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West Palm Beach, FL
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The Construction Industry Advisor
Winter 2012 l Fall 2011 l Summer 2011 l Spring 2011 l Winter 2011 l Fall 2010 l Summer 2010
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In recent years, increasing numbers of owner bankruptcies and insolvencies have brought pay-if-paid (PIP) clauses into the spotlight. These clauses — which shift the risk of owner nonpayment from general contractors to subcontractors — are controversial. But they’re common in construction contracts, so it’s important to understand their impact. This article discusses the enforceability of PIP clauses and their impact on surety bonds. A section explains the distinction between a PIP clause and a pay-when-paid (PWP) clause. 
A cost segregation study, which involves identifying the specific assets that make up a building and their costs, can provide benefits to both building owners and to contracting companies. The owner reaps the rewards of considerable tax deferral and the contractor can consult on this much-needed service and thus open up a new profit center. This article shows how a cost segregation study works, while a section offers a partial list of items that qualify for faster write-offs. 
In a struggling economy, often one of the first items on a contractor’s chopping block is the annual bonus. But rather than eliminating such financial incentives, it may be better to develop an incentive compensation program that’s designed to help achieve the company’s goals. This article offers five tips for designing a program that works. 
Integrated project delivery (IPD) is a collaborative approach to construction projects that can help make projects more successful and profitable. It usually goes hand-in-hand with building information modeling (BIM), a technology that facilitates collaboration. But neither has been widely adopted, because collaboration isn’t always easy in an industry in which relationships are often adversarial. Furthermore, these techniques may raise thorny legal and risk management issues. But, as this article explains, IPD and BIM can provide substantial advantages, as well. 
As 2011 winds down, it’s time for contractors to think about year end tax planning. It’s critical to take a strategic approach, balancing the desire for short-term tax savings against one’s interest in preserving the long-term financial strength of the business. This article discusses timing issues and accounting methods, followed by a look at 2011 tax breaks and the impact that various tax moves may have on lending and bonding relationships. A section shows why bonus depreciation and Section 179 expensing are particularly valuable this year for contractors investing in equipment and other fixed assets. 
If a construction company encounters unanticipated income, also known as “claim revenue,” it might find itself in hot water with the taxing authorities. So when is a company at risk? As this article explains, it’s important to know when to use the percentage-of-completion accounting method vs. the completed-contract method. And, in deciding what to include each year, contractors need to gather objective, verifiable evidence supporting each claim. 
For many contractors — particularly smaller ones — a joint venture or strategic alliance offers an opportunity to join forces with other construction companies to achieve business goals that one business couldn’t achieve on its own. This short article explains the difference between these two arrangements and the advantages that both offer to the partners involved. 
A controversial tax provision is scheduled to take effect in a little over a year, and it could have a huge impact on contractors’ cash flow. The provision requires most government entities to withhold 3% of payments for goods and services. However, a number of business groups oppose the new requirement and, as of this writing, several proposals are pending in Congress to repeal it. The article explains the rationale for the requirement and the arguments for repeal. 
Many contractors overlook the manufacturers’ deduction because it sounds like it applies only to manufacturing companies. Not so — many construction businesses, as well as architectural and engineering firms, can avail themselves of the deduction’s valuable tax savings. This article shows which activities qualify and how the deduction is calculated. A section cites a court case explaining that, for purposes of claiming the deduction, the distinction between “substantial renovation” and “maintenance” is critical. 
Having a financial health plan is critical for any construction business, but it’s especially helpful during a lackluster economy. By taking the company’s “pulse” on a regular basis, a contractor can ward off a number of financial maladies before the bottom line develops a serious ailment. This article describes some of the most important financial indicators, along with some of the ratios and other key measures used to assess them. 
In today’s economy, risk-averse project owners are more likely to require bonds. At the same time, cautious sureties have become more rigorous in their evaluation and approval of bond requests. So, it’s critical for contractors to show that they’re “bond worthy.” This article offers five tips for doing just that. 
Because delays can be costly, contractors often seek damages for delays caused by the owner or, in the case of a subcontractor, by the general contractor. But a “no damages for delay” clause can help mitigate the financial ramifications of such delays. Essentially, it denies a contractor’s right to recover monetary damages for some or all delays, limiting its remedies to an extension of time to complete the work. This article explains what the clause can and cannot do and lists some exceptions to the clause. 
Bankruptcy is an unfortunate fact of life. In the current economic climate, construction companies may be faced with project owners or developers that file for Chapter 7 (liquidation) or Chapter 11 (reorganization) protection. This article offers some tips to help contractors maximize their chances of getting paid. It explains how to obtain a security interest in the project, get paid from assets that aren’t part of the bankruptcy estate, and protect the right to payment for current work. 
Disputes arise in all types of business. But they can be particularly nasty for construction companies, because there are so many entities trying to get paid for projects fraught with risk. Yet such disputes can often be resolved more easily and quickly if they avoid litigation altogether. This article looks at a variety of alternative dispute resolution (ADR) methods that offer effective ways to address different degrees of conflict severity. Besides negotiation, mediation and arbitration, there are smaller, more intermediate steps that can be considered. A sidebar explains what’s involved when all else fails and it’s necessary to go to court. 
Over the last few years, the recession has caused many construction companies to expand into other states or even explore international options. It’s critical that contractors doing business in several states understand how each state’s sales and use tax laws will affect their business. This article explains how laws and regulations can vary widely from state to state, including how they differ in their treatment of contracts with tax-exempt entities. 
One of the most common fraud schemes today is also one of the simplest: check fraud. It’s relatively easy to create a forged or counterfeit check with nothing more than a computer, scanner and printer. But this article discusses a couple of simple solutions to this problem: positive pay and going paperless. 
Cash flow is the lifeblood of any business, but it’s particularly critical for construction companies. It’s essential to lay a solid foundation for healthy cash flow, starting with the contract. In many cases, it’s possible to negotiate contract terms that can accelerate the flow of cash. This article looks at such terms, including payment terms, retainage provisions, change order procedures and requisitions. A section offers nine cash-flow management tips. 
Many construction projects fall prey to what’s known as “profit fade.” In many cases, this costly problem comes into play when a job goes awry, taking with it the expected profit margin. This article shows how doing one’s homework, expecting the unexpected, and writing clear, specific contracts can help prevent profit fade from wiping out the bottom line — and make a surety more confident in one’s ability to make a profit. 
Each form of business — whether it’s a sole proprietorship, C or S corporation, limited liability company (LLC), or partnership — offers different advantages and disadvantages for a contractor. But there can be potential advantages to operating segments of a business through separate legal entities. This article shows how such a practice can reduce risk, offer tax advantages, help with succession and estate planning, and increase bonding capacity. 
Few areas of tax law are more confusing than the distinction between deductible transportation expenses and nondeductible commuting expenses. This issue is important for contractors and construction workers, who often travel from home to one or more temporary job sites or who use a home office as a base. This article shows how the IRS sees it. 
The Financial Accounting Standards Board and the International Accounting Standards Board are proposing a new revenue recognition standard that would have significant implications for construction firms. This article looks at how revenue recognition works now and how it could look in the future. A section reveals that the Small Business Jobs Act, passed in September, includes a tax provision extending 50% bonus depreciation to 2010, and shows how it affects calendar-year taxpayers using the percentage-of-completion method of accounting. 
Contractors everywhere have experienced the pain of rising construction materials costs and less work, putting their businesses in financial jeopardy. This article shows how an escalation clause in job contracts can help contractors fight back. It shows how such clauses work and how they’re calculated, and how to fend off risks that can be involved. 
The term “subprime” has been associated with predatory lending practices, but it’s not bad by definition; it simply means extending credit to less qualified borrowers, who pay a higher interest rate to compensate the lender for its increased risk. This article shows why, in construction, subprime bonding works essentially the same way as traditional bonding. It shouldn’t be one’s first choice, but it offers a viable option for contractors that don’t qualify for traditional bonding in today’s tight market. 
To avoid unpleasant surprises, it’s important that contractors continuously monitor their work-in-progress (WIP). WIP reports can track key information about each project, such as contract price, projected final costs, costs incurred and amounts billed to date, estimated gross profits, and the value of pending changes. This article shows how timely, accurate WIP reports can, early in a project, help identify problems with profit fade and underbilling, and help strengthen bonding relationships. 
Pennsylvania joined several other states that have enacted legislation targeting employee misclassification in the construction industry. On Oct. 13, Gov. Ed Rendell (D) signed H.B. 400, the Construction Workplace Misclassification Act, which provides a three-prong test for classifying an individual as an independent contractor. 
With its complex provisions and multiple effective dates, the new Patient Protection and Affordable Care Act has created a lot of confusion among employers — including construction company owners. This article answers some common questions about the new law, such as whether health insurance must be provided to employees, how companies can determine the number of full-time-equivalent employees they have and how this affects their legal obligations, and action steps to take. A section in this article discusses a tax credit that’s available for small businesses. 
Catastrophic events can happen at any time — but their consequences can be reduced if a construction company has a formal disaster management plan already in place. It starts with identifying every crisis that could challenge the business and then creating a suitable response to each. This article shows how to assemble a crisis management team, and how to be ready to address the emotional needs of employees affected by the crisis. 
Stalled and abandoned projects are an unfortunate reality in the construction business today. Financing may dry up, or owners faced with dwindling prospective tenants may conclude that they’re better off walking away. But that doesn’t mean contractors should do the same. Depending on their potential liability exposure, it may make sense for contractors to do some extra work to secure or stabilize the job site, or to protect their work against the elements — even if they won’t be compensated for it. This article describes the steps to take. 
Paperless construction management offers a variety of significant benefits — and using less paper is just the beginning. Paperless systems can not only reduce costs and help save trees, but also help increase productivity, reduce errors, and improve cash flow and profitability. This article looks at some of the specific benefits.