Thank you for the vast response we received regarding the guest articles included in the last edition of The Expert Report. The response has prompted us to make the guest article a permanent feature, alongside articles authored by DRG team members regarding topics within their particular expertise. We believe this diverse content will keep our readership abreast of current industry trends and topics that directly relate to the issues our readers encounter on a day to day basis. If you are interested in contributing a guest article, or have suggestions for topics you would like addressed in an upcoming issue, please contact Erin Fallon at 412-227-3670 or efallon@dugganrhodes.com.

Industry Trends

NEW PA LAW EXPOSES CONTRACTORS TO CRIMINAL SANCTIONS FOR EMPLOYEE MISCLASSIFICATION

By Robert A. Korn, Esq.Kaplin Stewart

House Bill 400, known as the “Contractor Work Place Misclassification Act” (the “Act”) was signed into law on October 13, 2010. While it is too early to feel the impact of this Act, there is little doubt that it is a game changer which will eventually impact the construction industry in Pennsylvania. No longer can contractors, with impunity, classify workers as independent contractors in order to avoid paying payroll taxes, worker’s compensation insurance costs and unemployment compensation expenses. Violators of the Act are now exposed to civil penalties, stop work orders and sanctions.

Effective February 10, 2011, the Act applies to employers engaged in the “construction” industry. “Construction” is broadly defined as erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work performed on real property or premises under contract, and covers both public and private work. Pennsylvania joins the ranks of 17 other states that have enacted similar laws, including, but not limited to, Colorado, Connecticut, Indiana, Massachusetts, Maryland, Nebraska, New York, Utah and Washington. Like Pennsylvania, some of the states’ laws focus solely on the misclassification of employees in the construction industry, while the laws of other states have a broader application.

THE EXPERT REPORTThe Newsletter ofThe Duggan Rhodes Group

100 First Avenue - Suite 700 Pittsburgh, PA 15222

Phone: 412.227.3670Fax: 412.227.3679www.dugganrhodes.comErin Fallon, Editorefallon@dugganrhodes.com

©2011 The Duggan Rhodes Group

Spring 2011

IN THIS ISSUE:

4Industry TrendsNew PA Law Exposes Contractors to Criminal Sanctions for Employee Misclassification

The King is Dead. Long Live the King.Migrating from P3 to P6

4Test Your Knowledge

4DRG Update

4Upcoming EventsABA Forum on the Construction Industry 2011 Annual Meeting

Continued on page 2

not an “employer” under the Act, but intentionally enters into a contract with an employer knowing that that employer intends to misclassify employees in violation of the Act, shall be subject to the same penalties, remedies and other actions as an employer including the criminal sanctions and civil penalties.

The civil penalties range from not more than $1,000 for a first violation to not more than $2,500 for each subsequent violation. The following factors are taken into consideration when determining the amount of the penalty:

•History of previous violations by the employer;•The seriousness of the violation;•The good faith of the employer; and•Size of the employer’s business.

The Secretary of Labor can also seek and obtain a “stop work order” on any project where the improperly classified individuals are working. The stop work order would take effect upon service being effectuated upon the employer or when served at the work site itself and the order will remain in effect until a court issues an order releasing the stop work order.

Beyond the civil and criminal sanctions under the Act, an employer who intentionally violates the Act exposes itself to penalties under the Fair Labor Standards Act for failure to pay overtime. There are other risks of misclassifying employees as well, the most significant of which is exposure to personal injury suits that might otherwise be barred if the employer had worker’s compensation insurance coverage in place.

To date there have been no civil penalties assessed against employers nor have there been any criminal prosecutions. It remains to be seen how vigorously the Act will be enforced.

In Pennsylvania, one is classified as an independent contractor only if the following criteria are met:

•The work is performed pursuant to a written contract;•Contractually, the individual must be free from the control

and direction over his or her performance;•The individual must in fact be free of control and direction

over his or her performance;•The individual must be customarily engaged in an

independently established trade, occupation, profession or business providing services in commercial or residential building construction. To meet this standard the individual must:• Possess the essential tools, equipment and other assets

necessary to perform the services;• The contract must provide that the individual

performing the services is subject to a profit or loss as a result of performing the services;

• The individual must perform the services through a business in which that individual has a proprietary interest;

• The individual must maintain a business location separate from the location of the person for whom the services are performed;

• The individual must perform similar services for others, free of direction and control over the performance of such services;

• The individual must hold himself or herself out to others who might avail themselves of his or her services; and

•The individual must maintain liability insurance during the term of the contract in an amount no less than $50,000.

The failure to meet any of the above-stated criteria exposes a contractor to the civil and criminal sanctions under the Act. The penalties, remedies and actions under the Act apply not only to an employer, but also to officers or agents of an employer. If an individual is improperly classified, the Act is violated if the employer, or officer or agent of an employer, fails to provide coverage required under the Workers’ Compensation Act or fails to pay contributions, reimbursements or other amounts required to be paid under the Unemployment Compensation Act. Each individual who is not properly classified exposes an employer, or an officer or agent of an employer, to a separate violation of the Act. If an employer, or an officer or agent of an employer, intentionally violates the Act, the first offense would be a misdemeanor of the third degree and the second and subsequent offenses would be misdemeanors of the second degree.

If an employer, or officer or agent of an employer, fails to properly classify an individual as an employee, the Act provides for an imposition of a summary offense subjecting the violator to a fine not to exceed $1,000. A conviction of a summary offense is admissible in any subsequent proceeding to establish an intentional violation of the Act. A party who is

E

2. True or False: Utilizing a Dispute Resolution Board on a project usually reduces the parties’ chances of ending up in arbitration or litigation.

1. A study by the American Arbitrators Association determined that arbitrators made decisions clearly in favor of one party over the other in what percentage of cases.

4. True or False: By adding an arbitration clause to a construction contract, the parties virtually guarantee that they will not have to resort to litigation to resolve disputes between them.

3. What method of dispute resolution has been determined to be superior to all other methods?

Test Your Knowledge

ArbitrationA

45%A

LitigationB

55%B

MediationC

65%C

None of the aboveD

75%D

Check your answers on page 4

2

Industry Trends (Continued)

3

The King is Dead. Long Live the King.Migrating from P3 to P6

By Donald Kaplan, CCC, PSP

The construction scheduling world is experiencing a not-so-subtle nudge from one of its major software players. As of the end of 2010, Oracle has stopped making Primavera P3 Project Planner and Primavera SureTrak available for sale. For an entire generation of construction professionals, this is an upsetting turn of events. Although we will continue to see these products in frequent use for the foreseeable future, the industry standards for critical path method (CPM) scheduling software are certainly going to evolve significantly in the short term. Instead of resisting, this should be seen as an opportunity to embrace new options and increase exposure to new project management alternatives.

I recently had the pleasure of attending the 1st Annual Construction CPM Conference in Orlando, FL. The focus was on the leading analyses and software solutions available to stakeholders to ensure the timely completion of their construction projects. Based on the wide range of risk managers, contractors, litigation professionals and consultants in attendance, it is clear that the construction community is asking for more from their software solutions than P3 or SureTrak could ever provide. As a result, the success of newer programs such as Primavera P6 Professional Project Management (P6) was frequently the focus of the conference case studies. In fact, P6 is increasingly becoming the software of choice for federal, state, and local government agencies, as well as leading Construction Managers (CM).

Transition from Old to New Over the last few years, we have seen dramatic increases in the required use of P6, both in our active scheduling work, as well as the forensic analysis of delays and disruptions on construction claims. We believe this trend will inevitably Continued on page 4

continue, led by larger players in the industry, which will have a trickle down effect on the industry at-large. Of course, the transition from P3 to the Project Management module within P6 will have unique ramifications on contractors who are developing logical schedules, Owners and CM’s who are evaluating those schedules in the context of the contract, and schedule experts and litigators who will potentially evaluate and argue impacts to the schedule. Below is a list of items for consideration as you transition from P3 to the new industry standard of P6:

1) It’s not always good to share. If as a general contractor you need to manage many engineering and construction projects with shared resources, then the promise of comprehensive, organization wide data is alluring. P6 is in fact built to support that type of user experience. But as a schedule consultant or attorney, you may be asked to review contemporaneous schedules from different clients, on wide ranging types of unrelated projects. These could be projects with entirely different Work Breakdown Structures, Activity Coding, Cost or Resource Loading, and Work Calendars. By utilizing separate databases for each client and project, we ensure the integrity of the native project schedule data (by minimizing the risk of overwriting, duplicating or changing the schedule data) and maintain the reliability of the CPM schedules.

2) Keep everything in order. The Enterprise Project Structure or EPS, a new feature of P6, allows for the hierarchical organization of the projects and subprojects one is trying to manage. The EPS may be used to represent iterations of a project schedule, such as the monthly schedule updates, or to differentiate between project phases. A well-organized EPS allows for meaningful data summaries, the ability to do targeted backups of individual schedules, and to keep accurate file inventories.

3) Convert with care. Importing a P3 schedule into P6 is relatively easy and most data is converted without any issue. Unfortunately, layouts and filters, financial periods and past period actual data are amongst a handful of data that is lost during the conversion process. It is always important to status a schedule after the import and verify it against the original file for any errors.

4) It’s hard to go back. More importantly, importing from P6 into P3 is a losing proposition due to the more robust P6 database, and should only be performed when one is certain that their schedule will not be adversely affected. Problems

The Act also contains an anti-retaliation provision, which bars punitive action against an individual who alleges that an employer has not complied with the Act. If “adverse action” against an employee occurs within 90 days of the exercise of an employee’s rights under the Act, there is a rebuttable presumption that the action is retaliatory. The burden of proof would then shift to the employer to show that its actions against the employee were not retaliatory.

Robert A. Korn is a partner in the law firm of Kaplin Stewart and serves as Co-Chair of its Construction and Surety Practice Group. He represents clients in all aspects of construction law and also serves as a mediator and arbitrator in complex construction disputes. He can be reached at rkorn@kaplaw.com.

P6JAN 1

manager, controller and Chief Financial Officer, as well as his current role as a construction claims consultant and expert witness. This combination of experience will allow him to offer a unique perspective to the ICCIFP decision making process.

DRG Professionals Receive CCE / CCC Credentials

Four DRG professionals became certified through the Association for Advancement of Cost Engineering International (AACE). William Kerns, Donald Kaplan, and Ivonne Beltran received the designation of Certified Cost Consultant (CCC). Jeffrey Hogan received the designation of Certified Cost Engineer (CCE). Over 90% of DRG’s technical staff now holds one or more certifications through AACE and other industry associations, including the ICCIFP and the Green Building Certification Institute (GBCI).

exist with calendar conversion, a whole host of data that cannot be converted, as well as data truncation issues. One must be certain that the schedule information that is being communicated is consistent from computer to computer or from person to person.

At its core, a CPM schedule is an invaluable tool for use in the execution of a project and, to be honest, the last thing one wants is the software to get in the way. The reality is that the transition from P3 to P6 is not without growing pains, as we have learned in our implementation of the software. P6 is fundamentally different in that it allows for the management of multiple projects with shared resources at the enterprise level, unlike P3, which is a single-project, single user environment.

For as much as the new version of Primavera differs from our old standby, P3, it still very much resembles the software that has dominated the industry for a couple decades, with its simple and effective reporting power. As the adoption rate increases, it will be hard for contractors and consultants alike to steer clear of the new standard much longer. Of course, legacy products are not going to disappear overnight, so the goal is to be adaptable. Familiarize yourself with new options and be conversant in the evolving CPM scheduling landscape.

Donald Kaplan, CCC, PSP is a Senior Consultant with The Duggan Rhodes Group. He specializes in construction related claims analysis and the development and maintenance of CPM project schedules. His CPM scheduling experience includes work on Pittsburgh’s Rivers Casino, the Philadelphia International Airport, and the NOAA Environmental Security Computing Center in Fairmont, WV. He can be reached at dkaplan@dugganrhodes.com.

DRG Update

Recent Promotions at DRG

Carren Gallick, CCC was promoted to Project Manager. Carren has been with DRG since its founding year of 1999 and has held many pivotal roles throughout her tenure. Carren specializes in construction claim analysis and preparation and the related damage assessment and quantification. In addition, Ivonne Beltran, CCC was promoted to Project Consultant. She works closely with Carren on the quantification of construction related damages and has been a member of the DRG team for over five years. DRG congratulates Carren and Ivonne and thanks them for their years of accomplished service.

William Kerns named to ICCIFP Board of Trustees

William Kerns, a Director with DRG, was recently named to the Board of Trustees of the Institute of Certified Construction Industry Financial Professionals (ICCIFP). William was selected as a Trustee based in part due to his prior construction industry experience, which includes working as a construction cost control 4

Upcoming Events

DRG will be attending and exhibiting at:

ABA Forum on the Construction Industry 2011 Annual Meeting

April 14-16, 2011Fairmont Scottsdale PrincessScottsdale, AZ

Visit the events section at www.dugganrhodes.com for more information.

1. D This study dispels the theory that arbitrators usually “split the baby” to avoid a harsh result to either party.

2. True. The Dispute Resolution Board Foundation published statistics in 2007 which stated that 98.7% of projects using a DRB were completed without resorting to subsequent dispute resolution methods.

3. No single method of dispute resolution is always superior to the others. Common client concerns, including the cost and length of time to resolve the dispute, are often considered when choosing a method.

4. False. However, many of the cases that result in litigation deal with issues that arise either before arbitration commences (such as the need to enforce an obligation to arbitrate) or after it concludes (to preserve a favorable award) as opposed to the substance of the arbitration itself.

Source: From research presented at the ABA Forum on the Construction Industry and the TIPS Fidelity and Surety Law Committee 2011 Midwinter Joint Meeting.

Test Your Knowledge Answers

D

Industry Trends (Continued)