Category: Construction

Posted on Jan 8, 2018

long-term contracts

Many commercial construction projects can extend beyond one year. Federal tax law provides special rules for accounting for these long-term contracts (Internal Revenue Code Section 460). The rules apply to all long-term contracts unless the contract is exempt due to several exceptions provided by the tax law.

Not a Long-term Contract

These contracts are not considered a long-term contract, and are therefore exempt from the accounting for long-term contract rules.

  • Contracts with architects, engineers or construction management
  • Contracts for industrial and commercial painting
  • Contracts completed before the end of the same tax year the contract commenced
  • Contracts with de minimis (minor) elements of eligible construction activities

Exempt for AMT Purposes

Any individual business owner who is subject to Alternative Minimum Tax (AMT) must use the percentage of completion accounting method on long-term contracts, unless the business structure is a small C Corp (eff. 2018) or engages exclusively in home construction contracts (80% or more of the estimated total costs are expected to be attributable to 1) buildings containing 4 or less dwelling units and 2) improvements to real property located at the building site and directly related to the dwelling unit)

Talk to your CPA to determine if you will be subject to the increased AMT threshold for single or married filing jointly tax status.

long-term contractsTo track expenses and income on non-exempt long-term contracts, contractors are typically required to use the “percentage of completion” accounting method for income tax reporting. The main disadvantage of this method is the inability to do much tax planning or tax deferment for things like accrued losses, uninstalled materials or retainage receivables, which can result in accelerated taxable income when compared with other accounting methods.

One of the exceptions to the tax law applies to companies with average gross receipts for the prior three years under $10 million. Under the new tax law effective for 2018, that threshold has been raised to $25 million. Now, long-term contracts of companies with average annual gross receipts under $25 million are considered exempt from the restrictive and complicated rules of Code Section 460.

For companies with average annual gross receipts above $25 million, compliance with the tax rules under Code Section 460 remains your only option.

If your CPA has not talked to you about the potential tax saving benefits of a different accounting method for your non-exempt long-term contracts — or explored if your company’s long-term contract status is now exempt — this year is a good time to ask about it. Because the accounting method chosen for each long-term contract must remain the same through the life of each contract, choosing the right accounting method is critical for any new long-term construction contract in 2018.

What is a long-term contract?

Before we explore various accounting methods, here is the simple definition of a long-term contract according to the tax code.

  • Long-term contracts are those that on the contract commencement date are reasonably expected to not be completed by the end of the tax year.

Ironically, under this definition, a contract that is expected to take a week to complete could be a long-term contract.  For example, if a contractor with a calendar year-end begins work on December 27 and expects to end on January 2 – the contract is a long-term contract.

Due to the complexity of accounting for long-term contracts tax rules — with their exceptions — as well as the variable nature of construction revenue, we often find that contractors are using a catch-all accounting method across all contracts. The key pitfalls of using the same accounting method for all long-term contracts over time may include:

  • paying tax earlier than necessary;
  • potential noncompliance with IRS rules as the company’s revenue grows;
  • and noncompliance discovered during an IRS tax audit, which could result in additional taxes and penalties.

Are you compliant?

Interestingly, contractors that may have used a noncompliant accounting method under the former $10 million threshold may now be compliant under the new $25 million threshold for 2018 contracts.

Let’s say that a contractor’s average annual gross receipts for three trailing tax years were $15 million. The company wasn’t using the percentage of completion accounting method per the tax law for 2016 and prior years. The contractor is non-compliant with its accounting for long-term contracts with respect to 2016 and earlier years.  If the IRS were to audit 2016 (and earlier) years, the non-compliance could result in significant tax, penalties, and interest.

Unfortunately for the contractor, the company is stuck with the non-compliant method in accounting for 2017 because changes from non-compliant methods in accounting must be filed prior to the end of the tax year.  The risk of being assessed significant tax, penalties, and interest remains.

However, this same company will not need to change the accounting method for new long-term contracts in 2018 because, due to the increased threshold in the new tax law, these new contracts are exempt from Section 460.

Alternatively, companies under the $10 million threshold that have used the percentage of completion accounting method for long-term contracts could do an evaluation by comparing the amount of income tax they would have paid in past years (considering both regular tax and AMT if the company is a partnership or S-corporation) had they used a different method of accounting. If there is significant tax savings, a change in accounting method should be considered. This will not qualify as an automatic change in accounting method. A user fee of $9,500 will apply and Form 3115 notifying the IRS of the desired change will need to be filed before the end of the 2018 tax year.  

As you can see, there are nuances to this area of the federal tax code. To prepare for the changes in 2018, each company should review accounting methods for long-term contracts with a CPA knowledgeable in this area of the federal tax code.

Continue Reading: What are Accounting Methods for Long-Term Contracts?

 

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

 

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Posted on Jan 4, 2018

The following are the primary accounting methods for long-term contracts, explained briefly, for smaller and larger contractors.

Smaller Contractors

Ave. Gross Receipts < $10 million (or < $25 million starting in 2018)

Completed Contract Method

  • No revenue is reported or costs deducted until the contract is complete:
  • Generally considered complete when 95% of expected costs have been incurred
  • Aggressive billing and collections do not impact income
  • Biggest tax deferral opportunity

The disadvantages of this method occur when several contracts finish in the same year, causing a spike in income and a spike in the tax rate. Contractors also cannot deduct losses on a contract until the job is complete.

Note that home contracts are exempt from Section 460 and that the completed contract method is generally used by home builders.

Cash Method

  • Revenue reported when collected
  • Costs deducted when paid
  • Large deferral opportunities by managing billings and acceleration of payment of costs

The disadvantages of the cash accounting method with long-term contracts is that contractors must spend cash to claim deductions and delay receipts to defer income, which is counter to smart business planning. Aggressive billing may result in acceleration of income.  Also, a declining economy could mean large tax bills in down years due to the inevitable reversal of income deferrals.

Accrual Method

  • Revenue reported when billed
  • Costs deducted when incurred

The disadvantages to the accrual accounting method are that aggressive billing generally results in acceleration of revenue, accrued losses on contracts are not deductible until the job is complete and tax planning techniques may be counter to business planning.

Percentage of Completion Method

  • Ongoing recognition of revenue and income, computed by the stage of project completion when compared to total costs to complete the project
  • Based on estimated future costs

The disadvantages to the percentage of completion accounting method are that accrued losses on contracts are not deductible and income can be accelerated due to things like uninstalled materials charged to jobs, overbillings by subcontractors or underestimated total costs to complete a job. The accuracy of the method is dependent upon the accuracy of estimates. Inaccurate estimates could result in inaccurate reporting of tax.

A Note About Alternative Minimum Tax (AMT)

For C-corporations, AMT was repealed for 2018 forward.

The 2018 tax law increased the AMT exemptions for individuals, however AMT continues to apply.  Percentage of completion is required for AMT purposes.  Thus the difference in income between percentage of completion and the income under the taxpayer’s method of accounting for long-term contracts is an adjustment for AMT purposes. If the contractor is organized as a partnership, S-corporation, or sole proprietorship, the owners should evaluate the effect of AMT when selecting their accounting method.

Home builders, as an exception, are permitted to use the completed contract method for AMT.

Larger Contractors

Ave. Gross Receipts > $10 million (or > $25 million starting in 2018)

Larger contractors are required to use the Percentage of Completion method under Code Section 460.

To offset the potential for accelerated income, companies may elect a 10% method, which defers recognition of revenue or costs until a job is at least 10% complete. This method is also allowable under AMT. It may be useful in instances when a contract commences toward the end of a tax year.

Larger companies are also required to use a look-back approach once a job is complete. Income in prior years is recalculated using actual costs, which may result in a change in gross profit for the prior year. Tax is recalculated and compared to tax actually paid for the year. Interest is calculated on the resulting over or under payment.

Code Section 460 also requires companies to allocate certain overhead costs to contracts. This may provide a deferral opportunity if the contractor is diligent in estimating overhead costs that may be allocated to the contract in future years.

To select the most advantageous accounting method or to determine if your company should change its accounting method in 2018, controllers and CFOs may need the guidance of a CPA knowledgeable in accounting for long-term contract rules. It helps to get a second opinion to support the right accounting method for your contracts that is both tax law compliant and offers the best potential for tax planning or deferral.

Continue Reading: Plan Ahead in 2018 for Accounting for New Long-Term Contracts

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

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Posted on Dec 27, 2017

Let’s say that your company established the completed contract method of accounting for long-term contracts that are exempt from Code Section 460 because its gross receipts fell under the $10 million threshold.

As the company grew, it continued to use this accounting method. It had two very good years in 2015 and 2016. In 2017 average annual gross receipts for 2014-2016 exceeded $10 million for the first time. For contracts that were open in 2016, the company will continue to report income from those contracts under the completed contract method. For contracts that were started in 2017, the company will be required to report under the percentage of completion method in accordance with Code Section 460 for every year until the contracts are complete.

However, for contracts started in 2018, because the gross receipts threshold was adjusted to $25 million, those contracts are exempt from complying with Code Section 460. The company will report those contracts under the completed contract method since it is the company’s established accounting method for exempt contracts.

Then again, if it was decided that it made sense to report 2018 contracts under a different accounting method other than completed contract, the company will need to file for a change in accounting method with the IRS.  The change is not classified as an automatic change; Form 3115 will need to be filed with the IRS prior to year-end.  A user fee (currently $9,500) will also need to be paid in order for the Form 3115 to be processed.

The bottom line is that companies with three-year trailing average gross receipts under the $25 million threshold in 2018 should do an analysis to determine if a change in accounting method makes sense. The analysis should include the following factors:

  • Whether an overall method of accounting of cash or accrual is the most advantageous;
  • The amount of taxable income deferred under the various accounting methods for long-term contracts;
  • The effect of AMT on the owners’ returns given the new AMT exemptions and elevated phase-outs;
  • The expected growth rate for the company and the length of time before it is expected to reach the $25 million threshold.

With thoughtful consideration and planning, the proper accounting method for long-term contracts can result in the deferral of a significant amount of income tax, which will help your company manage working capital more effectively.

Download the Whitepaper: 2017 Tax Law Impacts Accounting for Long-Term Contracts

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

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Posted on Dec 6, 2017

Believe it or not, 2018 is right around the corner, which means that the start of a new decade in 2020 isn’t that far off.

So the question is: Do you have 20/20 vision? In other words, how do you see your industry, and your firm’s place in it, during the next few years?

What You Can Expect

Let’s take a look at where the specialists think the industry will be heading in 2018 and beyond. Some of the changes can be expected — such as those relating to advances in technology — but others aren’t as obvious. Here are five trends to focus on.

  1. The Internet of Things (IoT).This term has been used to sum up technological innovations. Notably, the IoT allows firms to gather intelligence that can lead to better decision-making. For example:
  • Wearables, or computerized devices embedded in clothing or other items, can help track workers on sites and create alerts for hazardous situations or when equipment needs repair,
  • Drones can track a site’s progress faster, more accurately and cheaper than aircraft and human surveyors,
  • High-tech equipment such as tablets used in the field help determine time spent on specific tasks, and
  • Tracking applications such as GPS systems can show where workers are at all times.

As construction firms continue to rely on technological efficiency to improve the bottom line, the IoT is likely to become even more significant on job sites in the future. The challenge will be sorting through the reams of data to find what can best be used at your firm.

  1. Virtual and augmented reality. Strides continue to be made in virtual reality (VR) and augmented reality (AR). And the buzz around these technologies is growing louder as we head into 2018.

Reality technology enables parties to collaborate before the first hole is dug. Without getting out into the field, stakeholders can tour sites from their computers or other electronic devices. This lets firms visualize a site before it is built and detect and fix potential problems.

However, there’s room for improvement. Enhancements are needed to make this technology more cost-effective and work better with available software.

  1. Modular construction. Off-site assembly — also referred to as prefabrication (“prefab”) construction — isn’t new. But some observers expect it to begin taking off in a big way in 2018 as costs have declined and quality and performance have improved.

Using modular construction in a controlled, factory-type setting, can help eliminate some of the typical hindrances in the field, especially weather. It’s also easier to maintain quality control standards.

Although growth in this area has been slow, usage is picking up steam, particularly when it comes to HVAC construction and energy consumption.

  1. Materials and labor.Most experts see constructions costs rising significantly in 2018 — after remaining relatively flat in recent years — while labor shortages still abound. While cost increases appear inevitable, the possibility that rising inflation could exacerbate the problem has the specialists concerned. At some point, escalating costs my cause projects to be put off or removed from drawing boards.

A lack of technical training in schools and the aging workforce, suggests firms can expect to struggle to attract, retain and train workers. Already some firms have had to increase pay to to retain workers and this is expected to continue as the shortage of skilled workers persists. In addition, the costs of recruiting and training workers have grown.

The combination of these factors is forcing many firms to look for ways to cut costs.

One possible solution is a greater use of internships as firms attempt to hire workers straight out of secondary school. But construction firms need to do more to convince young people that advances in technology mean that construction is no longer strictly a blue-collar job.

  1. Safety and fraud. Unfortunately, for years the construction industry has led the way in workplace injuries and fatalities. According to the Bureau of Labor Statistics, in 2015, the industry topped the list of worker deaths, with 937 fatalities, the highest number since 2008 and an increase of about 4% from 2014. Although the construction industry accounts for most worker deaths, it ranked fourth in highest fatal injury rates among all industries.

Nevertheless, improvements are being made, again in part due to technology. Specialists expect this trend to continue in 2018.

To this end, firms are encouraged to use safety apps that can send vital information about safety protocols to each worker in the field with little effort. If your firm is still experiencing a high number of incidents, it should examine its procedures for complying with Occupational Safety and Health Administration (OSHA) requirements and other standards.

As law enforcement officials and agencies like OSHA have taken more notice of safety in recent years, scrutiny of construction firms has heightened. It isn’t likely to abate.

Construction firms are also warned to be on the alert for fraud involving billing and misappropriation of funds. As detection methods improve, fraud investigation is expected to increase.

What’s Next?

Overall, the outlook for the construction industry over the next few years appears favorable, particularly as technology improves and is used more widely.

According to Construction Labor Contractors (CLC), the industry is expected to have one of the largest increases in real output and reach close to $1.2 trillion by 2020. Efforts to boost the U.S. infrastructure should help with the output.

Because the U.S. population is expected to grow from 321.2 billion to 338 billion in 2020, there will be an increased need for residential housing. In addition, the construction employment agency cites factors such as consumer spending and governmental investments in tourism, office buildings and retail space as reasons why commercial construction will also grow.

Talk to the Pros

Take stock with your legal and financial advisors to determine how well suited you are for the changes ahead.

 

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Posted on Nov 29, 2017

Safety is a major concern for construction firms. Most improvement efforts focus on repairing and maintaining equipment or removing hazards from the job site. But little attention is paid to workers who aren’t getting enough rest.

Sleep deprivation can lead to increased injuries and fatalities. In addition, the risk of chronic health issues — including depression, obesity and even cancer — increases for workers who don’t sleep enough.

Reasons for sleep deprivation include:

  • Health issues,
  • Personal problems,
  • Demands of daily life, and
  • Job stress

Common Problems

Whatever the cause, the dangers associated with sleep deprivation are real. Here are eight common problems associated with this condition.

  1. Poor performance.Fatigued workers simply don’t perform as well as those who are rested. Workers don’t move and react as fast when they haven’t slept well.
  2. Mistakes, mistakes, mistakes.Tired workers typically react more slowly and make more mistakes on the job. This includes errors of commission (where an act causes damage) and errors of omission (where the worker’s failure to do something ends up harming a person or delaying the job).
  3. Communication issues.When workers are fatigued, they may not enunciate as clearly as usual. In addition, they may pause for long stretches, mumble or mispronounce their words, or distort language in a variety of other ways. This can lead to confusion and injuries when tired workers aren’t understood.
  4. Distractions.Tired workers tend to be easily distracted. They may have trouble following instructions or meeting safety standards because they aren’t wide awake. As a result, they could be injured or cause an injury to someone else.
  5. Impaired driving.It’s well-established how trucker performance is impaired by sleep deprivation. While your workers likely aren’t handling 18-wheelers, there are still legitimate concerns driving back and forth from job sites as well as operating heavy vehicles in the field.
  6. Memory lapses.Fatigue can result in a loss of short-term memory that results in setbacks or long-term memory where a worker fails to react in a way that he or she has been instructed to do.
  7. Mood swings.Sleep deprivation can affect the mood or attitude of workers. They may become surly or irritable, exhibit childish behavior, or even show a lack of regard for usual social conventions. Others may become withdrawn or unwilling to engage in necessary conversation.
  8. Poor decision-making.Sleep deprivation affects judgment. Studies have shown that people are inclined to take greater risks than usual without enough sleep. Risk-taking by tired workers can create hazards.

These problems aren’t independent of one another. Fatigued workers typically will exhibit several of these traits. What’s more, the problems compound over time. One or two nights of sleep deprivation can affect the way a worker functions the next day. If this persists for a week or beyond, the chances of an accident happening will only increase.

Steps to Reduce Worker Fatigue

While you can’t tell your employees when to go to bed and get up, there are certain steps that a construction manager or supervisor can take to improve the likelihood that workers will be rested well enough to perform soundly and safely. Consider the following practical suggestions.

Set sensible hours. Be reasonable about the hours you expect crews to work. When it comes to staying late, weigh all the relevant factors, including the imposition on workers’ personal lives and sleep habits. Constantly requiring workers to put in extra time can result in sleep deprivation or fatigue.

Don’t contact workers after hours. You aren’t helping your workers get the sleep they need by making frantic late-night calls about the next day’s work. Call workers during off-hours only in emergencies and respect their privacy.

Encourage exercise and healthy diets. The better physical shape employees are in, the better they’re likely to perform. You might even set up an exercise plan within the firm or offer incentives for joining a gym. Similarly, stress the importance of healthy eating habits, even though this can be difficult in remote job sites.

Cut down on caffeine. Caffeine can be a contributing factor to a lack of sleep and should be monitored. If you’re constantly getting coffee for the crew, especially in the late afternoon, you may be part of the problem, not the solution. Drinking coffee or caffeinated soft drinks can impair sleep even if they’re consumed hours before bedtime. Offer water, juice or other beverages instead.

Allow frequent breaks. We’re not talking about the bare minimum required by law. When it’s appropriate, provide workers with extra breaks, or a longer break than usual, to offset difficult working conditions, especially in inclement weather. By energizing workers in this manner, you can expect better results.

Take Control

There are many reasons for sleep deprivation you have no control over, but you should address the areas where you can help. This is for the good of everyone concerned — your firm, your customers and your workers. And don’t turn a blind eye to potential problems: If you see workers struggling with fatigue, act swiftly and decisively to get them out of harm’s way.

Has Sleep Deprivation Become an Epidemic?

“Sleep is the most under-appreciated health crisis in America,” states TV host Dr. Mehmet Oz.

He helped commission an extensive new sleep study of 20,000 individuals in conjunction with ResMed, a firm producing sleep-related products. According to the study, a staggering 79% of Americans get less than the recommended seven to eight hours of sleep each night.

In addition, more than 30% of survey respondents have a SleepScore of 55 or less (out of 100), a new statistic developed by Oz and ResMed. The average American SleepScore is 77.

The SleepScore is based on several factors, including gender, weight and height, age, and estimated hours of sleep a night.

Some of the causes cited for low SleepScores are:

  • Taking too long to fall asleep,
  • Waking up in the middle of the night,
  • Being excessively tired during the day,
  • Waking up early and not being able to go back to sleep,
  • Snoring,
  • Moving during sleep,
  • Amount of caffeine consumed late in the day, and
  • Amount of exercise in a week.

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Posted on Sep 25, 2017

The new 2018 car and truck models are already in the showrooms.

If you’re in the market for one or more vehicles for your construction business, look past the sticker prices when you weigh your decision. Don’t forget to factor in all the tax aspects into the equation.

Generally, your firm can claim tax deductions for business vehicle expenses, but there are numerous twists and turns along the way. Notably, the tax law includes several limits to ensure that business owners don’t go overboard. (For simplicity, let’s assume for purposes of this article that you’re purchasing a vehicle, although comparable rules apply to vehicles leased for business purposes.)

Two Methods

Briefly stated, you may deduct vehicle expenses in one of two ways.

1. Actual expense method. This method allows you to deduct your actual expenses based on the percentage of business use. For example, if you use a pickup truck 80% for business and 20% for personal use, you may write off 80% of your qualified expenses, including such items as oil and gas and insurance (see box below, What You Can Actually Deduct”). Plus, you’re in line for depreciation deductions, subject to certain limits.

With either method, you must keep detailed contemporaneous records as proof in case the IRS challenges your deductions. For instance, you must record the date, location, distance and business purpose of each trip. Bear in mind that the recordkeeping for the actual expense method is even more burdensome because you must account for every deductible item.

2. Standard mileage rate. Using this method, you rely on a simplified standard mileage rate to deduct vehicle expenses. The IRS sets the rate annually. For 2017, it’s 54.5 cents a mile (plus related tolls and parking fees). For example, if you drive the pickup truck 10,000 business miles in 2017, your deduction amounts to $5,450 (54.5 cents x 10,000) plus tolls and fees.

Potentially Larger Deduction

The actual expense method may justify the extra hassle, as it frequently produces a larger annual deduction than the standard mileage rate. In particular, you may get a tax boost from the rules allowing you to recoup a vehicle’s cost through depreciation deductions, subject to tax law limits.

Under current law, you generally can claim three tax breaks:

  1. A generous current deduction under Section 179 (the expensing deduction) for the cost of qualified business property placed in service during the year, including vehicles,
  2. A 50% bonus depreciation deduction if the property is eligible, and
  3. A depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) if there are any remaining costs.

For qualified business property, you may be able to claim all three, but with vehicles you likely will reach the max under Section 179 because of the so-called luxury car limits.

“Luxury Car” Limits

However, to deter taxpayers from claiming excessive deductions for top-of-the-line vehicles, Congress imposed “luxury car” limits, which actually kick in for moderately-priced cars, trucks and vans. For vehicles placed in service in 2017, the maximum deductions are as follows:

For example, again using the 80% business use example, the maximum first-year deduction for a van placed in service in 2017 is $9,248 (80% of $11,560).1Based on 50% bonus depreciation

Despite these restrictions, construction firm owners still have an ace up their sleeves.

Thanks to a special tax law provision, a qualified heavy-duty SUV with an unloaded gross vehicle rate of more than 6,000 pounds is exempt from the luxury car limits. In this case, the maximum deduction is capped at $25,000, far more generous than the usual luxury car limits. In addition, the vehicle is eligible for bonus depreciation and regular MACRS depreciation deductions.

Form of Ownership Matters

Keep in mind that the form of business ownership involved may affect the way vehicle deductions are handled:

  • Generally, sole proprietors claim the deductions on their personal tax returns by attaching Schedule C.
  • If a corporation reimburses business-related expenses to an employee who owns the vehicle, the firm generally deducts the reimbursements and the employee doesn’t report any taxable income.
  • For vehicles owned by a corporation, the corporation can deduct the full amount of the vehicle expenses, but personal driving benefits are taxable to employees.

This is just a brief overview of a complex set of rules relating to business ownership. Consult with your tax advisor regarding your situation.

Year-End Strategies

If you’re ready to buy a new vehicle for your business, there may be additional tax incentives for buying a 2018 model before the end of the year.

Significantly, in the first year of ownership, you’re entitled to claim the three major tax breaks listed above, regardless of when in the year the vehicle is placed into service. In other words, you can buy a pickup truck late in December, drive it to a job site the last week in the year and still qualify for the full first-year tax benefits.

Caveat: MACRS deductions may be reduced if the cost of property placed in service during the last quarter of the year exceeds 40% of the cost of all property (not counting real estate) placed in service that year.

Similarly, if you’re going to opt for an SUV that meets the requirement for the maximum $25,000 write-off, place it in service at the end of the year and maximize the deductions for the first year of ownership.

If you’re buying a new vehicle late in the year, it’ll be easier to keep track of your actual expenses for a short time if this would be beneficial. For vehicles acquired prior to 2017, you can generally switch from the actual expense method to the standard mileage rate in a subsequent year, including certain adjustments, but not the other way around if you previously claimed accelerated depreciation.

Possible Savings of Thousands of Dollars

These rules are complex, but construction firm owners may be able to save thousands of tax dollars with some astute year-end moves. Talk to your tax advisor to ensure you understand all the potential tax ramifications when shop to buy a new vehicle for your business.

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Posted on Jul 29, 2017

It’s trite but true: time is money. And in the construction industry, this saying is particularly pertinent.If a project can’t be completed on time, it may result in penalties and other unwanted repercussions, not to mention the harm to a construction company’s reputation. And, in the worst case scenario, the firm may not get paid at all.

Terms of the Contract

Delays in construction aren’t unusual and are usually covered by the terms of the contract. Typically, contracts set a number of deadlines, with penalties for failing to complete each on time, barring any special circumstances. Of course, looming large is the ultimate deadline — the substantial completion date.

Besides a final payoff, the substantial completion date may affect other matters, including state and local government requirements, payments to third parties, availability of tax incentives and responsibilities to lenders. It can’t be viewed in a vacuum.

The specifics will vary, but the list of elements governed by contract terms likely is to include the following items.

Identification of deadlines.

In some cases, the contract will specify a hard-and-fast calendar due date, such as the end of business at 5 pm (insert time zone) on December 31, (insert year). Alternatively, you might tie the completion date to a specific event such as one year after the municipality issues a building permit or two years after the contract is signed.

If you use a date tied to an event, make sure that the language in the contract is clear. Also, check to avoid deadlines that occur on a weekend or holiday or make appropriate adjustments (for example, the next business day).

Excused delays.

This is often at the crux of conflict between construction firms and clients, so it’s important that excused delays are ironed out in the contract. An “excused” delay is one that couldn’t have been reasonably foreseen before the parties signed the contract.

When possible, be specific regarding events that would result in an excused delay. For example, a strike by vendors providing raw materials might be listed as an excused delay. Conversely, inclement weather might not be allowed as an excused delay, depending on the geographic location of the project.

Excused delays can be a significant negotiating point and your interests may lie in whether your firm is the general contractor or a subcontractor. Although it may be difficult to resolve these issues at the outset, it could save plenty of hassle — not to mention legal fees — by coming to a clear agreement in the contract.

Money.

If delays are caused by factors outside of your control, your firm may require an increase in pricing to meet the specs of the project. Again, your needs may vary based on your role in the process, and you might specify increases for certain types of excused delays and not for others.

Owner-caused delays.

Even though construction firms often cause delays, the fault may lie with the property owner. For instance, an owner might make substantial revisions to the building plans, fail to point out flaws in the design or other problems after work has already started or simply procrastinate when important decisions must be made. Similarly, a subcontractor may be held back by the actions, or inactions, of a general contractor.

As you might imagine, this can turn into a contentious issue, so again it’s best to address contingencies in the contract. It must be established whether the delay is caused by one party or multiple parties and how the penalties and extra costs should be allocated. It’s best to clearly define the terms before problems occur and rely on an exact formula for attributing costs.

Finally, note that delays may occur because the owner fails to make good on certain promises, such as payment at different stages of the project. It’s logical that the construction firm shouldn’t bear the burden of this type of delay and terms in the contract may address these situations.

Notification.

When a delay occurs — by either party to the contract — notification is generally required. Typically, this responsibility is triggered after a designated number of days, such as 30 days after a deadline is missed. Failure to provide proper notification will often result in a waiver of rights and price adjustments.

Not only does this provision ensure that delays are legitimate, it creates a timeline that can be easily verified, thereby ensuring enforcement of contract terms. However, frequent delay notifications may also be a nuisance and hurt the relationships of the parties. Consider this in your negotiations.

Overview of Damages

In a typical situation, one of the parties will suffer damages when delays push back completion of the project. For example:

  • Damages to property owners. Due to delays, property owners may end up losing rental income, future tenants, public incentives and tax benefits, and financing opportunities, just to name several of the main possibilities. It may also require additional interest costs on loans and other related expenditures.
  • Damages to construction firms. A firm will likely face additional overhead costs when a project drags on past the stated deadline. In addition, revenue will be lost when crews remain tied up on the job when they could be working elsewhere.

These consequential damages also may be reflected in the contract. However, based on the language of the contract, it may not be possible to recover such damages, especially when they’re speculative in nature. It may be difficult to prove the dollar value with a reasonable certainty, so some costs may have to be absorbed.

Finally, consider the aspect of liquidated damages. These are damages agreed upon in the contact if one party breaches the contract. For instance, liquidated damages may apply if a contractor breaches the contract by missing the substantial completion deadline.

This provision generally stipulates an amount (such as $1,000 for every day the project is late). The amount is usually deducted from the project price. It should be noted that liquidated damages are often contested as to the enforceability of the provision and the calculation of the damages.

Review Closely

Pay close attention when you enter into a deal no matter how profitable it initially appears. Have your legal advisor draw up the contract to help ensure you’re adequately protected in the event of any significant delays.

Airport Delays

Some construction delays have higher profiles than others.

Case in point: Work on the new $1 billion “people mover” and remote rental car facility at Tampa International Airport (TIA) is currently running more than four months behind schedule.

Problems are to be expected, of course, but some of these caught the parties by surprise, such as:

  • Travelers kept getting in the way of construction crews.
  • Workers discovered storm drains near the people mover station at the main terminal, so the foundation had to be redesigned.
  • A soil problem was discovered under the people mover route connecting the remote parking garage and rental car facility with the main terminal. Again, the foundation had to be redesigned.

Initially, the project was supposed to be completed by October 2017. Now TIA officials will gladly settle for an opening before spring break in 2018.

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Posted on Jul 1, 2017

It is one thing to disagree about certain aspects of a construction project. It’s quite another when disagreements justify the termination of a contract due to default.

Prime example: In a recent case, a contractor doing work at a federal government facility faced termination for default where he repeatedly insisted on changing designs, failed to submit required documents and didn’t submit a safety plan. (Appeals of Industrial Consultants, Inc. d/b/a W. Fortune & Co., ASBCA No. 59622, 3/10/17)

Background

When construction projects end up in legal disputes, the terms of the contract generally control the outcome. And sometimes a breach of the contract results in a termination due to default.

Of course, not every breach is a deal-breaker. Only a material breach warrants termination. Courts have characterized a material breach as a substantial failure to perform or a violation of terms that is substantial enough to invalidate a contract’s intent. Essentially, a material breach is so fundamental to the terms of the contract that it defeats its main purpose.

One instance that can result in termination is a failure to follow design documents. In a classic case, the Appellate Court of Connecticut held that the construction of a kidney-shaped pool was a substantial deviation from the peanut-shape listed in the contract and that it constituted a material breach. The pool contractor’s refusal to comply with the contract’s specifications justified termination. (Strouth v. Pools By Murphy & Sons, Inc., 829 A.2d 102, 8/26/03)

Another basis for contract termination is a delay in completing the work by the date specified in the contract or where circumstances make timeliness critical. In some cases, a combination of failure to follow design and lack of timeliness can combine for a justified termination.

Facts of the Recent Case

A federal research and engineering facility in Hanover, NH, put out a contract to upgrade its heating, ventilation and air conditioning (HVAC) equipment. Although the scope of work was limited by budget constraints, the job was designed to include replacement of the air handling and condensing units, the variable air volume terminal units and the existing louvers, as well as ductwork modifications.

Prospective bidders were “urged and expected” to attend a pre-bid site visit conducted by the U.S. Army Corps of Engineers and told the work would have to meet certain Army Corps specifications. The contractor in question declined to visit the site before making the bid. The firm’s bid price was the lowest bid by a 35% margin.

The parties entered into a contract that allowed more than a year to complete the work. Work on site could only be performed on no more than four consecutive weekends after electrical work was completed by a third party. And that work couldn’t be finished until two months before the contract’s specified completion date.

Safety Plan and Product Data

One of the contract issues relating to the dispute was a standard government requirement that the contractor had to submit for approval by the contracting officer 1) an accident prevention plan and 2) product data for the air handling unit and other equipment.

The contractor visited the site for the first time a little over a month before work was scheduled for completion. After this walk-through, the contractor concluded that the government’s design had significant defects. He then began a campaign to redesign the work, which he refused to drop even though the Army Corps repeatedly told him to build as designed.

In the course of this process, the contractor submitted numerous Requests for Information to which the government promptly responded. Subsequently, the contractor either delayed in providing government-requested submittals or never provided requested submittals at all.

“Lack of Response”

Eventually, the officer in charge of the work sent three notices to the contractor, demanding that deficiencies be fixed. Numerous communications went back and forth between the parties. According to the officer in charge, the contractor was accusatory, combative and unwilling to cooperate. Two days after the scheduled completion date, the officer in charge issued a termination for default, citing the firm’s “lack of response regarding (the) request for required submittals, and to complete the contract as written.”

The outcome: The case went to an administrative judge for the Armed Services Board, who ruled that the contractor failed to:

  • Complete the work in a timely fashion,
  • Proceed with the work after the Amy Corps rejected its proposed changes to the project,
  • Furnish some of the requested submittals, and
  • Gain approval of other submittals.

Because the contractor was unable to demonstrate that the defaults were excusable, termination for default was granted.

Stick to Basics

Although you may have some leeway on construction projects, you must adhere to the basic contract. If it states that you must build in a certain way, follow the specified design or run the risk that your firm will be terminated for default.

4 Tips on Government Bids

When work in the private sector slows, you might be able to tap into another source of revenue: federal and local government authorities.

But winning a government bid is hardly a slam dunk, and your firm may find the process to be tedious and sometimes overwhelming. Here are four basic tips to help you get started.

  1. Start small and end big. Most government agencies place a value on past success. Win a few small contracts and then you can move on to a bigger piece. Once you get your foot in the door, keep it there until you’re ready for the next step.
  2. Do the legwork. Fortunately, you can find most of the resources you need online. First, sign up with the Central Contractor Registration (CCR) database, creating a profile so government procurement officers can find you. Then sign up for the pre-approved bidder list for the General Services Administration (GSA).
  3. Keep your nose to the grindstone. This is a marathon, not a sprint. It may take a couple of years or even longer to win your first bid. Those who throw in the towel early aren’t around to finish the race.
  4. Foster relationships. As it is in the private sector, developing relationships with government procurement officers is essential to continued business. In addition, partnering with other entities may lead to future payoffs.

 

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Posted on Jun 2, 2017

The Occupational Safety and Health Administration (OSHA) has updated its Outreach Training Program, including the courses for the construction industry. Meanwhile, the Government Accountability Office (GAO) has given the courses a thumbs-up in a study, saying they’re well-designed and operating efficiently.

The GAO compared OSHA’s design and evaluation efforts for its training program with leading practices in GAO’s training guide (which OSHA isn’t required to follow) and federal internal control standards. Based on its finding, the GAO stated that it won’t issue any recommendations for OSHA.

The agency’s report stated, “OSHA took steps to design the Outreach Training Program so that workers receive consistent and quality training by using data to identify the content of the training, developing training materials, and issuing detailed requirements for training providers.”

OSHA created its specialized training program to help ensure safe and healthy working conditions. Using a “train-the-trainer” model, the program authorizes someone who completes the curriculum to conduct training courses for employees in certain industries.

The training isn’t a requirement. However seven states require workers to complete OSHA’s 10-hour construction safety training course before being allowed to work on state-funded construction projects. The seven states are: Connecticut, Massachusetts, Missouri, Nevada, New Hampshire, New York and Rhode Island.

The construction training program teaches workers about their rights, employer responsibilities, and how to file complaints as well as how to identify, abate, avoid and prevent job-related hazards. It includes 10-hour and 30-hour versions. The longer course is geared to supervisors or others with safety program responsibility.

Recent Updates

The updated program closely resembles the previous training, with instructors delivering the 10-hour or 30-hour courses at vocational schools, union facilities and factory floors. Among some of the revisions are:

  • Class time is shortened to 30 minutes from 60 minutes. This means that if a 10- or 30-hour class is held over many days, participants are required to meet for at least 30 minutes a day.
  • Prerequisites for taking a trainer course include five years of safety experience in the industry covered by the training. In order to substitute education for two years of experience to meet this requirement, students must have a bachelor’s degree or higher.
  • Construction-specific updates:
  • Minimum teaching time is 2.5 hours.
  • A new elective, Foundations for Safety Leadership.
  • To stay current on relevant OSHA matters, authorized trainers must complete the Update for Construction Industry Outreach Trainers course every four years. The Trainer Course in Occupational Safety and Health Standards for the Construction Industry may also be used to maintain authorized status.

OSHA has also clarified some issues:

  • Time spent on testing and other paperwork or recordkeeping activities doesn’t counts as “contact hours,” and
  • Students must be sent home after 7.5 hours of class time, and they can’t return until at least 8 hours later (so, if a class ends at 10 p.m., the students can’t return before 6 a.m. the next day.

The curriculum follows a robust topic design that is constructed to ensure that each individual receives similar training no matter what the work situation.

Specific Course Work

Overall, the training modules must cover a specific set of topics with an allotted time devoted to each topic. Although there’s a small degree of flexibility, typically at least two OSHA-specific electives are delivered in the 10-hour course and six in the 30-hour course.

The required 10-hour Construction topics include:

1. Introduction to OSHA,

2. Personal protective equipment and lifesaving equipment,

3. Health hazards in construction, and

4. The Focus Four Hazards, which covers:

  • Falls,
  • Electrocution,
  • Struck by (for example falling objects, trucks or cranes), and
  • Caught In or Between (for example trench hazards or equipment).

The elective topics include:

Cranes Stairways
Excavations Ladders
Material handling Hand and power tools
Scaffolds  

The required 30-hour curriculum mirrors the 10-hour version but is more in-depth. Elective topics are expanded to 12 hours.

Disadvantages of the Program

Nevertheless, OSHA Outreach Training isn’t meant to be the only training for employees. There are several other important considerations.

Critics note that the Outreach Program doesn’t offer any additional indemnity or level of compliance over other training alternatives, despite frequent employer assumptions that it does. Firms providing the training to employees are still legally responsible for workplace accidents and fatalities. OSHA cautions participants that training is intended to provide basic safety hazard awareness. It’s mainly up to employers to ensure operations are properly performed.

Also, a fundamental weakness of this or any type of standardized safety program is that the training rarely addresses the hazards specific to any single employee role or worksite. To be more effective, safety training should emphasize specific learning objectives relevant to the work experience.

Some analysts suggest that a better idea might be to base safety training on an analysis of the hazards of a specific job. Some common job tasks that would comprise a routine hazard analysis are:

  • Jobs that cause (or may cause) consistent injuries or illness,
  • Jobs that cause (or may cause) severe or disabling injuries or illness,
  • New jobs,
  • Jobs that have changed recently, and
  • Complex jobs that require written instructions.

Hazards that are identified during a safety analysis can then be incorporated into company training. In addition, training and education can help workers feel competent enough to identify and report hazards they may encounter.

Finally, the program doesn’t satisfy the training requirements specified in OSHA standards for construction. Additional training is required to address exposures and hazards that employers may face either directly or indirectly. Workers should be well-versed in OSHA standards for operations conducted at their worksites.

Stepping Stone

Given the number of fatalities and injuries sustained by construction workers, it may be worth considering the Outreach Training Program as a stepping-stone toward further improvement.

Fear the “Fatal” Four

The Focus Four hazards were responsible for nearly two-thirds (64.2%) of fatalities in construction in 2015.

According to the Department of Labor, 4,836 workers were killed in all private sector jobs in 2015, the highest total since 5,214 in 2008. On average, that amounts to more than 93 a week, or 13 deaths every day.

Of the total, 937 (21.4%) occurred in construction — more than one out of every five.

The leading causes of construction deaths (excluding highway collisions) were falls, followed by being struck by an object, electrocution and being caught in or between two objects.

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Posted on Apr 28, 2017

There’s reason for optimism among U.S. construction firms in 2017. Economists generally have predicted a 5% upswing in the value of starts this year.

However, the industry continues to grapple with issues involving fraud, worker safety, rising materials costs and unions. And there are also a couple of politically charged issues that might give a boost to the industry (see Two Irons in the Fire below).

Here are four key challenges your company may face as the year progresses.

1. Fraud Exposure

Kroll, an international firm specializing in security solutions, commissioned Forrester Consulting to survey 545 senior executives spanning various industries to determine how fraud affected them in 2016. The resulting annual Global Fraud & Risk Report indicates that incidents of fraud among survey respondents have increased 7% since 2015. An astounding 82% of respondents say they experienced fraud last year.

The types of fraud identified in the the study are far-ranging and include:

Bribery and corruption Compliance or regulatory breach
Conflicts of interest Information theft
Intellectual property theft Internal financial fraud
Market collusion Theft and misappropriation of funds
Money laundering Vendor, supplier or procurement fraud

Despite such challenges, the construction industry’s exposure to fraud appears to be declining. Fewer construction, engineering and infrastructure firms reported fraud and cyber threats in 2016 than companies in any other industry represented in the survey. Specifically, fraud was reported by an average of 12% fewer companies in construction than reported on a global scale. Cyber security incidents were reported by 8% fewer construction companies than the average for all industries. Security issues were reported by 5% fewer respondents. The total number of fraud incidents in the industry also declined by 5%.

The reason for fraud most often cited by construction executives is high turnover. Former construction employees reportedly commit:

  • 33% of frauds,
  • 20% of cyber security breaches, and
  • 25% of general security breaches.

Construction firms fight fraud by:

  • Improving employee training and whistle-blowing programs,
  • Screening job candidates more closely,
  • Taking measures in information technology security, and
  • Enhancing risk management techniques.

Increasingly, new technology is helping firms cope with cyber security threats.

2. Injuries and Safety

Firms are addressing safety risks with increased measures to protect workers from falls, dehydration and other common hazards. However, work-related musculoskeletal disorders haven’t received the same level of attention — at least not yet.

A recent study by the Center for Construction Research and Training shows that these disorders are especially challenging among construction workers. They include muscle, tendon, joint and nerve strain often caused by unusual posture and excessive bending or twisting. Frequent exposure to vibrations may also contribute.

The study examines workplace injury and illness data from various surveys spanning 1992 through 2014. Although the number of musculoskeletal disorders reported in 1992 was nearly three times the number for 2014, they still accounted for about 25% of all nonfatal construction-related injuries. That resulted in a total wage loss of $46 million for the year.

Sick leave due to on-the-job injuries can have a major impact on a firm’s bottom line. Health experts suggest that ergonomic solutions could help limit the number of musculoskeletal disorder cases in the construction industry. Training and using equipment for heavy lifting are also recommended.

3. Building Materials

Figures from the U.S. Bureau of Labor Statistics (BLS) in December 2016 showed that the price of construction materials increased 0.4% from the month before, according to an analysis by the Associated Builders and Contractors trade association. Compared to prices the year earlier, materials were 2.1% more expensive at the end of 2016. Much of the increase was attributed to rising energy costs, which spiked 23.1% in December.

After those figures were published, Moody’s Investors Service released their outlook for 2017. It projected that 2017 will be a profitable year for the building materials market due to construction spending levels and steadily climbing prices. That translates into a growing concern for contractors, especially with workers demanding higher wages.

If prices continue to be pushed upward, companies may have to scale back on project capacity or consider other budgetary cuts to ensure a profit. The situation could be exacerbated if prices escalate beyond expectations.

4. Union Membership

Union representation in the construction industry reached 14.6% in 2016, up 0.6% from 2015, according to the BLS. That upward trend followed two years of decline. In any event, the industry maintains one of the highest union membership rates of any private sector, with only utilities, transportation and warehousing, and telecommunications outpacing it.

The BLS report also indicates that union workers’ earnings were 47% higher than those of nonunion workers in the industry, but they rose at a slightly lower rate over the year. The weekly median pay in 2016 increased:

    • 4.8% to $1,146 from $1,093 for union workers,
    • 5% to $780 from $743 for nonunion workers, and
  • 9.9% for all construction workers.

In addition to pay differences, union representation among construction workers is significant to firms because of differing approaches on legislative matters, safety requirements and project labor agreements. Dealing with union representation remains a sensitive issue for many construction firms.

The upshot: Experts are indicating guarded optimism for 2017. Although the forecast is far from gloomy, there will be challenges. It would be wise to proactively take steps to help keep your firm going strong.

Two Irons in the Fire

If they go forward, a couple of President Trump’s initiatives could bolster the construction industry in 2017 and beyond.

Pipelines: The president has given the green light to the Keystone XL and Dakota Access pipeline projects that were previously blocked. Besides the construction jobs that might be added to facilitate these projects, less regulation, especially in the area of environmental issues, could also result in increased opportunities for government contracts and other projects.

Border wall: The Customs and Border Protection section of the Department of Homeland Security has started to solicit proposals for building the president’s planned border wall. Even accounting for natural barriers, the construction of the wall would be a massive undertaking and would require a large influx of capital and manpower.

But in this uncertain political climate, it remains to be seen how these will actually play out.

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