04/08/2019

Cybersecurity Tips for Construction Companies

Technology continues to evolve at a rapid rate allowing construction companies to reinvigorate their approach to every day work through innovation and newfound efficiencies. 

While it’s necessary to continue to invest and explore the latest in technological advances – including activities such as building information modeling, virtual reality, drones, robotics – it’s equally important to invest in cybersecurity resources to protect themselves.

Phishing scams are one of the most common ways that hackers attempt to infiltrate companies through the use of phony emails that appear to be from legitimate sources.  This can result in malicious activity that takes many shapes. 

A fraudster can compromise sensitive data by targeting company employees and luring them in to clicking on a malicious link that will infect the user’s computer with malware.  Certain types of malware can apply passwords and other restrictions to critical data allowing the fraudster to hold it hostage, demanding a “ransom” be paid before its release (commonly referred to as “ransomware”). 

Phishing scam perpetrators will also often imitate a company executive and instruct a CFO, controller or other employee with cash disbursement authority to wire an immediate payment to a specified bank account. 

It’s not uncommon for fraudsters to observe company emails in order to allow them to reference recent projects or pose as a vendor that is due to receive payment – lending more credibility and legitimacy to the fake email.  Many companies have fallen victim to this scheme and wired funds to criminals who deposit the funds into offshore accounts, which significantly reduces recovery.

Construction companies are exposed to cybersecurity risk due to the significant volume of sensitive, confidential data they are required to protect including but not limited to bid data, designs, materials pricing, profit/loss data, employee information, and banking records.

While dual factor authentication, web filters and other software and hardware protection measures are important, the most critical investment a company can make in protecting itself from attacks of this nature is to provide frequent trainings and prevention exercises to all employees at every level. 

It is critical for construction companies to ensure they are devoting adequate resources to IT budgets, staffing levels and support.  Since IT is an overhead center that does not generate revenue it can sometimes be undervalued and treated as a cost cutting area, however the risk exposure and cost of falling victim to one of these schemes will often far outweigh the savings.

 

 

 

 

02/27/2019

Communicate Often To Ensure Your Jobs Stay On Budget

Given the significant growth in the construction and engineering industry over the past few years, construction companies in today’s environment have been more focused on managing the work in front of them (day-to-day operations) and sometimes fall short with communicating job status to the accounting team. 

While management’s focus on revenue drivers of their business (job site work, customer relations, etc.) is important, we can’t forget other “back office” aspects of the business (accounting, budgeting, financial planning, etc.).

Poor communication between operations and accounting can lead to surprises at the financial statement level and leave a company in a difficult position.

In order to prevent any “surprises” at the conclusion of a project, construction companies should consider the following best practice policies:

• Hold meetings on a regular basis (monthly is suggested, but quarterly may be reasonable depending on the size of your projects) between the accounting team and the project management team. The accounting team should include the CFO and/or Controller while the project management team should include the project managers, project superintendents and estimators. During these meetings, the project management team should provide updates on the status of the project and provide any changes to total contract values and total estimated costs. This allows the company to update their estimates throughout the project rather than just at the end.
  
  
• Ensure the project management team fully understand the financial components of construction accounting. For instance, many project managers view percent complete as the amount of billings to date relative to total allowed billings, when in reality they should be calculating percentage of completion as costs to date relative to the total estimated costs.
  
  
• Promote transparency and honesty with your team. The saying, “bad news does not get better with time” applies here. Understanding that there may be a cost overrun when the project is at 50% allows the company to accurately adjust the profit on the job and not pay taxes on revenue that hasn’t truly been earned. Also, if this news is provided near the end of the project, those costs may have to be absorbed with no opportunity of recuperation.

While being proactive with your “back office” functions can take more time in the interim, integrating the accounting team with the project management team will provide for stronger project management and more predictable financial results.

 

 

 

 

03/13/2019

Utilizing Drones in Construction

Many companies have taken to the sky to reduce costs and manage their job sites remotely. They can now check in on field operations in real time to view the progress at the job site and share the progress with their clients.

Reduce costs and increase efficiency by utilizing drones for:

• Land surveying:  Gives you great overview of the property and the surrounding areas that has decreased costs of surveying and helps contractors in estimating jobs. You can view and consider any challenges or savings your estimators can incorporate into the bid based on the information obtained.
• Inspection costs: Efficiencies gained on inspections as the drone can reach hard-to-get-to areas quickly. This can save time for your workforce and result in cost savings.
• Monitoring:  Assists in monitoring workers on job sites especially pertaining to safety protocol and how hard people are or are not working. Additionally, enables multi-job site monitoring in real time.
• Savings on insurance:  Some insurance companies offer a discount if you utilize drones to monitor your job site.

Promote your business and keep existing clients informed by:

• Adding photos and videos to your sales group.  Many people are visual and this can separate your company's proposal from the other bidders coming to the table.
• Client updates and support for completion estimates.  This provides a visual look at the project during development and billing process.

You will need to take time to do the analysis to determine to use internal or external drone operators. Some items you will have consider are the upfront costs of the equipment (hardware and software), liability and control, in making a decision on best approach for your business. Either direction will provide an additional tool for your business to utilize with immediate benefits managing job sites.

 

 

 

 

02/27/2019

Expectations of the Home Building Market in 2019

After a slow sales end to 2018, the home building market has gotten off to a solid start in 2019.  Declining mortgage rates, improved performance in the stock market, and solid job growth have helped improve home buyer confidence in the last couple of months.

2018 was a year of challenging supplier and subcontractor vendor cost increases that builders were not able to fully absorb.  As a result, gross margins declined in the industry by 1-3%.  2019 should allow home builders a chance to better manage their costs and improve gross and operating profits.

Finally, as a reminder, direct construction costs are the biggest cost a home builder occurs.  Even a small reduction in direct construction costs as a percentage of sales price can significantly increase a builder’s bottom line.  Any cost that can be removed from a house and multiplied with direct construction cost savings from other units can provide substantial income improvement.

 

 

 

 

02/19/2019

AGC’s Economic Forecast For Contractors

RubinBrown leaders recently attended the Associated General Contractor’s Financial Issues Committee semi-annual meeting.  Ken Simonson, Chief Economist for AGC of America presented his economic outlook.  Below are the highlights of his outlook.  

• The US economy is strong and growing:
• 3.5% third quarter real GDP growth, rising employment and pay
• Consumer, business confidence are generally high;  recession possibility is low
• Home & auto sales are slowing; trade & fiscal policy concerns remain
• Contractors remain busy and confident; construction employment at 10- year high, but several spending categories have slipped or stalled in past few months
• Three concerns:
• Impact of trade policies on materials costs and demand for construction
• Widening labor shortage, worsened by hostile immigration policy
• Rising interest rates may cut demand for income-producing projects, new homes

The AGC member expectations for 2019 are for dollar volume of projects to be higher in every construction category ranging from expected growth to be the lowest at 5% in multifamily residential to the highest at 17% in public building.

 

 

 

 

02/12/2019

Research and Experimentation in the Construction Industry:  You May Qualify For a Tax Credit!

The Credit for Increasing Research Activities, also referred to as the “R&E”, “R&D”, or “Research” tax credit, incentivizes companies to invest in people and technology that can lead to growth in revenues and profitability, as well as promote job retention and expansion. 

The credit focuses on three types of qualifying expenditures: wages, supply costs, and contract research.

We’re contractors, we don’t have scientists in white lab coats, how can we qualify for a research credit? 

Simply defined, the R&E Tax Credit is a federal incentive that rewards taxpayers for the development and/or improvement of a product, process, formula, invention, technique, or software.  For a contractor, the first question is, are you at economic risk under the contract terms for the development or improvements to designs?

If you pass the risk hurdle, then some additional questions to ask are: 

• Do you make improvements to designs in the field arising from value engineering opportunities, unanticipated site conditions, etc.? 
• Are you a design/build contractor? 
• Do you have a pre-fab shop? 
• Are you utilizing CAD and/or BIM in the development of your designs? 
• Does your company have a patent? 
• Have designs or projects failed and needed to be reworked before or during construction? 

Many architects and engineers, electrical and mechanical contractors, and general contractors have qualified for the R&E Tax Credit.

If you have further questions regarding this valuable tax incentive, contact your RubinBrown Construction Services team member today.

 

 

 

 

01/24/2019

Buy-Sell Agreements for Contractors:  What You Need To Know!

Construction firms spend time devising strategies around labor shortages, challenging projects, developing backlog, new tax rules, state of the economy and many other areas.

In addition to these, it is vitally important to ensure that you have a crisis plan in place if something catastrophic were to happen.
One area to consider is your company’s buy-sell agreements.  Some businesses either don’t have buy-sell agreements in place or don’t periodically review them.  

A buy-sell agreement governs the transfer of ownership of a company in certain circumstances.  If a buy-sell agreement is not in place or is not effective, the impacts of an event may result in consequences not desired by the business or family.  Generally, buy-sell terms become relevant upon defined events taking place.  Examples of such events include the following:

 

• Death or disability
• Retirement
• Severed Employment
• Succession

Upon an event, the buy-sell acts as a road map on how to transfer the ownership interests as defined.  Agreements generally dictate pricing terms/options, methods of transfer and the timing, among other things. We often recommend that certain discount features be included in the buy/sell agreements to ensure the stock redemption does not cripple your company or other shareholders financially.

It is important to routinely include reviewing these agreements in annual strategic planning sessions.  Ensure that your construction attorney and accountants and other key stakeholders have reviewed the documents.  An effective strategy will provide comfort that if something happens that is not planned, you have made good decisions to protect your family, teams and the investment in the business.

 

 

 

 

01/10/2019

New Tax Deferral Strategy for Small Contractors

The new tax law provides a new and substantial tax benefit for small contractors.

Under the new law, a contractor is considered “small” if the average revenue of the prior three years is below $25 million. A small contractor is exempt from using the percentage of completion method for tax purposes. Thanks to the new tax reform, a small contractor may choose to use an exempt method such as completed contract or the cash method of accounting to account for its qualifying long term contracts.

Under the old rules, average gross receipts for the preceding three tax years of $10 million or less qualified for this exempt method. This is a new and significant tax deferral strategy if your company revenue falls between $10 million and $25 million. Most small contractors should consider the use of the completed contract method, which provides a deferral of gross profit to date on each long-term job. The new rule is effective for contracts entered into after January 1, 2018, so even fiscal year filers could benefit from this new law.

For example, assume a small contractor has a $5 million contract. Total expected cost is $4.5 million for ending gross profit of $500,000. If this job was entered into in 2018 and is 85% complete at year end, then gross profit of $425,000 would be required to be recognized under the percentage of completion method. Under the completed contract method, with the same contract facts, the gross profit recognized is zero. This is a significant tax deferral until the contract completes in the following year. This tax savings can help contractors better utilize cash flow.

While this deferral could be very beneficial, keep in mind that alternative minimum tax (AMT) will still follow percentage-of-completion, resulting in a potential increase to AMT income for individual owners. This applies in the case of S Corporations and Partnerships, but will not apply to C Corporations, as corporate AMT has been repealed under the new tax law.

 

 

 

 

12/13/2018

The Evolving Challenge of Work-Life Balance

A company that is able to effectively manage the challenge of providing employees with a work-life balance will have stronger retention, higher productivity and will experience higher employee morale.

As modern technology steadily advances at a rapid rate and the wide use, availability and affordability of smartphones, tablets and smaller laptops continues to increase, employees are empowered to be more efficient in their daily tasks and can work just about anywhere at any time. While efficiency and flexibility are paramount to maximizing the utilization of today’s worker, this also presents the challenge of forming necessary boundaries between personal and professional life.

Behind us are the days of leaving the office along with the work that is physically stored there. Imaging and paperless initiatives have become the norm for many companies. Email, virtual private networks (VPNs) and file sharing have evolved in such a way that access to information and tools necessary for employees to perform their duties are available 24 hours a day, 7 days a week. With this drastic shift, how do employers set expectations in a manner that continues to provide their employees with these resources that allow for efficiency and flexibility while avoiding the risk of turnover due to fatigue and burnout?

Given the labor shortage in the construction industry, the strong global construction market experienced in recent years, the industry’s requirements for when an employee may have to physically be on a jobsite and the polarizing nature of this discussion, it is critical for employers in the industry to devote the proper attention and resources to enhance their employees’ experiences. Failing to do so can have a negative impact not only on the morale and quality of work, but it can also result in a higher rate of safety failures or incidents while limiting a company’s growth opportunities.

In order to address this challenge, it is important for employers to tap into the goals, key motivating factors and preferences of their employees. This can often be effectively achieved through small focus group discussions, company-wide surveys and creating internal initiatives or task forces to enhance the employee experience. None of that information grab will matter if it is not utilized to inform management of their employees’ preferences in an effort to ensure expectations placed on employees incorporate the ability to set healthy boundaries between work life and personal life.

A company that is able to effectively manage this challenge of work-life balance will have stronger retention, higher productivity and will experience higher employee morale. In achieving this, companies will give themselves a competitive advantage in a marketplace where work-life balance is a constant struggle.

 

 

 

 

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?