_________________________________________________________________________________________

With the State Legislature prepared to begin its 2005 session in mid-January, the Empire State Subcontractors Association (ESSA) will focus on reforming the retainage practices of both private and public owners as a high priority for New York State subcontractors. NESCA’s state affiliate adopted its 2005 legislative program on September 30^th, a program that includes two bills dealing with retainage.

In an industry where profit margins are thin and cash management is essential, the withholding of retainage (particularly when the amount of retainage held is excessive) can create a significant financial strain on subcontractors since retainage essentially requires subcontractors to finance a portion of the project interest-free. Further, subcontractors who report income based on the percentage of completion method actually pay income tax on the retained funds that have not yet been received. Studies have show that retainage increases project costs, reduces competition and, contrary to popular belief among owners, actually provides a financial disincentive for timely completion of the work. The impact of retainage has grown more severe as average construction industry profit margins have declined over the last 30 years.

Fortunately, the trend across the country has been toward a reduction in the percentage of retained funds. In recent years, numerous states have enacted laws requiring retainage reform to include the reduction of retainage, holding retainage in interest-bearing escrow accounts, and even line item release of retainage. Here in New York, legislation was enacted in 1978 that effectively limits subcontractor retainage on public projects to 5 percent, unless prior to entering into a contract with the subcontractor, the general contractor requests performance and payment bonds, and the subcontractor is either unwilling or unable to provide them. Further, in 2003 New York State adopted a private construction prompt payment law that included a provision limiting subcontractor retainage to the percentage being retained by the owner from the general contractor. This law also provides for the payment of one percent per month interest charge on any retainage that is not released by the owner within 30 days of final approval of the work.

In January, ESSA will reintroduce legislation that would require retainage on private projects in NYS to be deposited into an interest-bearing escrow account for the benefit of those from whom retainage has been held. The primary purpose of this bill is to reduce the risk incurred by subcontractors of owner insolvency or diversion of the retained funds during the period retainage is held. This bill advanced to 3^rd reading in the Senate during the 2004 session and will be pushed hard by ESSA early in the 2005 session.

ESSA will also reintroduce a bill that would require a 50 percent reduction in retainage on all public projects upon completion of 50 percent of the project. Since retainage held on state and local public works projects can amount to a significant sum of money for many subcontractors, this bill would put a large portion of that money back into the pockets of subcontractors sooner than is currently the case.

While the practice of holding retainage is fully entrenched in the construction industry, the key to retainage reform will be to convince public and private owners, as well as the Legislature, that the hidden costs outweigh the perceived leverage that the practice of holding retainage brings.

NESCA Membership Meeting

January 13, 2005

Century House – 6:00 p.m.

Joint Meeting With NAWIC

6:00 Open Bar/Registration

6:30 Dinner: Sirloin Steak

7:10 Business Announcements

7:30 Program: Panel Discussion on Hot Legal,

Insurance and Accounting Issues

Open Bar, Dinner, Tax & Gratuities - $35

PRESIDENT’S MESSAGE (Go Top)

I am very pleased to note that New York State subcontractors quietly won a significant victory last month on the issue of payment entitlement. On December 8^th, State Supreme Court Judge Louis C. Benza held that contract provisions assigning the contractor’s lien rights to the subcontractor as the subcontractor’s exclusive remedy in the event of owner non-payment are void and unenforceable in New York State. In deciding Gomez Electrical Contractors, Inc. v. Bast Hatfield, Inc., Judge Benza held that such language effectively waived Gomez’s right to file or enforce a lien and therefore was barred in accordance with the 1995 West-Fair case [see legal counsel’s message on page 3 for more details]

As reported in the December Newsletter, NESCA had filed an amicus brief in support of Gomez’s position. Likewise, the General Building Contractors of NYS had filed a brief in support of Bast Hatfield’s position. NESCA had argued that the Bast Hatfield payment provision was, in fact, a pay-if-paid clause, the same in substance as that barred by the Court of Appeals in the West-Fair case. The judge agreed, thereby short-circuiting one of the “creative” ways general contractors have been attempting to circumvent the West-Fair decision and transfer the risk of owner non-payment to subcontractors.

This was a nice win for NESCA and for all subcontractors doing business in New York. It also serves to demonstrate how NESCA has made good use of our member-supported Legal Defense Fund for significant legal issues of common interest to all subcontractors. This truly is what NESCA is all about -- representing the common interests of subcontractors and suppliers, whether in the Legislature or in the courts. Because of Judge Benza’s decision, a decision based in large part on the arguments advanced by NESCA, all subcontractors will benefit. That’s why it is so hard for me to believe there are still subcontractors out there who aren’t members of NESCA. The theory is simple; the more members we have contributing to the effort, the more NESCA will be able to do for everyone.

Speaking of contributing to the effort, last month all members were sent information about NESCA’s Legal Defense Fund and how this fund has financed NESCA’s involvement in a number of important legal cases over the last several years. Unfortunately, the Legal Defense Fund coffers are beginning to run dry, so we need to replenish the fund through member contributions in order to continue the effort to represent subcontractor interests in the courts. In fact, the Board of Directors has just approved NESCA’s involvement in a very important case that deals with subcontractor payment bond claim rights under Section 137 of the State Finance Law. I urge all members to make a contribution to the NESCA Legal Defense Fund in any amount you can. Your contribution will enable the association to apply the collective resources of our members to fight for the rights of subcontractors to file legitimate payment bond claims under Section 137 in accordance with the long-existing statute.

Kevin J. Garrity, President

COURT VOIDS CONTINGENT PAYMENT CLAUSE AS VIOLATIVE OF THE WEST-FAIR CASE (Go Top)

On December 8, 2004, the Supreme Court of the State of New York, Albany County, rendered a decision in the Gomez Electrical Contractors, Inc. v. Bast Hatfield, Inc. case. The Court held that a contingent payment clause in the contract was voided and unenforceable for the reasons articulated in West-Fair Electric Contractors v. Aetna Casualty & Surety Company, 87 N.Y.2d 148 (1995). The Court noted that both the Northeastern Subcontractors Association, Inc. and the General Building Contractors of New York State, Inc. had appeared as amicus curiae.

The contract provision in question stated in relevant part: “In the event that the Owner fails to pay [defendant], in whole or in part, any sums due under the general contract, which sums include sums as may be due to [plaintiff] from [defendant], [plaintiff] acknowledges and agrees that it shall accept in full satisfaction of its payment rights the assignment from [defendant] to [plaintiff] of all of [defendant’s] lien rights against Owner, to the extent of the unpaid sum due to [plaintiff]. [Defendant] shall in all respects cooperate with [plaintiff] in the pursuit of such assigned lien rights and shall execute such other and further documents as may be necessary to permit [plaintiff] to pursue such lien remedy. [Plaintiff] agrees that it will accept in satisfaction of any sums due it from [defendant] in such situations such sums as may be recovered from the owner through the pursuit of the Lien Law remedies “

After reviewing the holding in West-Fair Electric Contractors v. Aetna Casualty & Surety Company, the Court stated that “the provision in the subcontract effectively waives plaintiff’s right to file or enforce a lien against defendant, because plaintiff has waived its right to payment and, therefore, any mechanic’s lien under the Lien law may not be enforced against the defendant as the debt is not due and payable. Accordingly, this provision is void and unenforceable” and “barred for the reasons articulated in West-Fair . . . ”.

The Court further rejected a second argument by the defendant contending that factual issues existed as to the relationship between plaintiff’s president and the owner, which would preclude awarding summary judgment to the plaintiff.

This case illustrates contractors’ continued crafty but unsuccessful attempts to circumvent the impact of the West-Fair case.

Terence J. Burke, NESCA Legal Counsel

LEGISLATIVE UPDATE (Go Top)

Minimum Wage Increase – Members are reminded that the minimum wage in New York will increase on January 1, 2005. On December 6, 2004 the Senate joined the Assembly in overriding Governor Pataki’s veto of a bill that will increase New York’s minimum wage in three increments as follows: Effective January 1, 2005 - $6.00; Effective January 1, 2006 - $6.75; Effective January 1, 2007 - $7.15. The Governor had vetoed the bill on July 29^th stating he believed a minimum wage increase should be done at the Federal level so that New York would remain competitive with other states. The Assembly quickly voted to override the Governor’s veto on August 11^th.

Bond Requirement Increased to $100,000 – On November 16, 2004, Governor Pataki signed Chapter 698 Laws of 2004, which raises the performance and payment bond limits for public work found in Section 137 of the State Finance Law. Effective December 16, 2004, public agencies will now have the discretion to waive the requirement for performance and payment bonds where the aggregate amount of the contract is under $100,000. The old limit had been $50,000.

Governor Vetoes Striker Replacement Bill – On November 5, 2004, Governor Pataki vetoed a bill that would have prohibited New York employers from granting permanent employment status to workers hired to replace striking employees. The bill also would have required employers to award back pay to workers if a determination was made that the employer hired a permanent replacement worker during a strike or lockout. In his veto message, the Governor stated that the National Labor Relations Act (NLRA) gives the federal government jurisdiction over labor disputes, and permits employees to strike and employers to permanently replace striking workers. He stated that this bill would have violated the preemptive doctrine which prohibits enforcement of a state law that conflicts with federal law.

Governor Vetoes Plastic Pipe Ban – On December 15, 2004, Governor Pataki vetoed a bill that would have banned the use of plastic pipe in many commercial construction applications. The bill would have banned the use of plastic pipe for: underground vent piping; aboveground vent piping; underground storm drainage piping; inside leaders; exterior leaders and gutters; roof drains and water distributing system piping. In his veto message, the Governor stated this bill would conflict with the State Fire Prevention and Building Code adopted in 2002 and which provides a set of requirements that are consistent with fire and building codes nationwide.

WELCOME NEW MEMBER (Go Top)

Trojan Hardware Co., Inc.

96 Congress Street

Troy, NY 12180

(518) 272-7330; FAX (518) 272-0550

Contact: George Sheehan

CALENDAR OF EVENTS (Go Top)

January 6, 2005

NESCA/GBC/ECA 5-Week Course

STP Unit #9

Building Industry Center, 6 pm

January 13, 2005

Board of Directors Meeting

Century House, Latham, 5 pm

January 13, 2005

NESCA Membership Meeting

Century House, Latham, 6 pm

January 25, 2005

NESCA/OSHA Alliance Seminar

Demystifying OSHA

Building Industry Center, 6 pm

January 2005

NESCA/GBC/ECA 5-Week Course

Basic Computer Skills

February 3, 2005

Board of Directors Meeting

Century House, Latham, 6 pm

February 10, 2005

NESCA Membership Meeting

Century House, Latham 6 pm

Many Thanks to the Generous Co-Sponsors of NESCA’s December 9, 2004

Holiday Meeting & Reception

Awesco KAMCO Supply Corp.

Albany Interiors, Inc. Maximum Security Products, Corp.

All-Lifts, Inc. McLeod Systems, Inc.

The Breakell Law Firm, P.C. S & O Construction Services, Inc.

Terence J. Burke, Esq. Precision Glass & Aluminum, Inc.

Burt Crane & Rigging Rose & Kiernan, Inc.

NES Rentals Campito Plumbing & Heating, Inc.

CNA Surety Stants Combustion Associates, Inc.

Clemente Latham Concrete Stone Bridge Iron & Steel, Inc.

Cristo Demolition, Inc. Teal, Becker & Chiaramonte, CPAs

Harbour Roads Victaulic Company of America

Henderson-Johnson Co., Inc. The Woodward Company

MEMBER ANNIVERSARIES (Go Top)

In January, the following members have reached milestone anniversaries as members of NESCA. Thank you very much for your continued support!

Five Years

OC Iron Works, Inc.

Ten Years

Maximum Security Products Corp.

Thirty Years

The Woodward Company

RBM Guardian Fire Protection, Inc.

Office/Retail Space Available

New professional office/retail space for rent in Empire Zone located in the town of Waterford. Two unfinished units of 1,300 sq. ft. each. Ready to finish to suit your needs. Please call 238-2383 for more information.