11/29/2018

New Revenue Recognition Guidance – Unique Considerations for Construction Companies

Construction companies must consider contract modifications, performance obligations, variable consideration, uninstalled materials and contract costs when accepting guidance on the new revenue recognition standard.

The new revenue recognition standard is effective for all private companies for their years beginning after December 15, 2018 and must be analyzed for the opening balances of the earliest year presented. With this, companies must analyze their revenue streams to determine any changes in accounting as well as internal control procedures that are required in connection with the implementation. This has many companies asking, “How does it affect me?” Construction service companies have some unique issues that must be addressed, including:

• Contract modifications. A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties of the contract. Generally, a change order and contract modifications are considered revisions to the existing contract. However, a change order could potentially be a separate contract if the increase results in a separate distinct good or service and the price increase represents a stand-alone selling price.
• Performance obligations. A performance obligation is a promise to transfer a good or service that is distinct or a series of distinct goods or services. A good or service is considered distinct if the customer can benefit from the good or service on its own or with other readily available resources and if the promise is separately identifiable from other promises in the contract. Items should not be considered distinct if there is a significant service of integration with other goods or services; if goods or services are significantly modified or customized; or if the goods or services are highly interdependent or highly interrelated. Contracts with multiple services such as construction/maintenance elements or two distinct construction services (for instance, the combination of a construction service that a subcontractor could perform and general contractor services under one contract) could be separate performance obligations under the new revenue recognition guidance. In such a case, the contract price would be allocated as allowed within the guidance to the applicable performance obligations.
• Variable consideration. Variable consideration includes any pricing elements in the contract that are not fixed including unpriced change orders, claims, liquidated damages, incentives, penalties, economic price adjustments, bill rate adjustments and other pricing changes. For construction service entities, these changes are commonplace in the industry. Controls and processes should be put in place so that variable consideration is included in the contract price at the time that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.
• Uninstalled materials. The construction services company should first consider whether the items qualify for recognition as inventory, which would primarily relate to standardized items that can be transferred and used on many job sites. Uninstalled materials accounting should be considered when the materials cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation(s). In this case, the best depiction of the entity’s performance may be to adjust the input method by recognizing revenues only to the extent of the costs incurred if: the good is not distinct; the customer obtains control significantly before receiving the services related to the good; the cost to transfer the good is significant; the entity procures the good from a third party; and the entity is not significantly involved in designing and manufacturing the good. Depending on the nature and size of the materials, consideration should be made as to the timing of gross profit recognition on the uninstalled materials as or when the materials become installed. Additionally, it may be appropriate to remove the good from the revenue recognition calculation altogether depending on the relevant circumstances.
• Contract costs. Incremental costs of obtaining a contract, such as sales commissions, should be charged to expense over the period during which goods or services are transferred to the customer. Costs to fulfill a contract should be capitalized if:  the costs relate directly to a contract or an anticipated contract that the entity can separately identify; costs generate or enhance resources that the entity will use in satisfying the future performance obligations; and the costs are expected to be recovered. Under this guidance, bond costs may require capitalization and amortization over the life of the contract, if significant.  Certain costs such as the following should be excluded from the revenue recognition process and instead be considered period costs: costs that would be incurred regardless of obtaining the contracts; general and administrative costs; wasted materials; significant inefficiencies; owner provided materials; and others.

The analysis of these issues among others within the new standard will help reduce divergence in practice under current, generally accepted accounting principles. However, because of the long-term nature of construction service entity contracts, the process for evaluation should be performed now in order to avoid surprises for sureties, bankers and owners.

Have you started the implementation process for the new revenue recognition standard?

 

 

 

 

11/07/2018

Selecting Software – Tips for the Construction Industry

According to the “Construction Technology Trends 2018 Report,” approximately 81% of construction companies indicated that they planned to spend more on technology in the current year compared to last year. Some of that investment involves replacing outdated software or upgrading to more integrated, user-friendly software. But where to start? Below is a three-step guide for those in the construction industry:

 

Step 1: Evaluate Cost. Cost is a huge factor in new software and you must balance what you need versus what you want to spend. Items that can impact cost include:

 

• Company size and number of users - for example, cloud-based solutions are usually priced based on the number of users and the modules or features you want to access.
• Development of specialized reports – are they included or extra?
• Upgrades - is there a monthly maintenance cost or do you pay for updates as you go?
• Storage and backup – are there costs associated with additional storage or backup procedures?

Step 2: Evaluate ease of use and mobile capabilities. The software you select should:

 

• Be user-friendly for both field staff and management.
• Be easily accessible for both field staff and management. Can you access the software anytime, anywhere from a desktop or laptop computer as well as a mobile device (iPad, iPhone, etc.)?
• Does it allow for VPN access, screen sharing and more?

Step 3: Evaluate your company’s unique needs. Some questions to ask include:

 

• Will this software grow with your business?
• Do you want an integrated system? (i.e., if you enter data in one module it automatically updates another).
• Modules specific to your business outside of an accounting system such as:

• Project management
• Estimating & job costing
• Building Information Modelling (BIM)
• Service management
• Document management

To build a list of potential software vendors, try reaching out to the industry associations affiliated with your company for recommendations – some may even offer member discounts!

 

 

 

 

 

10/30/2018

M&A Activity High in the Construction Industry

An article titled “M&A Activity High in the Construction Industry,” written by Chris Daues, a Manager in RubinBrown’s Assurance Services Group, was recently published in CE This Week, Construction Executive’s weekly e-newsletter.

 

Daues discusses how the M&A and private equity space offer new avenues for construction firms to divest, diversify and grow; an excerpt appears below:

There is no doubt that construction activity in the mergers, acquisition and private equity space is more prevalent throughout most of the country than has been seen in many years. This prevalence is a positive trend for the industry as it increases opportunities for growth and offers more options with succession planning for construction business owners. As the result of a growing population in metropolitan areas and aging infrastructure, construction spending in the U.S. continues to rise.

Read the full article in Construction Executive.

 

 

 

 

10/23/2018

Technology Trends in the Construction Industry

As technology continues to improve, construction companies must adapt in order to keep up with the trends in the industry.

Technology is transforming the industry and implementing new technologies requires strategic, long-term planning. Here are some trends to consider:

Building Information Modeling

Building Information Modeling (BIM) is a 3D model-based process that allows architects, engineers and contractors to collaborate on projects, giving each party better insight on how their work fits into the project. BIM connects these professionals so they can efficiently design, build and operate buildings and infrastructure. The realistic visualizations can also help to gain faster approvals and avoid surprises.

Virtual Reality

Virtual Reality (VR) can be used in conjunction with BIM. The main benefit of VR is the ability to provide virtual walkthroughs to clients or targets in order to give them a better idea of what their investment will look like before construction begins.

Drones

Drones can be used to quickly and effectively map a construction site, as well as analyze the progress of a project. Using drones, construction companies are able to get the job done faster and cheaper than with traditional methods.

Robots

As a shortage of skilled labor continues in the construction industry, robots may become more and more common. Although full automation of most tasks is not currently possible, as breakthroughs in robotics technology continue, the applications in the construction industry will grow as well. In short, robotics could help fill the skilled labor gap and complete projects more quickly, safely and cheaper than the alternative.

To stay up to date on other trends within the construction industry, subscribe to RubinBrown's ViewPoints Construction Services Blog.

 

 

 

 

09/28/2018

New Pass-through Deduction for Fiscal Year Filers Provides Tax Benefit

Contractors, home builders, architects and engineers shouldn’t lose out on the potential tax benefits of the new pass-through deduction, even if they are a fiscal year filer.

 

Over the summer, the IRS issued various sets of regulations to assist with the interpretation and application of the new tax law, the Tax Cuts and Jobs Act, which was passed in December 2017.

 

One facet of the law that contractors, home builders, architects and engineers must pay close attention to is the pass-through deduction (also known as Section 199A, or the Qualified Business Income deduction). This new law allows pass-through entities, generally partnerships and S-Corporations, to exclude 20% of its qualified business income from its taxes.

 

Where the law gets tricky is the application of the deduction to a fiscal year filer. The law is effective for tax years beginning after December 31, 2017. However, because the deduction is claimed at the partner or shareholder level and nearly every individual taxpayer files on a calendar year end, even fiscal year entities could qualify for and pass out this deduction to its owners.

 

Let’s take imaginary company ABC Electric Co., an S-Corporation electrical contractor with a September 30, 2018 year end, as an example. The flow-through activities of the company will be reported on the owners’ 2018 individual income tax returns, allowing those owners to claim the new pass-through deduction benefit – a benefit they should certainly not miss out on.

 

If you have questions regarding the application of this new tax benefit to your company, contact your RubinBrown Construction Services tax professional.

 

 

 

 

09/12/2018

New Revenue Recognition Standard is Effective Soon. Have You Started Your Implementation?

The new revenue recognition standard is effective for all private companies for their years beginning after December 15, 2018.

 

This means that companies need to review their revenue recognition process and analyze the effect of the new standard for all contracts that are in process at their upcoming year ends. The effect of any differences between your current revenue recognition methods and the new methods will be the adjustment required to your financial statements.

 

The new standard has five steps.

1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

 

As you can see, the terminology is different from the percentage of completion method that most construction firms are using today.

 

Some of the significant differences you’ll see as you begin your implementation is the accounting for variable consideration and uninstalled materials. Variable consideration includes items such as early completion incentives and liquidated damages. You’ll need to consider the probability of receiving or paying these amounts when determining the initial contract price. Uninstalled materials under the new standard include all materials not installed versus only non-unique materials under the existing standard.

 

If you haven’t already started analyzing your operations to determine what, if any, changes will be needed, RubinBrown encourages you to start now.

 

 

 

 

08/02/2018

Construction Spending On The Rise

Construction spending totaled $648.8 billion in the second half of 2017, which is a 12 percent increase from the first half of 2017 and a 2 percent increase from the second half of 2016.

 

Overall, since the first quarter of 2012 through 2017, construction spending has steadily increased.

The American Institute of Architects (AIA) is estimating 4% growth for non-residential construction spending in both 2018 and 2019.

The AIA’s forecast cited natural disasters, tax reform, infrastructure focused legislature, and business confidence levels as reasons for growth in the engineering and construction (E&C) arena.

Additionally, employment can be a strong indicator of industry health. Per the 2018 Associated General Contractors of America (AGC) 2018 Construction Outlook National Survey, 26% of construction firms surveyed expect to increase employee count by 11 to 25%.

 

 

 

 

07/30/2018

Increased Number of M&A Activity Through 2018

More than 20% of all M&A activity in the engineering and construction industry in 2017 had a public company buyer, which is the highest level since 2011. The activity has continued into 2018 with Granite Construction and Layne Christensen Company announcing a $565 million M&A deal.

Given the world’s growing population and aging roads and bridges, the need for construction firms with a focus on infrastructure continues to grow. Reports indicate that, “the world will need to spend $94 trillion on infrastructure by 2040 to meet demand.” Based on this forecasted demand, M&A activity should continue to increase in the infrastructure niche.

GCs have not historically been attractive acquisition targets in the M&A environment. However, as GCs are looking to diversify their revenue streams and integrate business lines, the acquisition of a specialty contractor could make sense.

RubinBrown is seeing more of this throughout the country, which is helping GC’s increase margins by self-performing certain work while diversifying their revenue stream.

 

 

 

 

07/09/2018

Recruiting And Talent Retention In The Construction Industry

With the experienced worker shortage alive and well in the construction industry, recruiting and talent retention feels more important than ever! RubinBrown has identified a few strategies that construction firms should consider when it comes to improving talent retention and team member development.

Ownership

You may have heard the saying “think like an owner,” which is important, but to take it a little further, we’re suggesting that you build your team with team members that take ownership of work assigned to them.

Team members that take ownership of projects or jobs assigned to them and who stick with the project until completion are a joy to work with and good role models to have within your organization.

Communication

Surprises late in a project are rarely good, so your team members must communicate engagement status often to avoid surprises. Encourage your team to think at the end of every day, “What did I do today and who needs to know about it” and then send out status updates accordingly.  

Service Oriented

We’re all in the business of serving others. Someone that has a service-oriented mindset is much more likely to be a good representative of your firm and keep your clients happy!

 

 

 

07/02/2018

The Importance of Mentoring

The goal of mentoring is to transfer as much knowledge from your experienced team members to your new team members. Competition is alive and well in the construction industry, so this is easier said than done.

Oftentimes the experienced team members might be threatened by newer team members and not want to share tips or information that will help the younger team members be successful. This attitude is not healthy in your organization and must be addressed when encountered.

A mentoring program should be structured with experienced team members mentoring new team members. Informal mentoring meetings should occur as often as necessary, but a formal meeting should occur at least twice a year.

The formal meetings should be documented with mentoring notes or an evaluation summary. These mentoring notes can be used to follow up on areas identified for improvement.

 

 

 

06/26/2018

Fraud In the Construction Industry

Here’s a statistic that will keep you up at night…a typical case of fraud within the construction industry has a median loss of $245,000.

 

The threat of fraud can never be wholly removed; however, companies should take steps to identify likely fraud schemes they might face. Below are a number of schemes frequently used to defraud construction companies.

 

Billing Schemes

Reports indicate that billing schemes account for 35% of the fraudulent activity within construction companies.

 

The schemes can be payments to fictitious vendors, overpayment to vendors (often through collusion with an internal employee) and purchase of personal items with company funds.

 

Theft

The construction industry is particularly susceptible to theft of materials due to the location of jobs and the difficulty of tracking construction materials. Job sites can be in remote areas or some distance from the corporate headquarters and subject to less supervision.

 

Additionally, materials on job sites are hard to track and measure during the construction process. Items lying around a job site like lumber, concrete, copper pipe, wire and cable can create an opportunity for thieves if proper controls are not in place.

 

Misuse of Company Equipment

Similar to theft of materials, misuse of company equipment can also become an issue if there is a lack of controls present. For instance, an employee could operate a side business using a company’s idle equipment.

 

Bid Rigging & Corruption

Contractors are subject to the risk of bid rigging and other forms of corruption. In the ACFE study nearly 47% of the fraud cases examined in the construction industry had an element of corruption.

 

Whether it was bribery, kickbacks or quid pro quo situations, the bid process can be riddled with opportunity for this type of fraud.

 

Other Fraud

The construction industry is subject to the same fraudulent activities faced by every other industry. These include payroll fraud through fictitious employees, check tampering and fraudulent expense reports.

 

 

 

 

06/19/2018

The Importance of Internal Controls

To help prevent fraud in your construction company, RubinBrown recommends that you design a control structure that will reduce the opportunity for fraud and increase the chances fraud will be detected. Although there are no guarantees related to fraud, the foundation to a strong internal control environment is proper segregation of duties.

Here are some other simple yet effective internal controls you can implement with relative ease:

• Check all estimates for accuracy of calculations, labor rates and correspondence with drawings.
• Compare job cost estimates with actual costs. Require approvals for cost adjustments or transfers of costs between jobs.
• Require that materials estimates above a specified amount include quotes from two or more vendors.
• Make purchases only with pre-numbered purchase orders, and match them to both receiving reports and invoices before payment is made.
• Check vendor invoices against estimates to ensure proper discounts and pricing.
• Always refer to specific job numbers, phase codes or work order numbers in onsite communications.
• Obtain ink or electronic signatures on change orders before work begins, and revise contract values accordingly.
• Allocate equipment usage to contracts weekly and record equipment maintenance expense in the ledger as they occur.
• Review all billings for timeliness, accuracy, conformity with contract terms and correct customer information.
• Reconcile contract billings with general ledgers monthly, and calculate underbillings and overbillings.
• Prepare and review financial statements monthly and reconcile them to supporting ledgers, bank statements and loan schedules. Per the ACFE report, management’s review of financial data took place in 62% of the cases examined and caught the fraud 16% of the time. The average loss detected by management’s review was $125,000 and lasted 18 months.

 

 

 

06/05/2018

Succession Planning: Part Two

Previously, RubinBrown's Construction Services shared the important steps a construction company should take to begin a succession plan for their company. After building value and communicating objectives to your fellow leaders, you are ready for the next steps in the process.

 

Groom A Successor
Once the goals have been discussed and agreed upon, choosing and grooming a successor follows.

 

This is an important piece of the succession plan because it is the successor who is able to utilize the owner’s intangible assets. The owner has knowledge, skills, and relationships that other employees may not possess.

 

When evaluating successors, it is essential to identify and quantify the right qualities for each position. Both hard and soft skills should be evaluated, as well as behavior.

 

A successor’s behavior, such as natural leadership and ability to work with others, plays an important role in selecting a successor. Another important quality is the successor’s desire.

 

Attaining ambition comes from giving them adequate training and development, necessary leadership experience and quality mentorship.

 

Transfer Ownership
The next and most complex step is to decide how to transfer ownership. Contributing to the complexity is the multitude of ways ownership can be transferred.

 

Gifting stock is an effective way of passing stock to successor individuals and in turn, reducing the estate of the original stock owner. And while gifting stock can seem self-explanatory, many considerations need to be taken into account. These considerations include the annual gift exclusion, future appreciation of the stock, and voting versus non-voting stock.

An alternative to gifting is a stock redemption. To qualify for a Section 303 stock redemption, the deceased must have corporate stock that makes up 35% or more of their adjusted gross estate.

 

Therefore, this is a good option for families where a corporation constitutes the majority of the family’s wealth. Under this code section, a corporation may redeem its stock from the estate on a tax-favored basis in an amount equal to the decedent’s estate taxes and administrative expenses. In many instances, the redemption may be part of a buy/sell agreement.

 

Buy/sell agreements are also an effective method to transfer ownership. With a buy/sell agreement, the price of the stock is based on a predetermined valuation.

 

An ESOP is another succession planning opportunity that requires annual valuations. An employee stock ownership plan, or ESOP, allows owners to sell up to 100% of their stock to a defined benefit plan that is owned by its own employees. Therefore, the employees of the business become shareholders in the company.

 

Another choice is stock recapitalization. Both common and preferred stock can be recapitalized, but the benefits of each vary. Common stock recapitalization enables a shift in voting power to successors that will operate the company.

 

Preferred stock recapitalization can shift future increases in corporate value to those who own common stock and freeze the value of the estate of a principal stockholder, so the subsequent increases in value go to the common stock held by their heirs. As you can see, this option provides a lot of flexibility for estate planning.

 

Estate Planning
Estate planning is the last step in the process. However, this step should be considered throughout the planning process. Make sure you can clearly answer the following questions:

 

• What do I want to leave to my family?
• Do I have the financial capacity to retire?
• What are the tax consequences of my succession plan and beyond?

 

 

 

06/12/2018

Succession Planning: Part One

People do not want to talk about their incapacitation, retirement, or death. To talk about your successor means you have to relinquish control, plan for a sale of a business that you have overseen, and inherently trust another with one of your most valuable assets.

Strong management succession will increase the business’ value, in addition to providing other benefits.

Building Value

Building value in your construction company is important. In most other areas of the business there are formal processes and plans that are followed to reduce cost and uncertainties and build value.

The first step of the process is to identify key decision-makers and succession planning goals and objectives. Gather information such as:

• Who are the current owners?
• What top management will be involved in the planning?
• Who are the outside advisors that should be consulted?
• What is the transition timeline?
• What do you want your legacy and the company’s legacy to be?

Management may have expectations of future ownership or different roles within the company. Will continuity among advisors provide stability during the transition process or is it time to seek other counsel that aligns with the vision of the new ownership group? These questions are not easily answered. Nor is there a common right answer for these questions.

Every organization and succession plan just like every set of blueprints is different and should be handled accordingly.

Communicating Objectives

The next step of communicating the objectives with key members of the organization is vital.

• Will management be on board with the goals of the succession plan?
• Are the family members on board with changes of control among generations?

A misstep in communication could cause costly disruptions such as power struggles between key employees or family members and stress for external players, including suppliers, customers, lenders and advisors.

If the succession plan contemplates transfer to a third party buyer, how do you keep key stakeholders incentivized throughout the transition?