Category: Construction

Posted on Apr 7, 2017

Women have made strides in the construction industry, but despite the inroads, they have a long way to go before reaching parity with their male counterparts, especially when compared to other industries.

According to a U.S. Bureau of Labor Statistics report published late in 2015, the last available report of its kind, women accounted for 47% of all employed people in the United States. However, the share of women represented in specific occupations varied greatly. For example, 90% of registered nurses, 81% of elementary and middle school teachers, and 63% of accountants were women. In comparison, the federal study showed that women represented only 9.3% of construction workers.

For decades, sexism was prevalent in the industry, with only occasional breakthroughs before the feminist movement really started taking hold in the latter half of the 20th Century. While strides have been made on job sites and in executive suites since then, fighting against age-old habits remains an uphill battle.

Early Conditioning

Women have faced barriers in practically every industry and profession — pioneers often speak of shattering the glass ceiling on compensation and job positions — but the construction industry has been particularly intimidating. As a result, female participation remained on the low side.

As girls grew up, many were conditioned to look for jobs in education and health care. Construction was often characterized as male-only or at least dominated by men.

Other factors deterred the growth of women in the industry. Some women turned to other careers because of sexist attitudes and a desire to be taken more seriously. Others pointed to safety and health concerns. And without a sufficient number of leaders who could serve as mentors, the needle didn’t move far in construction.

Three Areas of Change

Nevertheless, advances have been made as women gain more traction. This is exemplified by significant changes in three areas:

1. Stereotypes. Women are no longer pigeonholed as teachers or nurses. Increasing numbers of people are thinking more broadly, including girls and their parents during the formative years and decision makers at construction firms. It’s no longer your granddaddy’s construction company.

Technology also is having a major influence. As technological advances are made in construction, women who previously might not have joined worked crews on-site now participate from the home office. More industry leaders are visiting (and sometimes recruiting at) high schools, technical schools and colleges to get the message across about available opportunities. And women are being encouraged to take courses that can lead to further advancement in the industry.

2. Harassment. Inappropriate practices simply aren’t tolerated. Managers and supervisors who would have looked the other way in the past are now on high alert. Stricter human resources policies are being developed and observed.

In addition, females on construction crews are speaking up. Previously, they may have been silent about sexual harassment for fear of losing their jobs. However, by shining a light on inappropriate behavior, improvements are being made. Groups such as the National Association of Women in Construction and Chicks with Bricks are lending support.

3. Safety. All construction workers, male and female, face risks on a daily basis. But the work may be more even more hazardous for women because protective gear and equipment generally is designed to accommodate average-sized men. Women may have difficulty finding properly fitting protective equipment.

Increasingly, firms are starting to use equipment and clothing that is designed for women on construction jobs. Similar accommodations are being made for men of smaller stature.

As with sexual harassment, women might not report issues about construction safety for fear of losing their job. However, laws enforced by the Occupational Safety and Health Administration (OSHA) offer some protection.

OSHA also provides information, training, and assistance to workers and employers in an attempt to improve safety for women on construction jobs. It offers webinars relating to these issues as well.

Note: When an employee signs a formal complaint, it is more likely to result in an OSHA inspection.

The Road Ahead

The construction industry increasingly is becoming a better option for women, featuring competitive pay, career training and the opportunity for growth. While women still have to fight for equal pay in this country across the board, the gender wage gap is shrinking.

In fact, certain numbers favor women in construction. According to a recent U.S. Census Bureau report, full-time female construction workers made about 93.3% of what male workers were paid compared to 79.5% of what male employees were paid overall.

Women are also being given more opportunities to take on higher-paid positions, such as construction managers and construction site inspectors, where they can utilize communication and management skills. Also, more females are taking on an entrepreneurial role, including fields that were previously dominated by males, such as construction.

A Brighter Future?

According to the U.S. Census Bureau, there are slightly more than 150,000 women owning businesses overall in 1997 and that number roughly doubled during the next decade. This bodes well for more female construction firm owners in the future.

It seems that women are gaining ground in the construction industry and we can expect this trend to continue.

One Woman’s Story

Adeleen Shea drew plenty of dirty looks when she walked through malls under construction in her distinctive pink hardhat and conservative business suit.

At the time she was a project coordinator just out of college. Now she is general manager at Commonwealth Building Inc., in Quincy, MA, and has been in the construction business for 36 years.

When she started, seeing a woman on construction sites was a rarity, especially in certain areas like the Midwest, and some crews resented her presence. Shea says that the situation has improved, but it’s still not ideal.

“It’s better than it was,” she notes, “but being a woman in the construction industry remains a challenge.” Significantly, she refers to an undertone where workers believe that a woman is “taking away a job that would have been a man’s job.” The construction workplace is evolving, but the pace is slower than in many other industries.

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Posted on Mar 3, 2017

Construction companies experience unique accounting structures due to expenses driving revenue as projects move through various stages of completion. By managing a variety of costs, such as overhead, budgeting, and talent, owners and project managers can improve cash flow and bid smarter on fixed price contracts.

Overhead and Budgeting

While profits (or lack thereof) are directly driven by job costs, don’t forget to factor in overhead:

  • Office payroll and benefits
  • Building rent or mortgage
  • Utilities
  • Internet
  • Insurance
  • Marketing
  • Equipment and supplies
  • Professional services
  • Professional dues
  • Meals and lodging
  • Shipping and postage
  • Cell plans

Every dollar of overhead reduces your ability to compete and bleeds money from profit margins. Make the time and effort to examine every overhead line item on the profit and loss statement. Look for opportunities to reduce overhead. If it has been 2-3 years since you last shopped the item, whether it is property and casualty insurance, a cell phone plan or your electrical provider, do so.  You may be surprised at the amount of cost you can drive out of your overhead.

Finally, make the time and effort to develop a comprehensive budget incorporating your understanding of your job cost drivers, your targeted sales numbers and your refined overhead. Develop the discipline to compare your actual performance to the budget on a monthly basis, if for no other reason than to refine your understanding as to the cost drivers within your business.

Talent and Risk

This brings me to your pool of talent. FMI Quarterly noted in a 2016 survey of construction firm owners that lack of experienced field supervision and project schedules posed some of the top risks to their bottom line. This points to the critical role that the right talent plays in a company’s success. And, as we know, skilled talent is very hard to come by in this field.

Traditionally, many construction companies have had a busy season and a slow season in which workers are furloughed and start collecting unemployment. Post-Recession, companies have downsized their primary workforce and brought on temporary labor through staffing agencies as needed. Others have changed their business model to eliminate the slow season and keep employees busy year-round.

Whichever hiring and retention option you choose, the main idea is to right size your workforce and make sure you are hiring the right people in the first place. A temp-to-hire option through a staffing agency can reduce the risk of hiring the wrong person who costs money in training and time but ends up quitting a few weeks or months later. The more you can stabilize and train a strong pool of talent, the less likely you are to outlay unemployment, worker’s compensation or other employee costs.

Stay Disciplined

Over the past decade, the construction industry has seen even the biggest and longest-running construction companies fail. A regular study of contractors by risk management consultancy FMI concluded that getting too much work, too fast, with inadequate resources led to inadequate capitalization. Often, the hubris within leadership led to the company’s downfall, assuming they were too big to fail. Imagine the risks, then, to a small operation.

A dedicated CPA can perform an analysis of past jobs and predict the likelihood of profitability on future jobs. If your company is regularly averaging a negative margin, for example, it won’t be long before your company risks its bonding capacity — or worse — is headed toward bankruptcy. Before taking that risk, get to the bottom of your true costs so your company can thrive in a competitive fixed-price environment.

Download the Whitepaper: The Real Cost Savings to Look For in a Fixed Price Environment

Cornwell Jackson’s Tax team can provide guidance on reigning in costs by reviewing your profit and loss statements, work in process and general accounting ledgers. Contact our team with your questions.

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 Feb 21, 2017

At the heart of a profitable construction company is an accurate bidding process. An accurate bid involves much more than your expected materials or your sub-contractor and labor costs. There are also other variables to consider related to the site, the weather, the subs (or GC), customer expectations and how you expect your competitors will bid. The more you factor in those variables across all bids, the closer you can get to a bid that is competitive but will also match true costs.

Construction companies can get very efficient at estimating the expected costs per job; however, they don’t always factor in “hidden” job-related costs in developing the bid:

  • Labor-related benefits
  • Fleet vehicles (owned or rented) and maintenance
  • Fuel
  • Small tools and other job consumables
  • General liability insurance
  • Safety program

If these costs are not considered, the company is at risk for missing the expected job profit, particularly in longer-lived jobs.

Reducing Job Costs and Increasing Margins

Identify the areas where your company has historically experienced cost overruns and develop incentive plans for the project management or field supervisory team to minimize those costs. If their bonuses are tied to the following key performance indicators, it can help to improve per job realization:

  • Cost-effective materials sourcing
  • Efficient and timely use of labor
  • Waste reduction
  • Safety management
  • Early troubleshooting on budget or timeline concerns
  • Timely work in process updates
  • Quality standards (minor punch lists)

If you have never instituted a specific accountability program for these KPIs, develop standards for two or three and incorporate them into the next round of new work. If there is already some level of accountability in place, audit the results and look for additional areas for improvement.

When designing the incentive plan, it is important to keep parameters in place so that cost savings achieved do not come at higher costs in another category. For example, a labor savings incentive program may inadvertently incentivize the foreman to bypass safety protocols. An accident on the job will potentially result in long-term increased costs in worker’s compensation insurance (not to mention legal claims) that far outweigh the labor savings. Additionally, design the program so that any bonuses are not paid until the warranty period has run in order to assure cost savings do not come at the cost of quality.

Does your company schedule a realization meeting after every completed job? These meetings can identify jobs that provided a healthy margin as well as jobs that lost money. By reviewing past performance, you can get a better sense of where bidding and costs were not aligned, the drivers for cost overruns and even whether a project type is still worth pursuing. For these meetings to be effective, however, you have to have accurate cost reporting. When looking at past jobs in which a company made or lost money, it’s a good exercise to understand exactly what drove the costs. Even though every company at some point has experienced a freak of nature, an accident or a materials shortage, there are usually more cost drivers that the company and its management can actually control.

One of the other areas that a company can review — and this ties to a longer-term shift in the business strategy — is the type of job bid.

Conditions change, and the jobs that used to be lucrative for a company can slowly whittle away margins due to higher competition, compliance issues or threadbare budgets. At the company I served, it was determined that K-12 school construction projects had experienced tightened margins, shortened project timelines and increased competition. Shifting the segment focus to junior college improvement projects, a market segment with less competition, helped the company to improve profit margins.

Continue Reading: Balancing Overhead, Budgeting and Risk to Increase Project Profits

Cornwell Jackson’s Tax team can provide guidance on reigning in costs by reviewing your profit and loss statements, work in process and general accounting ledgers. Contact our team with your questions.

Scott Allen - Construction Industry Expert

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 Feb 9, 2017

construction accounting, construction CPA, accounting for construction company, accounting for construction companies

Construction companies experience unique accounting structures due to expenses driving revenue as projects move through various stages of completion. By managing a variety of costs, maintaining safety for employees and hiring the right people, owners and project managers can improve cash flow and bid smarter on fixed price contracts.

In my role as the fractional CFO/controller for a rapidly growing construction company earlier in my career, I experienced the tough reality of out-of-control costs in a fixed contract price environment. Costs were out of control partially because the company’s rapid growth was surreptitiously changing the company’s underlying cost structure and partially because economic conditions had changed. The net result was a squeeze on profit margins and cash flows that placed the company in danger of marching down the primrose path.
The squeeze resulted in a snowball effect on cash management. The accelerated growth had outpaced the company’s ability to increase the bank line of credit capacity, which meant that any increased demand for cash had to be satisfied through cash flow generated by the jobs. We had to navigate complicated lien rules in order to collect receivables. We had to re-evaluate billing policies and increase the company’s overbilled positions. When bidding new work, we had to be disciplined in the size of projects the company chased or risk the company’s bonding capacity. Meanwhile, we saw general liability and worker’s compensation insurance rate increases due to changes in the market. We could only hope that materials costs would not follow suit.

Once it became clear that we were dealing with something more systemic than a bad job or two, the owner and I went to work understanding what had happened and trying to correct the underlying issues. Within two years, the company accomplished a true turnaround. Starting with a company that was losing $400,000 a year, we ended up with a company that produced a gross profit margin of more than 15 percent annually.

Just one of the interesting lessons learned through this experience was that few construction companies, if any, spend the necessary time each year to comb through their budgets and question the true costs of each line item. Whether it’s the company cell phone plan or fuel and maintenance costs for fleet vehicles, no budget item is too small to scrutinize for long-term savings to the bottom line.

If your company exists in a fixed-price contract environment — as most construction companies do — expenses drive revenue. Especially with a Post-Recession mindset, profitable construction companies must have the discipline to look at their work–in-process reports every month and identify any expenses that are trending above budget.

There are, of course, other factors that can impact cash flow and profits in any given year. Let’s look at the key drivers for real cost savings in the life of a construction company — both short-term and long-term.

Continue Reading: Defining True Job Costs for Construction Bids

Cornwell Jackson’s Tax team can provide guidance on reigning in costs by reviewing your profit and loss statements, work in process and general accounting ledgers. Contact our team with your questions.

Scott Allen - Construction Industry Expert

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 Feb 2, 2017

The graying of America is well documented. With the leading edge of the Baby Boomer generation already past the age of 70, the next two decades will see a 90% surge in the number of people in this segment of the population.

As the ranks of Baby Boomers residing with their children or remaining independent continue to swell, housing demands are changing. There is a growing need for existing home renovations and new housing that accommodate the needs of this aging population. Where expectant parents baby-proof their homes, many residences now may need to be “senior proofed.” This poses challenges and opportunities for the construction industry.

Harvard University’s Joint Center for Housing Studies (JCHS) issued a report late last year that highlights the issues. The report, Projections and Implications for Housing a Growing Population: Older Adults 2015-2035, indicates that during the next two decades, the number of households headed by a person aged 65 or over will increase by roughly 41% to 41.2 million in 2025 and 60% to 49.6 million by 2035. At that point, 33.3% of U.S. households will be headed by someone aged 65 or older.

From 2015 through 2025, the most rapid growth will occur among households aged 70 to 79. From 2025 to 2035, the fastest growth will occur among households headed by someone who is aged 80 or over. In total, in 2035, the number of households headed by someone aged 70 or older will grow 90%, while those headed by a person 80 or older will more than double to 16.2 million.

Continued advances in medical care may further increase those numbers.

Implications for the Housing Market

Of course not all older adults live, or want to live, independently. Some reside with their adult children, others with relatives or roommates, and still others in group quarters, including nursing homes or similar facilities.

The expansion of older households offers significant opportunities for construction firms to provide the new and modified housing that this group will need. Even for the large share of older adults who plan to stay in place, their housing often isn’t well suited to their needs. By 2035, substantial growth in the need for modifications and technology is expected to enhance safety to allow for greater independence in the home.

Although the share of older adults who move each year is low, the JHCS projects more than “825,000 older households moving into owned homes and 1.6 million older households moving into rented homes in 2035.” Some will want to downsize while others will be looking for more space.

A recent survey by Demand Institute shows that 42% of respondents aged 50 to 69 who plan to move will want smaller homes and 32% will try to upsize. The survey by the independent consumer demand think tank found that the inclination to stay close to family and friends is clear, and most don’t expect to move far from their current neighborhood. That finding reinforced the results of an AARP survey in 2014 that showed that being near friends and family ranked as the top choice of housing preferences for those aged 45 and older.

Keeping Disabilities in Mind

Disabilities that occur more frequently with age can present a housing challenge for older adults, especially for those who want to grow old in their current homes. For example, most U.S. homes are poorly equipped to accommodate extra space for walkers or wheelchairs, require stairs to reach a bath or bedroom or have door and faucet handles that are difficult to manipulate for those with arthritis.

By 2035, 17 million older-adult households will have at least one person with a mobility disability who could be restricted by stairs, narrow corridors, doorways and traditional bathroom layouts. This will mean modifications and new construction will have to meet higher standards of accessibility.

Some individuals may resist modifications if they don’t have disabilities, particularly if they have financial concerns or they anticipate moving to another place as they get older. However, given that disability increases dramatically later in life, planning ahead can make eventual changes easier. For example, homeowners may be encouraged to add accessibility features during a remodel, such as a walk-in showers or bathroom walls reinforced for future installation of grab bars.

Develop Your Plans

It may be time for your firm to develop plans to take advantage of this rapidly growing segment of residential construction. Becoming a go-to contractor for seniors’ needs will likely give your company a competitive edge that may help expand your business. Visit the Certified Aging-in-Place Specialist (CAPS) program https://www.nahb.org/en/learn/designations/certified-aging-in-place-specialist.aspx at the National Association of Home Builders (NAHB) website for guidance on the business management and customer service skills you will need.

The CAPS designation offers potential clients what they desire the most: assurances that your business can help with accommodations that will allow them to safely and securely remain in their homes. In addition, the CAPS designation makes homes more “visitable.” Even if homeowners don’t think they need additional task lighting, grab bars and other modifications for their own use, family members and others might. CAPS can help your company thrive in this growing remodeling market niche.

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Posted on Jan 20, 2017

The Section 199 deduction for producing domestic products is often associated with the manufacturing industry. In fact, it is sometimes called the “manufacturer’s deduction.”

But it doesn’t belong exclusively to manufacturers. Other industries, including construction, may take advantage of it. To drive home this point, the IRS recently issued a Technical Advice Memorandum (TAM 201638022) approving the tax break for a company primarily engaged in renovation and construction.

Background Information

The Section 199 deduction has been around for more than a decade. When it first took effect in 2005, it was equal to 3% of income from qualified production activities income (QPAI). It was doubled to 6% for 2007 through 2009, and raised to its current 9% level in 2010. For a business in the 35% tax bracket in 2017, that deduction effectively will amount to a tax cut of more than 3%.

The rules for computing QPAI are complex but, generally, it equals domestic production gross receipts (DPGR) minus the sum of:

1. The costs of goods sold that are allocable to domestic production gross receipts,

2. Deductions, expenses or losses that are directly allocable to those gross receipts, and

3. Certain other deductions, expenses and losses that aren’t directly allocable to those receipts or another class of income.
For this purpose, DPGR includes money derived from the sale, exchange, lease, rental, licensing or other disposition of certain qualifying property that must be manufactured, produced, grown or extracted (MPGE) in whole or in significant part within the United States. (See “Rules of the Road” below.)

Be aware that other significant limits may come into play. For instance, if a company’s taxable income is lower than its QPAI before the deduction is calculated, the break is claimed as a percentage of taxable income. Furthermore, the annual deduction is limited to 50% of W-2 wages the business pays. This can be a significant limitation for employers trying to keep a lid on salaries.

On the plus side, the Section 199 deduction isn’t limited to C corporations. It may also be claimed by other types of business entities, including S corporations, limited liability companies (LLCs), partnerships and sole proprietors. Thus, the tax break is available to a wide variety of taxpayers ranging from small businesses to corporate giants.

Inside the Technical Advice

Getting back to the IRS TAM, the company involved is considered to be a construction business under the North American Industry Classification System. Generally, it engages in all phases of field construction, including but not limited to:

  • Direct hire of most labor crafts,
  • Construction and rigging engineering,
  • Welding,
  • Estimating, and
  • Preparation for foundation and ground work.

The projects at issue involved the renovation, construction or erection of structures not specified in the TAM. The renovations either materially increased the property’s value, substantially prolonged its useful life, or both. Although specifics in the memorandum are largely redacted, the materials indicate that the projects were significant in terms of scale, crew and time commitment.

The firm also builds and uses in its construction activities large structures that weigh hundreds or even thousands of tons.

Under a little-publicized part of Section 199, gross receipts are treated as DPGR if they’re derived from the construction of “real property” within the United States while the taxpayer is actively engaged in construction activities.

The IRS has issued copious regulations on this issue. Notably, the regs include a special rule stating that, to determine what activities and services constitute an “item” of real property, a taxpayer in construction may use any reasonable method, based on all of the facts and circumstances.

Critical Tax Analysis

The company addressed in the TAM claimed that its activities were performed on real property under Section 199, with gross receipts from each project constituting DPGR. It said that it’s reasonable to consider each project as an “item” for this purpose. Note that the definition of “real property” in the regulations includes “inherently permanent structures” other than machinery, and structural components of inherently permanent structures.

However, the Large Business and International division of the IRS argued that treating each project as an “item” wasn’t reasonable. It contended that the company’s activities on these projects didn’t qualify as the construction of real property under Section 199 because the jobs were related to tangible personal property.

In analyzing the issue, the IRS Chief Counsel’s Office (which writes the TAMs) looked to the two basic requirements, under tax regulations, for an inherently permanent structure:

1. It must be affixed to real property, and

2. It must ordinarily remain affixed for an indefinite period of time.
The Chief Counsel’s Office first determined that the units were real property because they satisfy both requirements as inherently permanent structures. It also determined that the conclusion that the units qualified wasn’t affected by the exception for machinery mentioned earlier.

Accordingly, the TAM concludes that the company’s projects qualified as real property construction activities and the gross receipts constitute DPGR.

Bottom Line

Keep in mind that TAMs represent a final determination of an IRS position, but only regarding the specific issue in the case at hand.

Contractors can, however, take away this pearl: Any company may be eligible for the Section 199 deduction if it meets the requirements. If you think you may qualify, consult with your CPA. This is a technical area of tax law best left to the experts.

Rules of the Road

Under Section 199, domestic production gross receipts (DPGR) may be derived from the following activities:

  • Manufacture, production, growth or extraction by the taxpayer of tangible personal property — including all tangible personal property (except land and building), computer software and sound recordings,
  • Production of qualified film,
  • Production of electricity, natural gas or water,
  • Constructing real property, and

Providing services of architecture/engineering.
DPGR resulting from the property produced must be owned by the taxpayer claiming the deduction.

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Posted on Dec 13, 2016

“Green building” is no longer a fringe movement among environmentally conscious contractors. Nor can it be dismissed as a pie-in-the-sky aspiration.

It appears that green building is here, at long last, and likely to stay in vogue for the foreseeable future. There was ample evidence of this at the recent 2016 Greenbuild International Conference & Expo in Los Angeles. The same was expected at the gathering in Boston on November 8-10.

Background Information

Green building — also known as green construction or sustainable building — refers to practices and procedures that are environmentally sensitive and make efficient use of resources. It encompasses the entire life cycle of a building, from design and construction through operation and maintenance to renovation and, if necessary, demolition.

This type of construction requires firms to find the proper balance between traditional considerations such as quality, functionality and affordability with sustainability. And green building isn’t limited to just new construction, it can be applied to all buildings.

Among the technologies and materials you might use if you are constructing a green building are:

  1. Natural paints, which are void of the volatile organic compounds typically found in their traditional counterparts, eliminate indoor pollution and decompose naturally without contaminating the earth.
  2. Zero-energy designs that use solar cells and panels, wind turbines, and biofuels, among others, to provide electricity and HVAC needs.
  3. Water recycling, which reuses treated wastewater for agricultural and landscape irrigation, industrial processes, toilet flushing, and replenishing a groundwater basin.
  4. Low-emittance windows coated with metallic oxide to block the sun’s harsh rays during summer and keep the heat inside in the winter. They significantly bring down HVAC costs.

Although the ground rules and technology continue to evolve, the main shared objective of green building remains protecting the environment. This may be accomplished through such elements as:

  • More efficient use of energy, water and other resources,
  • Improved productivity,
  • Reduced waste, pollution and general deterioration of the environment, and
  • Sustainability.

Data Collection and Analysis Trends

Previously, green building relied primarily on anecdotal evidence or limited instances documented on a case-by-case basis. Now, with support from certification organizations (see box below), improvements in data collection and analysis are furthering green building initiatives.

Data collection is only now moving to the forefront of the construction process. This may transform how buildings are designed, constructed and operated.

Specifically, it’s now possible to track data sets during the operations and maintenance stages, including:

  • Air quality,
  • Lighting,
  • Utility and leading data,
  • Thermal comfort, HVAC and weather,
  • Waste recycling,
  • Security, and
  • Occupancy.

Gathering this information and then acting on it can have a profound impact, especially when technology is used, and it may result in greater energy efficiency and cost reduction.

A potential stumbling block is the complexity of varying software tracking methods. This is being overcome by advances in technology that make it easier to quantify and apply the data. With programs like GRESB, companies can track the continuing performance of their buildings and make improvements when necessary.

Furthermore, innovators using this approach are being recognized as leaders in their industries, generating greater interest from investors, while attracting and retaining top-notch talent. This happy confluence of events creates even more momentum for the green building movement.

Investors and other interested parties have also sparked green building activity by trumpeting the need for reducing the world’s carbon imprint. Naturally, the investors are interested in protecting their assets, but they are also addressing environmental concerns and promoting the type of sustainability that will benefit them in the long run. Finally, environmentalists in certain other fields (notably, the manufacturing sector) have rushed to join the cause.

Outlook for More Greening

Now that the steps of data collection and analysis are being implemented, proponents of green building hope to move forward through innovation and sensitivity to environmental issues. But certifications and adopting different approaches for utilizing data to improve building performance shouldn’t be the final goal. It’s important for green building to become integral to the construction process.

Expect technology to facilitate the next phase. Stakeholders in the industry, including construction firms of all shapes and sizes, should learn from others and then “pay it forward” by sharing information and new developments with peers.

Those who don’t jump on the bandwagon now run the risk of being left in the dust.

Seven Top Shelf Products

At the 2016 Expo, BuildingGreen Inc., a green resource center based in Vermont, presented its annual selection of green products that have the potential to change construction processes and procedures.

They ranged from products that conserve electricity to those that reduce construction waste to replacements of traditional materials with healthier alternatives. Here are seven of them:

  1. Accoya Acetylated Wood, which is stable, insect repellent and moisture resistant.
  2. Securock ExoAir 430, a weather barrier that allows for faster installation and reduces jobsite waste.
  3. Aquion Low Toxicity Battery, which uses non-hazardous sodium sulfate electrolyte instead of the common lithium ion or lead acid found in typical batteries.
  4. Nextek Power Hub Driver, an all-in-one AC to DC power converter that uses solar energy, batteries, and other renewable energy sources to convert power currents.
  5. HyperPure Water Piping, a flexible potable water pipe made from bi-modal polyethylene.
  6. Designtex Textiles, a database that allows search through more than 8,000 certified sustainable textile materials based on criteria ranging from specific certifications, to chemicals, logistics and optimized chemistry.
  7. The d-Rain Joint Rainwater Filter Drain that is a low-cost system to manage water runoff.

Being Certified

Supporting the green construction movement are standards, certifications and rating systems aimed at mitigating the impact of buildings on the natural environment through sustainable design.

The Building Research Establishment’s Environmental Assessment Method (BREEAM) is the first green building rating system in the U.K. It is the oldest rating system, created in 1990.

In 2000, the U.S. Green Building Council (USGBC) followed suit and developed and released criteria also aimed at improving the environmental performance of buildings through its Leadership in Energy and Environmental Design (LEED) rating system for new construction. The U.S. Green Building Council developed it.

Various other efforts stimulating green building have been championed by the World Green Building Council and World Bank. Netherlands-based Global Real Estate Sustainability Benchmark (GRESB), a for-profit organization specializing in assessing real estate properties, has also been a valuable contributor.

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Posted on Sep 22, 2016

Federal Construction Contractors

Many people support the ideal of buying American-made products. That’s reflected in marketing that appeals to our patriotism. In addition, certain laws and regulations govern federal contractors and “Made in the USA” business activity. And during this election year, there’s an emphasis on supporting American businesses.

However, what could be a boon for certain sectors could hinder others. According to some observers, the construction industry is a prime example of an industry that could be hurt.

Federal Restrictions

Buy America features are prominently spotlighted in three areas of federal legislation:

1. Buy American Act. This federal law was passed during the Great Depression and has been modified and updated several times over the years. But its main thrust remains the same — that the U.S. government give preference to U.S.-made products in its purchases.

Currently, the law requires that more than half (at least 51%) of the components of a product be made within the borders of the United States. In addition, the product must be substantially transformed in some way, shape or form by laborers in this country.

Although federal government contractors generally must comply with the Buy American Act, there is an out. Under the Government Procurement Agreement (the GPA), signatory countries of the World Trade Organization, of which the United States is one, can treat products made in other GPA countries as homegrown if they satisfy a minimum value threshold. For instance, a U.S. company can take advantage of that exception if a federal contract is valued at $5 million or more.

There are ways to get waivers but you can’t just say, “It costs too much” (see box below).

2. Buy America Act, which is part of the Surface Transportation Assistance Act, not to be confused with the Buy American Act described above. This legislation is a highway spending bill that includes requirements for federal government contractors to buy in the United States. The provision applies to certain projects financed by the U.S. Department of Transportation, and typically involves purchases of iron and steel, although it may include other manufactured goods.

“Buy America provisions ensure that transportation infrastructure projects are built with American-made products,” explained Secretary of Transportation Anthony Foxx.

The standards in this law are very tough. Notably, made in America generally means that 100% of the components used must be melted, poured, shaped and coated in a U.S. steel mill. Currently, there are fewer than a dozen of these “integrated” steel mills in the country. All of them are in the eastern part of the country and some don’t produce construction materials.

Another difficulty for some contractors is that the law precludes the use of GPA products.

3. Environmental protection regulations. Rules pertaining to the Environmental Protection Agency (EPA) also cast a giant shadow over the construction industry. For instance, the EPA’s American Iron and Steel rule applies to products such as manhole covers. Recipients of assistance from the Clean Water State Revolving Fund and the Drinking Water State Revolving Fund are required to use iron and steel products produced domestically. This applies to the construction, alteration, maintenance, or repair of a public water system or treatment works.

Observers in the industry have complained that while buying domestically-produced materials is a popular message, the broad scope of the governance ignores the reality of today’s global economy.

Impact on Construction

The rules may hurt construction firms in several ways:

As in the case of integrated steel mills, companies may wind up vying to show which one is more patriotic. Moreover, when a construction firm needs steel for a project, it may have to use a mill on the other side of the country. This increases shipping costs and other tangential expenses,

Requiring domestically sourced materials may affect trade relationships with other countries. As an example, even our strongest trading partners, such as the European Union and Canada, might restrict purchases of U.S. products in kind.

Projects may be delayed or even halted. Recently, a high rail system planned between Las Vegas and Los Angeles was scuttled because of plans to use railroad cars made in China. (There are exceptions for certain “rolling stock” items like railroad cars, but they still must be produced 60% in the United States.)
Special attention should be paid to the “red tape” associated with the EPA regulations. First, construction firms must determine which rules apply to them and to what extent. Second, they must adopt procedures to ensure that they meet the requirements and then spend time and money on execution and supervision.

Government contractors may hire outside professional help, including legal counsel. And while this can remove many of the headaches, it adds to costs.

Yet another compliance problem can occur when obtaining manufacturer certifications that the products or materials were actually made in America. In a classic example, the Metropolitan Transportation Authority of New York City had to rip out and replace a fire suppression system that was part of a renovation when it found that some of the components originated in Finland. This happened even though the contractor had certification that it was an American-made system.

Looking to the Future

Barring any significant changes after the presidential election, contractors are likely to have to follow these rules for the foreseeable future. If anything, the buy America theme is picking up more steam and has much political support. So consult with your advisors for help devising was to remain compliant and cope in a cost-efficient manner.

Waivers May Be Obtained

Federal government contractors may be able to obtain a waiver from the requirements of the Buy American Act and the Buy America Act to use domestic material if their application has certain elements including:

1. They’re unreasonably expensive.

2. They aren’t available in sufficient quantity or volume.

3. They aren’t within the public interest.
Requirements may also be waived by the President or a delegated authority, to support reciprocal agreements with other countries in the Trade Agreements Act, the North American Free Trade Agreement and the World Trade Organization.

Here’s a fact sheet about the requirements and available waivers from the U.S. Department of Transportation.

The Federal Trade Commission’s “Made in USA” Policy

The Buy American Act and the Buy America Act should not be confused with the Federal Trade Commission’s (FTC’s) “Made in USA” policy, which applies to all businesses — not just federal government contractors.

The FTC Act gives the commission the power to bring law enforcement actions against false or misleading claims that a product is of U.S. origin. Generally, the FTC requires that a product advertised as “Made in USA” be “all or virtually all” made in the United States. That means the product should contain no (or negligible) foreign content.

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Posted on Aug 16, 2016

Safety FirstLike the saying “You gotta be in it to win it,” many construction firm owners submit many bids for local jobs to be in it.

But to thrive and survive, you need to do more than just be in the bidding process. Your firm must be able to submit bids that have a reasonable chance of approval. And your firm must win often enough to thrive.

There’s no foolproof method for developing and submitting winning bids. Still, by following some basic principles, you can improve your chances.

Bidding is an art, not a science. Usually, the bidding process is reserved for the general contractor, but the architect and others might participate.

Although contracts may be awarded to the lowest bidder, the process often involves more than just cost. It also may involve the qualifications of the firm making the bid. Having an excellent reputation for quality and timely work may be just as important, if not more so, than offering the lowest price.

Use of Construction Bid Software

To help develop more successful bids, your firm might consider using some of the many bidding software programs available. Typically this software is used as part of the cost estimation and budgeting process. You also may subscribe to a database of construction costs, updated monthly. Although your firm may choose to maintain its own database to better reflect local pricing.

Materials and labor costs are critical parts of the equation. The software defines the materials and labor hours for a particular project and then calculates the job cost from the database. All you need to do is find a job defined in the database and the software does the “grunt work.” This reduces the possibility of leaving out some costs.

The software also lets you compare final job costs to the initial bid and fine tune your final bid by, for example, inserting lower or higher costs for materials and labor.

Construction bid software is relatively inexpensive. Most programs range from between $50 and $250, depending on the features. Usually, the program will be designed to work with Excel spreadsheets, although some are stand-alone.

Among the multiple benefits of this software are that it:

  • Helps general contractors keep track of financial data on a daily or even hourly basis,
  • Stores budget information in one location for easy access, and
  • Reduces to near zero the chances for errors in mathematical computations that can often crop from the human factor.

Five Steps of Bidding

Once you have acquired estimating software and become proficient at using it, you’ll be better equipped to submit bids. Although the process may vary, partly because of regional differences, there are essentially five important steps.

  1. Assess the location and conditions of the job you’re bidding on. Notably, you must learn to say “no” to jobs that don’t make sense for your firm for such reasons as distance, extreme heat or cold or hazardous conditions. To be financially successful, you must know when to walk way from jobs where you’ll almost certainly lose money.
  2. Itemize the materials that will be needed. Normally, you should figure on a 10% to 15% add-on for waste and service charges. If you acquire the materials yourself, it cut into your profit margin, but it may be necessary to secure the job.
  3. Compare the work with jobs your firm has previously completed. This is where experienced construction firms gain an edge. For those just starting out, it’s inevitable that you will bid too high or too low for some jobs. Chalk it up to experience and learn from it. Over time, you should be able to work more expeditiously and efficiently, which will make it easier to estimate the time and costs required to complete a job.
  4. Multiply your hourly rate by the hours estimated for the job and add the cost of materials. Tack on a percentage for overhead expenses such as insurance, licensing and transportation. Determine if your result makes sense from a client’s perspective. If your instincts tell you that the final number needs adjustment, take another look.
  5. Submit the bid along with a detailed schedule. Most important, the client will want a firm completion date.

Best Position

Bidding can mean the difference between a successful business and going under. By using the latest software and other tools at you disposal, you can position your firm for the optimal opportunities.

Seven Popular Bidding Programs

The number of software programs available can be overwhelming. The following is a list of seven that are currently popular:

  • Quick Bid
  • Prebuilt ML
  • B2W Estimate
  • Co-construct
  • Stack
  • Clear Estimate
  • Plan Swift

For reviews of these and other products, go here.

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Posted on Aug 5, 2016

Are you drawing too much salary from your construction company — or perhaps not enough? Be careful: The IRS may challenge deductions for wages it thinks are unreasonable.

In a recent case, the co-owners of a cement contracting business chose to pay themselves a certain amount of compensation, contested the IRS’s refusal to allow part of the compensation as deductible and eventually won the case (H. W. Johnson, Inc., TC Memo 2016-95). The U.S. Tax Court’s decision revolved around the “independent investor” test.

Separate Divisions

The company was owned by the retired founder’s wife (51% interest) and his two sons (24.5% each). It grew to become one of the largest concrete contractors in Arizona, with more than 200 employees. Annual revenue rose rapidly after the sons assumed control of daily operations. When they took over in 1993, the company showed revenue of $4 million. That mushroomed to $23.87 million in 2003 and $38 million in 2004, the two tax years questioned by the IRS.

Each brother supervised a division of the company, overseeing all operations including:

  • Contract bidding and negotiation,
  • Project scheduling and management,
  • Equipment purchase and modification,
  • Personnel management, and
  • Customer relations.

Working 10 to 12 hours a day, five to six days a week, the brothers were at job sites daily and regularly operated equipment. They each were readily available if problems arose and were known locally for their responsive and hands-on management style.

The concrete work that the brothers supervised required considerable technical skill. Over the years, their business built an excellent reputation with developers, inspectors and other contractors for timely, quality performance. As a result, the company routinely won contracts even when it wasn’t the lowest bidder.

During the two years in dispute, the brothers personally guaranteed loans allowing the business to buy materials and supplies. In 2003, faced with the possible disruptions in their concrete supply, the brothers partnered with investors to start a concrete supply business — despite their mother’s objections about the risks. This move allowed the company to prosper when others were suffering.

The board of directors voted to pay the brothers $4,025,039 and $7,300,916 in 2003 and 2004, respectively. But the IRS partially denied the company’s deductions for this compensation, finding that $811,039 for 2003 and $768,916 for 2004 wasn’t reasonable.

Tax Court Outcome

The Tax Court applied the five factor test used by the U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this case would have gone. Based on the appeals court’s landmark ruling in Elliotts v. Commissioner (716 F.2d at 1245-1247), five factors are used to determine reasonable compensation:

  1. The employee’s role in the company,
  2. A comparison with other businesses,
  3. The character and condition of the company,
  4. Potential conflicts of interest, and
  5. Internal consistency in compensation.

According to the court opinion, the IRS argued that the current case hinged on the “fourth Elliotts factor; namely, whether a hypothetical independent investor would receive an adequate return on equity after accounting for [the brothers’] compensation.”

Responding to that argument, the Tax Court said that the annual return after payment of the compensation closely approximated the return generated by comparable companies. Accordingly, it said that an independent investor would have been satisfied with the return.

After examining all the factors, the Tax Court concluded that the compensation paid to the brothers was reasonable under the circumstances and, thus, deductible. Each brother was integral to the success of the business — including performance that resulted in remarkable growth in revenue, assets and gross profit margins during the years at issue.

Takeaway for Contractors

For contractors, the takeaway from this Tax Court ruling is to be sure you’re familiar with the independent investor test and how it applies to IRS challenges of compensation arrangements for shareholder-employees. Although there’s no definitive bright line test on what constitutes “reasonable,” the courts have historically cited several factors that vary by jurisdiction. These include:

  • Amounts similar businesses pay their shareholder-employees,
  • Reasons for paying high compensation (spell them out in your corporate minutes),
  • The nature, extent and scope of the taxpayer’s work,
  • The taxpayer’s qualifications and experience,
  • The size and complexity of the business,
  • General economic conditions,
  • The employer’s financial condition,
  • The employer’s salary policy for all employees,
  • Compensation paid in previous years,
  • Whether the employer and employee are dealing on an arm’s-length basis, and
  • Whether the employee guaranteed the employer’s debts.

No single factor is greater than the other. The decision generally comes down to the number of factors weighing for or against reasonable compensation.

Remember to pay reasonable amounts for services actually rendered. These actions should help protect you if the IRS ever comes calling,

Also, it makes a big tax difference whether amounts paid to owners and other high-income employees are treated as compensation or dividends. Compensation is deductible from the employer’s taxable income; dividends aren’t and effectively represent a second level of taxation on corporate income.

For this reason, some employers choose to maximize the tax benefits by increasing the compensation. However, if a company simply pays its employees whatever it wants, it could find itself in hot water with the IRS. Typically, when the IRS successfully challenges an amount as “unreasonable,” the difference between the payment and a reasonable amount attributable to services provided can’t be deducted.

Best Defense

Of course, reasonable compensation issues don’t always involve excessive amounts. In some cases business owners may arrange for low or even no wage payments to reduce payroll taxes. As a result, the owners must argue with the IRS that they should be paid less, not more. If you find yourself in such a situation, you can bolster your position by spelling out the reasons for a low salary — including plans to use funds for expansion — in your corporate minutes.

The IRS may re-characterize compensation even if the business is running a loss — for an example, see Glass Blocks Unlimited (TC Memo 2013-180, 8/7/13). But, whatever the reason for the agency’s scrutiny, your construction company’s best first response to an IRS compensation challenge is to contact your CPA for professional guidance in building your defense.

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