Monday, April 12, 2010

LEED Building for California

by David McPherson LEED AP, Watt Tieder et al

The “green building” niche for the construction industry has been slowly developing for years. However, with the passage of several laws at the federal, state, county and city levels, contractors, developers and owners must be familiar with the green building laws for their particular jurisdictions and the LEED requirements. This article summarizes certain federal and state laws demonstrating the high importance that is being placed on green building and what contractors should know with respect the LEED requirements that they control and can affect during construction.

Last year, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) was passed by the Federal Government seeking to restart the American economy. While the Stimulus Act reaches far and wide, there are significant opportunities for contractors, developers and property owners with respect to “shovel ready” projects. A close examination of the Stimulus Act confirms that a multitude of these opportunities are vested in “Green Building.” Indeed, tens of billions of dollars in the Stimulus Act funding initiatives are earmarked for green building. The Stimulus Act provides at least $45 billion in funding for renewable energy, energy efficiency and other energy related programs. In addition, almost $20 billion in tax incentives for renewable energy and efficiency measures are included. Here are just a few examples: (1) at least $4.5 billion is allocated to the U.S. General Services Administration to convert its facilities to “high-performance green buildings” in an effort to make federal buildings more energy efficient; (2) $4.2 billion was set aside to modernize various Department of Defense facilities to go toward green building related improvements; (3) $6.3 billion in grants were established to assist state and local governments to make investments in energy efficient projects and those that would reduce carbon emissions. While the Stimulus Act includes many additional programs related to green and sustainable building projects, it is readily apparent that the federal government is committed to spending significant resources towards energy efficient and green projects. It is easy to conclude that the Stimulus bill is truly a shot in the arm for the green building market.

But more is happening in green legislation at the federal level. On June 26, 2009, the United States Congress passed the American Clean Energy and Security Act (“ACESA”), and at the time of this writing is before the Senate. The ACESA, if made into law, will have a great impact on green building. Some of the key components of the ACESA are: (1) 20% of electricity derived from renewable energy sources and efficiency by 2020; (2) $90 Billion invested in renewable technology; (3) implementing energy saving standards for buildings and industry; and (4) a cap/trade/offset scheme for carbon emissions. While the ACESA bill contains much more, it is clear that green building is not a trend and is here to stay. The question is: “Are you prepared?”

What does this mean for California? Well, much of the federal funding from the Stimulus Act is intended to flow directly from the Federal Department of Energy to grantees or people who “work with” the Internal Revenue Service to obtain tax rebates. More importantly, considerable funds will flow into California public agencies to benefit the Golden State contractors, owners and residents. Most significantly is the fact that the California Energy Commission will receive almost $300 million in energy efficiency and renewable energy funds. While it remains to be seen how the agencies decide to best coordinate the programs, the significant funding represents a unique and unprecedented opportunity for contractors and developers in the green market place.

While the Stimulus Act alone should be more than enough for California contractors, developers and owners to recognize the need to understand the United States Green Building Association LEED requirements for construction, the California legislature has taken a leading role in implementing laws requiring more and more green building. Here are some examples:

• Executive Order S-3-05 (2005) sets Green House Gas (GHG) emission reduction targets. Californians are to reduce GHG emissions to 2000 levels by 2010, reach 1990 levels by 2020, and then achieve an 80% reduction from 1990 levels by 2050. This would require buildings to become much more efficient and sustainable.

• California Global Warming Solutions Act of 2006 (AB 32) requires the California Air Resources Board to prepare regulations required to reduce GHG emissions to 1990 levels by 2020. These regulations are to be adopted by January 2012.

• Under SB 97 (2007), the California Office of Planning and Research must, by January 1, 2010, prepare guidelines for mitigation of actual GHG emissions or their effects. It is expected that these guidelines will include incentives bonuses for green buildings.

• With the passage of AB 811 (2008), property owners (commercial, industrial, and residential) are able to finance the installation of energy efficiency improvements and distributed generation, renewable energy sources (solar, wind, weatherization, energy efficient technology) that are permanently fixed to real property within the cities and counties opting in to this law with low interest loans which can be repaid in up to 20 years on property taxes.

While the above just scratches the surface, it is abundantly clear that contractors, owners and developers cannot ignore the fact that green building is here to stay. Moreover, California has long been recognized as a leader in green building laws and regulations. It is simply a matter of time until more and more states, counties and cities implement similar laws and requirements. Only those contractors, owners and developers with a working knowledge of the LEED requirements will be able to successfully navigate through this rapidly growing and expanding area of construction.

Cash Flow Reporting: Use Technology for Better Business Management

By Steven Antill-Foundation Software Inc.

“Cash is king.” “Cash is the lifeblood of any organization.” These ubiquitous sayings explain what every contractor already knows: cash is one of the most critical components to a construction company’s success and stability.

In addition to developing cash flow forecasting at the planning stage of every contract, contractors also need a system at the corporate level to monitor cash flow in a proactive and timely manner. This system, known as cash flow reporting, provides the data necessary for analysis and decision-making. But what exactly constitutes good cash flow reporting?

In the world of construction, business owners should view and understand cash flow from two perspectives: across the entire organization as a whole and at the job level.

Company-Wide Cash Flow Reporting

Many contractors struggle to understand the peaks and valleys of cash flow as it affects the entire organization. Outside the Balance Sheet and the Income Statement, one of the most overlooked financial statements is the Statement of Cash Flow. This report is based on General Ledger activity and shows how changes in balance sheet and income statements line items affect cash. The information is generally broken down into three sections: Operating, Investing and Financing.

Why is this information so important to contractors? Mainly, it has to do with the fact that Income Statements are used to see company profitability, and Balance Sheets are used to satisfy creditors, manage inventory and collect receivables... but both miss the flow of cash in and out. A prepared Income Statement, for example, may show revenues that have been reported but not yet collected and expenses that have been reported but not yet paid. In the same sense, an increase in A/R billings does not necessarily mean in increase in cash, and the posting of an A/R invoice (which increases a company’s Income) has no effect on cash. A Cash Flow Statement, in contrast, identifies the cash that is flowing in and out of the company via cash receipt transactions: accounts receivable collections, A/P invoice payments, payroll liability payments, and so on.
Most good accounting systems that operate on an acrual method should offer a standard Cash Flow Statement generated within the General Ledger. When reviewed regularly, this report gives construction business owners a much clearer understanding of their company’s financial position than can be learned from the Income Statement and Balance Sheet alone. Negative cash flow from operating activities, for example, may raise a red flag as to why the reported net income is not turning into cash. Or a large increase in accounts receivables may uncover problems with billing or collection procedures.
Cash Flow By Job Reporting

Most construction projects are considered individual profit centers, each with its own cash cycle. Therefore, in addition to the Statement of Cash Flow that shows cash activity on a company-wide basis, contractors should also pay attention to cash flow by job to see how each project affects cash flow for a given period. Analyzing cash inflow and outflow by project allows contractors to identify profitable jobs that are funding themselves as well as underperforming jobs that are possibly being funded by other jobs.

Good construction-specific accounting software should make it easy, if not automatic, to prepare a Cash Flow By Job report. Some systems even incorporate this all-important report into their executive “dashboards” so that the information is displayed graphically and is available on a real time basis. (See Sample Report #1) At a minimum, the contractor should be able to see cash received or collected via cash receipts per job minus what was paid out of AP and payroll. It’s important to note that when defining Payroll Cash Paid to Date, the report should include not net payroll (employees’ wages) but rather gross payroll (employees’ wages plus FICA, FUTA, SUTA, Workers’ Compensation, prepaid insurance and other burdens).

For a more detailed look at cash flow by job, contractors will want a report that also includes a Revised Contract Amount, a Revised Estimated Cost, Gross Profit, Open Payables and Open Receivables per job (See Sample Report #2). Using this information – in conjunction with Cash Collected and Cash Paid to Date out of A/P and Payroll – construction business executives should be able to see the percentage of cash flow to contract and the percentage of cash flow to gross profit. Not only does this allow contractors to alter cash flow projections based on actual cash activity, but it also provides invaluable information on cash flow trends via jobs or types of jobs. In the long term, that can lead to better cash flow forecasting.

Proper cash flow management is essential for all businesses, but it is especially important in the cyclical, project-based world of contracting. To properly monitor cash flow activity, construction executives need to regularly view and understand reporting from two perspectives: the company-wide Statement of Cash Flow and the project-level Cash Flow by Job report. And with today’s sophisticated construction accounting applications, they can easily accomplish both.