Tax Savings Opportunities - Empowerment Zones, Green Building Deduction, etc.

As I wrote in November, we’ve added a specialty group to our firm’s tax practice…our “SALT” Group (State and Local Tax). Since then, we’ve really been focusing on identifying opportunities surrounding the tax incentives in place for having a labor force work within an empowerment zone as well as the green building tax deductions available. 

The credits for employees working in empowerment zones can be as much as $37,000 per employee earned over a 5 year period.  This credit is front loaded (more is earned the first year than subsequent years) and is designed to incentivize hiring within these designated zones.  Some of our contractors are benefitting signficantly from this program.  Even if the office locations of the contractor do not fall within a zone, we explore whether any jobsites may fall within zones.  If an employee spends at least half their time over the year in zone areas, the contractor may be eligible for a credit.  As you can imagine, if a contractor's office(s) is located within a zone, or it has jobsites within zones, the dollar amount of the credit earned can be large.

There are many areas within Southern California and around the U.S. that are designated as empowerment zones as outlined in IRS Publication 954, Tax Incentives for Distressed Communities. If you aren’t a fan of reading IRS Tax Publications, an easier read might be found here at Wikipedia on Empowerment Zones. The tax credits available can be substantial and we are having great success working with our contractors in identifying, and taking advantage of, these tax savings opportunities.

There are also Local Agency Military Base Recovery Areas that are designated by the government which provide for tax incentives for the development of closed military bases. The Tustin Marine Corps Air Station and San Bernardino International Airport and Trade Center are examples of areas that have been designated with this program.

Another area where tax savings opportunities exist is with the Section 179D deduction. Different from the immediate expensing of capital expenditures, this deduction provides for an immediate tax deduction for implementing energy efficient systems within a building. These systems include improvements to the building envelope, HVAC, lighting and hot water delivery systems to name a few. Energy savings must be demonstrated in accordance with specified criteria contained in Standard 90.1-2001 of the American Society of Heating, Refrigerating and Air Conditioning Engineers and the Illuminating Engineering Society of North America. The systems must have been placed in service beginning January 1, 2006 through December 31, 2013. The deduction is the lesser of the cost of implementing the systems up to $1.80 per square foot. If only one system is implemented, the deduction is limited up to $0.60 per square foot.

A few useful websites on the subject are listed below…

Database of State Incentives for Renewables & Efficiency

United States Code Section 179D

Green-Buildings.com Commercial Green Building Tax Deduction Information

American Society of Heating, Refrigerating and Air-Conditioning Engineers at Wikipedia

Send me an email if you’d like to learn more about how to go about determining whether your company, or any of the contractors you work with, can qualify for these tax savings.

Risk Management - Employment Practices Liability Insurance

Employment Practices Liability Insurance is a relatively new form of business line insurance however every business employing people should absolutely have this coverage. Claims made against employers are increasing during these difficult economic times. Wrongful termination lawsuits are on the rise as businesses have had to lay people off over the past year or so. Letting people go, either via termination for cause or reduction in force, in full accordance/compliance with accepted human resources practices is very difficult for most businesses; even those with Human Resource professionals in-house. The exposure for employers is significant and appropriate coverage should be maintained.

If you are unfamiliar with this type of insurance and/or uncertain you have appropriate coverage, I strongly encourage you to contact your insurance broker today to discuss your company’s exposure and how best to address it.

Contractor Liability for Unlicensed Subcontractors

As if owning and managing a construction business on a daily basis wasn’t challenging enough, especially given the economic headwinds in recent times, contractors must be aware of the potential liability which arises from doing business with unlicensed subcontractors. In summary fashion I’ll highlight the more important facts/points of a case which illustrates the potential pitfall.

The case of Sanders Construction Company, Inc. v. Martin Cerda [And five other cases] is important because it further established and maintained the liability of a General Contractor for the unpaid wages of his/her unlicensed subcontractors. The following summarizes the basic facts which were not in dispute:

• In September 2006 disputes arose regarding the quality of the subcontractor’s work
  
  
• After Sanders discovered the subcontractor’s license had expired prior to June 2006, Sanders continued to work with the contractor
  
  
• Sanders was paying the subcontractor and did not believe he was responsible for paying the subcontractors workers
  
  
• The subcontractor ceased work on the project in January 2007
  
  
• The workers ceased work either in December 2006 or January 2007
• 
  

The hearing officer cited the holding in Hunt Building Corp. v. Bernick (2000) 79 Cal.App.4^th 213, 220: “Labor Code section 2750.5 operates to conclusively determine that a general contractor is the employer of not only its unlicensed subcontractors but also those employed by the unlicensed subcontractors.” The hearing officer decided Sanders was the statutory employer of the workers employed by the subcontractor, entitling them to wages and interest. (§ 98.1, subd. (c).) The hearing officer declined to award waiting time penalties because he deemed there was a good faith dispute about whether Sanders was the employer.

Sanders filed an appeal and lost, with the superior court adopting the reasoning of the Labor Commissioner. Like the hearing officer, the superior court relied on Hunt and its interpretation of section 2750.5.

There are many issues to be aware of, many items to verify including ensuring the current and active license status of any subcontractors you do business with. The alternative of staying on top of items such as this could be a potentially crushing expense.

How in the World Did That Guy Get a Bond?

By Daniel Huckabay, President – Commercial Surety Bond Agency

It seems like I get asked this question a lot these days - especially when it comes to those one or two contractors on every bid that are below everyone else's cost to do the work. Fortunately for me, I haven't had the question asked about any of my clients. But it does leave you wondering what surety companies are basing their underwriting off of for some of these contractors and what the ramifications will be?

The surety industry has been interesting to watch over the last few years. This decade started with several tough years economically. As a result, sureties took substantial losses and there was a significant reduction in the number of surety companies in California through mergers, some exiting the California market and others going out of business altogether. These tough early years brought the usual disciplined underwriting after surety companies get whacked with losses, and that combined with the very strong economy from 2004 to 2007, resulted in some of the most profitable years in history for sureties as well as for contractors.

As the economy began to take a nosedive at the end of 2007, a strange and counterintuitive thing happened, more surety companies entered the California market. Since the downturn began, there have been at least eight sureties expand their presence or open up completely new offices in California. So just as contractors are facing less work and more competition, so are the surety companies. Most of these new surety companies target smaller contractors bidding jobs less than $5 million, and as a consequence, the surety underwriting for small contractors has become more competitive and in some cases, less stringent.

This change in the surety marketplace has no doubt made it easier for contractors in the private sector that had never previously been bonded to establish a bond program. Surety companies have historically been cautious in granting credit to a contractor making this move unless the owner or a key employee has prior experience in the public works arena or the contractor was going to take a slow and limited approach with say one job at a time.

Today, however, many of the smaller surety companies are not performing a thorough enough evaluation of these contractors. More often than not, they don’t even meet with the contractors, and therefore never hear the contractors plan first hand or whether they have the experience and capability to execute it. Most importantly, the sureties are missing out on the most important piece, which is evaluating a contractor’s character. This has long been the cornerstone of the underwriting process, and an individual’s personal and business philosophies can only truly be understood in face-to-face meetings.

So then what are these surety companies basing their underwriting on? Many of the contractors that previously did private work made a substantial amount of money during the upswing, and I can only guess that surety companies are banking on these strong balance sheets to offset the lack of experience. However, as we all know, it only takes one or two bad jobs in the construction business to wipe out capital that it took years to accumulate. They are also using tools such as fund control and collateral, which will certainly offset some of their added risk and exposure, but how much so remains to be seen.

In a down cycle such as we are in, it typically takes 12 to 18 months for contractors to pick up bad work, stumble and eventually default. If this holds true this time around, we should see many contractors go out of business next year. We've already seen several companies go out of business this year, and I would expect that number to increase significantly by the second and third quarters in 2010.

As contractors default, surety companies will face rising losses beginning next year and continuing well into 2011 and perhaps 2012. This will no doubt cause many of the sureties, especially the smaller ones, to tighten their underwriting standards. This means many of those contractors that do manage to hang in there will face a different problem - having their bonding capacity reduced or cut completely as surety companies shy away from contractors that have losses or show signs of an inability to stay in business.

But with great challenges comes opportunities for those contractors that plan ahead now. Through all of this, the number of contractors that are bondable will shrink and many of those that can get bonds, will be able to get less two years from now. This affords those that can take certain steps to maintain or increase their bond capacity over the next 12 to 24 months a significant competitive advantage. After all, what better way to reduce your competition than to bid work that others can't, because they aren't able to get a bond.

Here are 7 things you can do to improve and expand your bond program.

1. Retain as much money in your company as possible. Because most contractors aren't making much money these days, this really means limiting the distributions you take from your company or lowering your salary/rent paid to yourself wherever possible. Think of investing in your company financial strength as a tool that helps you get bonds to get work, just like investment in equipment allows you to complete work.
   
   
2. Defer equipment purchases if you can. This will only lower your cash or increase your debt depending on whether you finance it, and surety companies, now more than ever, want contractors with a strong working capital position consisting of plenty of cash and little or no debt. (working capital = current assets minus current liabilities)

3. Improve your internal accounting systems. Surety companies are big on contractors having accounting systems that enable them to know where they are at all times financially. The better, and more timely, you are able to communicate this information to your surety company, the more confident and comfortable they'll feel with you. Remember, surety companies operate under the rule of thumb that bad news travels slow. Avoid the suspicion and concern by producing internal financial statements within 30 days of the period ending, quarterly or six-month CPA prepared financial statements within 60 days and year-end financial statements within 90 days. Any delay could cause a bond to get declined until surety gets a financial statement.

4. Upgrade your year-end financial statement to a review if you currently only get a compiled from your CPA. As sureties experience increased losses due to contractors failing, their requirements across the board are bound to get more stringent. This is particularly true with the smaller surety companies that now except compiled financial statements since they will likely have the highest frequency of losses. We've already seen several change their minimum requirement to a CPA review, and this will definitely become more commonplace.

5. Meet with your bond company at least once a year. Let them know in detail how you are doing and what your projections are. Have a well thought out plan that you can clearly outline to them. Surety companies like to work with contractors that know where they stand now, where they're headed in the future and know how they are going to get there.

6. Make sure you have the right set of advisors guiding you. Now more than ever getting advice from construction specialists is imperative. This includes not only your surety agent, but your CPA, banker and insurance broker.

7. Ask your surety their advice on what you can do to improve your bond program. It comes at a great price, it’s free! You can't get a better deal than that. Plus it will indicate to them that you value their input and treat them as a partner in your business - especially if you follow through on their advice.

Cost Management Tip - Managing Vehicle Fleet Expenses

Over the years, we’ve seen energy costs increasing which has an impact on all our daily lives and businesses. If your company has a fleet of trucks, cars and other equipment which uses fuel, you have undoubtedly noticed the rising cost of gas over the last ten or fifteen years. Today, fuel costs almost 2.5 times what it did in 1995 (per data reviewed at http://www.eia.doe.gov/ the Energy Information Administration). At times in the past few years it has been more than triple 1995 numbers and it wouldn’t be surprising for those energy price levels to return in the next few years. It’s especially important during these challenging times to take advantage of any and all resources available to help manage our business costs in any way we can.

In working with our contractors, as well as discussions with construction industry groups I’ve spoken to in recent years, I’ve raised an issue surrounding the review of fuel transactions. I mention how I’ve heard that a particular individual may fuel up at 2PM on a Friday afternoon and again 8AM the following Monday morning. How can a full tank of gas from Friday afternoon get used so quickly? I usually have people smile and nodding their heads as if they’ve seen that before. I’ve also heard that the frequency with which fill-ups occur begs the question about a card being used perhaps to fill up a spouse’s car with some gas every now and then. Another scenario I’ve been presented with is that many of these fueling stations have mini marts wherein the field personnel will do shopping and add it to the fuel transaction charge resulting in only one charge to appear on the credit card bill.

In the last few years a company called Wright Express has come to my attention. Since Wright Express has been on my radar, I’ve spoken with many contractors who were in fact aware of them and in some cases using them. Many more contractors had never heard of them. If any of the scenarios above resonate with you, you may want to get familiar with Wright Express or a similar service provider. Per their website (http://www.wrightexpress.com/About/index.html) they are a “leading provider of payment processing and information management services to the U.S. commercial and government vehicle fleet industry…The information we collect at the point of sale includes the amount of the expenditure, the identification of the driver and vehicle, the odometer reading, the identity of the fuel or vehicle maintenance provider and the items purchased. This data is captured through our network, which consists of fuel and maintenance locations utilizing our proprietary software.”

I’ve heard from contractors who use their system that the data discussed above is readily available on the statements they receive. I also hear that there are customization options available such that you can control the days/times that fuel may be purchased and set other parameters as well to better control these costs. Every contractor who uses them seems to be very pleased with the service.

I’ve heard, and repeated often, many times over the years “Employees do what we inspect, not what we expect.” The services and information offered by Wright Express seems to provide another means to inspect transactions affecting your businesses.

Please note I have never spoken with anyone at Wright Express nor have any association whatsoever with them.

Employee Empowerment - The Key to Safety Success

by Matthew J. Key – Vice President - Safety - Knight & Carver Wind Group – San Diego, CA

In these times of companies downsizing, out sizing, re-engineering, doing more with less, and compliance to safety regulations, California Occupational Safety and Health Administration and Federal Occupational Safety and Health Administration (CalOSHA/FedOSHA) is requiring companies to have employee involvement and safety committees. Management needs empowered employees to be involved in the safety process.

Management is referred to as: Chief Executive Officers, directors, managers, supervisors, or individuals who have authority and can give authority. Support and commitment to the safety cause is very necessary from all levels of management.

Employees are very effective and motivated when they are empowered and will rally behind the cause of safety. Safety committees are ways that employees can be empowered to decrease incidents, accidents and injuries in the workplace.

Empowerment is defined as “freedom and authority given to employees to pursue their unique vision”. When this is provided to safety committees, strong commitment and support is evident.

The elements critical for safety committee success are: Trust, Communication, Commitment, Teamwork, Training, Awareness, Positive attitude, ownership and recognition. They can be explained as follows:

Trust from management involves demonstrating to the safety committee that they are empowered or have the authority to make decisions and get things done. The committee will not be a figurehead so to speak. Management support and commitment is the number one element crucial for the success of safety committees.

• Communication is critical because everyone (management, safety committee, and employees) needs to be informed regarding safety issues and concerns.
• Teamwork provides the foundation for success. The commonality exists when everyone involved works to have a safe environment. Contribution from each team member gives the uniqueness of different points views and ideas to get the job done successfully.
• Training cannot be overlooked. Having accurate information through training to care for safety concerns provides the safety committee expertise, credibility, and consistency to deal effectively with safety concerns.
• Awareness of safety concerns and how it will be cared for is essential. An awareness campaign can include safety posters, newsletters and safety magazines. When hazards can be identified and eliminated this will bring about a proactive safety program when it comes to reducing or eliminating incidents, accidents and injuries.
• Positive Attitude is strength for a safety committee. Concentrating on what’s going right, what progress have been made, and what can be done to make it better, attaining goals will assist the safety committee to stay motivated.
• Ownership is an important element because all employees including the safety committee need to feel part of the process as owners. Getting employees involved in sub-groups to care for safety concerns, or listening to their suggestions will go a long way for employee participation and involvement.
• Recognition provides an awareness by all that the safety committee is recognized for a job well done. When management shows, in the way of something tangible, (certificates, lunches, dinners, gifts, etc.) this sends a message to the safety committee and employees that their efforts and actions are appreciated and motivate them to do more.

Yes, empowering employees by means of safety committees can have a very big impact in reducing and eliminating near misses, incidents, accidents, and injuries.

Ten Ways to Help You Better Market Your Construction Company

With backlogs beginning to dwindle and concerns about where work will come from as we approach 2010, how to get more work is one of the contractor’s greatest challenges right now. Generally the marketing aspect within a construction company is a weaker element of the overall business. Few contractor’s have a dedicated marketing department or even an outside marketing consultant. Historically word of mouth, reputation, project list, etc. has served as the primary components of the marketing initiative. In this article I’ll offer ten effective ways to get your company’s name in front of the right people. These strategies will help to better your chances of getting new work and establishing your place in the market!

The following is a list of ideas you can review to determine if some are right for your company…

1. Talk to your Bond Agent about getting on Bond Companies Preferred Contractor List

Some jobs go bad and contractors go out of business. The bond company is asked to step in and finish the job. Who actually does the work when the bond company steps in to finish? Contractors do of course…why not you? You own and operate a solid, well run financially stable construction company (even still with the challenges we’ve all faced in this current environment). Your bond agent has relationships with multiple markets and knows you, your company and its history very well. Why not have your bond agent (and CPA and others who know the bond companies) get your name in front of the bond companies and perhaps even arrange meetings? Someone has to do that work (and it’s usually very nice work to have from a profit perspective).

2. Company Newsletters

Most of you receive these articles I publish via a newsletter format. There are many applications, such as ConstantContact and CoolerEmail, which make the preparation and distribution of electronic newsletters relatively easy. The cost of such services can range from generally $30 to $100 for a generous number of emails allowed per month including some Customer Relationship Management (CRM) functionality. Like anything, time must be devoted to this initiative. I have seen several newsletters come through my inbox but actually very few from contractors. In fact I can only think of very few contractors who do newsletters on a regular basis. One electronic newsletter I receive via ConstantContact and another through the regular mail. Both of these are well done, feature projects the company is working on (or recently awarded or completed), contain pictures, etc. The electronic newsletter I receive also has a nice feature focusing on one employee each month. The newsletter concept keeps the company name front of mind, highlights who they are and what they do. All of these elements are critical to establishing and maintaining your company’s place in the market. Using these online service providers such as ConstantContact and CoolerEmail is quite easy if you are comfortable with computers. I’m reasonably confident that most contractors have at least one person within the organization who can manage the creation and distribution of a monthly newsletter. They would need help from you in creating the distribution list and assistance with the content. It’s a relatively inexpensive tool which can yield a reasonable return on the investment.

3. Internal Trade Shows

Your company may have multiple services it provides and/or a variety of ways it performs one or many of the services. There is a good chance that, if asked, some of your employees would not be able to effectively articulate what your company does and/or how it does it. If your employees do not understand who you are, exactly what you do and how you do it they stand little chance of bringing opportunities into your organization. One way to help educate your employees is to have each department or group within your company create a “booth” which can be visited by all of your employees. Each booth might have pictures, props, powerpoint slide shows or any other materials/items which would help tell the story of what that group does and how it does it. This is a fun way for all of your employees to interact amongst different departments and learn about your company at the same time!

4. Create a Target List

If you are a Subcontractor, perhaps there are certain General Contractors with whom you would like to work. General Contractors may be looking to work with certain owners. Create a short list of those prospects and begin asking those with whom you do business whether they have any contacts within those organizations on your target list. As we all are aware, it’s a small world and those of you who use LinkedIn or Plaxo can see many of us are interconnected. Ask your professional service providers, employees, etc. if they know anyone at those companies and you may be surprised at the success you may achieve in getting at least one meeting. Be persistent as it may take time, however if you don’t begin trying you will certainly not make the connections you wish.

5. Industry Associations

Many of you have attended meetings with the Associated General Contractors (AGC), American Subcontractors Association (ASA) and many other alphabet soup organizations over time. They are good venues to receive timely information on topics that affect your business, usually come with a decent meal (not great, but decent) and the ability to interact with your peers, those you work for, those who may work for you as well as professional service providers who understand your industry. One objective you may wish to achieve in attending these meetings might be to get at least one or two cards of people who would want to follow up with. Perhaps a casual lunch meeting in a one on one setting might be mutually beneficial. We need to recognize that simply attending an industry association event is not always (or even usually) enough to help you achieve your goals. It may take the follow up one on one meetings or even participation on committees or the Board of the organization to get meaningful business results. You may also decide that such participation is more about achieving personal satisfaction. Like many things, “you get out of it what you put into it!”

6. Website

Every business can, and should, have a very good website (not just a website). The site should provide a select customer and project list (with pictures), appropriate contact information and be well designed from a graphic and color standpoint. We have all often heard that a receptionist is the “Director of First Impressions” when people call into your office. I’d suggest that the same holds true for your company’s website in today’s internet age. If you see “website under construction” in 2009, that may tell you something. The professional appearance of your website will create, in many cases, the first impression for those looking to learn more about your company. There are many service providers, some who charge very reasonable prices for high quality web design, available such that poor websites for decent sized businesses should be a thing of the past. Email me if you’d like contact information for such services.

7. Employee Involvement and Incentive Plans

I’ve heard more times in recent weeks “All of my employees are business development people.” I think this is a good strategy. The fact is all employees are not business development people…they may have been told they are, but in reality they are not and that’s OK. If that message is delivered to your Project Managers, Field Supers, Office Personnel, etc. and only a percentage of them actually take it to heart and make attempts at getting work and/or contacts for the company you are ahead of the game. I believe all companies should have a business development bonus program. How you structure it is up to you however I’d suggest either relatively small flat amounts perhaps based on contract size or a percentage of the final gross profit (keeping in mind you have back office overhead to cover as well). Those individuals who actually help to deliver results should be awarded for their efforts and productivity.

8. Talk to your CPA, Banker, Bond Agent and Attorney about connecting with their client bases

If you are dealing with service providers who specialize in Construction, ask them if they might be able to make introductions to certain contractors for you. This ties in with the target list recommendation above. You can ask in a generic way without naming a specific connection you’d like to make, however from my perspective you will get more traction if you have a specific contact you’d like help with. They may or may not be able to help, but asking never hurts.

9. Speaking Events

This is a great way to get in front of a number of people at once. If you are a subject matter expert let’s say on government contracting or LEED certification or any topic, many groups are looking for speakers on a regular basis. I know the ASA has a General Contractor talk about their business at least once a year.

10. Advertise in trade magazines, Blue Book, etc.

Obviously there are many magazines and other publications from which to choose and there is no point in aimlessly buying space in a magazine without reasonable comfort that it will provide a good return over time. There are many ways to judge which publications make sense including keeping an eye out in the lobbies of construction firms you respect, reviewing the circulation data published in each magazine, referrals from friends who have had success/traction from certain publications, etc. If possible, find a way to have a specific identifier in each advertisement such that you could measure each placement’s success.

Conclusion

Marketing is perhaps one category where contractors can do significantly better than they are doing today by engaging a few of the ideas (or others of course) above. Some of these ideas are not too difficult to implement. In today’s environment you must pursue every avenue possible to generate more business opportunities for your company.