Construction Accident and Fatality Rates Fall

America’s construction sites are much safer than they were a decade ago, according to the Associated General Contractors of America (AGC). The organization announced the results of a new analysis that found a 38% drop in construction safety incidents and a 47% decline in the construction fatality rate since 1998. The AGC attributed the decline in accident and fatality rates to the federal government’s adoption of a safety oversight approach known as “collaborative safety.”

Combating Illegal Employment

U.S. Immigration and Customs Enforcement launched a new audit initiative on July 1, 2009, that attempts to identify employers that don’t comply with employment eligibility verification laws by auditing selected companies’ I-9 forms.

The High Cost of Employee Absenteeism

Just how costly are unauthorized employee absences? A survey from consulting firm Mercer, The Total Financial Impact of Employee Absences, found that the average total costs of incidental unplanned absences amount to 6% of payroll. The survey also found that incidental unplanned absences result in the highest net loss of productivity per day -- a decline of 21% compared to 15% for planned absences and 17% for extended absences.

Tax accounting for long-term construction contracts can be complex. Regulations proposed by the IRS could help certain home construction contractors by expanding the types of contracts that can qualify for the home construction contract exemption from the percentage-of-completion method of accounting.

Background

Under federal tax law, taxpayers generally must use the percentage-of-completion method to account for taxable income from a long-term contract. However, “home construction contracts” are exempted from this requirement. Instead, the tax code permits the use of other methods, such as the completed-contract method. Generally, with the completed-contract method, all contract income and contract related expenses are deferred until the taxable year the contract is completed, even though payments are received in years before completion.

Defining a Home Construction Contract

Under the tax code, a home construction contract is a construction contract in which 80% or more of the estimated total contract costs (as of the close of the tax year in which the contract was entered into) are reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of:

o Dwelling units contained in buildings containing four or fewer dwelling units and

o Improvements to real property directly related to the dwelling units and located on the site of the dwelling units.

Townhouses, Row Houses, and Condos

Currently, each townhouse or row house in a complex is treated as a separate building (irrespective of the number of townhouses or row houses physically attached to each other) for purposes of the home construction contract definition. The IRS’s proposed regulations would also treat each individual condominium unit as a separate building. As a result, contractors working on larger condominium projects could qualify for the home construction contract exemption.

Common Improvements

The IRS has previously taken the position that land sale contracts are not home construction contracts eligible for the completed contract method where the land developer isn’t performing the construction contract activities related to the dwelling units. As a result, land developers that subdivide, improve, and then sell lots have not been eligible.

The proposed regulations would expand the scope of the home construction contract exemption. Under the proposed regulations, a contract for the construction of common improvements would be considered a contract for the construction of improvements to real property directly related to and located on the site of the dwelling units, even if the contract is not for the construction of any dwelling unit.

Examples of common improvements include:

o Land clearing and grading

o Sidewalks and roads

o Sewers

o A clubhouse on the property

In general, a common improvement does not benefit only one particular dwelling unit or lot. However, under the proposed regulations, land clearing and grading would be considered common improvements even when performed on a particular lot.

The proposed rules mean that a land developer selling individual lots, as well as the land developer’s contractors and subcontractors, might have long-term construction contracts that qualify for the home construction contract exemption.

The proposed regulations may change by the time they reach their final form. We will keep you apprised of the progress of these proposals and alert you when they are finalized.

Small Construction Contracts

The tax law provides an additional exemption from the required use of the percentage-of-completion method for “small construction contracts.” Contracts can qualify if:

o The contract is originally estimated to be completed within two years of the contract start date and

o The contractor’s average annual taxable gross receipts for the three previous tax years did not exceed $10 million.

“ . . . land developers that subdivide, improve, and then sell lots have not been eligible.”

In competing for jobs, many contractors tend to underestimate and undersell their firm’s strengths. It’s not difficult to understand why: Selling doesn’t come naturally to most contractors. Sales skills tend to be regarded as “soft” skills and viewed as much less important than craft or estimating skills. The reality, however, is that contractors need to develop a range of sales-oriented skills and techniques if they want to be successful. Here are some steps recommended by sales professionals that can help improve your sales skills and boost your firm’s chances of winning contracts.

Do Your Homework

Research potential jobs carefully before you bid on them. Make sure the job is within the range of your expertise and your experience. Your bid should cover contingencies and leave room for an acceptable profit. If the job seems like a good fit, qualify potential customers by using publicly available resources to identify any past problems they might have had paying contractors and suppliers.

Focus on the Personal

Bringing a bid or a quote to a prospect in person can sometimes be more effective than e-mailing it. Why? A face-to-face encounter introduces you to the prospect and personalizes the process. It also gives you a chance to answer any queries and to clarify and elaborate on certain aspects of your bid that you consider important. You may even be able to use the opportunity to close on the job with the customer on site.

Differentiate Yourself from the Competition

Use every available opportunity to define and highlight to prospects what it is that separates your company from other contractors. In promotional material, ads, and bid documents, emphasize your employees’ years of experience, your firm’s special skills, any awards you have won, and any guarantees or warranties you offer on your work. Give prospects a reason to seriously consider your company for their next project.

Follow Up

Always follow up on sales calls and quotes in a timely way. Follow-up calls give you a chance to counter possible objections raised by the prospect. Above all else, they demonstrate your professionalism and your enthusiasm about working on the project.

“A face-to-face encounter introduces you to the prospect and personalizes the process.”

Cost overruns are a perennial drain on profits. The culprits can range from design changes to weather-related delays, from do-over work to unanticipated increases in the cost of raw materials. Regardless of the source, the end result is less money for the contractor. While there are no guaranteed methods of preventing cost overruns, contractors can reduce the chances that unanticipated extra costs will adversely affect their bottom line by making good use of cost tracking tools.

Delving into the Details

Project accounting and project control software can help contractors keep projects on budget. Instead of waiting until a job has been completed to find out if it was profitable, contractors can access real-time data showing project costs. Tracking detailed information broken down by cost codes helps contractors identify where and how cost overruns are occurring. By quickly taking steps to correct developing problems, contractors are better able to get a project back on track and stay within the budget’s guidelines.

Tracking Change Orders

Too often, contractors are not fully paid for all of their employees’ labor or for the use of equipment, tools, and material needed to complete change orders. Using software to identify and document change orders, assign appropriate charges to the required changes, and record when payment is received can help eliminate uncertainty and ensure that the contractor is paid on time. This is particularly relevant since many contracts have notice clauses that require the contractor to notify the owner of the impact and cost of additional work within a specific time frame. Promptly billing for change orders can help minimize cost overruns and protect profit margin over the life of a project.

Preparing More Accurate Bids

Having verifiable job cost data allows contractors to more easily determine whether their bids on past projects resulted in the projected profit margin. With detailed information, contractors can identify which parts of a project conformed to bid projections and which went off budget. Future bids on similar projects can be refined to minimize the possibility of overrun problems.

Job Cost Reporting

Job costing systems vary in their capabilities and complexity. Basic features to evaluate when comparing systems include:

o The level of job cost detail the system can track

o Standard reports and the extent to which users can create customized reports to meet their needs

o Integration with other software (project management, estimating, etc.)

Ultimately, the best system is one that a company can use effectively to produce the critical information necessary for making smart, timely business decisions. We would be happy to help you analyze your company’s specific needs.

“ . . . identify which parts of a project conformed to bid projections and which went off budget.”

Targeting Future Homebuyers

Researchers cite women, baby boomers, and immigrants as the demographic groups most likely to drive future demand for housing. Women are the fastest growing buyer segment, while baby boomers are downsizing and seeking out smaller and less labor-intensive properties.

EPA Extends Storm Water Construction General Permit

The Environmental Protection Agency (EPA) has extended by one year, to June 30, 2011, its 2008 storm water Construction General Permit (CGP). The 2008 CGP regulates the discharge of storm water from construction sites that disturb one acre or more of land and from smaller sites that are part of a larger development. The agency wants the extension to incorporate the new national Construction and Development Effluent Limitations Guidelines requirements into the CGP.

IRS Audits

The audit rate for all corporate returns other than Form 1120S was 1.3% for the 2009 fiscal year, according to the IRS. For partnership and S corporation returns, the rate was .4%. The IRS audited 1,425,888 individual income-tax returns in 2009. However, the majority of those audits (77.1%) were correspondence audits.

Construction is a difficult and unpredictable business. Contractors know that there are some things they can do little about -- the weather, for example. But they also know that they can take certain measures to prevent issues such as theft, damage, subcontractor defaults, or work site injuries from having serious financial consequences for their business. The most effective tool they use to minimize the impact of potentially costly events is insurance.

Knowing what types of insurance are available and which may be needed specifically for your business is critically important. Some owners and governmental entities will insist that your firm have certain types of insurance in place before they’ll consider a bid. The following overview of the different types of insurance available to contractors may help you determine the overall approach that is most appropriate for your business.

Surety Bonding

A surety bond is an agreement that binds you, the contractor, to comply with the terms and conditions of a contract. It typically deals with the performance of some or all stages of a construction project. In situations where your firm can’t successfully meet the terms of the contract, the surety assumes your financial responsibilities until the project is completed. You may find it impossible to obtain work on certain projects without first obtaining surety bonding.

General Liability Insurance

Lawsuits are a fact of life for businesses. Losing a lawsuit or agreeing to a settlement can be extremely expensive. General liability insurance protects your business assets in case your business is sued for something it did (or did not do) that caused a personal injury or property damage. Commonly, an accident or mistake may have occurred. Liability insurance may cover a variety of claims, including bodily injury, property damage, personal injury, and even damage from slander or false advertising.

Workers’ Compensation Insurance

Businesses are generally required to carry workers’ compensation coverage. Workers’ compensation insurance protects you from worker lawsuits that result from injury related accidents on the job and may provide various benefits, including medical treatment and compensation for your injured employees’ lost income. If covered, employees receive workers’ compensation payments irrespective of who was at fault for the accident. If you have projects in more than one state, you should be aware that workers’ compensation laws vary from state to state.

Builder’s Risk Insurance

Builder’s risk insurance is intended to provide protection for construction projects under way. In addition, it generally covers any theft of or damage to materials used in a project, such as plumbing, lighting fixtures, electrical equipment, or appliances.

Pollution Liability Insurance

Trade, general, and specialty contractors must factor in the possibility of an accidental release of fuel oil, gases, or chemicals from ruptured pipelines and fuel tanks on a project. Were that to happen on one of your projects, it’s possible that your business could be held liable and face substantial financial losses. Pollution liability insurance provides protection for contractors for a wide range of pollution risks. In addition, policies may provide insurance for third-party claims for bodily injury and property damage as well as for remediation costs that stem from pollution incidents.

Key Person Insurance

What would happen to your business if you, a partner, or another key employee were to die? Key person life insurance is designed to protect your business in such a scenario. If you operate your business with multiple partners, you should consider using life insurance to fund a buy-sell agreement. Disability insurance for you and your key people should also be a priority.

Property Insurance

Basic property insurance typically protects the physical assets of your business, such as buildings, inventory, furniture, documents, machinery, and similar items.

Wrap-up Insurance

Wrap-up insurance plans consolidate insurance coverage for general contractors and subcontractors who are working on a single project. It’s purchased and managed by a single sponsor, either the owner or the general contractor. A wrap-up policy typically extends to workers’ compensation, general liability, excess liability, builder’s risk, and pollution liability insurance.

Umbrella Insurance

A business can use so-called umbrella coverage to protect itself from a major catastrophe or lawsuit. Umbrella insurance provides coverage in amounts in excess of the difference between your underlying general liability coverage and the amount awarded or settled upon up to the policy’s limit resulting from a lawsuit or other claim.

Call Us

Take the time to review your firm’s insurance coverage so you can identify any gaps that may exist. If we can help with your review, please call us.

Social networking sites reach millions of people and have significantly changed the way people communicate and interact online. The influence of these sites can be enormous. Some of your employees may use social media while on the job or away from the workplace. And it’s possible that their use of these media could create legal problems for you and your business. Even if you only have a couple of employees, you should be aware of potential trouble spots.

There are two areas that you should be concerned about: the perception that employees are speaking on behalf of your business and leaks of confidential or proprietary information. A specific company policy regarding employees’ use of social media may offer your business some protection.

Who Speaks for Your Business?

Your company’s public image and standing in the community could suffer if an employee who has identified him- or herself as a company employee uses offensive language online. Or, what if an employee uses a social media site to endorse or to offer a testimonial about one of your firm’s projects, a condo development, for example, and does not disclose his employment relationship? Your business may be found to have violated the Federal Trade Commission (FTC) Act if someone later claims that he or she was misled into buying what is alleged to be a defective product based on your employee’s comments. Essentially, under Federal Trade Commission guidelines on the use of endorsements and testimonials, employees may be considered paid endorsers for your company by consumers even if your employees are not authorized to speak on your company’s behalf.

The FTC has stated that it generally won’t take action based on the activities of a single rogue employee. However, it has also indicated that it could take action against businesses whose failure to establish or maintain appropriate internal procedures resulted in a consumer injury.

Leaks of Confidential Information

Employees may accidentally disclose financial information, marketing plans, or expansion strategies on a social network site they frequent. You may not discover that the leak occurred until it’s too late and the damage has been done. The result could be a financial or strategic loss for your business.

A Solution

A written company policy on your employees’ use of social media could help minimize liability issues. We recommend that you involve your legal advisor in drafting your company’s social networking policy.

U.S. construction work sites are becoming safer. The number of fatalities in construction fell 20% from 2007 to 2008, according to data compiled by the U.S. Department of Labor’s Bureau of Labor Statistics. Despite the decline, contractors need to remain vigilant and continue to find ways to protect their workers from on-site accidents. One area that contractors could focus on is the improper use of power tools and the potentially serious consequences of their misuse. Whatever the power tool -- a table saw, jack hammer, or chain saw, for example -- it can be helpful to keep reminding employees that care must always be taken when using them. Here are some points worth repeating.

Focus on the Basics

If you supply the equipment, you should confirm that the operators have read the manual and are familiar with all of a tool’s safety features. Consider having operators sign an acknowledgement to that effect. Anyone operating power tools should be required to wear the proper protective gear -- safety glasses or goggles, ear plugs, and non-slip steel-toed workboots. Operators should only use undamaged power tools that have insulating grips. Power cords must not be frayed or worn. Most workers know enough not to wear loose clothing or jewelry on the site, but it’s still worth reminding everyone how dangerous it can be if clothes or jewelry get caught in a tool’s moving parts.

Stay Alert

Familiarity can sometimes lead to complacency and unnecessary risk taking, and accidents may occur when operators don’t pay enough attention to their surroundings. Overhead electric lines and buried electric cables pose significant potential hazards to equipment operators. Operators should have sufficient space for the safe operation of their tools and should be able to work in areas free from flammable liquids or vapors. Just as importantly, operators need to be aware of other workers and construction vehicles operating in or near their own work area.

Work site safety is a continuing process, one that requires time and effort on the part of contractors. However, the payoff for this extra care and vigilance is a safe work environment and potentially lower insurance premiums.

“. . . accidents may occur when operators don’t pay enough attention to their surroundings.”

A recently passed federal law holds out the promise of some financial relief for contractors struggling in the current difficult economy. The Hiring Incentives to Restore Employment (HIRE) Act contains tax incentives designed to encourage businesses to hire and retain unemployed workers.

The incentives include a payroll tax holiday and an income-tax credit for retaining eligible employees. Contractors that hire seasonal workers will likely benefit from the break on payroll taxes. In addition, the new law benefits businesses that buy machinery and equipment in 2010 by retaining the $250,000 expensing limit under Section 179 of the tax code.

Payroll Tax Holiday

The employer portion of the Social Security payroll tax is currently equal to 6.2% of up to $106,800 of wages paid to an employee. The Hire Act exempts employers from paying their share of the Social Security tax on wages paid to qualified individuals from March 19, 2010, through December 31, 2010. The law does not place a limit on the number of qualifying workers an employer can hire.

The tax holiday is available for a newly hired employee who:

o Is hired (or rehired) after February 3, 2010, and before January 1, 2011.

o Has not been hired to replace a terminated employee unless the former employee left the employer voluntarily or was terminated for cause.

o Is not related to the employer (as defined in the law).

o Has been unemployed for the 60-day period ending on the date employment begins or has worked no more than 40 hours during the same 60-day period.

o Provides a signed affidavit certifying his or her unemployment status. Employers may use Form W-11, available on the IRS’s website (www.irs.gov), for this purpose.

Credit for Retained Workers

In addition to the payroll tax holiday, employers can claim an income-tax credit for retaining qualifying workers for at least 52 consecutive weeks. The credit for each retained employee is (1) $1,000 or (2) 6.2% of wages paid to the employee during the 52-week period, whichever is less. The credit is available only if wages paid to the employee during the last 26 weeks of the 52-week period are at least 80% of wages paid during the first 26 weeks.

Section 179 Expensing

As noted, the dollar limit on asset purchases eligible for Section 179 expensing will be $250,000 for 2010 as a result of the HIRE Act. The $250,000 deduction maximum is reduced to the extent the cost of qualifying property placed in service during the taxable year is greater than $800,000. The Section 179 expensing election is available for most non-real-estate assets.

We would be happy to help you determine if your firm can benefit from any provision of the HIRE Act.

Given how weak the construction industry is currently, adding bonding capacity may not appear to be a priority for your company right now. However, taking on additional bonding capacity makes sense for several reasons. First, it sends a signal to owners that your firm is in solid financial shape. Owners want to work with contractors they can be assured will be there for the duration of their projects. Second, additional bonding helps when it comes to lining up the best subcontractors to work on your projects since subcontractors want to work with financially strong contractors. Finally, securing additional bonding positions your company to take on a wider variety of projects -- as well as those with a higher dollar value.

However, before your surety will issue additional bonding to your company, it’s going to ask you to supply significant documentation detailing the firm’s financial health. As a part of the evaluation process, the surety will ask to see your financial statements, appropriate interim and annual schedules, and schedules of contracts in progress, contracts completed, backlog, and disclosures about the extent to which contract billings are used as bonding collateral.

Provide Timely Statements

Respond to your surety’s requests for financial information as quickly as possible. Better still, be proactive and make your financial statements available to your surety on a regular basis.

Review Your Accounts Receivable

Your surety may be alarmed by any large variation in the level of accounts receivable. You’ll need to take steps to institute a prudent collection policy if you want to keep this from happening. Review older receivables regularly and establish workout arrangements with customers that are slow to pay.

Focus on Cost Accounting

Your surety wants to feel comfortable about how you estimate and manage job costs. That’s why you should expect your surety to carefully review your estimated and actual gross profit on a job-by-job basis. Your goal should be to minimize “profit fades” -- the decline in profit margin from the time a contract begins to the time it is completed. Of course, you’ll want to be certain that your accounting systems are functioning properly before you give your surety financial information.

You’ll find it easier to manage estimated profits on your existing jobs if job cost information is up to date. So make certain that you update the labor and material costs you incur on projects on a weekly or bimonthly basis. Your accounting controls should be in place so that accounts payable and payroll costs are reported properly.

Reveal Transactions Between Related Parties

Your financial statements should disclose any related-party transactions. It’s important that you are up front about detailing the nature and terms of any agreements between persons with potential conflicts of interest.

Be Prepared To Detail Personal Finances

The surety is likely to request information about your personal finances. If you invest in real estate, you may need to disclose to the surety the related financing arrangements, cash flow, occupancy rates, and lease information. In addition, you should inform the surety of any personal guarantees on loans. Your surety also may want to review your insurance coverage -- especially life insurance. Life insurance cash surrender value can enhance your company’s adjusted working capital, which is an important factor analyzed by sureties. Because the surety is depending on your actions in the future, inadequate personal insurance can limit the company’s bonding capacity.

Whatever the outcome of an attempt to secure additional bonding, the fact that you are paying closer attention to your financial statements also provides you with information that is valuable for the effective management of your construction operations.

Safe Harbor Rules for Deposit of Employee Plan Contributions

The federal Department of Labor recently issued a final “safe harbor” deposit deadline for 401(k) plans, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs and Salary Reduction Simplified Employee Pension Plans (SEPs) with fewer than 100 participants at the beginning of the plan year. The regulations state that participant contributions and loan repayments will be treated as made in a timely manner if the amounts are deposited with the plan no later than the 7th business day following the date the amount was received by the employer. In the case of wages withheld, it’s the 7th business day following the date the amount would have been payable to the participant in cash.

“Green” Building Risks Concern Owners and Contractors

Many construction industry participants believe that there are certain potential risks associated with green-built and LEED-certified projects but are unsure how best to manage these risks, according to a report issued in 2009 by Marsh Inc. The report notes that owners, contractors, and design firm executives involved in green design and construction are most concerned about financial risks, including the impact of green design, construction, and ownership on profitability, cost, and their ability to complete projects on time and within budget.

Like most contractors, you’ve probably worked one or more projects that continued to incur unanticipated additional costs even though the projects were close to completion. And more often than not, you may have ended up with a much smaller profit margin than you originally projected when you first put in a bid. Known as “profit fade,” this occurrence often results from weak estimating processes.

Here are some suggestions that can help strengthen your estimating procedures so that the profit you ultimately earn on a project will be very close to your original estimate.

Analyze Past Projects: As a first step, look closely at past performance. Choose several projects that were highly profitable and others that weren’t. Compare each project’s estimated costs to the final figures. Analyze the major assumptions that were used in preparing the estimates to see if the assumptions were reasonable.

Study the Design Specs: When preparing an estimate, review the design specs several times so that you can figure out with as much accuracy as possible the quantities of material required on each job.

Review Wage Rates: Double-check your estimates on wage rates for each job. Be sure that the rates have been updated to reflect any changes in wage scale or in union rates. At the start of a job, make sure the project manager is aware of the labor costs that were incorporated in the bid.

Stay Within Profit Targets: Consider whether your company should have a written policy that states the minimum amount of profit you are willing to accept on every job. Don’t bid on a job if that minimum can’t be achieved.

Update for Contract Modifications: Every time an owner or architect changes a contract specification, review and revise your estimates. It’s one of the most effective ways to protect your business against profit fade.

Follow Up on Completed Projects: Compare your estimates to your final cost reports. If there are significant differences, you’ll need to go back and find answers. Once you’ve identified what accounts for the differences, you can develop procedures to prevent a reoccurrence.

Accurate estimating is absolutely critical to profitability. You should regularly review and reassess your estimating processes to help ensure that your profit margins remain solid.

“Compare each project’s estimated costs to the final figures.”

Almost $140 billion of the $787 billion allocated in the American Recovery and Reinvestment Act of 2009 is targeted toward federal construction projects. For contractors dealing with the nationwide slowdown in commercial and residential construction, federal construction work can be a source of steady, lucrative projects. If you are interested in pursuing government construction work, the following brief overview of the process may help you in your efforts.

Identifying Likely Federal Prospects

Your goal is to identify federal construction projects that mesh with your company’s level of expertise and your plans for growth. In addition, you want to be sure that the cost of acquiring federal business is low enough that you can maintain acceptable profit margins.

You can begin the search process by reviewing the websites of various federal agencies since the law requires every agency to post information about their contracts. You can do the research yourself, or you can use a government market intelligence service to provide specifics on federal contracting opportunities.

Once you’ve identified potential opportunities, you’ll have to decide on whether you’re prepared to make hard money bids or if answering requests for qualifications (RFQs) or requests for proposals (RFPs) will be more effective.

Bids

Hard money bids can be disadvantageous since price is the only distinguishing factor separating your company from others. You’ll have to be very sure that your estimates are rock solid. Underestimate your costs and you could win the bid but lose money on the project.

Request for Qualifications

Various agencies put out RFQs to build a list of qualified contractors. If you opt for this approach, you will have to supply the agency with a list of former clients, background information on your company’s past projects and business approaches, company resources data, and your financials. Once you are accepted onto an agency’s qualified contractor list, you are essentially prequalified to bid on appropriate projects as they come up.

Request for Proposals

An RFP allows you to differentiate your bid beyond price; however, this design-oriented process tends to favor firms with architecture and engineering capabilities. The RFP’s specific requirements should guide the content and format of your response. Structure your proposal toward detailing how your company’s strengths can bring the best value to the agency. Be sure you completely address all the requested information. If any requirements are unclear, ask for an explanation.

Your proposal might include:

o A recap of the general requirements

o Details regarding how you will meet each requirement, including your business’ credentials -- experience, equipment, resources, staffing, skills, technology, etc.

o The schedule you propose

o The costs, including as necessary, labor, materials, and equipment, plus your payment terms

o If requested, details regarding the staff who will oversee and manage the project and their backgrounds

o Supplementary information, such as descriptions of similar projects you have completed

Begin your proposal with an executive summary that covers your capabilities and strengths. Also include a table of contents that will allow the agency’s procurement officers to find their way easily through your information.

Obtaining information about and applying for government construction work can be a time consuming process. In the right situation, however, government projects can be well worth pursuing.

Standard Contract for Federal Projects

The complex rules for federal government projects can be intimidating and can prevent contractors from attempting to bid on potentially rewarding jobs. However, a coalition of construction industry associations, ConsensusDOCS, has created and published a standard agreement that specifically addresses the complexities of federal subcontracting.

The document, known as the ConsensusDOCS 752–Subcontract for Federal Government Construction Projects, is intended to simplify and streamline the often cumbersome federal contract application process by addressing the many terms and conditions that contractors must meet in order to comply with the terms of the Federal Acquisition Regulation (FAR). The American Recovery and Reinvestment Act of 2009 requires that all federal projects that are administered directly by federal agencies be governed by FAR. However, FAR does not apply to federal-aid projects such as highway and bridge construction and clean water projects.

The agreement addresses the new employment eligibility and verification regulations, compliance with business and ethics rules, federal Prompt Pay Act requirements, stop work orders, and other items.

The IRS has set the optional 2010 standard mileage rate at 50¢ per mile for owned or leased autos (including vans, pickups, and panel trucks) for business travel. That’s a 5¢ decline from the 55¢ rate that was in effect for 2009. The IRS says that the decline reflects the generally lower transportation costs compared to 2009.

The standard mileage rate is used to calculate the deduction for business use of a car. The deduction, which is calculated by multiplying the number of business miles driven by the appropriate rate, covers expenses related to the cost of owning a vehicle (e.g., depreciation) as well as operating costs such as maintenance, repairs, insurance, and gas. Parking fees and tolls connected to business driving, though, can still be claimed as separate deductions. Taxpayers can opt out of using the standard mileage rate and instead deduct their actual expenses.

The Standard Mileage Rate Has Advantages

The standard mileage rate offers taxpayers several advantages. For example, the taxpayer doesn’t have to keep a record of actual expenses or save receipts. Instead, the only requirement is that the taxpayer maintains a record of the time, place, business purpose, and number of miles traveled. In addition, if auto expenses are deducted via the mileage rate, the auto is not subject to the tax code’s depreciation dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.

Beginning January 1, 2010, the standard mileage rate for the use of an automobile in connection with a move that qualifies for the moving expense deduction is 16.5¢ a mile, 7.5¢ lower than the rate for 2009. The mileage rate for driving a car for charitable purposes remains unchanged for 2010 at 14¢ per mile. This rate is set by law and is not adjusted for inflation.

“The standard mileage rate is used to calculate the deduction for business use of a car.”

The slowdown in many areas of the construction industry and the economic turmoil that shook the financial markets in late fall have affected contractors in numerous ways. One of the challenges contractors have faced is the tightening of standards by surety companies.

Obtaining bonding is critical, and contractors need to show their companies in the best light possible if they are to get the bonding they need. You can take several steps to make your company more attractive to sureties.

Be Prepared

Take the time to carefully review for accuracy all the financial information that your surety will require. This should include information on liquidity and working capital, cash flow, work in progress, over- and underbillings, backlogs, change orders, and claims. Provide all requested documents in a timely manner.

Be Proactive

Keep the surety informed of any problems that your business may be experiencing and what steps you are taking to solve those problems. In addition, if your financial situation shows evidence of an improvement, be sure to contact the surety company with that information and provide them with an interim statement.

Focus on Accounts Receivable

A buildup in the level of accounts receivable can be a red flag to sureties. Enforce a prudent collection policy. Review older receivables regularly. Establish workout arrangements with slow-paying customers.

Convert Short-term Debt to Long-term Debt

Converting your short-term debt to long-term debt reduces your current liabilities and boosts your working capital -- a favorable development in the eyes of a bonding company.

Keep Inventory Down

Keep your inventory levels down since many sureties discount the balance sheet value of inventory. If you have significant quantities of inventory on hand at year-end, you may be able to increase your bonding capacity by breaking out the inventory’s main components and disclosing how you intend to use the inventory in the footnotes to your financial statements.

Plan Purchases Carefully

Consider leasing if your equipment needs are short term or undetermined in length. Whether you opt to buy or lease, keep your surety informed about your activities.

Reduce Overhead

Sureties like to see evidence that your company is making an effort to hold the line in expenses. Just be sure that your company’s ability to compete isn’t affected by your cost cutting.

Disclose Transactions Between Related Parties

Make sure your financial statements disclose any related-party transactions. It’s prudent to inform your surety of the nature and terms of any agreements between persons with potential conflicts of interest.

Implementing many of these strategies may require time. However, it will be time well spent if it helps your company obtain the surety bonds it needs. For more information on ways to improve your financial picture, please contact us.

“Converting your short-term debt to long-term debt reduces your current liabilities and boosts your working capital.”

Shortage of Safety Supervisors

Graduates of occupational safety and health programs are being snapped up straight out of college by companies eager to staff their safety departments. However, many graduates don’t consider careers in construction, a situation which is forcing contractors to become more aggressive in recruiting graduates and in offering competitive wage and benefit packages.

FIN 48 Delayed One Year

The Financial Accounting Standards Board (FASB) announced that it is delaying the implementation of FIN 48 by nonpublic entities for one year. FASB’s Statement of Financial Accounting Standards (SFAS) No. 109 sets forth the financial accounting and reporting standards for the effects of income taxes resulting from an entity’s activities during the current and previous tax years. FIN 48 directs how SFAS No. 109 applies by setting a threshold condition that a tax position taken by an entity must satisfy before any part of the benefit of that position may be recognized in the entity’s financial statements.

Spreading Holiday Cheer

Contractors are allowed to give their employees merchandise of nominal value -- hams and turkeys, for example -- with no negative income-tax consequences. These items are considered “de minimis” fringe benefits that don’t have to be included in the taxable compensation of the recipients if making a general distribution is seen as a means of promoting goodwill.

Do you provide tools to your employees, or do you expect your employees to provide their own? Companies that ask employees to arrive on the job with their own tools sometimes decide to reimburse their employees for the cost of the tools. Making the reimbursements under an accountable plan can provide tax benefits.

Expenses that are reimbursed under an accountable plan that meets IRS requirements are income-tax free to employees and are not subject to withholding or payroll taxes. Your company deducts the payments as a business expense. If the accountable plan requirements are not met, the reimbursements must be included in your employees’ gross wages -- and your company will incur the associated payroll tax costs.

To satisfy the accountable plan requirements, a tool allowance plan must meet all three of the following conditions:

o There must be a business connection. The reimbursed expenses must be for tools your employees need and use on the job.

o Your employees must adequately account to you for each expense within a reasonable period.

o Any amounts in excess of the substantiated expenses must be returned to your company within a reasonable period.

IRS Issues New Ruling

The IRS recently issued a new ruling on tool allowances that clarifies certain aspects of the accountable plan regulations. The IRS noted that not all tool plans are the same and that the facts of a plan should be reviewed to determine if it satisfies all of the accountable plan requirements. When implementing a tool allowance plan, employers should not simply continue to pay employees the same amount as before, splitting the amount into two portions -- one treated as wages and the other as a nontaxable reimbursement for tool expenses. This wouldn’t meet the requirements because employees would continue to receive the same gross pay, including the amount designated as a tool allowance, without regard to whether the tool expenses were (or are reasonably expected to be) incurred. In addition, employers should be careful to require that employees submit documentation of their expenses.

“Making the reimbursements under an accountable plan can provide tax benefits.”

Most contractors have experienced problems getting the final payment on a job. Sometimes the issue is quickly resolved, while other times, it can take months or even years for that last payment to come through. If you are a homebuilder or remodeling contractor, here are two key strategies that can help ensure that you receive full payment for your work.

Start with the Contract

To protect your interests, make sure your contract defines the specifics of the project and details how every phase will be handled. The contract should also outline your responsibilities when it comes to hidden defects, exclusions, unexpected work, and change orders. Similarly, it should define the owner’s responsibilities, if any, when it comes to supplying materials or performing work that could have an impact on the project’s scheduled completion date.

Reengineer Your Payment Schedule

The standard payment approach of a third as deposit, a third at the start of the job, and a third on completion exposes you to potential cash flow problems during the job and a major problem if the owner holds back the final payment because of some dispute over the work. Cash flow problems can also arise even if the payment schedule is divided into equal weekly or monthly payments.

A more effective approach may be to list all the distinct phases of the job and submit an invoice for payment when each phase is completed. For example, a custom home project might have up to 30 phases. Contractors who take this approach rarely experience cash flow problems and typically deal with a small outstanding balance at the end of a project, perhaps only 3%. A key element in making this approach work involves sending out invoices in a timely manner, generally within 24 hours after each phase is completed.

With margins on many jobs growing increasingly tight, contractors have to take steps to make sure they are paid for every aspect of their work. Applying these two strategies could help bring you closer to achieving this goal.

During times when project starts are slowing and profit margins appear to be shrinking, contractors have to examine every aspect of their operations to maximize their bottom line. Project modifications deserve close scrutiny since they can potentially reduce a contractor’s profit margin and adversely affect cash flow.

Contractors can be proactive by developing procedures to minimize both the frequency of project modifications and their impact. These suggestions may help.

Know Exactly What the Project’s Requirements Are

A good first step is to obtain clarification on any aspect of the project that may give rise to misunderstandings later on. Contractors should sort out to their satisfaction any concerns they have over language or unclear instructions in the project’s specifications before they sign a contract.

Familiarize Staff with Contract Provisions

Familiarizing field personnel with the extent of the project as detailed in the contract is another effective step that contractors can take. Supervisors should be able to identify what is and what is not included in the contract and, when necessary, know what to do to obtain approval and payment for any changes. Supervisors who do not grasp the scope and the specifics of a project can end up failing to properly process and bill for changes.

Communicate Proposed Changes to the Customer

Once changes have been requested or identified, contractors should immediately contact the customer to confirm them. If the project contract specifies notification procedures, it’s important that supervisors follow those procedures to the letter.

Ensure Fair Payment for Changes

Some contracts specify the method for pricing changes. In cases when the contract does not offer pricing guidance, contractors have to be sure to include both direct and indirect costs, such as additional project management and staff time to compile and bill the change. Most important, contractors should leave room for a profit when they are pricing changes.

Contractors who develop and implement procedures for handling project contract changes are more likely to get paid for their work. For help with developing systems and procedures to strengthen your company’s financial position, please contact us.

Types of Contract Changes

Change Orders. Typically originated by the customer, change orders modify an original contract by increasing or decreasing the project’s original scope. They commonly involve changes in design or specifications and may affect both pricing and a project’s scheduled completion date.

Extras. Additional work that is not included in the original contract can range from the simple to the complex. Extras are usually billed separately and rarely affect the original contract amount.

Back Charges. These are charges for completed work or costs incurred by one party that, under the original contract, should have been performed or incurred by the party being billed.

Disputes/Claims. Contractors sometimes claim that a customer owes an additional amount for costs associated with delays caused by the customer, errors in the original specifications, unapproved change orders, or additional work that was not anticipated or agreed to. Typically, disputes and claims take some time to settle (or litigate) and are not always resolved in the contractor’s favor.

Incentives/Penalties. Incentive clauses allow for payments to the contractor that are greater than the contract price if the contractor meets or exceeds certain specified goals. And some owners insert penalty clauses, such as a liquidated damage provision, that penalize the contractor for not meeting a completion date specified in the contract.

“Project modifications . . . can potentially reduce a contractor’s profit margin and adversely affect cash flow.”

The economic downturn has only heightened the need for contractors to look for ways to save money and increase revenues. A top-to-bottom review of your operations may reveal some surprising areas where significant savings can be found.

Manage Equipment

Use More Efficiently

Fuel is probably a major expense for you, especially if you are involved in road, bridge, and other types of heavy construction. You can reduce fuel consumption by monitoring equipment idle times and managing fuel efficiency.

Remote asset management technology uses GPS hardware attached to each piece of field equipment to send data via a server or cell tower to a desktop computer in your main office. Your office staff gets real-time data on the equipment’s precise location, run times, idle times, and speed. Armed with this information, you can see how much fuel is being used and take steps to establish procedures that reduce idling times. Reducing idle times for equipment not only saves fuel, it often translates into increased job site productivity.

Using remote asset management technology can also save money on maintenance. For example, the system can automate the process of monitoring equipment maintenance schedules and help in scheduling timely maintenance on heavy equipment. Better scheduling reduces wear and tear and helps prevent equipment breakdowns.

Charge for Every Change Order

Tracking and charging for every change order lowers your cost of doing business. For every change your customer asks for, break down the costs and present the estimate before you begin any work. For each change order, use a standardized cost template. Be sure to capture all extra costs, including:

o Additional time to process paperwork, supervise the work, and complete additional accounting

o Costs associated with the use of equipment, tools, utilities, and temporary protection, such as fencing and barricades

o Gas and oil

o Insurance

o Clean-up

Record every change order in a log created for this purpose. Change orders should be identified by serial number, subject, and date received. Obtain the signatures of all parties involved before work begins.

Improve Material Handling

You can improve productivity by reducing the unnecessary handling of materials on the job. Implementing a measurement program that allows you to determine how many times material is double handled on a job is a critical first step in this process. Once you have the data, specific situations and conditions that create a high likelihood that material, supplies, and equipment will be double handled should be easier to identify.

Consider preparing a map of your job sites and designating specific locations for storing materials where they will be safe from theft or damage. It makes sense to locate these sites as close as possible to where the bulk of the project’s work is being done and only move materials and equipment from the storage locations to places on the site where they will be used immediately.

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Our firm would be happy to work with you and help you look for ways to reduce expenses and improve revenues.

Long-term contracts can be lucrative for contractors, but sureties can be nervous about the many risks associated with such commitments. Contractors can take a variety of steps to protect their businesses and reassure sureties when assuming the risks of long-term contracts.

Subcontractor or Supplier Default

What happens to your firm and to the project if a subcontractor doesn’t pay a vendor? You waste valuable time and resources trying to sort out payment issues and terms. Joint check payments with the subcontractor are a way to reduce risk on those occasions when large amounts of construction supplies or equipment for the project must be purchased. As always, the best way to mitigate risk with subcontractors or suppliers is to perform an in-depth review of their background and their performance history. If that review identifies any red flags, then you should be very careful about working long term with them.

Rise in the Cost of Materials

The prices of timber, cement, asphalt, and other construction materials all fluctuate depending on a variety of local, national, and global market conditions. Very large contractors attempt to protect themselves from these fluctuations by hedging. Smaller contractors have fewer options and less flexibility. However, if you are a smaller contractor, you can engage in a form of hedging by agreeing to pay suppliers a locked-in price for products and materials up front. You pay the agreed-on price irrespective of whether the price of the materials rises or falls.

Outside Events

Before accepting a long-term contract, consider the project’s location. Weigh whether a proposed project’s location has the potential to create unforeseen and potentially costly problems related to oversight and control. What may initially appear to be a very profitable project may end up actually costing you money. Take a pass on a project if it is so far from your home base that you may not be able to keep adequate tabs on its progress.

“Before accepting a long-term contract, consider the project’s location.”

Towns Mandating ENERGY STAR as Code

Here’s a trend worth watching if you are a homebuilder: Some municipalities are requiring that every new home built in their communities be ENERGY STAR compliant. (ENERGY STAR is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy.) Reactions to the requirement are mixed, with some homebuilders’ associations supporting the measure and others opposing it on the grounds of cost.

Employment-tax Audits Coming Your Way

Contractors should be aware that the IRS plans to launch a new audit program targeted at federal employment-tax returns. While the IRS intends to examine all lines on the returns, it says that it will focus on fringe benefits, reimbursed expenses, the classification of workers (employee versus independent contractor), and officer compensation.

Buy New and Save Taxes

Contractors who have plans to buy a vehicle this year for business use could save taxes if they buy a new vehicle instead of a used one. The maximum first-year deduction for depreciation or Section 179 expensing for a business-use-only new luxury car purchased in 2009 is $10,960, compared to $2,960 for a used vehicle. The maximum write-off for a new light truck or van is $11,060, whereas it’s $3,060 for a used vehicle.

Contractors can take a variety of steps to minimize cost overruns, keep a project on schedule, and reduce the potential for litigation. One of the most effective is to keep detailed and timely records that cover every aspect of a project from start to finish. Here is an overview of the most important records you should keep for every project.

Project History

Recording, classifying, and saving all correspondence related to a project will allow you to follow up on a project’s history from start to finish. Set up separate files for correspondence to and from the owner, the architect, subcontractors, and so on. In addition, create separate files that relate to any changes in the initial specifications and plans.

Do not neglect to date incoming correspondence and to sign, date, and number all outgoing correspondence related to requested changes.

The same goes for any correspondence sent by fax or e-mail. A comprehensive paper trail like this can prove invaluable if any disputes should arise over change orders or payment for change orders.

Project Schedule

Typically, as the contractor, you create and deliver a schedule that outlines how your firm intends to accomplish its work within the contract performance period. Sometimes, an owner/developer creates the schedule. Either way, you have to periodically update the schedule to show your progress on the project.

A project schedule can also help you identify potential trouble spots well before they impact your bottom line. In addition, you can use the schedule to help with forecasting how best to allocate your employees and your equipment.

Detailed Job Site Log

Require your project manager or superintendent to maintain detailed daily records of the project’s progress as well as records of any specific conditions that may have a bearing on the project’s planned performance. Apart from their value as a project management tool, you can use these records to identify problems, which, if left unchecked, could threaten the progress and profitability of future projects.

Change Order Log

This is another key piece of documentation you’ll need. Creating a paper trail that is as comprehensive as possible will be helpful if any disputes arise.

Records of Meetings

By scheduling regular meetings, phone calls, and reports to your customers, you’ll be able to minimize any confusion and potential disputes. You can use this time with your customers to discuss:

o Project changes

o Change orders

o Subcontractor issues

o Zoning issues

o Environmental concerns

o Completion time frames

Minutes identify who attended a meeting, when it took place, and what was discussed or decided during the meeting. Since minutes are an important method of documenting contract performance, it’s in your interest to maintain them carefully.

Project Costs

You need a way to track project costs through every phase of the construction process and identify where costs are running over budget. An effective and efficient cost accounting system that allows you to track all direct and indirect costs related to each project is the best way to achieve this goal.

Some of the more common breakdowns of work activities include trade/specialties, phases, or activities noted in the project schedule. Costs should be identified by type (materials, labor, equipment, subcontracted labor, etc.). Keeping your accounting records up to date as a project progresses will give you the financial information you need to make decisions.

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If you would like some assistance in developing the systems and the procedures that allow you to maximize your resources, please contact us.

“A project schedule can also help you identify potential trouble spots well before they impact your bottom line.”

Many contractors recognize that they need to spend time thinking about the big picture -- the growth, direction, and management of their companies. Unfortunately, they are either too caught up in the day-to-day work of running their businesses or too uncertain about their strategic planning skills to give important issues the attention they deserve.

If you find yourself in a similar position, perhaps you need some outside help.

The insights and perspectives of a group of individuals not directly involved in the day-to-day operations of your business can help you see things in a different light. These “outsiders” can offer valuable advice on a range of important issues. You may want to look into tapping the expertise of a semi-formal group of advisors or an advisory board of directors.

Sources of Help

You can use your own contacts in the community or ask for the assistance of professional advisors when seeking the names of suitable potential candidates for your board. Very often, the best candidates can be found among members of your local business community, successful professionals, community leaders, entrepreneurs, and academics.

Types of Advice

Only you know what issues are significant for the long-term financial health of your contracting firm. Still, an advisory board should be able to help you with a strategic business plan, an analysis of your management team’s strengths and weaknesses, and the identification of any improvements that should be made to your overall operational systems. An effective board can help you streamline business standards and procedures as well as assist you with issues related to compensation, best practices, budget planning, cash flow, and overhead.

As experienced financial professionals with a strong understanding of business and the construction industry, we’re prepared to help you position your firm for success. Please call us for advice and assistance.

“You may want to look into tapping the expertise of a semi-formal group of advisors or an advisory board of directors.”

Congress and the administration have put into place a comprehensive economic stimulus plan in an attempt to revitalize the economy. Several spending provisions of the American Recovery and Reinvestment Act of 2009 (the Act) will have a direct impact on many sectors of the construction industry. The Act also contains a number of tax-related provisions that may be of benefit to contractors. Here’s an overview of some of the new law’s major provisions.

Construction Spending

The overall package contains over $140 billion in spending for a variety of construction programs. Transportation infrastructure, which includes highway and bridge construction, high-speed rail corridors, and transit funding, is slated to receive $49.3 billion. Building infrastructure will receive $29.6 billion for projects that include Veterans Administration medical facilities; public housing; and military construction, operations, and maintenance. Energy and technology projects, such as the expansion of the electricity grid and the weatherization assistance program, are in line to receive $29.8 billion. The bill also sets aside $21.4 billion for water and environmental infrastructure.

Bonus Depreciation and Section 179 Expensing

A provision allowing a first-year depreciation “bonus” equal to 50% of the cost (technically, the “adjusted basis”) of qualified new business assets has been extended for a year, generally for property placed in service through 2009.

In addition, under the Act, the dollar limit on asset purchases eligible for Section 179 expensing is $250,000 for the 2009 tax year, extending the same limit that applied for 2008. The $250,000 deduction maximum is reduced to the extent the cost of qualifying property placed in service during the taxable year is greater than $800,000.

Net Operating Losses

Eligible small businesses with net operating losses (NOLs) for a taxable year ending in 2008 (or, at the taxpayer’s option, a taxable year beginning in 2008) may elect to increase the usual two-year carryback period to as many as five years. Carrying back an NOL to an earlier tax year may result in a refund of taxes paid for that year.

Renewable Energy Provisions

The Act provides business and individual taxpayers with several tax incentives for producing and conserving energy from renewable sources. For example, the $4,000 cap on the 30% business energy tax credit for certain small wind energy property is repealed.

Estimated Taxes

The new law temporarily eases the estimated tax requirement for individuals who received the majority of their 2008 income from a small business and whose adjusted gross income was less than $500,000 ($250,000 if married filing separately). For 2009, qualifying individuals may pay estimated tax of 90% (versus 100% or 110%) of the tax liability shown on their 2008 tax return.

Encouraging New Hiring

The new law also expands the Work Opportunity Tax Credit available to employers that hire members of certain targeted groups by adding new targeted groups (unemployed veterans and disconnected youth). The amount of the credit available to an employer is determined by the amount of qualified first-year wages paid by the employer.

“The overall package contains over $140 billion in spending for . . . construction programs.”

A growing number of private and corporate clients are insisting that contractors construct their buildings using a combination of recycled and environmentally friendly new materials.

Savvy contractors need to find ways to incorporate sustainable building practices and products into their business models. A good first step is to understand how and why certain materials and products are certified “green.”

“Green” Certification

Construction-related products and materials are certified as environmentally friendly in three ways:

o First-party certification involves manufacturers certifying that their products meet certain environmental criteria.

o Second-party certification means that a trade association or other organization certifies products as meeting “green” standards.

o Third-party certification entails unbiased, independent laboratory testing of products or a detailed analysis of manufacturers’ claims that cannot be verified through testing to ensure the products are objectively considered to be environmentally friendly.

Contractors should focus on third-party certification when selecting products and materials to use in their projects. It is considered the most thorough and rigorous of the three certification methods. Most contractors are already familiar with ENERGY STAR -- a joint program between the EPA and the U.S. Department of Energy -- which certifies as energy efficient a range of products and materials. However, contractors should also familiarize themselves with other third-party certifiers, such as the Forest Stewardship Council, which certifies wood products as being harvested from sustainably managed forests. In addition, Scientific Certification Systems (SCS) offers rigorous evaluation and certification services to numerous manufacturers. SCS certifies a wide range of construction materials for recycled content and their impact on indoor air quality.

Become LEED Certified

Contractors that incorporate certifiably “green” products and materials in their projects can earn credits toward being approved by the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED). An increasing number of property owners and developers are requiring this certification from their construction contractors.

LEED certification is granted to contractors for meeting standards in one or more of six different categories: innovation in design, sustainable sites, water efficiency, energy and atmosphere, indoor environmental quality, and materials and resources.

More IRS Audits

A recent report from the Government Accountability Office reveals that for its 2008 fiscal year, the IRS increased its audits of high-income taxpayers by close to 16%. Audits of small businesses increased by 3%.

Less Information Required on Davis-Bacon Payroll Records

Contractors covered by the Davis-Bacon and Related Acts will no longer have to include employees’ home addresses and Social Security numbers on weekly certified payroll records submitted to contracting agencies or to the federal Department of Labor’s (DOL’s) Wage and Hour Division. The change to the prior requirement was driven by the DOL’s stated intention to “better protect the personal privacy” of individuals involved in covered construction projects.

Study Finds Retrofits Deliver Big Energy Savings

Twenty-one percent of the energy consumed each year in the U.S. is spent on operating and maintaining homes, according to federal energy officials. A recent study conducted for the California Homebuilding Foundation found that spending $10,000 retrofitting a 1960s home could save 8.5 tons of carbon emissions.

The Environmental Protection Agency (EPA) has proposed tighter controls on storm-water discharges on construction sites. If adopted, these proposed standards may end up costing the construction industry in excess of $2 billion annually to monitor and chemically treat and filter storm-water runoff from construction sites, according to an industry group.

The Problem

The EPA says that it wants to strengthen existing regulatory programs for discharges from construction sites. The agency has stated that improper control of storm-water discharges from construction activity is “among the many contributors of sediment which is one of the major remaining water quality problems throughout the United States.” The EPA notes that storm-water discharges during the clearing, excavating, and grading of construction sites can cause a range of physical, chemical, and biological impacts on lakes, streams, and rivers.

What the Guidelines Propose

Current regulations require contractors to implement control measures to manage discharges associated with construction activities. The proposed standards, known as effluent limitation guidelines (ELGs) and new source performance standards (NSPSs), would establish a technology-based “floor,” or minimum requirements that contractors would have to meet in order to obtain the required construction permits. Under the proposed ELGs, storm-water discharges from construction and development sites would have to meet a numeric effluent limit designed to reduce the amount of sediment, turbidity, total suspended solids, and other pollutants in discharges from the sites.

The proposed regulations are designed to supplement existing state and local programs that seek to impose limits on pollutants in storm-water discharges.

Costs to the Construction Industry

The EPA states that, if implemented, these standards would cost the construction industry close to $2 billion annually. Construction industry groups argue that the real cost of the new standards would be significantly higher. Experts with the Associated General Contractors of America estimate that the new rules would cost site operators approximately $20,000 per acre for compliance.

If you provide a 401(k) or other defined contribution retirement plan for your employees, you are probably now dealing with a variety of unanticipated issues as a result of the downturn in the economy. Can you, for example, still afford to match some or all of your employees’ plan contributions? Does offering a benefit like a retirement plan still make sense?

What’s more, the severe decline in investment values may have rattled your employees who participate in the plan. Your employees may be asking you about losses in their plan accounts and what they should do next -- even whether they should continue to participate in the plan. Other employees may be worried about what will happen to their retirement savings if the financial firms managing their plan investments fail.

These are all difficult questions. However, the following points may help you in your decision making.

Continue Offering a Retirement Plan?

The reality is that only you can determine what adjustments, if any, you may need to make to your benefit structure after looking closely at your financials. However, odds are that a key reason you offer a retirement plan to your employees is that you believe the benefit helps your company attract and keep the most qualified and competent employees. In addition, your retirement plan provides significant tax benefits. Those tax advantages have not changed. And keeping the best and most motivated employees working for your company is probably more crucial to your company’s financial health during a recession than it is when the economy is strong.

Maintain, Reduce, or Eliminate the Match?

Matching contributions have been shown to increase plan participation rates. Obviously, your decision whether to continue offering a match will depend on your company’s financial health. Your need to conserve cash may force you to take an action you’d prefer not to. Still, your employees are likely to understand the situation if you explain why you plan on reducing or suspending the match.

Be aware that you’ll have to meet certain regulatory requirements before you can suspend or eliminate a match. In addition, there may be other restrictions related to the pension law’s nondiscrimination and safe harbor rules. So proceed with caution if you choose to take this road.

Answering Employees’ Questions

Employees with questions about their retirement accounts should be encouraged to access the plan’s website and to read plan-provided investment education materials. These sources may be sufficient to answer many of your employees’ questions. Key points that may be relevant in this environment include the following.

Investment losses: Plan participants should be aware that their losses are only paper losses until they decide to sell (or redeem) their shares. If participants plan on making changes in their portfolios, they should determine if the changes make sense in light of their investing time horizons, overall financial goals, and their tolerances for investment risk.

Volatility: Stocks rise and fall in value every single trading day. These price movements, known as volatility, can become extreme under certain circumstances. The conditions of the last several months have created apprehension among investors and that, in turn, has produced extreme downward volatility in stock prices. Historically, however, the long-term direction of the stock market has been upward. (Past performance does not predict or guarantee future results.)

Safety of plan assets: Your employees need to understand that you -- the employer -- and the financial firm(s) acting as custodian, managing and investing their retirement savings, are not permitted to commingle participant plan assets with your own accounts. The assets of a qualified retirement plan are legally held in a trust, separate and apart from the assets of the employer sponsoring the plan. These assets must be used solely to benefit plan participants and beneficiaries.

Determining the best direction forward during this challenging period may require the input of outside advisors. We would be happy to help your firm look for ways to maximize your financial resources.

“The assets of a qualified retirement plan are legally held in a trust, separate and apart from the assets of the employer sponsoring the plan.”

Takeover work can be a good opportunity, but there are several issues that contractors should examine before agreeing to step in and complete a project. If a takeover project has been offered to your firm, here are some things you’ll want to investigate.

Background of the Dispute

Find out why the owner and the original contractor parted ways. Was it for cause? If so, can you avoid the same issue? Did the owner have difficulties paying the contractor on time? If this was the case, can you say for sure that it will be different for you if you take on the project? Obviously, you don’t want to commit your resources to a takeover project only to end up waiting a long time to get paid. One possible way to avoid late payment issues is to insist on a retainer up front or regular payments for completed work, on a weekly basis, for example.

Current Status of the Work in Progress

A careful inspection of the worksite conditions, the worksite’s access and egress, and the quality of the work performed so far can help you estimate expenses and how much profit you are likely to make on the work.

Adequacy of Current Insurance Policies

Contact your insurance agent for confirmation that your current policies include coverage for takeover work. Walk away from the project if you don’t have or can’t obtain coverage since the financial risks would be too high.

Willingness of Subcontractors To Stay on the Job

Clarify before accepting a takeover job whether some, all, or none of the subcontractors will be staying on the job. Some subcontractors might be reluctant to continue working if the original contractor failed to pay them for the work they’d already performed. If that’s the case, it might be necessary for the owner to step in and pay the subcontractors what they are owed. If the subs have been paid on time, inspect their work to be sure that it meets your standards. Then, you can ask them to stay on if you wish.

Takeover work can be profitable. However, be sure to seek input from your professional advisors regarding due diligence before you agree to take over an existing project. We’d be happy to help you in any way we can.

“Find out why the owner and the original contractor parted ways.”

New Draft Crane and Derrick Rules

The U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA) recently issued proposed regulations for cranes and derricks. The proposed rules focus on key crane safety issues -- ground conditions, the assembly and disassembly of cranes, the operation of cranes near power lines, the inspection procedures for cranes, the use of safety devices and signals, and the training and certification of crane operators.

Electronic Filing Required

Contractors with 25 or more trucks, tractors, or other heavy vehicles used on highways must now file their excise tax, Form 2290 (Heavy Highway Vehicle Use Tax Return), electronically with the IRS. Contractors can choose to file Forms 720 (Quarterly Federal Excise Tax Return) and 8849 (Claim for Refund of Excise Taxes) electronically also.

Increases Expected in Federal Highway Spending

Industry observers are speculating that state and local governments facing serious fiscal problems in 2009 may defer transportation investments to meet budgets. However, federal spending may blunt the impact of any such cutbacks. Congress increased federal highway funds in 2008 by 5.5% over 2007’s number by allocating $41.2 billion in spending. In addition, the recently enacted American Recovery & Reinvestment Tax Act of 2009 makes infrastructure spending one of its priorities.

Sureties, banks, and other creditors measure your business’s financial strength by reviewing financial trends and numerical relationships using the information presented on your financial statements. To do this, they typically calculate a variety of financial ratios. Comparing ratios from current periods to ratios from prior periods and to industry standards provides insight into your company’s financial health and the potential risk of extending or guaranteeing credit.

Reviewing your firm’s financial ratios with us on a regular basis can help you better manage your company’s finances. Some of the ratios that can be important include:

o Profitability ratios, such as gross profit margin, return on assets, and return on equity. These ratios show how effectively your company is using its resources and curtailing costs to produce profits.

o Liquidity ratios, such as the current ratio. Liquidity ratios measure your firm’s ability to pay off short-term obligations as they become due.

o Underbilling ratios, such as the underbillings to equity ratio. This ratio measures the percentage of your company’s net worth represented by work performed but not yet billed. A ratio greater than 20% is considered unusual and would be a cause for concern. The underbillings to working capital ratio reveals the percentage of your working capital that is composed of underbillings.

o Backlog ratios indicate how long it will take to complete work under contract (number of months in backlog) and the remaining gross profit not yet earned on contracts that haven’t been completed (backlog gross profit).

o Asset utilization ratios measure the efficiency of your company’s use of its assets. For example, your fixed asset ratio will show to what extent fixed assets make up your company’s equity. If the percentage seems too high, creditors and sureties may regard your company’s investment in fixed assets as excessive.

o Debt utilization ratios allow you to measure your company’s liabilities in relation to its asset base and earnings ability. For example, if your company has a high debt-to-equity ratio, it means that your company is financing its assets using a large amount of borrowed funds.

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Financial ratios can give you a snapshot of your company’s fiscal health. They can also help you identify potential problems that may require you to take corrective measures. Please contact us for assistance in analyzing your company’s financial statements and tracking key ratios.

Financial Ratios

The Ratio How It’s Calculated What It Means

Current Ratio Current Assets ÷ Will current assets be enough
Current Liabilities to meet current liabilities?

Return on Equity Net Earnings Are your assets effectively
(before income taxes) ÷ generating profits?
Total Net Worth

Equity to Total Net Worth ÷ Are your overhead expenses
Overhead General & Administrative appropriate for the size of
Expenses your company?

Gross Profit (Net Sales – Cost of What’s the difference between
Margin Goods Sold) ÷ Sales revenues and cost of sales?
Is it enough to meet selling
and administrative expenses?

Debt-to-Equity Total Liabilities ÷ How heavily is your company
Stockholders’ Equity leveraged?
(or Net Worth)

Fixed Asset Ratio Net Fixed Assets ÷ Does your business have
Total Net Worth enough liquid funds for
current operations?

Return on Assets Net Earnings Are your assets being used
(before income taxes) ÷ effectively to generate
Average Total Assets profits?

Backlog to Average Backlog in Dollars How much accumulated
Working Capital ÷ (Current Assets – committed work do you have in
Current Liabilities) relation to working capital?

Outsourcing work to independent contractors is probably more common in construction than in many other industries. After all, bringing in qualified independent contractors to handle various aspects of a project with tight deadlines makes perfect sense. It also makes financial sense.

Know the Ground Rules

However, don’t let the financial advantages of hiring independent contractors blind you to the need to consistently treat them as independent contractors. You must familiarize yourself with the factors that the IRS uses to help differentiate an independent contractor from an employee.

If you misclassify an employee as an independent contractor, the IRS will seek unpaid payroll taxes, and possibly penalties and interest on that amount, from your firm. And you could be forced to provide the worker with the same benefits you provide for your employees.

What the IRS Looks At

The IRS reviews a wide range of common law factors in determining whether a worker is an employee or an independent contractor. Depending on the circumstances, these factors include:

Behavioral control. Independent contractors are not under the direct supervision and control of company personnel and do not receive detailed instructions about how work is to be performed. All of the following are examples of such instructions:

o When and where to do the work

o What tools or equipment to use (Independent contractors furnish their own tools and equipment.)

o What workers to hire to assist with the work

o Where to purchase supplies and services

o What work must be performed by a specified individual

o What order or sequence to follow

Even if no instructions are given, behavioral control may exist if the business has the right to control how the work is performed. In addition, the issue of training is weighed by the IRS. Independent contractors do not receive company-provided training about procedures to be followed and methods to be used in performing a task.

Financial control. The facts that determine whether a business has the right to control the business aspects of a worker’s job include:

o The extent to which the worker has unreimbursed business expenses (Independent contractors typically pay their own business and travel expenses.)

o The extent of the worker’s investment

o The extent to which the worker makes services available to others

o How the business pays the worker (Independent contractors are usually paid separately by project.)

o The extent to which the worker has the opportunity to realize a profit or loss (Independent contractors may realize a profit or suffer a loss while performing contracted services.)

Relationship of the parties. A review of certain factors can illustrate the nature of the relationship:

o Written contracts that describe the relationship the parties intend to create

o Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay

o The permanency of the relationship (The independent contractor’s services are typically for separate and distinct projects; however, employees also may be hired on a seasonal or project basis.)

o The extent to which services performed by the worker is a key aspect of the company’s regular business

If a worker is hired with the expectation that the relationship is for more than a specific period or project, then the IRS will consider this factor as evidence of an employer-employee relationship.

If you need help in ensuring that your firm correctly classifies independent contractors, please contact us.

A Presidential Executive Order issued last year requires contractors who perform work for the federal government to verify their employees’ eligibility to legally work in the United States using the U.S. Citizenship and Immigration Services’ E-Verify system. The new rule was originally scheduled to take effect on January 15, 2009. However, implementation of the rule has been delayed until May 21, 2009.

E-Verify

E-Verify is a free Internet-based system operated by the Department of Homeland Security in partnership with the Social Security Administration that allows participating employers to electronically verify the employment eligibility of their existing employees and new hires. The federal government says that the new rule virtually eliminates Social Security mismatch letters, improves the accuracy of wage and tax reporting, protects jobs for authorized U.S. workers, and helps employers maintain a legal workforce.

Under the new rule, contractors awarded a prime federal contract must use E-Verify on projects with a period of performance longer than 120 days and a value above $100,000. The requirement to use E-Verify also applies to subcontracts in situations where the prime contract contains the E-Verify requirement and the subcontract for services or construction has a value greater than $3,000. Any company awarded an applicable federal government contract will be required to enroll in E-Verify within 30 days of the contract award date and begin using the system to ensure their employees’ legal status.

During fiscal year 2008, employers participating voluntarily in E-Verify made more than 6.6 million employment verification inquiries. Less than 4% of the individuals whose information was submitted to E-Verify were found to be ineligible to work legally in the U.S. Individuals who are not immediately cleared by E-Verify have the opportunity to correct their government records in order to confirm their work eligibility.

The use of the E-Verify system is under review by the current administration. At press time, no changes have been announced.

“. . . the new rule virtually eliminates Social Security mismatch letters . . . .”

The slowdown in many areas of the construction industry and the economic turmoil that shook the financial markets in late fall have affected contractors in numerous ways. One of the challenges contractors have faced is the tightening of standards by surety companies.

Obtaining bonding is critical, and contractors need to show their companies in the best light possible if they are to get the bonding they need. You can take several steps to make your company more attractive to sureties.

Be Prepared

Take the time to carefully review for accuracy all the financial information that your surety will require. This should include information on liquidity and working capital, cash flow, work in progress, over- and underbillings, backlogs, change orders, and claims. Provide all requested documents in a timely manner.

Be Proactive

Keep the surety informed of any problems that your business may be experiencing and what steps you are taking to solve those problems. In addition, if your financial situation shows evidence of an improvement, be sure to contact the surety company with that information and provide them with an interim statement.

Focus on Accounts Receivable

A buildup in the level of accounts receivable can be a red flag to sureties. Enforce a prudent collection policy. Review older receivables regularly. Establish workout arrangements with slow-paying customers.

Convert Short-term Debt to Long-term Debt

Converting your short-term debt to long-term debt reduces your current liabilities and boosts your working capital -- a favorable development in the eyes of a bonding company.

Keep Inventory Down

Keep your inventory levels down since many sureties discount the balance sheet value of inventory. If you have significant quantities of inventory on hand at year-end, you may be able to increase your bonding capacity by breaking out the inventory’s main components and disclosing how you intend to use the inventory in the footnotes to your financial statements.

Plan Purchases Carefully

Consider leasing if your equipment needs are short term or undetermined in length. Whether you opt to buy or lease, keep your surety informed about your activities.

Reduce Overhead

Sureties like to see evidence that your company is making an effort to hold the line in expenses. Just be sure that your company’s ability to compete isn’t affected by your cost cutting.

Disclose Transactions Between Related Parties

Make sure your financial statements disclose any related-party transactions. It’s prudent to inform your surety of the nature and terms of any agreements between persons with potential conflicts of interest.

Implementing many of these strategies may require time. However, it will be time well spent if it helps your company obtain the surety bonds it needs. For more information on ways to improve your financial picture, please contact us.

“Converting your short-term debt to long-term debt reduces your current liabilities and boosts your working capital.”

Shortage of Safety Supervisors

Graduates of occupational safety and health programs are being snapped up straight out of college by companies eager to staff their safety departments. However, many graduates don’t consider careers in construction, a situation which is forcing contractors to become more aggressive in recruiting graduates and in offering competitive wage and benefit packages.

FIN 48 Delayed One Year

The Financial Accounting Standards Board (FASB) announced that it is delaying the implementation of FIN 48 by nonpublic entities for one year. FASB’s Statement of Financial Accounting Standards (SFAS) No. 109 sets forth the financial accounting and reporting standards for the effects of income taxes resulting from an entity’s activities during the current and previous tax years. FIN 48 directs how SFAS No. 109 applies by setting a threshold condition that a tax position taken by an entity must satisfy before any part of the benefit of that position may be recognized in the entity’s financial statements.

Spreading Holiday Cheer

Contractors are allowed to give their employees merchandise of nominal value -- hams and turkeys, for example -- with no negative income-tax consequences. These items are considered “de minimis” fringe benefits that don’t have to be included in the taxable compensation of the recipients if making a general distribution is seen as a means of promoting goodwill.

Do you provide tools to your employees, or do you expect your employees to provide their own? Companies that ask employees to arrive on the job with their own tools sometimes decide to reimburse their employees for the cost of the tools. Making the reimbursements under an accountable plan can provide tax benefits.

Expenses that are reimbursed under an accountable plan that meets IRS requirements are income-tax free to employees and are not subject to withholding or payroll taxes. Your company deducts the payments as a business expense. If the accountable plan requirements are not met, the reimbursements must be included in your employees’ gross wages -- and your company will incur the associated payroll tax costs.

To satisfy the accountable plan requirements, a tool allowance plan must meet all three of the following conditions:

o There must be a business connection. The reimbursed expenses must be for tools your employees need and use on the job.

o Your employees must adequately account to you for each expense within a reasonable period.

o Any amounts in excess of the substantiated expenses must be returned to your company within a reasonable period.

IRS Issues New Ruling

The IRS recently issued a new ruling on tool allowances that clarifies certain aspects of the accountable plan regulations. The IRS noted that not all tool plans are the same and that the facts of a plan should be reviewed to determine if it satisfies all of the accountable plan requirements. When implementing a tool allowance plan, employers should not simply continue to pay employees the same amount as before, splitting the amount into two portions -- one treated as wages and the other as a nontaxable reimbursement for tool expenses. This wouldn’t meet the requirements because employees would continue to receive the same gross pay, including the amount designated as a tool allowance, without regard to whether the tool expenses were (or are reasonably expected to be) incurred. In addition, employers should be careful to require that employees submit documentation of their expenses.

“Making the reimbursements under an accountable plan can provide tax benefits.”

Most contractors have experienced problems getting the final payment on a job. Sometimes the issue is quickly resolved, while other times, it can take months or even years for that last payment to come through. If you are a homebuilder or remodeling contractor, here are two key strategies that can help ensure that you receive full payment for your work.

Start with the Contract

To protect your interests, make sure your contract defines the specifics of the project and details how every phase will be handled. The contract should also outline your responsibilities when it comes to hidden defects, exclusions, unexpected work, and change orders. Similarly, it should define the owner’s responsibilities, if any, when it comes to supplying materials or performing work that could have an impact on the project’s scheduled completion date.

Reengineer Your Payment Schedule

The standard payment approach of a third as deposit, a third at the start of the job, and a third on completion exposes you to potential cash flow problems during the job and a major problem if the owner holds back the final payment because of some dispute over the work. Cash flow problems can also arise even if the payment schedule is divided into equal weekly or monthly payments.

A more effective approach may be to list all the distinct phases of the job and submit an invoice for payment when each phase is completed. For example, a custom home project might have up to 30 phases. Contractors who take this approach rarely experience cash flow problems and typically deal with a small outstanding balance at the end of a project, perhaps only 3%. A key element in making this approach work involves sending out invoices in a timely manner, generally within 24 hours after each phase is completed.

With margins on many jobs growing increasingly tight, contractors have to take steps to make sure they are paid for every aspect of their work. Applying these two strategies could help bring you closer to achieving this goal.

During times when project starts are slowing and profit margins appear to be shrinking, contractors have to examine every aspect of their operations to maximize their bottom line. Project modifications deserve close scrutiny since they can potentially reduce a contractor’s profit margin and adversely affect cash flow.

Contractors can be proactive by developing procedures to minimize both the frequency of project modifications and their impact. These suggestions may help.

Know Exactly What the Project’s Requirements Are

A good first step is to obtain clarification on any aspect of the project that may give rise to misunderstandings later on. Contractors should sort out to their satisfaction any concerns they have over language or unclear instructions in the project’s specifications before they sign a contract.

Familiarize Staff with Contract Provisions

Familiarizing field personnel with the extent of the project as detailed in the contract is another effective step that contractors can take. Supervisors should be able to identify what is and what is not included in the contract and, when necessary, know what to do to obtain approval and payment for any changes. Supervisors who do not grasp the scope and the specifics of a project can end up failing to properly process and bill for changes.

Communicate Proposed Changes to the Customer

Once changes have been requested or identified, contractors should immediately contact the customer to confirm them. If the project contract specifies notification procedures, it’s important that supervisors follow those procedures to the letter.

Ensure Fair Payment for Changes

Some contracts specify the method for pricing changes. In cases when the contract does not offer pricing guidance, contractors have to be sure to include both direct and indirect costs, such as additional project management and staff time to compile and bill the change. Most important, contractors should leave room for a profit when they are pricing changes.

Contractors who develop and implement procedures for handling project contract changes are more likely to get paid for their work. For help with developing systems and procedures to strengthen your company’s financial position, please contact us.

Types of Contract Changes

Change Orders. Typically originated by the customer, change orders modify an original contract by increasing or decreasing the project’s original scope. They commonly involve changes in design or specifications and may affect both pricing and a project’s scheduled completion date.

Extras. Additional work that is not included in the original contract can range from the simple to the complex. Extras are usually billed separately and rarely affect the original contract amount.

Back Charges. These are charges for completed work or costs incurred by one party that, under the original contract, should have been performed or incurred by the party being billed.

Disputes/Claims. Contractors sometimes claim that a customer owes an additional amount for costs associated with delays caused by the customer, errors in the original specifications, unapproved change orders, or additional work that was not anticipated or agreed to. Typically, disputes and claims take some time to settle (or litigate) and are not always resolved in the contractor’s favor.

Incentives/Penalties. Incentive clauses allow for payments to the contractor that are greater than the contract price if the contractor meets or exceeds certain specified goals. And some owners insert penalty clauses, such as a liquidated damage provision, that penalize the contractor for not meeting a completion date specified in the contract.

“Project modifications . . . can potentially reduce a contractor’s profit margin and adversely affect cash flow.”

Mileage Rate Increases

The optional mileage allowance for owned or leased autos increased 8¢ from 50.5¢ to 58.5¢ per mile for business travel from July 1, 2008, to December 31, 2008. The rate increase applies to the use of owned or leased autos, vans, pickups, and panel trucks. This mid-year adjustment in the 2008 standard mileage rate is part of a larger government attempt to offer taxpayers some relief from rapidly rising gas prices.

The Green Advantage

The residential green building market share is expected to almost double from 12% to 20% ($40 billion to $70 billion) of the market by 2012, according to research by McGraw-Hill Construction and the National Association of Home Builders. The report also found that 40% of homebuilders believe that building homes using green materials and processes helps them market their homes in a down market.

Minimum Wage Increases

The federal minimum wage increased to $6.55 per hour on July 24, 2008. It will increase again to $7.25 per hour on July 24, 2009.

IRS Clamps Down on Fuel Tax Credit Scams

The fuel tax credit is on the IRS’s radar screen. The agency has included unreasonable claims for the credit on its “Dirty Dozen” list of tax scams for 2008.

Contractors know that good supervisors and skilled employees can make the difference between bringing in a project on time and on budget and missing those targets. Their value to the company rises in tough economic times. How can you be sure that your business’s key employees won’t be tempted by an employment offer from a competitor? You can use a combination of common sense, pay, benefits, and nontraditional rewards to keep key employees on your team.

Respect and Autonomy

High performing employees want respect for their skills, judgment, and abilities. Since they thrive on challenges, they also want responsibility, a degree of autonomy, and freedom to work without someone constantly looking over their shoulder. Giving key employees respect and a degree of independence generally won’t cost you much, but the rewards for your firm can be substantial.

Inexpensive and Free Incentives

Many incentives are cost free. Non-monetary rewards can range from recognizing an “employee of the month” to a simple face-to-face expression of thanks for a job well done. Relatively inexpensive incentives include gift certificates, spot cash awards, and additional paid vacation days.

Incentive Compensation Plans

You can structure a plan so that the compensation can be paid currently or deferred to a later date, such as retirement. Two possible approaches are performance-based plans and discretionary incentive compensation plans.

A performance-based plan is one in which the incentive compensation can be a fixed percentage of the profits that the company or the supervisor’s division has earned. Alternatively, it can be a fixed percentage of the profit earned on an individual contract. Another variation entails paying additional compensation only when individuals achieve specific objectives.

Discretionary incentive compensation plans reward key employees whose contributions to a project or to the business are evident to owners but are difficult to measure using traditional benchmarks. This plan design gives you the latitude to reward those individuals who, in your judgment, are most valuable to your business’s success.

Only you can decide the most appropriate way to reward exceptional employees. However, in these tough economic times, retaining key employees should be a priority.

“High performing employees want respect for their skills, judgment, and abilities.”

Construction work is hard on equipment. Regular use in a wide range of conditions can wear out even the best maintained equipment and vehicles. At some point, you will have to decide whether it still makes financial sense to repair and maintain existing equipment or whether the time has come to replace it with something new.

A good way to assess the replace-versus-repair decision is by calculating the hourly cost of owning and operating your current equipment and its potential replacement. Replacing a piece of equipment typically makes sense if its hourly cost (after considering the cost of repair) exceeds the hourly cost of the potential new or used replacement equipment.

Calculating Hourly Costs

Hourly costs should be based on the same utilization projections for the current equipment and the proposed replacement. The major factors to consider in the hourly cost calculations include:

Machine value loss. This refers to the yearly loss in market value (taking into consideration tax deductions for depreciation).

Capital costs. This is the equipment’s value multiplied by your business’s weighted cost of capital, adjusted for taxes.

Miscellaneous ownership costs. These would include taxes, permits, insurance, and administrative overhead associated with the equipment, adjusted for tax benefits.

Operating costs. These include the after-tax costs of fuel, oil, repairs, and maintenance, as well as other operating costs.

Downtime costs. Using an hourly rental rate, annual downtime costs can be projected by factoring in machine availability and utilization.

Productivity differential. The difference between the machines is accounted for on an after-tax basis.

These calculations are performed for each year of the expected useful life of the current equipment. Ideally, the equipment should be replaced in the year the sum of its hourly costs exceeds the sum of these costs for the replacement.

Buying Equipment

The Economic Stimulus Act of 2008 (ESA) should prove very helpful to contractors that purchase equipment in 2008. Eligible taxpayers may elect under Section 179 of the tax code to deduct as a business expense the cost of new or used assets placed in service during the year. This “expensing election” is taken as opposed to claiming depreciation on the asset. The ESA raises the previous $128,000 expensing limit to $250,000. The overall investment limit jumps from $510,000 to $800,000. It is possible that you may be able to claim a deduction for the full cost of the equipment and machinery you place in service this year.

The ESA also allows an additional first-year depreciation deduction equal to 50% of the adjusted basis (generally, the cost) of qualifying new equipment. The adjusted basis of the equipment is then reduced by the bonus depreciation when computing regular depreciation on the equipment. This additional first-year deduction is generally available for property placed in service after December 31, 2007, and before January 1, 2009.

“Regular use in a wide range of conditions can wear out even the best maintained equipment and vehicles.”

You may be thinking about selling your construction firm at some time in the future. And you want to be certain that the proceeds from the sale of your business, as well as the other assets you have accumulated over the years, will provide financial security for you and your loved ones. You also may have concerns about how your assets may be affected by income, gift, and/or estate taxes. What, for example, would the estate-tax consequences be if you transferred your business to a child or other relative?

These are all legitimate concerns. However, careful estate planning can help you accomplish your goals and avoid many of the traps that can reduce the size of the inheritance that eventually will pass to your family and/or other beneficiaries. Here are some of the issues related to estate planning that you ought to consider.

Start with a Will

If you die without a will, you’ll have no control over what happens to your property. Rather, the state’s laws will govern the disposition of your assets. With a will, you can specify who gets what after you die, who administers your estate, and who is appointed guardian of any minor children you may have. In addition, a will may help speed up the settlement of your estate. Even if you have a will, it may need to be revised if you sell your construction firm or experience another major life event.

Have a Buy-sell Agreement

A buy-sell agreement is an effective way of ensuring the orderly transition and management of your construction firm and that surviving family members will be fairly compensated should you or a co-owner die. It is a contract between the owners of a business under which each owner agrees that, typically, on death, disability, or retirement, his or her business interest will be sold to the other owners (or to the business itself) at a price (or using a price methodology) that’s determined under the agreement. The buy-sell agreement also can be triggered under other circumstances defined in its terms, such as bankruptcy, divorce, or other legal action that could threaten an owner’s business interest. Just as importantly, the agreement should have a mechanism for providing the funds needed to make the purchase.

Maintain Adequate Life Insurance

Life insurance is often a key component of an effective estate plan. It can provide the funds necessary to pay a variety of expenses and meet your family’s ongoing cash flow needs following your death. Life insurance can also be used in conjunction with a buy-sell agreement to fund the purchase of a deceased business owner’s shares, providing liquidity to the owner’s family.

Create a Plan

You may want your children or other family members to take over your business. You can accomplish this goal more effectively through careful planning. A good plan should examine how your business interest will be acquired by the younger generation and how that acquisition will be financed. Moreover, a carefully considered succession plan should seek to protect the company’s value and its ability to compete. It should also help minimize your estate taxes.

You can capitalize on what’s known as the “federal gift-tax annual exclusion” by giving your children company stock over time. Every year, you can give cash or other assets worth up to $12,000 -- per recipient -- without any federal gift-tax consequences by using the gift-tax annual exclusion. Your spouse can do the same. Or, with a gift-splitting election, a gift can come from one of you and be as much as $24,000 by using both of your gift-tax annual exclusions.

Use Trusts for Tax Savings

You can leave everything to your spouse and your estate generally won’t have to pay federal estate taxes, thanks to the federal unlimited estate-tax marital deduction provisions. However, assets that remain in your spouse’s estate when he or she dies could be subject to federal estate tax if those assets exceed the applicable exemption amount for federal estate-tax purposes.

Trusts can help you reduce taxes and accomplish other, equally important objectives. Trusts can also:

o Provide asset management and protection

o Unify an estate plan

o Help avoid probate

o Ensure the future financial security of surviving family members

o Meet charitable giving and philanthropic planning goals

Get Expert Advice

You can protect what you own from unnecessary taxes and ensure your loved ones’ future financial security. Professional advice is critical. Talk to us.

“Trusts can help you reduce taxes and accomplish other, equally important objectives.”

The standard practice in construction is to pay someone to haul away the waste construction and demolition materials that are typically generated on every job. Most contractors regard the disposal of concrete, wood, asphalt pavement, asphalt shingles, drywall, and metal as simply a cost of doing business.

Going the Recycling Route

However, some savvy contractors are recycling waste construction materials on site and reaping some serious rewards. It’s a win-win situation all around. Contractors may be able to reduce their waste disposal costs since some recyclers charge less to accept materials that can be profitably recycled. Recycling also keeps these materials out of landfills. Just as important, contractors will be able to attain points toward the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification for their recycling efforts. (LEED certification is granted during the construction phase for using recycled materials (or those with recycled content) or recycling construction waste. An increasing number of owners are requiring this certification from their construction contractors.)

Getting Started

Start by contacting local and state agencies in charge of recycling waste. They’ll be able to tell you what’s recyclable and what’s not. Currently, most construction waste can be recycled, but facilities may vary by state and region. Concrete, for example, is widely recycled as road base, general fill for drainage, and for pavement aggregate. Recycled asphalt shingles can be used as aggregate for new asphalt hot mixes. Drywall can be ground up and reused for gypsum wallboard and in the manufacturing of cement.

Local and state agencies can also give you contact numbers for local recyclers. Certain recyclers accept mixed loads of materials and sort the debris out themselves. If your projects generate significant amounts of construction debris, it may even be economical to recycle on site. Homebuilders, for instance, can grind up clean wood, drywall, and cardboard for use as a soil amendment.

You can find out more by going to the U.S. Environmental Protection Agency’s Construction and Demolition (C&D) Materials website at www.epa.gov/epaoswer/non-hw/debris-new/index.htm.

The recently enacted Economic Stimulus Act of 2008 (ESA) contains several provisions that are beneficial for contractors. In particular, ESA helps contractors that are planning to purchase equipment by raising the Section 179 expensing and investment limits. In addition, ESA provides for a bonus first-year allowance that will help contractors depreciate more of the cost of a business asset in the year it is placed in service.

Increase in Section 179 Expensing

A contractor that buys machinery, equipment, trucks, and other qualifying assets can elect under Section 179 of the tax code to expense (deduct immediately, rather than depreciate over several years) the cost of the property purchased and placed in service during the tax year, up to a specified dollar limit. The maximum expensing amount is phased out, dollar-for-dollar, once the cost of the qualifying property placed in service during the tax year exceeds a specified amount. Moreover, the amount that can be expensed can’t be greater than the taxpayer’s taxable trade or business income.

ESA increases the limits applicable to the Section 179 expensing election for the 2008 tax year only. For property placed in service in tax years beginning in 2008, ESA raises the $128,000 expensing limit to $250,000. The overall investment limit jumps from $510,000 to $800,000. As a result of these increases, many small and medium-sized contractors may be able to claim a deduction for the full cost of the equipment and machinery they place in service this year.

Example: M Paving Company, with 2008 taxable income of $300,000 (not considering the expensing deduction), buys and places in service during the year new equipment costing $220,000. Under the Economic Stimulus Act of 2008, the full $220,000 purchase price of the equipment can be deducted for 2008 tax purposes.

Bonus First-year Depreciation

The new law also provides another incentive for the purchase of business-related assets. Taxpayers can claim an additional first-year depreciation deduction equal to 50% of the adjusted basis of qualifying property (generally, new business property rather than real estate). The adjusted basis of the property is then reduced by the bonus depreciation when computing regular depreciation on the property. This additional deduction is generally available for property acquired after December 31, 2007, and before January 1, 2009.

Example: LJM Construction Corporation, a calendar-year taxpayer, bought $1 million of machinery with a five-year life under the tax law’s depreciation rules. Under the prior law, the first-year depreciation on the machinery would have been $200,000 (20%). Thanks to ESA, LJM Construction can deduct first-year depreciation of $600,000 (i.e., 50% of $1 million bonus depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis ($100,000)).

Call Us

The latest changes in the tax law may present opportunities for your firm. Please contact us to discuss your company’s situation.

“. . . ESA helps contractors that are planning to purchase equipment . . . .”

Close management of overhead costs is absolutely critical in today’s business climate. Failure to track all costs and to allocate them to individual projects where appropriate makes it harder to measure profitability and to prepare accurate bids. By tracking and controlling overhead, you can maximize profits for your contracting firm and put your business in a stronger position to weather the current downturn in construction.

Strategies for Managing Costs

Look for opportunities to assign costs to specific projects whenever possible. Your equipment costs -- depreciation and the expense of operating a maintenance and repair facility -- should be allocated to every job in which you use your equipment. It will help you in the bidding process if you come up with an allocation rate that’s based on the value of your equipment and then charge the cost of equipment to each job by the hour, day, or week.

Don’t overlook the costs of sending managing personnel and estimators to inspect a job site or to talk with employees. By assigning the cost of their time on such visits to a specific job, you’ll end up with a more accurate picture of your costs per job.

Indirect costs, such as corporate office expenses, staff salaries, office supplies, insurance, taxes, advertising, and marketing expenses, are generally easier to control and reduce than direct costs. Like most contractors, you likely can identify ways that you can trim the costs associated with travel and entertainment expenses, expendable vehicles and equipment, temporary staff, and certain other administrative costs.

A Target-rich Environment

Could older Americans be the silver lining in an otherwise dark cloud for homebuilders? Some builders say “yes” and point to recent research by the National Association of Homebuilders, which reveals that individuals over age 55 now make up 20.9% of all new home buyers and 24.3% of new custom home buyers. Contractors who have enjoyed success by catering to this demographic say that the key is to develop products that will be attractive to the 55+ group. Typically, that means building in locations that are close to recreational activities and medical, restaurant, and retail facilities, where the amenities are provided by the community at large.

Deduction for S Corp. Shareholders

When an S corporation picks up the cost of health coverage for a shareholder-employee who owns more than 2% of the corporation’s outstanding stock, the shareholder must include the benefit in gross income. An offsetting “above-the-line” deduction is generally available to the shareholder on his or her personal return, which ultimately results in the benefit being income-tax free. However, in 2006, the IRS said that this favorable tax treatment isn’t available to an individual who is an S corporation’s sole shareholder and employee if the insurance is purchased in the shareholder’s name. The IRS has now relaxed its position and will allow the above-the-line deduction.

Collecting, collating, and storing business and tax records can often be time consuming and tedious. Still, it’s an important task, one that contractors shouldn’t ignore or postpone. Easily accessible, organized records can help simplify and streamline numerous aspects of your business dealings and can prove invaluable when disputes arise.

Overview

Detailed records can help you handle audits or challenges from the IRS and state tax departments. During audits, the IRS may question certain deductions or credits your contracting firm has claimed. Producing the relevant paperwork that substantiates any deductions and credits you claimed is often all it takes to satisfy an IRS challenge.

In addition, good records can help your business in a variety of other situations. Employees or the Department of Labor could sue over disputed hourly rates or overtime payments. Other employees may charge discrimination relating to hiring and firing practices. Clearly, accurate and complete records can make the difference between winning and losing a dispute.

Federal acquisition regulations require contracting firms that participate in federal government contracts to retain various records for specific time periods. Details regarding these requirements are available online at www.acquisition.gov/far. In addition, OSHA, the IRS, and various state and local building departments have a number of requirements regarding the retention of records. And don’t forget that record retention requirements often are built into contracts.

IRS Requirements

The IRS says that generally you must keep your records that support an item of income or deduction on a tax return until the period of limitations for that return runs out. The period of limitations is the period of time in which you can amend a tax return to claim a credit or refund, or that the IRS can assess additional tax. Years referenced below relate to the period after the return was filed. Returns filed before the due date are treated as filed on the due date. The periods of limitations that apply to income-tax returns are:

1. You owe additional tax and situations (2), (3), and (4) do not apply to you; keep records for three years.

2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for six years.

3. You file a fraudulent return; keep records indefinitely.

4. You do not file a return; keep records indefinitely.

5. You file a claim for credit or refund after you file your return; keep records for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later.

6. You file a claim for a loss from worthless securities or a bad debt deduction; keep records for seven years.

7. Keep all employment tax records for at least four years after the date that the tax becomes due or is paid, whichever is later.

Permanent Records

You will want to retain certain business records in permanent files. These include:

o Articles of incorporation

o Stock records and corporate minutes

o Deeds and mortgages

o Depreciation schedules

o Financial statements and audit reports

o General ledger and year-end trial balances

o Licenses and permits

o Copies of filed tax returns

o Tax and legal correspondence

o Contracts and leases

o Insurance records

Other Records

It’s generally a good idea to keep certain financial records for at least seven years (unless a longer retention period is required). These include:

o Sales records

o Expense reports

o Automobile logs

o Purchase orders

o Customer and vendor invoices

o Bank statements

o Accounts payable records

o Accounts receivable records

o Payroll records

You may be able to discard certain other items. Ask us for details. And remember, these are general rules of thumb. Check with the necessary government agencies and your attorney to determine the legal requirements that may apply to your contracting firm’s business.

“Easily accessible, organized records can help simplify and streamline numerous aspects of your business dealings and can prove invaluable when disputes arise.”

How often do you communicate with your banker? Do you wait until it’s time to renew your company’s line of credit or apply for a new loan? If so, it may be time to take a fresh look at your banking relationship.

By talking to your banker regularly, you’ll find out about bank products and services that could help your contracting business grow and develop. Your banker will get to know you personally and learn more about how you operate your business. Equally important, your banker can plug you into a fairly broad network of business contacts that may turn into business opportunities for your company.

Keeping the lines of communication open and providing your banker with ongoing updates regarding your business activities and finances during good times and bad can go a long way toward helping you build a long-lasting relationship.

Provide Regular Financial Updates

At a minimum, your banker will probably want to see your company’s quarterly financial statements. However, you can go further than that by also providing interim updates on new contracts and long-term expansion plans.

High overhead expenses can be a red flag. Show your banker that your company is holding spending on selling, general, and administrative expenses to reasonable limits.

If your company carries more debt than other contractors of a similar size, you may need to put spending plans on hold until you get your debt levels under control. Or consider leasing rather than buying new equipment. If you don’t already do so, you may want to impose controls on overbillngs and underbillings. Large overbillings may signal a potential cash flow squeeze in the future, while underbillings could indicate that your company is facing some problems on one or more jobs.

Stay in Touch

Banks do not like surprises. Stay in touch during tough times as well as during good times. In general, most banks will try to help your business get past a difficult period if you keep them apprised of what’s happening at all times. For example, update your banker if your company is suffering from a cash problem because of delayed payments or lower-than-anticipated margins on one or more jobs. It’s at times like these that your efforts at cultivating a strong relationship with your banker will pay off.

“Stay in touch during tough times as well as during good times.”

Irrespective of how good or bad the construction market may be, you can be sure of one thing -- your surety provider will want to take a close look at your numbers before it will issue bonding. What it finds on your balance sheet will influence whether you’ll get competitively priced bonding or not.

Ideally, the facts presented in your financial statement will show that your firm is in good financial health. Here are some measures that are commonly used to assess the strength of the balance sheet.

Working Capital

The amount of available working capital determines your company’s ability to finance current operations. Two key measures of the adequacy of working capital are the current ratio and the quick ratio (also known as the “acid test”). The current ratio is simply the amount of current assets divided by current liabilities. Ideally, your company should try to maintain a 1.2 to 1 or better ratio of current assets to current liabilities. The quick ratio is the amount of cash, cash equivalents, and short-term receivables divided by current liabilities. This ratio predicts your company’s ability to pay its current obligations with cash. One way to increase working capital is to use long-term debt instead of cash or short-term financing for fixed asset purchases.

Getting Paid

Slow collections are a serious problem for many contractors. You should monitor the amount of your accounts receivable over 60 days and try to hold that figure to a minimum. You can calculate the average number of days accounts are outstanding by taking net accounts receivable, multiplying by 365, and dividing the result by annual revenue. You can improve the number by sending bills out for work and materials as you complete each stage of the project. Be sure each bill clearly explains what stage of the work was completed. Send reminders when the customer doesn’t pay you within an allotted time. That usually works, but if you still don’t receive payment, you may have to threaten to stop work on the project until you’re paid.

Capitalization and Debt

Too little capital and high levels of debt can also make your balance sheet look extremely unattractive to a surety. One common way to measure a company’s level of capital is the debt to equity ratio. It is calculated by taking total liabilities divided by net worth. The higher the ratio, the greater the risk creditors face.

You also have to watch underbillings. Significant underbillings could indicate that your company is facing some problems on one or more jobs. You should be prepared to explain why costs that have been incurred cannot be billed currently.

Profitability

Low profit margins on too many jobs will limit your company’s future growth. You can measure profitability by using a return on assets ratio or a return on equity ratio. The first indicates your company’s profits generated from its assets and is calculated by taking net earnings and dividing that amount by average total assets. Well-run construction firms typically derive a 10% or higher return on assets. Return on equity measures the return on money invested by the owners. You can find this number by dividing net earnings by total net worth. It’s not unreasonable to expect to have a 15% or greater return on equity.

Analysis of your company’s financial statements can provide valuable information you can use to effectively manage the firm. By paying close attention to the balance sheet items that sureties focus on most, you can put your company in a better position to obtain the bonding it needs.

“Too little capital and high levels of debt can also make your balance sheet look extremely unattractive to a surety.”

It’s no secret: Inadequate cash flow is a leading cause of financial failure. In a tough economic environment, it’s more important than ever to focus on cash flow. Adopting some of the following “best practices” can help you manage -- and enhance -- your contracting firm’s cash flow.

Prepare Cash Forecasts

Map out the way you will bill jobs before you begin work; then use that information when preparing cash flow projections. Err on the conservative side and be sure to forecast both regular expenses and those that come up infrequently, such as annual insurance premiums.

Control Spending

Keeping a lid on spending allows you to hold on to cash for those times when you really need it. Run the numbers and, if they appear compelling, look into
leasing equipment and heavy machinery rather than buying. To the extent possible, avoid job borrowing -- using overbillings on one job to finance another. Setting aside the money collected on a project to pay that project’s expenses avoids a cash squeeze down the road.

Manage Your Payables

Take advantage of creditor payment terms and time your payments to conserve cash. Don’t get too carried away, however -- you don’t want to take any actions that might negatively impact your credit rating. If you don’t already do so, use electronic funds transfer to make payments on the last day they are due. Review vendor discounts for early payment and take advantage of terms that are favorable to you.

Tighten Receivables

Know the payment terms outlined in your contracts. Issue invoices promptly, supplying any required supporting documentation, and contact customers as soon as you detect any delays in payment. Of course, you can also encourage customers to pay their bills quickly by offering a discount.

“Keeping a lid on spending allows you to hold on to cash for those times when you really need it.”

The Regulatory Burden

The cost of complying with federal regulations falls most heavily on companies with fewer than 20 employees. These very small firms pay $7,647 per employee per year to stay in compliance, substantially more than the $5,282 per employee spent by much larger firms.

Building Information Modeling Gaining in Popularity

Over a third of construction project and program owners stated that they have used Building Information Modeling on one or more of their projects, according to a recently released survey conducted by the Construction Management Association of America and FMI. Building Information Modeling involves the creation of digital information about a building project, which is used for design decision-making, the production of construction documents, cost estimating, construction planning, and, ultimately, managing and operating the facility.

Audit Chances

The IRS 2006 Data Book shows that the percentage of partnership returns that were audited by the IRS rose from 0.26% in 2004 to 0.36% in 2006, while the percentage of S corporations that were audited doubled over the same period, rising from 0.19% in 2004 to 0.38% in 2006. The audit rate for corporations under $10 million in assets rose from 0.32% in 2004 to 0.80% in 2006, while the audit rate for corporations with $10 million or more in assets jumped from 16.74% to 18.60%.

Recent estimates place the business costs associated with occupational injuries at close to $170 billion annually.* No contractor wants to see employees injured on a work site. Addressing safety and health issues in the workplace can save contractors money and add value to their businesses through:

• Lower workers’ compensation insurance costs
• Reduced medical expenditures
• Fewer quality issues on projects
• Increased productivity
• Improved morale
• Better labor relations
• Reduced turnover

Many contractors are taking the initiative and conducting their own safety inspections at every work site where they are active, as well as at the storage, maintenance, and office facilities they operate. By being proactive, contractors are also sending a clear message that employee safety is a priority.

If you are interested in instituting a formalized safety program in your company, OSHA has checklists that can help. Here are some key areas that may deserve your attention.

Receiving, Shipping, and Storage

Examine equipment, layout, heights, floor loads, material handling and storage methods, and training for material handling equipment, such as loaders
and forklifts.

Hand and Power Tools

Review inspection, storage, and repair of all power tools. Educate employees on the proper grounding, use, and handling of all tools used in your projects.

Electric Power

Review and formalize policies on working with, in, or near electric lines. Project managers and supervisors should use only certified electricians to set up switches, breakers, fuses, switch boxes, junctions, circuits, and extensions on your work sites.

Chemicals

Any chemicals used on work sites should be handled, transported, and stored according to state and federal requirements. Employees working with these chemicals should be trained, closely supervised, and provided with protective clothing.

Personnel

Provide employees with appropriate training in identifying hazards and in checking machines before use. Training should also be provided on the safest methods for cleaning, oiling, and adjusting machinery.

Maintenance

Provide regular and preventive maintenance on all equipment used at different work sites and record all work performed on the machinery.

Building and Grounds Conditions

Examine all floors, walls, ceilings, exits, stairs, walkways, ramps, platforms, and aisles to ensure that they do not present any safety hazards.

Safety Equipment

You should be aware that, by law, contractors are required to provide certain types of protective clothing and equipment to employees. According to the
federal government, personal protective equipment (PPE) in this category includes the following:

• Nonprescription eye protection
• Prescription eyewear inserts/lenses for full-face respirators
• Goggles
• Face shields
• Laser safety goggles
• Hard hats
• Hearing protection
• Respiratory protection
• Fall protection
• Ladder safety device belts
• Reflective work vests
• Rubber insulating gloves
• Non-specialty gloves — payment is required if they are PPE, such as for protection from dermatitis or severe cuts and abrasions. Payment is not required if they are for keeping clean or for cold weather protection.

“By being proactive, contractors are also sending a clear message that employee safety is a priority.”

The Water Resources Development Act of 2007 (WRDA), regarded as the largest civil works bill in the nation’s history, was recently passed by Congress and signed into law by the President. The new law mandates federal budget authorizations of $23 billion in funding for more than 900 projects overseen by the U.S. Army Corps of Engineers.

The projects, which currently will impact 24 states, include flood control, coastal restoration, navigation, and recreational projects, as well as studies for future projects.

Numerous construction industry groups, including the Construction Management Association of America and the Associated General Contractors of America, urged passage of the measure. The economic benefits of this new law for the construction industry are expected to be significant.

Who Gets What

Utility contractors are likely to be among the winners since the WRDA authorizes $2.4 billion for water and wastewater projects. Other contractors will benefit from an estimated $1.9 billion allocated for the construction of enhanced navigation improvements for the Upper Mississippi River. In addition, $1.7 billion will be spent on an ecosystem restoration project, also for the Upper Mississippi River.

The Gulf Coast, which has seen significant construction activity since Hurricane Katrina, will benefit from money allocated for coastal restoration projects
and water control infrastructure that are needed to mitigate hurricane damage. An estimated $600 million will be spent on reducing hurricane and flood damage across 1,700 square miles of coastal Louisiana.

In all, the Congressional Budget Office estimates that nearly $7 billion will be spent over the next 10 years on these Gulf Coast projects.

“Utility contractors are likely to be among the winners since the WRDA authorizes $2.4 billion for water and wastewater projects.”

Federal “Good Samaritan” Legislation

Only 21 states have “Good Samaritan” laws, which protect responders working in emergencies and natural disasters from lawsuits for negligence. Since construction companies and their personnel have volunteered to help after numerous emergencies and disasters, construction industry groups are asking for federal “Good Samaritan” legislation.

Non-residential Construction Shows Strong Growth

According to the Associated General Contractors of America (AGC), the non-residential sector of the construction market appears to be largely unaffected by troubles in the credit market. Government figures show that the lodging, office, and commercial construction segments all recorded gains through July of 2007. Construction in the lodging segment jumped 60% year-to-date, while private office construction rose 22% and commercial construction was up 15% for the same period. Other construction segments that did well in the first seven months of the year were power and private health care.

Forward Looking Index Points to Growth

Another good sign for the non-residential construction sector came from the American Institute of Architects, which announced that its July Architecture Billings Index recorded its second highest level in the survey’s history. The index, which measures demand for architects’ services, is an indicator for future construction activity.

Like other businesses that prepare financial statements in accordance with generally accepted accounting principles (GAAP), construction firms need to become familiar with a new accounting pronouncement known as “FIN 48.” The Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for Uncertainty in Income Taxes, to interpret Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The new accounting guidance applies to all types of entities, including C corporations, pass-through entities such as S corporations and partnerships, and real estate investment trusts.

Overview

Very generally, FIN 48 establishes the accounting for uncertain “tax positions” taken on a company’s tax returns and addresses how those positions are to be reflected in the financial statements. The scope of the pronouncement is extremely broad -- FIN 48 governs the accounting for all material income-tax return positions taken (or which will be taken) that are reflected in measuring current or deferred income-tax assets and liabilities for interim and annual periods.

Since federal, state, and local tax laws are highly complex, many issues can arise in preparing a tax return, including issues related to income recognition, the allocation of income among taxing jurisdictions, and the deduction of expenses. Even the decision not to file an income-tax return in a particular state is a tax position that must be evaluated in the context of FIN 48.

The Nuts and Bolts of FIN 48

Meeting the complex requirements of FIN 48 will require businesses to determine and assess all material positions taken on their income-tax returns as of the date they adopt FIN 48, including uncertain positions, in all tax years that remain subject to assessment or challenge by the tax authorities.

According to FIN 48, businesses must undertake a two-step process in evaluating a tax position:

Recognition: A business must determine whether it is “more likely than not” that a tax position will be upheld upon examination of its technical merits, including any related appeals or litigation. As part of this process, the business should always assume that the appropriate taxing authority -- operating with full access to and knowledge of all relevant information -- will examine the position. If a tax position doesn’t meet the more-likely-than-not threshold, no tax benefit from the position may be reflected in the financial statements.

Measurement: If a position meets the more-likely-than-not recognition threshold, it must then be measured to determine the amount of the benefit to recognize in the statements. The business has to measure the tax position based on the largest amount of tax benefit that is more than 50% likely to be realized upon final settlement with a taxing authority that has full knowledge of relevant tax information.

Differences between tax positions taken on a company’s tax returns and amounts recognized in its financial statements will typically result in an increase in a liability for income taxes payable, a reduction in an income-tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability.

Ongoing compliance with FIN 48 will require businesses to track their tax positions based on any new information that may become available. This includes monitoring tax laws and court decisions (typically with the help of the company’s professional advisors) to determine if changes or new laws could alter the recognition or the measurement of a tax position.

Interest and Penalties

A business must accrue interest and penalties that, under relevant tax law, would be incurred if an uncertain tax position were rejected. Under FIN 48, interest would begin accruing for financial statement purposes in the period in which it would begin accruing under relevant tax law. Any applicable penalties generally would be accrued in the first period in which the business claims or expects to claim the position on its return.

Disclosures

FIN 48 requires a reconciliation of the total amounts of unrecognized tax benefits at the beginning of the period to the total amounts of unrecognized tax benefits at the end of the period. Other disclosures required by FIN 48 include:

o Total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate

o Total amounts of interest and penalties recognized in the statement of operations and in the statement of financial position

o For positions in which there is a reasonable possibility that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date:

(1) The nature of the uncertainty

(2) The nature of the event that could occur in the next 12 months that could cause the change

(3) An estimate of the range of the reasonably possible change or a statement that an estimate of the range can’t be made

o A description of tax years that remain subject to examination by major tax jurisdictions

Action Steps

For public companies, FIN 48 became effective for fiscal years beginning after December 15, 2006. The date for implementing FIN 48 requirements for private companies and nonpublic pass-through entities was recently delayed. Private firms not already implementing FIN 48 will have to comply for periods that begin after December 15, 2007. Implementing the requirements of FIN 48 may require a review of:

o Accounting policies

o Prior year financial statements for open tax years

o The results of prior income-tax audits

o Tax returns for all tax years where the statute of limitations has not expired

o Detailed trail balances for all legal entities for all open tax years

o All major acquisitions and dispositions in open tax years

Please feel free to contact us with questions regarding FIN 48 and to discuss its potential impact on your contracting firm’s financial statements.

It’s important to stay up to speed on changes in the laws governing retirement plans since some of these changes could offer additional saving opportunities for you and your employees. The Pension Protection Act of 2006 (PPA) is a case in point. In addition, don’t ignore routine issues of plan compliance if you want to avoid regulatory problems down the road. The sidebar identifies some compliance issues that deserve your attention.

Higher Deferrals

The PPA makes permanent earlier law changes regarding increases in maximum annual salary deferrals to 401(k) plans and catch-up contributions for individuals aged 50 or older. Also made permanent are increased maximum contribution limits for individual retirement accounts (IRAs) and the option to treat elective deferrals to 401(k) plans as after-tax Roth contributions.

Plan Statements

The PPA requires 401(k), profit sharing, and other individual account retirement plans that allow employees to direct their account investments to issue account statements at least quarterly. A notice is also required regarding default investment options in cases when employees do not direct their investments. Statements must include an explanation of any limitations or restrictions on the right of the participant to direct an investment. The statements must also include information outlining the importance of having a well-balanced and diversified portfolio and explaining the risk of holding more than 20% of account investments in the security of one entity (such as employer securities).

Automatic Enrollment

The PPA includes a provision that makes 401(k) plans with a “qualified automatic contribution arrangement” eligible for safe harbor treatment under the tax law’s nondiscrimination tests. Moreover, the statute removes conflicts with state laws in regard to wage withholding without employee consent. These changes are generally effective for plan years beginning on or after January 1, 2008.

Greater Fiduciary Protection

Plan sponsors are also relieved from fiduciary liability with respect to default investments once the sponsors meet the law’s requirements. The U.S. Department of Labor recently issued a final regulation that identifies lifecycle and targeted retirement date funds, balanced funds, and professionally managed accounts as examples of investments that meet the criteria for default investments. In addition, a capital preservation product may be used for the first 120 days of participation. The PPA also extends fiduciary protection to sponsors when plan assets are “mapped” from one investment platform to another during a period when the sponsor switches investment service providers, provided the pension law’s requirements in connection with authorizing and implementing a blackout period have been met.

Routine Compliance Checklist

Update and Distribute SPDs: Your Summary Plan Description (SPD) generally must be updated at least once every five years. If you make what are known as “material modifications” to your plan, you must give participants a summary of those modifications within 210 days after the end of the plan year in which they were made. Also, new participants must be provided with an SPD within 90 days of becoming a participant.

Distribute SARs to Participants: Plan participants must generally receive a Summary Annual Report (SAR) from the plan within nine months of the end of the plan year.

Review Plan’s Bonding Level: Plan fiduciaries must be bonded. Regularly review your plan’s bonding status since the minimum bonding amount increases as the assets in your plan increase.

Review Plan Forms: Regularly review your plan’s forms, such as beneficiary designation forms and benefit election forms, to ensure they are current.

File Form 5500: File Form 5500, Annual Return/Report of Employee Benefit Plan, along with required schedules (or Form 5500-EZ) in a timely manner.

Taking a proactive approach can help ensure that your plan operates at maximum efficiency and will continue to operate in full compliance with all relevant tax and pension laws.

“Plan sponsors are also relieved from fiduciary liability with respect to default investments . . . .”

Contractors nationwide are preparing to fight back against a law* that will require federal, state, and local governments to withhold 3% from all payments for goods and services. The 3% tax, slated to become operational in 2011, is intended to guard against possible tax evasion by businesses.

With certain exceptions, the law requires 3% withholding on all government payments for products and services made by all branches of government and their instrumentalities (including multi-state agencies). The law will affect payments for goods and services under government contracts and payments to any person for a service or product provided to a government entity.

The New Law’s Ramifications

The construction industry argues that it would be particularly hard hit by this new withholding tax and objects to its imposition on several grounds. According to the Associated General Contractors of America:

o The government will essentially be withholding funds required to complete a project since the withholding applies to the total contract and not to the net revenue that a project generates.

o The amount of the withholding will be equal to or greater than the profit on many construction projects since general contractors, especially those working as construction managers, do not typically make 3% profit on a contract.

o Federal law requires construction contractors to carry several types of bonds. Typically, surety companies examine a contractor’s cash flow before opting to cover a contract. The new law will restrict cash flow for many contractors, which, in turn, will affect the ability of contractors to acquire bonding. Many contractors may end up paying higher-than-normal premiums simply to acquire bonding, while others may be denied coverage.

o Current laws require corporations to make quarterly estimated tax payments toward their income-tax liabilities. In view of this requirement, the imposition of an additional withholding tax is an unnecessary burden.

o S corporations and joint ventures would face additional reporting since withholdings need to be accounted for and reported to each shareholder or partner. This increased reporting burden may end up reducing the number of entities willing to take on large government projects.

We will keep you updated on any further developments as they relate to this new law.

* The Tax Increase Prevention and Reconciliation Act of 2005, Section 511, which amended Internal Revenue Code Section 3402(t).

“. . . the law requires 3% withholding on all government payments for products and services . . . . ”

It’s easy to assume as a contractor that the more backlog you have, the better off you are. You may think that a large backlog of projects is a sign of continuing financial health and a vote of confidence in your company by property owners and developers. In fact, you may believe that a large backlog is as good as money in the bank. However, that’s not always the case. What’s more important than the size of the backlog is your ability to manage it effectively.

Filling the Jobs Pipeline

Obviously, no contracting firm wants to find itself with an empty jobs pipeline. You may have been in that position in the past and felt pressured to take on any kind of project simply to cover your overhead. As a long-term strategy, however, taking on jobs just to cover your expenses is not a recipe for financial health.

While a sizeable backlog of projects is certainly a testament to both your reputation, as reflected through referrals, and to your staff’s sales skills, too many jobs in the pipeline can create its own set of problems. For example, you risk alienating your customers with delays when you take on more jobs than you can handle in a timely manner. What’s more, there’s a real danger that your crews and your finances will be stretched too thin if you overestimate your capacity for additional work. Growing too quickly without the systems and personnel in place to handle the increased workload can actually threaten the solvency of your business.

Finding a Balance

Determining the level of backlog your business can comfortably handle is a key to keeping your customers satisfied -- and it’s critically important to your business’s financial health. In general, you’ll be within industry norms if you have a backlog of six to twelve months.

You’ll be better able to reach and maintain an optimal level of backlog if you pay attention to the following issues:

Analyze the Risks Before You Bid

Before you submit a bid on a job, analyze how each project will affect your financial resources, liability exposure, personnel levels, and scheduling needs. These factors need to be weighed against anticipated profitability. Pay particular attention to cash flow. Do projections to identify the jobs that will strain your firm’s liquidity -- even if they appear profitable on paper. If you anticipate cash flow problems, take steps to negotiate favorable terms with your suppliers and lenders in advance.

Don’t forget to take a close look at your current staffing levels. Are they sufficient to handle all the jobs that you are bidding on? The success of any project will depend largely on the ability of your project manager to deal with personnel constraints.

Meet Customers Regularly

Once a customer accepts your bid, it’s important to maintain regular contact with that customer, especially in the pre-construction stage. It’s an opportunity to make sure that you are both very clear about what the project entails. It gives you a chance to clarify design, material, cost, and scheduling issues and to prevent potential problems or delays from materializing. Regular meetings reassure the customer of your company’s professionalism and help manage expectations. The meetings also make it more likely that you’ll start and complete the project according to the agreed-upon schedule.

Keep an Eye on the Bottom Line

Always monitor the progress and the projected profit of an ongoing job. When you identify under-billed jobs, bill them quickly, as provided under the terms of your contract.

“What’s more important than the size of the backlog is your ability to manage it effectively.”

Pay for Travel Time

Construction workers who were employed on an airport extension project were required to pass through a security checkpoint on the tarmac and to travel on authorized, company supplied buses and vans in order to reach their worksite. The workers argued that they should be compensated for their travel time and the time they spent going through security. A U.S. Appeals Court rejected their claim and stated that under the Portal-to-Portal Act, walking, riding, or traveling to and from the location where the principal activities are performed (including passing through security checkpoints) is exempt from compensation.

Office Developers Opting for Tilt-Up

Tilt-up construction is being used by a growing number of office developers, attracted largely by the potential for cost savings over more traditional construction methods. Long used in constructing warehouses and big-box stores, tilt-up involves concrete being poured into large frames which are then tilted up after hardening to form the walls of a building. The Tilt-Up Concrete Association, the industry’s trade group, says that 309 million square feet of walls were constructed using this approach in the U.S. last year.

Fraud is a potential problem that contractors can’t afford to ignore. In fact, a recent national study of occupational fraud and abuse conducted by the Association of Certified Fraud Examiners reported that the construction industry had the second highest median loss per scheme ($500,000) among all industries surveyed.

Payroll fraud is one area where contractors can be especially vulnerable. It’s not hard to see why, since many construction workers are temporary and cash payments are common. Typically, payroll fraud falls into four main categories:

o Falsified hours or pay rates -- Employees claim to have worked more hours than they actually put in or falsify a pay rate.

o Ghost employees — Often using the Social Security numbers of dead people, an employee, typically in a supervisory position, creates one or more false identities and puts these non-existent workers on the company payroll. The fraudster then pockets the wages paid out to these fake employees.

o False workers’ compensation claims -- An otherwise healthy worker fakes an injury in order to claim disability benefits.

o Commission schemes -- An employee falsifies the amount of sales or wrongfully increases the commission rate.

Protections Against Payroll Fraud

You can protect your business from payroll fraud by employing these strategies:

Divide Duties

Don’t let the same individual handle all cash functions -- bookkeeping, collections, check writing, and bank account reconciliation. If you don’t already require two signatures on payroll checks and large disbursements, start doing so immediately. In addition, put controls in place that permit one employee to review payroll data entered into your system by another employee.

Monitor Bank Statements

Make sure that you or another principal receives all bank statements unopened. Review them promptly and check them for unusual items.

Review Payroll

Review paychecks to be sure they include the appropriate deductions for taxes and other items. Check payroll records for evidence of duplicate names, addresses, and Social Security numbers.

Call Us

We can review your internal controls to ensure that your accounting system and procedures are as good as they can be.

“Payroll fraud is one area where contractors can be especially vulnerable.”

Attracting and retaining employees whose skills and commitment contribute significantly to the growth and profitability of the business should be a priority for every contractor. While high-performing project managers, supervisors, and engineers are typically driven by their own high standards, a satisfactory compensation package can often motivate them to continue performing at peak levels.

Contractors have found that providing compensation “over and above” base pay has helped retain and motivate key employees. Here’s what you need to know if you think you might want to introduce some form of incentive compensation plan into your workplace.

What It Is

An incentive compensation plan is designed to tie pay to performance and to achieve gains in worker productivity. A compensation plan can take the form of merit pay, bonuses, profit sharing, corporate stock ownership, and commissions. The reward can be paid currently or deferred to some time in the future, typically at retirement. An incentive compensation plan can be purely discretionary and may be targeted to individual employees, work crews, the organization as a whole, or a combination of these groups.

Irrespective of which approach is chosen, managers and supervisors should understand what’s expected of them to qualify for the incentive compensation. Contractors should clearly spell out minimum performance standards, even in situations where the compensation is purely discretionary. Many contracting firms have found it helpful to link corporate goals to managers’ and supervisors’ performance objectives in order to earn incentive compensation. Indeed, the most successful incentive compensation plans are customized to the contractor’s specific needs and goals.

Performance-based Plan

A performance-based plan employs objective criteria to determine incentive pay. Generally, the plan gives managers a fixed percentage of profits per division or contract. Some plans establish clearly identified objectives that the manager must accomplish in order to receive the compensation. For instance, since punch lists significantly impact a contractor’s bottom line, some contractors award incentive pay to managers or foremen for minimizing punch lists and/or for resolving them efficiently.

Discretionary Plans

Contractors value discretionary incentive compensation plans for their flexibility. For example, it’s not always possible to grant incentive pay or to assess the contributions of top performers solely through a set of objective criteria. Since these individuals are often put in charge of the most complex projects, a more subjective analysis of their performance may be warranted. A pure performance-based plan could end up undervaluing a key employee’s overall contributions, particularly on difficult or unusual projects where certain skills may be difficult to measure. However, a discretionary plan would allow a contractor to reward a key employee based on the contractor’s own assessment of the value of the employee’s various contributions.

Deciding on Payment

The construction industry has traditionally relied on cash bonuses. However, a growing number of privately owned firms are offering top performers the opportunity to receive an equity stake in the business. Typically, ownership interests come in the form of restricted stock. Under this arrangement, the employee is granted an equity interest in the company but would forfeit some or all of the stock if he or she leaves the company prior to a predetermined vesting schedule.

Other contractors who are less willing to give up any actual ownership in their firms rely more on “phantom” stock and on stock appreciation rights to reward key employees. These incentive payment strategies allow recipients to benefit from and share in any increase in the value of the company stock while not actually owning any shares.

We Can Help

We can help if you think that your company could benefit from introducing an incentive compensation plan or if you are dissatisfied with your current plan’s operation.

“Contractors have found that providing compensation ‘over and above’ base pay has helped retain and motivate key employees.”

The Small Business and Work Opportunity Tax Act of 2007, which was signed into law by the President on May 25, 2007, contains several provisions that have an impact on the construction industry. Here’s a brief overview of some of those provisions.

Section 179 Expensing

The Section 179 expensing election allows you to take an immediate deduction for the cost of most kinds of depreciable assets in the year they are placed in service instead of claiming depreciation deductions over a multi-year period. The new law provides for an immediate increase of the expensing limit from $112,000 to $125,000 for 2007. The expensing limit is reduced dollar for dollar when the total qualifying assets placed in service exceed $500,000 for tax year 2007. In addition, the higher expensing election has been extended through 2010 and thresholds will be indexed for inflation.

The Work Opportunity Tax Credit (WOTC)

The WOTC is a tax credit that employers may receive on an elective basis when they hire individuals in certain targeted groups. The new law expands the targeted groups to include more disabled veterans and people living in counties that have experienced significant population losses. Employers who hire disabled veterans are eligible to receive twice the normal credit of $2,400 per eligible employee. Under the new law, employees must begin work before September 1, 2011. The previous hiring deadline had been December 31, 2007.

GO Zone Incentives

The new law also contains several tax relief provisions targeted at businesses operating in the parts of the Gulf Coast hit by hurricanes in 2005. Businesses in this region can expense an additional $100,000 in eligible equipment and machinery purchases under Section 179 for both 2007 and 2008 due to a one-year extension of the higher limit. The deadline for placing GO Zone buildings in service that qualify for enhanced low-income housing credits has been extended by two years to December 31, 2010.

Any qualified GO Zone repair or reconstruction is treated as a qualified rehabilitation for purposes of the qualified mortgage bond rules.

If you’d like to determine if and how these new provisions of the tax law could impact your business, please contact us for details.

The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.