pointed members toward the paperwork to try to fill out as quickly as possible.”

Dan Welch, Welch Tile & Marble

Dan Welch, CEO, Welch Tile & Marble in Kent City, Mich., said the company has been using Zoom for over two years with consultants from out of the country, while BombBomb is new to the firm. “We’ve had it for two weeks and we’re just starting to get the hang of it,” he said. “I have been using Microsoft to finalize our apprenticeship program for six months. All work well and take some time to get used to, and all are being used at a larger level after the COVID-19 outbreak. Zoom and Microsoft are great to record the meeting and make notes when the meeting is over. Both are much better forms of communication because you can see the body language.”

As for the future, Brookes believes we are entering into a new era of how we do work and business, as the “situation has forced us into being creative and making use of tools that we hadn’t adopted previously. Because we are creatures of habit, I believe we will continue to use these tools in one form or another moving forward.

“I’ve come to realize that I can be more productive on my office side of the business and fewer site visits are required when using services such as Google Duo, which is also a free service,” he added. “The roll out of 5G will make these services much faster and will be a game changer, in my opinion. Once quantum computing becomes mainstream, I think we all will be conducting business differently than we have in the past. This COVID-19 situation has forced us into this way of doing business rather than it being a natural progression of technology.”

Christi Williams, demand generation manager, Managed Solution, noted, “As a Microsoft partner, we have been using Teams at our organization for quite some time. The difference now is people are using video more than they used to. Teams has been great, especially for company-wide communication and information sharing. With email, it can get buried or overwhelming. Teams makes it easy for us to share updates, announcements, files, and more.”

Moving forward, she noted, the company has employees at different sites, plus it works with many people outside of the organization, so video conferencing is a great way to stay connected. “Many were not using video on calls previously, but I think this isolation is pushing people a bit out of their comfort zone,” she added. “I hope to continue seeing more people and companies utilize it, especially those that have multiple headquarters or employees partially remote.”

Schluter’s Huffstickler also sees a future that features increased video conferencing. “I fully expect that this format will continue to be the norm in the future,” she concluded. “I presume that remote work – and even shared office meetings – will be conducted on a regular basis in this format.”

Shannon Huffstickler, Schluter Systems, uses VC to stay connected with colleagues and contacts during social distancing restrictions. 

Turning Negative Emotions and Thoughts into Positive Actions

Millions of people out of work.  Family members concerned for loved ones, especially those vulnerable or at risk to COVID-19. Employees fearful of working with co-workers in close proximity of each other, for obvious reasons.  

It is no wonder that an alarming number of people are experiencing increased stress and anxiety, and even in extreme cases, are suffering from depression.  There is so much negative energy circulating that you just simply can’t avoid it.  

As NTCA Executive Director, I have been on the phone with many members and peers. We all have tried to support each other in different ways. At first, I tried to tell myself that I mustn’t let people see how this situation was affecting me personally and professionally.  But as time has progressed, and more people have been transparent with me and opened up and shared with me how they are really doing, I began to feel it was okay to do the same.  

I have to admit that the situation has at times gotten under my skin. You just flat out get tired from the negative commercials, social media, phone calls, etc. Business starts to become affected. The money dries up. The first thought is that you just want to curl up in a ball, put your hands over your ears, and simply pretend that this stuff is just simply not happening.  

I tried it. It doesn’t work.  

So I started trying to find sources of positive mindsets. People who weren’t surviving in these times, but actually thriving in this environment.  

One video podcast I watched really rang true with me. Stress doesn’t always have to be negative. In fact, stress can be positive. I think about times I played sports when I was young, or when I had to prepare for a large presentation in a big crowd, etc. These were stressful times, but overall they became positive experiences. This has helped me to realize that these times can be the same.  

For instance, I joined some peer groups of other association leaders in both the construction industry and outside it  This was extremely helpful because I gained some empathy and also was able to feed off of their enthusiasm and energy.  

My goal is to turn this negative energy around immediately.  I want to use this time where I am not traveling and really assess changes that need to take place in both my personal and professional life. I want to to instill this energy into those that I work with and interact with. I am excited about it and admittedly a little fearful too. But fear can be a motivating factor, if you channel this the right way.  

I’m looking forward to working with all of you on many of these initiatives.  

Estimating costs and profits to win at the tile game

The problem: underestimating time and costs

It had been dark outside for some time. My stomach was empty and delicious smells from downstairs were making my mouth water. I took solace in the fact that my loving wife was on her way, bringing a home-cooked meal to my jobsite. I would be working late tonight to meet the deadline I had promised my clients.

Once again, I had miscalculated the time it would take me to complete the tile work in this second story bathroom remodel. What’s worse than the extra time it took is that I had a sinking feeling that I had underestimated the cost of materials as well, and being who I was, those miscalculations would only affect my bank account.

Looking back on my early years of being a tile contractor, thinking about the way I priced my work – or should I say, “the way I underpriced my work” – I often wonder how I made it past year one. I suppose all those long days and unpaid weekends kept me afloat. I was always running to the next job, believing the next job would be the one where I saw a profit!

Things only got worse as the size of the jobs I was winning got larger and larger. “Look at this!” I practically shouted at my wife, “My first five-figure job; think of all the money I will take home from this one!” Months later our bank account was in a similar state, but I would fall for the trick again, “Check it out honey! I just won a job over $25,000!”

It wasn’t until my firstborn was here that I actually stopped long enough to think about what was going wrong. It was then that I knew I had to make some changes, if not for me, then for my wife and newborn daughter. How would I turn the ship around and start to estimate timeframes and job costs more accurately?

The solution: calculating direct and indirect costs

To start, I had to break free from my bad habits and learn some good ones! I had to start estimating my jobs based on my real-time history of how long it was taking me on average. 

I had to learn my numbers. I had to learn what my business’s overhead was every single day. Yes, even days I wasn’t installing tile, my business was costing me money! I also learned to calculate a markup that would account for the overhead as well as profit. Because after all, if I was working that hard to just make ends meet, I might be better off working for someone else and at least have my nights and weekends free! 

Every job has direct costs that are fairly simple to calculate. Direct costs are things like labor and setting materials – everything that you are paying for to get that tile installed!

What many contractors forget to calculate is their indirect costs. Miscalculating or guessing at your company’s overhead can be a grave mistake for many. Your business is alive and all living things need something to stay alive – your business needs money! Yes, even the days you are not installing tile, your business is spending money. You have to spend some time to figure out exactly how much money your business needs on a daily average. Only then can you fold that cost into what you should be charging. 

As a business owner I like to pay myself the same salary every single week, whether we installed tile or not, so I consider my weekly salary as part of the business overhead since it never changes, even if I’m on a beach in Hawaii for a week.

So, how does one go about accurately estimating and pricing their tile work? 

The math

Let’s use an example called Bob’s Tile Company. Bob has two employees, one installer and one apprentice. Bob pays his installer $30/hr and his apprentice $15/hr. But that combined $45 dollars winds up costing Bob’s Tile closer to $70/hr due to things like mandatory payroll taxes and worker’s compensation. Bob’s Tile also provides its employees six paid holidays a year, which is accounted for.

Bob is putting together an estimate for a job he is confident will take five days to complete. So he goes about figuring out his estimate like this.

Direct costs for the week-long job:

  • Labor = $70×40=$2,800
  • Materials = $1,200

Indirect costs for the week-long job:

  • Company overhead = $300
  • Owners salary = $1,600

That week-long job (five days) will cost Bob’s Tile Company a total of $5,900. We have yet to add in a markup percentage for profit. 

As a general rule a contractor company should aim to have at LEAST a 30% Gross Profit Margin minimum. 

So for the example above, Bob is going to sell the job for a 33% Gross Profit Margin, to give himself a little wiggle room. The way he calculated this math is to take his cost ($5,900) and multiply it by 50%. (See the Markup Quick Conversion chart.)

  • $5,900 x 50% = $2,950. This is the job’s gross profit.
  • We now have the sales price $5,900+$2,950 = $8,850.
  • You can also arrive at this number using $5,900 x 1.50 = $8,850

If we want to double check the exact gross profit margin of past jobs, just divide the gross profit by the sales price.

  •  $2,950 / $8,850 = 0.33 x 100 = 33% gross profit margin.

Now this is a simplified example and there are some missing elements to the equation. Truth be told, you can make this as simple or as complex as you want to.

If you have loads of work, your phone never stops ringing and you hate math, you might decide to calculate for 50% gross profit which would be the cost of the job x 2. On the other hand, if you are in a very competitive market, your phone isn’t ringing much and you love math and studying, you need to buy and study the book Markup and Profit for Contractors by Michael C. Stone. (You can also listen to Michael’s interviews on the Tile Money Podcast.)

If you would like to continue this discussion, feel free to post a question or comment inside the Tile Money Facebook group.

Luke Miller hosts the industry’s first-ever business-focused Podcast called Tile Money, sponsored by the National Tile Contractors Association, LATICRETE International and Crossville, Inc. For more information, visit www.Tilemoney.com, email [email protected] or phone 831.588.0417

Other options besides PPP for small businesses

Whether or not a tile or flooring retailer, contractor, or installer was able to secure a Payroll Protection Plan (PPP) loan, they are likely to need additional financial support. Even a PPP loan covers only 8 weeks of payroll and part of a business’s other expenses. There are a variety of other options including Small Business Act (SBA) Economic Injury Disaster Loans (EIDL), SBA Emergency EIDL grants, and the SBA Express Bridge Loan Pilot Program. In addition, states and local cities and counties are offering a variety of loan and grant programs. To check out whether there are programs in you location, go to https://www.zenefits.com/workest/the-big-list-of-covid-19-financial-assistance-programs-for-small-businesses-by-state/.

The Federal Reserve recently announced another option for businesses; its highly anticipated Main Street Lending Program (Program). This Program is designed to facilitate credit to small and mid-sized businesses that were in good financial standing before the COVID-19 crisis. The Program offers 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Principal and interest payments on these loans will be deferred for one year. Firms that have taken advantage of the PPP are also eligible to take out Main Street loans.

Businesses seeking loans under either facility must commit to, among other things:

  • Make reasonable efforts to maintain payroll and retain workers.
  • Follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.
  • Not seek to cancel or reduce any of its outstanding lines of credit with the lender, or any lender.

Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses.

With the rapid pace at which laws, rules and orders are being issued, NTCA is working with other associations to keep members informed and updated regarding their opportunities and obligations during the COVID-19 crisis. The association will also continue to provide important information that may impact members.  Go to the website at www.tile-assn.com for the most up to date information on the COVID-19 crisis. 

Notice: The information contained in this article is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion,and is not a substitute for the advice of counsel. 

Do your people know the play? Practice the daily huddle to align your team

It works for (insert your favorite quarterback here) and it can work for you, too. It is, perhaps, one of the most effective leadership and management tools at your disposal, and takes just a few minutes to execute. But it is rarely used. You should start doing it tomorrow. If you are already doing it, you should work to make it better. What is it? A daily huddle.

You need to tell your people things they need to know to do their job. They want to hear those things. Contrary to popular belief, there are employees at all levels and all ages who want to do a good job. Many of those who are disengaged feel that way because the boss is not communicating with them.

The daily huddle is a fine solution. And it can work in any industry. The concept is simple. Before the workday starts, you gather your team to deliver key information to align them for the day. Are there any special events/visitors/incentives? How about a key training or safety tip? Perhaps you will talk about production or sales targets for the day. All this information gives them direction and helps them to be more productive. You also might toss in some feedback about how things went yesterday. (While this is not a time to single out poor performers, you may highlight some wins from the day before.)

Make sure to ask for input and questions. If the huddle is a new concept for your team, people will be reluctant to share anything initially. But, over time they will see you are serious about the huddle and will work with you to make it better. I have seen, and participated in, huddles that were also a stretch-and-flex period to increase safety awareness and to warm up cool muscles before starting physical labor. It sends a strong message that the company is serious about safety when the boss joins in the huddle and the flex when he is visiting. I have also seen bosses blow off that part – and that sends a message, too! Communication is one of the keys to success in just about any endeavor. I have never conducted an employee satisfaction survey for a client in which the results indicated there was too much communication. In fact, over 85% of my surveys have indicated that communication from management is in need of drastic improvement. The huddle is a quick, easy and inexpensive way to fix a major problem.

Why it works

Let’s look at why it works. First, it is personal. No texting or email is involved. This is direct, eye-to-eye contact – still the most compelling form of communication we have. When we look someone in the eye we know we have their attention and we can see them understand our message. Also, engaging in eye contact shows people they are important, that you want to communicate with them. It conveys the message that you trust them enough to share this information with them. When you ask for their input, you are literally saying, “I want to hear what you have to say. I am interested in you and the value you contribute to our team.”

It comes down to trust and respect. And it educates and aligns people on key business issues. They feel like they are part of the team and they operate from a “we,” not a “they,” perspective. When I interview an employee and he speaks of his firm in terms of “they do… they say,” it makes me cringe. It is as if the employee does not actually consider himself part of the company, but rather some visitor who has little stake and even less affiliation or sense of camaraderie. Keeping people informed is your job. Setting direction is one of the primary roles of a leader. In the case of the huddle, the direction is short-term. We are not communicating the strategic plan of the company; we‘re merely stating the goals of the day.

What‘s the payoff? You get employees who are more motivated and educated to do the job. Does it always work? No, not every single employee may respond to the huddle – but most will. I can guarantee though that starting the day without a huddle insures a workforce that is uninformed and de-motivated. And not even the worst quarterback in the league would attempt that..

Negotiate and draft “pass through” clauses you can live with

Owners, contractors, subcontractors and lower-tier contractors must have a sound understanding of the operational details and triggers of “pass-through” provisions as their terms can significantly impact the obligations and risks of performing for lower-tier contractors. 

What is a pass-through clause?

Pass-through clauses (a.k.a. flow-down or conduit clauses), typically incorporate by reference the terms of a prime contract between owner and general contractor into a subcontract, thereby binding subcontractors to the same duties and obligations – and to the same extent – as the general contractor has to the owner. Pass-through clauses may use general “substantially as follows” or “substantially the same as” language, but, importantly they are not uniformly worded and can have the effect of imposing obligations never negotiated or contemplated by the lower-tier contractor. However, when drafted and used correctly pass-through clauses can provide protections to all parties by unambiguously flowing down specific upstream obligations of general contractors to the subcontractors who are actually performing the majority of the work. 

How are pass-through clauses implemented? 

It is in the owner’s interest to bind the subcontractor to the same obligations as the general contractor. For the general contractor, pass-through clauses provide a way of ensuring that subcontractors, suppliers and other downstream parties are required to comply with certain prime contract requirements. 

However, subcontractors may attempt to reject responsibilities flowing down to them when the pass-through terms lack sufficient clarity as to the subcontractor’s specific contractual and compliance obligations. Subcontractors will want to limit or reject overly broad pass-through clauses which – for example – make them assume responsibilities meant for other parties or that incorrectly excuse a prime contractor for its mistakes while still flowing down the responsibility for the mistakes to subcontractors. 

Other pass-through clauses may require that subcontractors be paid by the general contractor when the general contractor is paid by the owner. In such a scenario, a savvy subcontractor will want to reduce the risk of non-payment by negotiating and re-drafting terms to avoid limiting the subcontractor’s rights or remedies in the event of a claim or payment dispute. 

Subcontractors and contractors should work collaboratively to negotiate, revise or remove pass-through clauses that are of concern or to re-balance the risks. 

There are many other scenarios to which pass-through clauses can apply and where their effectiveness depends upon how well all parties can agree on their interpretation, such as: 

  • Who has authority to approve a change order, claim or delay notification and in what form it should be submitted, detailed, and supported by documentation? 
  • Who will have the responsibility for prosecuting a claim against the owner and how the recovery and attorney’s fees will be allocated – whether arbitration or litigation – and which parties will be required or permitted to participate? 
  • What happens if there are pass-through claims of subcontractors (i.e., claims the owner is responsible for) and claims that are only between the general contractor and a subcontractor? 

Importance of properly drafted pass-through clauses

As the “pass-through” language in prime contracts and subcontracts tends to “flow-down” damages, limits of liability or indemnification downstream – from the owner and general contractor level to lower tiers of subcontractors and suppliers – pass-through clauses become no less important than any other terms in a construction contract. 

It is essential that drafters review the prime contract and the complete set of the upstream documents in order to craft effective pass-through provisions. Moreover, well-drafted pass-through provisions should only include terms that already exist in the prime contract; and should not flow down the entire prime contract because doing so introduces contradictions with other subcontract terms. 

To assist parties with drafting pass-through clauses, The American Institute of Architects (AIA), in its A201™–2017 provides subcontractual relations language, used in owner-general contractor agreements, by which contractors can require subcontractors to be bound to the contractors by the same prime contract terms and to assume toward the contractor all the obligations and responsibilities that the contractor assumed toward the owner. It also allows subcontractors the benefit of all rights and remedies against the contractor that the contractor – by the prime contract – has against the owner, and requires the contractor to identify to subcontractors any terms and conditions of the subcontract that may be at variance with the prime contract documents.

Similarly, the AIA’s language establishing the contractual relationship between contractor and subcontractor in the A401™–2017, which cross-references A201–2017, passes “the duties and responsibilities of the Contractor under the Prime Contract to the Subcontractor with respect to a portion of the work designated in the completed A401–2017 document.” 

The enforceability of pass-through clauses in complex construction agreements often hinges on the perceived clarity or ambiguity to both upstream and downstream parties. In order to avoid unintended legal or financial consequences the critical drafting process should be assisted by professionals experienced in commercial law and construction law and with accessibility to all of the upstream and downstream documents.

Pass-through interpretation and enforceability can vary by state

The location of the project plays a significant role in how pass-through language may be interpreted and enforced. Therefore it’s important to understand the nuances of applicable state laws when drafting and implementing pass-through clauses. 

For example, in New York, courts have held that general “incorporation clauses” in a subcontract can only bind a subcontractor to the “scope, quality and manner of the work to be performed by the subcontractor.” While many states take the New York approach, other states do allow a generalized “flow down” of obligations via “incorporation clauses.” And still other states construe all contract documents, including the prime contract, subcontract and all exhibits, together in an effort to harmonize and give effect to all of the provisions of the contract so that none will be rendered meaningless.

Pass-through best practices

Below are a few other examples of best practices that should be considered when reviewing or drafting pass-through provisions:

  • Negotiate pass-through terms at the pre-bid stage so that the costs/benefits of undertaking flowed-down obligations may be factored into bids. 
  • Parties should work collaboratively to address gaps in risk-shifting or risk-sharing and develop acceptable levels of risk. 
  • Limit the requests for pass-through revisions to a small group of terms or issues (and not to the prime terms) to increase acceptance. 
  • Avoid using general “incorporating by reference” language that can be misinterpreted to merely incorporate prime contract for a limited purpose. 

FinPan, Inc. hosts courses on AEC Daily

finpan logoFinPan, Inc. is proud to announce that it now has two courses on AEC Daily. The second course, “Current Trends in Design: Curbless Shower Systems” finished in the AEC Daily Top 20 courses completed for its first month, over the summer of 2018. It placed 5th overall with 159 hours completed by the specifying community. FinPan’s first course, “Water Management Solutions for Traditional and Curbless Shower Pan Installations” is also available online. 

Jeff Ketterer

Jeff Ketterer

“We are pleased to offer architectural and design professionals an objective overview of trends in our industry all while helping to promote the tile industry,” said Jeff Ketterer, Corporate Trainer for FinPan. “The course is an overview of how curbless shower pans are designed for durability and safety, and meet the needs of accessible designs. Discussions on traditional methods and new modern ones are addressed from a design and installation process along with their associated benefits and drawbacks. 

“In today’s digital age, it is critical to provide sufficient resources towards online educational and training portals as they create a far more convenient and timely platform for the specifying community to broaden their horizons and learn about new and innovative products and methods,” he added. “Lunch and learns are still a great educational tool, but the time limitations from both the supplier and specifier sides make them more difficult to set up than ever before.” 

For those companies looking to broaden their reach to architects, interior designers, contractors and other industry professionals, AEC Daily is a great outlet to consider. AEC Daily is a developer and host of online education courses for the construction industry. It is an e-learning provider and is one of the largest sources for free online construction education courses that offer Continuing Education Units (CEUs) for its participants. It provides the opportunity to manage and satisfy CE requirements in a secure, easy-to-use website that is available 24/7. Course completion is automatically reported to applicable industry associations such as American Institute of Architects (AIA), Interior Design Continuing Education Council (IDCEC) and many more

Several companies in the tile industry already have courses available such as LATICRETE, Noble Company and Tile Redi. Check out AEC Daily online at aecdaily.com to learn more. To learn more about the products offered by FinPan check out their website at

Is there an information toxic dump in your office?

Does your organization have offices, file cabinets, storage rooms, and offsite facilities full of unidentified paper files and electronic documents? If so, you probably have an “information toxic dump!” Twenty-five years ago most organizations had a “central filing system” and “Mabel” – whose sole responsibility was ensuring that the records that the organization needed for legal reasons were maintained properly. Managers had private secretaries who were paid to make sure that when their bosses were done with the papers in their office, they were transferred (with the help of file clerks) to the central filing system. The central filing system was purged on an annual basis. 

Then Bill Gates made it possible for organizations to put a computer on every desk, and the dynamics of records management changed dramatically. “Mabel” and the file clerks were fired or transferred to other positions. Central File Rooms were turned into offices. The file cabinets were scattered around offices wherever there was space – supply rooms, hallways, and individual offices. Managers were expected to manage their own information and do their own filing. Secretaries became administrators with projects of their own. Soon, records management as it existed began to disintegrate! 

Records management today

Today in most offices, information exists in three “silos” of information:

  1. Individual offices
  2. File cabinets scattered around the office
  3. Office storage rooms and offsite filing facilities

The information in individual offices is managed somewhere between very well or very poorly – depending on the skills of the individual employee – but in any case is rarely available to other members of the organization should the employee who has the information, or filed it, be unavailable.

The information in file cabinets scattered around the office is “owned” by no one in particular. Theses file cabinets primarily contain files no longer needed by individual employees, or left by employees who are no longer there. Even though they often contain information that could be useful, individual employees don’t know it exists, and thus end up creating new information. The information in storage rooms and offsite filing facilities contains vital information that could save money, or cost millions of dollars in the case of an audit or lawsuit. Unfortunately, offsite storage often contains information that should never have gone there, but no one wanted to take the time or effort to clean it out! 

Why records management really matters

Your ability to accomplish any task or goal is directly related to your ability to find the information you need when you need it. Finding information in every organization – regardless of whether it is in paper or electronic format – is becoming an ever-increasing challenge. This inability to find information causes all sorts of problems for the organization and for the individual – wasted time looking for information or recreating already-existing information, missed opportunities, and increased stress, which in turn results in increased health care costs.

Research shows that 80% of the information kept in most offices is never used. Ironically, the more information that is kept, the less it is used, simply because it’s too difficult for employees to find. Often employees can’t even find the documents they themselves created – let alone any information created by another employee – especially someone who is no longer with the organization. As a result, it’s easier to just start over!

Who is responsible for the problem and what can be done about it? 

Blame for the records management debacle falls in several courts:

  1. Management blames employees for the problem.
  2. Employees blame management for the problem.
  3. Organizations don’t have a user-friendly system.
  4. Employees aren’t trained on the filing systems.
  5. Management fails to look at records management as an ongoing activity.

To create and maintain an effective records management program, we must answer the following six questions:

  1. What information should we keep?
  2. In what form?
  3. For how long?
  4. Who is responsible for maintaining the information?
  5. Who needs access to the information?
  6. How can everyone who needs the information find it? 

Now here is the reality: Answering those six questions requires the cooperation of everyone in the organization. It can easily take up to one year, or even longer, to answer them, since accuracy requires addressing the questions over a one-year business cycle at a minimum.

Creating and maintaining an effective records management system 

I’ve developed a five-step process called The Productive Environment Process™, which can be applied to organize information in any organization. 

  1. State your vision. If your records management program is successful, what will you be able to do that you can’t do now? What positive effect will an efficient records management program have on the organization and your customers? 
  2. Identify your obstacles. What currently prevents you from having a successful system? 
  3. Commit your resources. How much time, money, and human resource power are you willing to put into the project?
  4. Design your SYSTEM (Saving You Space Time Energy Money). What tools (software, existing filing systems that work well, etc.) do you currently have that will be helpful in the process? What other tools are available? What processes do you need to apply? A crucial component is applying The Art of Wastebasketry® to eliminate unnecessary records. 
  5. Maintain your success. What procedures do you need to develop and implement so the system you create will continue to work long after the creators of the system are gone? 

Note the common word in those five steps: “Your!” It would be wonderful if creating a records management system was simply a matter of buying a book or hiring an expert who told you exactly what to do. A successful records management program, however, requires people, processes and technology. It must be supported by management, customized for the organization, and executed by everyone in the organization to succeed on an ongoing basis. 

According to an article in the July 2010 issue of Journal of Accountancy, a paperless strategy can yield savings of 30% to 40%. Some of the savings comes from reduced overhead costs, such as what you spend on paper or real estate expenses, while others come from the increased efficiency of working digitally. Every firm is different and the extent to which it goes digital varies, but a paperless strategy will reduce costs and improve profitability, even in ways firms haven’t considered up front. 

Designing, implementing, and maintaining an effective records management program is the best place to start on the road to a “productive environment™” – an organized office in which everyone can find what they need when they need it so they can accomplish their work and enjoy their lives.

As Mark Twain stated so eloquently, “Progress starts with the truth.” The first step is for management to agree on the definition of a successful records management program. It is important that this conclusion be reached with the involvement of administrative staff – because the reality is that often management doesn’t really understand all the information that is necessary for staff to accomplish the objectives that management expects.

© Barbara Hemphill 2010-2018

Trademarks and Registrations are the property of Barbara Hemphill

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