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Construction Methodology Inappropriate for Small Plumbing and Heating Contractor

This Claimant operates a plumbing and heating installation and repair business located in Gretna, Louisiana (Zone D). Its Business Economic Loss claim was denied for failure to meet the Settlement Agreement Exhibit 4D causation requirements. Claimant appeals, arguing the Claims Administrator erred in utilizing the CAO Policy 495 Construction Methodology, as opposed to the Annual Variable Margin Methodology, in correcting matching issues identified in its financial data.  Had the AVM Methodology been used instead, Claimant contends it would have satisfied causation.
According to the record, the Administrator assigned Claimant the NAICS Code listed on its 2010 tax return; i.e., 238220, Plumbing, Heating, and Air-Conditioning Contractors. That is one of the categories assigned to the Policy 495 Construction Methodology. Prior to filing this appeal, Claimant unsuccessfully sought Reconsideration in keeping with the Appellate Rules. The Administrator’s Post-Reconsideration Denial Notice contained the following analysis:
We have reviewed the Reconsideration Request regarding the use of the Construction Methodology. Claimant is classified under a construction NAICS code and confirmed materials are purchased on a job by job basis. Additionally, the claimant does not maintain inventory. Further, the claimant reports inconsistent monthly revenues, including those with negative revenue. As such, no changes have been made to the previous compensation calculation with regard to the methodology selection as variable expenses were deemed to more closely reflect the monthly business activity ofthe claimant.
Claimant argues forcefully that it is a small plumbing installation and repair business with a short term engagement/billing cycle. Further Claimant does not utilize percentage of completion accounting methods that traditional construction companies use. P&Ls are maintained on a cash basis, and are therefore accurately recorded due to its short billing cycle. Likewise, the vast majority of work is completed in under 30 days and invoiced shortly thereafter. As such, many, if not most, of jobs are small, residential projects that are completed within a day or two, are invoiced on-site immediately upon completion and paid the same day.  As such, Claimant completes most its jobs, invoices those jobs, and is paid on those jobs within a week’s time and certainly with in the same month.

BP counters, in response, that the Administrator found multiple grounds which justified use of the Construction Methodology, including Claimant’s purchase of materials on a job by job basis and election not to maintain inventory as well as inconsistent monthly revenues, including negative revenues in some months. To quote BP further:

Thus, the matching issue with this claim arises from Claimant’s revenues, which the Construction Methodology addresses by reallocating revenues based on the
more correctly recorded variable expenses.
Claimant argues on appeal that its business operates on a short revenue cycle and that should end the inquiry in favor of the use of the AVM. However, the record
(including Claimant’s supplemental documents containing the depository receipts and customer invoices) supports the Settlement Program’s findings that Claimant’s monthly revenues as recorded in its P&Ls were not sufficiently reliable. For example, 25% of the revenues booked to January 2007was in fact for work done in December 2006. Similarly, Claimant’s revenue for November 2010 was overstated in the P&Ls, and a negative revenue of $13,467 was booked to December 2010 to reconcile the P&Ls and tax returns. Thus, there were at least four months where Claimant’s revenues on the P&Ls did not accurately reflect Claimant’s operational activities.
In rebuttal, Claimant points to the Calculation Notes which reflect correction of those errors by the claims analyst utilizing appropriate adjustments, as follows:
1) Adjustment 5: Increased Revenue January 2007. The DWH Accountant asked about the increased Revenue recorded in January 2007, September 2010, and April 2011. The claimant’s attorney confirmed the increase is, ” due to larger jobs involving commercial work performed”. The claimant’s attorney later explained that 25% of the revenue recorded in January 2007 was for work performed in December 2006. The DWH Accountant created an adjustment to reverse 25% of the revenue recorded in January 2007.

2) Adjustment 6: Negative Revenue December 2010. The DWH Accountant inquired about the negative revenue recorded in December 2010. The claimant’s attorney stated the negative revenue recorded in December 2010 was due to a $13,000 adjustment made as November 2010 revenue was overstated.” The DWH Accountant created an adjustment to record the reversal in November, the month when the revenue was overstated, rather than December.
Claimant concludes by saying the Construction Methodology revenue allocation is not necessary to achieve proper matching here since (1) the errors were addressed and corrected by the analyst and (2) Claimant’s expenses are recorded concurrently with the work it performs. BP’s efforts to portray its job based materials purchases and lack of inventory as reasons for application of the Construction Methodology, instead demonstrate that it does not have large mismatches.

BP’s efforts to portray its job based materials purchases and lack of inventory as reasons for application of the Construction Methodology, instead demonstrate that it does not have large mismatches between the timing of job purchases and revenue recognition. It is undisputed that Claimant does not utilize any form of percentage of completion accounting and the revenue issues cited by BP were noted and corrected by the claims analyst. Equally significant is the fact that Attachment A to Policy 495 expressly states a Claimant with a given NAICS Code will not automatically be assigned to a given methodology by virtue of that Code if, in the judgment of the Claims Administrator, there are factors that indicate revenues and expenses would be more sufficiently matched by applying an alternative methodology.

De novo review of this record leads this panelist to conclude Claimant’s financial data would be more sufficiently matched by applying the AVM Methodology. This panelist notes that a fellow panelist reached the same conclusion in an appeal of an electric service contractor which involved virtually identical facts. For the foregoing reasons, this Claimant appeal is sustained. The denial is overturned and the claim is remanded to the Claims Administrator with instructions to process it utilizing the

Annual Variable Margin Methodology.

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