Sunday, November 3, 2013

New Litigation Threat Facing Contractors

The construction industry may soon face a new wave of litigation filed by attorneys on behalf of laborers.  On October 10, 2013, Governor Jerry Brown signed into law SB 435 (Senator Padilla).  This Senate Bill, which goes into effect January 1, 2014,  is “an act to amend Section 226.7 of the Labor Code, relating to compensation.”  The amendment adds the term “recovery period” in addition to meal and rest periods as originally included in Section 226.7.  The recovery period is essentially a “cooldown” period to prevent heat illness.  This bill provides compensatory relief for field laborers who are not accommodated with shade under which the recovery period is to be taken.  These recovery periods may be taken throughout the day per Cal-OSHA regulations.  It would not be surprising to see class action labor attorneys spring into action to aid in enforcement of these provisions.

The amendment to Section 226.7 is interesting with respect to its expanded language.  It essentially adds requirements to comply with statutes, regulations and/or orders of the Occupational Safety and Health Standards Board and the Division of Occupational Safety and Health.  As such, this amendment ties Section 226.7, which stipulates penalties of one hour, per employee, per workday, that each meal or rest or recovery period is not provided, with Cal-OSHA rules and regulations.  One of the more notable regulations under Cal-OSHA is with respect to Heat Illness Prevention.  This  code section, click here for the details, requires employers to provide proper shade to accommodate 25% of the employees on the shift without having physical contact with one another.  There is a temperature threshold stated in this section requiring employers to provide this shade to be available when the temperature reaches 85°F.  It also requires the employer to provide access to shade even if the temperature doesn’t reach 85°F upon the employee’s requestThe rest periods for cooldown must be at a minimum 5 minutes to prevent overheating.  Access to shade must be available at all times.

For those wishing to read the language of Section 226.7 as amended by the bill for themselves, I’ve included it below here:
(a) As used in this section, “recovery period” means a cooldown period afforded an employee to prevent heat illness.

(b) An employer shall not require an employee to work during a meal or rest or recovery period mandated by an applicable statute, or applicable regulation, standard, or order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health.

(c) If an employer fails to provide an employee a meal or rest or recovery period in accordance with a state law, including, but not limited to, an applicable order of the Industrial Welfare Commission, the Occupational Safety and Health Standards Board, or the Division of Occupational Safety and Health, the employer shall pay the employee one additional hour of pay at the employee’s regular rate of compensation for each workday that the meal or rest or recovery period is not provided.

(d) This section shall not apply to an employee who is exempt from meal or rest or recovery period requirements pursuant to other state laws, including, but not limited to, a statute or regulation, standard, or order of the Industrial Welfare Commission.

Although this may prove to be challenging for contractors to comply with, as always it’s best to know the landscape such as it is.  Please share this with your contractor friends accordingly so they can decide how best to navigate these requirements.

Sunday, October 6, 2013

Financial Reporting Update

Back in March I wrote about the possible changes on the horizon regarding revenue recognition in the construction industry.  These proposed changes would alter how we report on construction company operations and consequently would require a significant retraining of all those who prepare and use those statements. 

There has been an effort put forth by the American Institute of Certified Public Accountants (AICPA) wherein they have created a model for financial reporting for small and medium-sized businesses.  This model, published in a report entitled “Financial Reporting Framework for Small and Medium Sized Entities" (abbreviated as FRF for SME), provides a pathway enabling qualifying entities to report via a non-GAAP "Other Comprehensive Basis of Accounting" (OCBOA).  By choosing this pathway, any burdensome changes in generally accepted accounting principles (GAAP) would not necessarily affect a company reporting under this FRF –SME.  This would enable a more cost effective and clearer methodology under which to report the results of operations and avoid any unnecessary complexities brought forth by an ever changing GAAP model while providing a clear, concise, relevant and useful report.  The costs saved would of course be primarily outside professional fees, but also internal cost savings as interim internal financial statements would also be reported under the FRF – SME model to outside users.  Beyond the cost savings, any confusion created in the market by some of the proposed changes in GAAP would be avoided.

The National Association of State Boards of Accountancy (NASBA) and the AICPA have now joined together in support of this new framework.  On July 15, 2013, the two organizations issued a joint statement indicating that NASBA will assist in the development of a decision making tool for businesses to help them decide if this reporting framework is right for them.  I suspect many businesses in the market we serve here in Southern California would be good candidates as they are privately owned and operated.

One of the greatest challenges facing those interested in adopting this reporting methodology is acceptance by the market – the users of these financial statements.  Many creditors require financial statements to be presented in accordance with GAAP.  These very same users might very well find the FRF – SME model more useful, concise and relevant to their needs vs. GAAP as it is proposed to change.  Some of the proposed changes to GAAP, besides the revenue recognition change discussed in my March posting, include accounting for leases.  The simple summary here is that essentially all leases will be capitalized.  Rent expense will be a thing of the past and the reader will see amortization of the right to lease assets along with interest expense in its place.  Banks, bond companies and others who use financial statements need to gain an understanding of the changes in GAAP coming down the road.  They need to assess how those changes will affect the reporting for the businesses they work with and whether those changes to the reporting are useful to them as creditors and users of those statements.  Given recent developments with the AICPA and now NASBA, it appears there are viable options to consider.

If the banks and bond companies could begin re-writing their credit documents such that the financial reporting/records requirement reads “financial statements to be provided in accordance with current accounting pronouncements” versus “…maintain its books and records in accordance with GAAP” then this FRF – SME framework could be an attractive option.  The markets need to take notice of these proposed changes to GAAP now so that any unintended consequences can be avoided and small to medium-sized businesses will not be burdened with the reporting requirements that are generally meant for much larger businesses.  This will help everyone involved including the users of the statements and the business owners.

Thursday, September 19, 2013

Workers Comp Insurance Rates Set To Go Higher Again

This past Friday the Workers’ Compensation Insurance Rating Bureau of California (WCIRB) submitted another pure premium rate filing to the Insurance Commissioner.  The new rate proposed is $2.70 per $100 of payroll and would be effective January 1, 2014.  This increase represents an approximate 7% increase from July 2013 and 17% over January 2012.  You might recall in 2012 the Pure Premium Rate spiked up 30% in that year.

The cost of doing business in California continues to rise and businesses must anticipate, and be prepared for, that reality.  Keep in mind that the increase in the pure premium rate is just one of several factors affecting insurance premiums.  It is a good idea to contact your broker now to determine ways to mitigate any increases you may be facing.

As I pointed out in my posting in November 2011, you must always consider your costs at the price they will be incurred when you are performing your work, not at the time of the bid.  Insurance increases, as well as anticipated materials prices or other increases, need to be considered when preparing bids.

Although these increases never come as good news to the market, I was reading the 2011 posting again wherein I noted in July 2003 the rates were $4.80 per $100 of payroll.  It’s good to keep things in perspective.

Monday, June 10, 2013

Profit enhancement idea - Software designed to keep track of tools, supplies, inventory, etc.

If you run a construction business, no doubt you’ve wondered at times where certain supplies, small tools, shop inventory and the like end up.  You look at the costs you incur for these items and ask why it’s so high.  How many hammers, ladders, and other small tools and supplies have you had to buy over and over again?  It’s an issue I’ve heard about over the years and I’ve offered some suggestions to mitigate these losses including a quarterly tool allowance which the employee gets to use to purchase their own tools and keep whatever is left over.  This way there is incentive to not “lose” any tools and you fix the cost.  That can be effective, however with today’s technology there are alternatives.

Just this week one of my clients was raving about software that tracks tools, consumables, sundries, inventory and equipment so that these items don’t go unaccounted for.  It builds additional employee accountability into your system using bar coding methodology.  When an employee takes any item, they must scan it to a job which allows the job cost system to track it.  This enables management to see exactly how much of these items are being used on a particular job versus the budget. 

Waste in any area, including items in these categories, hurts the bottom line, the company and your ability to take care of your employees via year-end bonuses, etc.  The software is called Waterwheel Software and my client is a very satisfied customer.  As with anything I discuss on this blog, I have neither a financial interest in this company nor its products.  I haven’t ever contacted them and I personally have no experience with it.  Based on my subcontractor’s high satisfaction level, and that he was referred to it by another subcontractor happy with the offerings, I thought I’d pass the information along here.  I also noticed several customer testimonials on their website as well.  This seems to be a system worth considering.

Sunday, May 5, 2013

Architectural Billings Index

The March 2013 Architectural Billings Index (ABI) numbers came in above the critical 50.0 number for the 8th month in a row on a national basis (also for the West Region) coming in at 51.9.  The West Region reported in at 51.9 while the Northeast, Midwest and South regions reported 54.6, 53.9 and 53.6 respectively.  The strongest sector nationally was Multifamily Residential at 56.9 with Commercial reported at 53.5 followed by Mixed Practice (53.3) and Institutional (50.6).

The West region reported 46.6 in 2012 and 47.7 in 2011, so the 51.9 is a nice improvement and as the number is greater than 50.0, indicates architect’s billings are increasing.  As I reported a few years ago, the ABI is a leading indicator of construction activity as construction spending generally lags architect’s billings by 9 months to a year.  In recent months, we have seen many contractor’s backlogs increase with improving margins.  However, we also still see challenging situations as well.  That being said it seems like many contractors are finding more opportunities and are posting good results.  Those who continue prudent operational/fiscal management, are selective with which jobs to bid and running with lower overhead are poised to take advantage of the improving landscape.

Sunday, April 7, 2013

CFMA's Compensation Trends in the Construction Industry (along with PAS, Inc.)

The Construction Financial Management Association (CFMA) publishes a magazine bi-monthly entitled “Building Profits”.  In the January/February 2013 issue, it contained an article addressing compensation trends in the industry.  The analysis includes breakdowns by position providing further breakdowns by region, company size, sector, etc. and is insightful.

The highlights of the survey include suggesting that higher compensation levels can be found in the East and the South and Business Development personnel can command higher salaries than the CFO. 

PAS, Inc. is, in my opinion and experience, the leading firm providing compensation data for the construction industry.  They are the engine behind this analysis.  The complete survey, definitely worth a read, can be found here...

Sunday, March 10, 2013

FMI's 2013 US Markets Construction Overview

Recently I attended a presentation by FMI Management Consulting.  I've known FMI for many years and have come to respect them as a leading firm in the construction industry.  The slideshow in the following link contains over 50 slides of data ranging from forecasts in different sectors of the construction industry to surety statistics to demographics/population data (including maps), profitability information and economic data, etc.  I hope you find the information useful...  

Proposed Revenue Recognition Changes Update

You may have heard over the last year or so about the proposed changes for how contractors will recognize revenue.  For those of us who have been in the in the industry for a while, we are most familiar with Statement of Position (SOP) 81-1 (Accounting for Performance of Construction-Type and Certain Production-Type Contracts, 1981) which was replaced by Accounting Standards Codification (ASC) 605-35.  These pronouncements dictate the current standards for revenue recognition, Percentage of Completion based primarily on costs.

The world is changing, in many ways getting "smaller".  Convergence is a word we hear tossed around regularly in terms of reporting standards internationally.  I've been following these drafts as they are called, published by the Financial Accounting Standards Board (FASB) for some time now.  They seem to be getting closer to pulling the trigger on what will change after much back and forth between industry participants and the FASB.  I'm personally a fan of how we report now, I'm not sure what is "broken" so to speak.  Again, I think it has more to do with consistency across industries and nations rather than how we here in the US Construction Industry feel about the current model for revenue recognition.

The CFMA has done a nice job of summarizing the current state of affairs.  We won't be dealing with any changes for a few years as they've set 2018 as the first year private companies will need to comply.  Here's the CFMA Synopsis...

Sunday, February 3, 2013

American Taxpayer Relief Act 2012

There has been much going on in Washington in recent weeks surrounding our tax laws and fiscal policies.  Thankfully the adults in Congress reached a compromise last month and the President signed into law the American Taxpayer Relief Act of 2012.

I'm not sure "relief" is an appropriate word to be used in the title here, however we did gain some certainty, at least with respect to tax rates.  I'm also not sure the American worker who heard so much in the media about protection of the middle class felt relief when s/he opened up that first paycheck in 2013 and was puzzled why the net check went down only to learn payroll taxes went back to the normal, pre-holiday, rates.

US Bank did a nice job in summarizing, in a short two page document seen below, what they are calling the "tax highlights" of the new law.

Tax Depreciation Limits

I thought it might be nice to publish a summary of the 2012 tax depreciation limits for accounting and finance personnel to be able to reference.  If these limits don't particularly excite you, please forward to those tasked with knowing such things.

Below are the 2012 tax depreciation limits for Section 179 and bonus depreciation, since this changes year to year.  The American Taxpayer Relief Act of 2012 extended the Section 179 amounts for the 2012 and 2013 tax year.  The 50% bonus depreciation was also extended to the 2013 calendar year.

1.       Section 179 for 2012 tax year (see below) - Maximum Sec. 179 deduction $500,000.  Investment limit $2,000,000.  (If more than $2M of fixed assets additions of qualifying Sec. 179 assets, the Sec. 179 deduction phases out dollar-for-dollar, e.g., if there is $2,000,001 in additions, the Sec. 179 is reduced to $499,999 – Sec. 179 is completely phased out when total additions exceed $2.5M).  Most common non-qualifying Sec. 179 assets are Leasehold Improvements (with exceptions).

2.       50% Additional First Year Bonus Depreciation – Asset must be new.  The bonus depreciation was 100% for the 2011 calendar year.  (For example, if you have a 6/30/12 FYE client, 100% bonus depreciation will apply for 7/1/11 – 12/31/11, and 50% bonus depreciation will apply for 1/1/12 – 6/30/12).

CALIFORNIA – California never conforms to federal.
1.       Section 179 – Maximum Sec. 179 deduction $25,000.  Investment limit $200,000.  (Same dollar-for-dollar phase out applies – at $225k new additions, Sec. 179 is completely phased out).

2.       No bonus depreciation allowed.

The basic rule for tax years – it is determined by when the fiscal year starts.

The 2012 tax year for Section 179 is applicable for 12/31/12, 1/31/13, 2/28/13, 3/31/13, 4/30/13, 5/31/13, 6/30/13, 7/31/13, 8/31/13, 9/30/13, 10/31/13, and 11/30/13 clients.

1.       3 year SL – off-the-shelf software
2.       5 year MC200 – cars & trucks (see note below for limitations), computers, machinery and equipment
3.       7 year MC200 – furniture, phones
4.       15 year MC150 – land improvements (parking lot, fencing, sidewalks)
5.       27.5 year SL – Residential Real Property
6.       39 year SL – Commercial Real Property (including leasehold improvements that are structural and affixed) – certain LHI can utilize a shorter 15-year life for federal if certain criteria are met – please ask if this applies to your client.

1.       Most cars and trucks are limited to the amount of depreciation (including Sec. 179 and bonus depreciation) you can take each year.  The code for listed property in BNA is “AL.”  For 2012, autos are limited to $3,160 depreciation in the first year.  If bonus depreciation is taken (auto needs to be new), the first year depreciation limit is increased to $11,160.

2.       For trucks having gross vehicle weight rating >6,000 lbs. and bed length >6 feet – can take Sec. 179 for entire cost – refer to Table I in the attached file

3.       For (a) SUVs >6,000 lbs., (b) vans >6,000 lbs., and (c) trucks >6,000 lbs. with bed length < 6 feet – Sec. 179 is limited to $25,000 – refer to Table II - IV in attached file

If Sec. 179 is being limited, and you are trying to figure out which assets to apply the Sec. 179 and which assets to not, the basic steps to take are:

1.       First, choose all the assets with the longer class life (e.g., choose the 7-year asset vs. 5-year).

2.       Second, choose the asset closer to year end (e.g., choose the asset purchased on 12/31 vs. the asset purchased on 1/1).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein. Notice: The information contained in this message may be privileged and confidential and protected from disclosure. If you are not the intended recipient, or an employee or agent responsible for delivering this message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by replying to this message. Please also destroy any hard copies and delete this message from your computer. Opinions, conclusions, and other information in this message that do not relate to the official business of our firm shall be understood as neither given nor endorsed by it.

Thursday, January 10, 2013

Chapman 2013 Economic Forecast

Each year since 1978 Chapman University has published an economic forecast.  These reports are widely anticipated and regarded as one of the better forecasts known for their detail and, most times, accuracy.

At the bullet points below, I've provided some of the highlights per my review of the report.  For those wishing to read the full report, and I encourage you to do so, you can find a copy here.  The full report has many charts, graphs and tables which are quite useful.

  • The recovery is in its 3rd year and Chapman forecasts the recovery to continue into a 4th year in 2013 with an estimated increase in GDP of 2.1%, roughly similar to 2012.
  • Housing continues to be a bright spot.  Nationally, housing inventory is low and housing starts have increased significantly.  Housing starts increased 25% in 2012 and are forecast to increase again at a 13% clip in 2013.  Nationally, prices increased 6% in 2012 and are forecast to increase 3.5% in 2013.  In Orange County, Chapman forecasts price appreciation of 4.2% in 2012 and 6.8% in 2013.
  •  Household Net Worth is forecast to return to its pre-recession high by the end of 2013 which explains the boost in consumer confidence seen in recent months.
  •  “California and Orange County economies will be facing headwinds in the coming year that may derail the recent pickup in job creation.  Higher taxes – sales, income and payroll – are the primary concern.” 
  •  “On the bright side, the Anderson Center’s California Consumer Sentiment Index increased to 94.2 in the third quarter of 2012, a level not seen since the third quarter of 2007.” 
  •  “Another positive development is the rebound in construction spending…construction spending…is projected to grow by 10.0 percent in Orange County in 2013.” 
  •  “Overall, our forecast calls for an increase of 1.8 percent in total payroll employment in Orange County in 2013…Job growth in construction, professional & business services and leisure & hospitality will outperform all the other sectors of the economy in Orange County and California.” 
  •  “The combination of job and real income growth along with historically low mortgage rates bode well for the housing market.” 
  •  “In fact, Orange County’s notices of default is currently the lowest in Southern California and showed the sharpest decline in the third quarter of 2012 and is also at its lowest level since the housing slump.”

New California Law Will Prevent Contractors From Shifting Liability for Their Own Active Negligence to Downstream Contractors and Suppliers

by Greg Clement, Partner, Burkhalter, Kessler, Clement & George LLP

Senate Bill 474, codified in California Civil Code section 2782.05, will broaden the types of indemnity provisions that are unenforceable under California law.  Effective January 1, 2013, “Type 1” indemnity provisions in construction contracts, which cover a contractor’s concurrent active negligence, will no longer be enforceable.  In conjunction with the new law, the contractor’s ability to shift the costs of defense to downstream contractors and suppliers will also be limited.

Under existing law, contractors can include broad indemnity provisions in commercial construction contracts which shield the contractor from liability even for its own “active” negligence.  These “Type 1” broad indemnification provisions have been enforceable as long as the liability does not arise from the “sole negligence or willful misconduct” of the contractor or owner.  Civ. Code §2782(a) (emphasis added).

California Civil Code section 2782.05 now renders “Type 1” indemnification provisions unenforceable, imposing liability upon general contractors, construction managers, or other subcontractors for “claims of death or bodily injury to persons, injury to property, or any other loss, damage, or expense” arising out of the “active negligence or willful misconduct of that general contractor…”.  Civ. Code §2782.05(a) (emphasis added).  Furthermore, although construction contracts with public agencies and owners of privately owned real property are expressly excluded from section 2782.05, public agencies and private owners are similarly prohibited from including “Type 1” indemnity provisions in their construction contracts pursuant to section 20782(b)-(c).

Another change in the law is that contractors will be prohibited from allocating the costs of defense of claims to their downstream contractors and suppliers.  The new restrictions contained in section 2782.05 prohibiting indemnity for one’s own active negligence specifically include the “costs to defend” claims in litigation.

Senate Bill 474 describes the express purpose of the new law as a means “to ensure that every construction business in the state is responsible for losses that it, as a business, may cause.”  The statute also prevents a contractor from “forum shopping” to avoid the effect of the new law by imposing a requirement that California law will apply to these contracts without regard to any choice-of-law rules that might otherwise apply.  In addition, any waiver of any of these provisions is contrary to public policy, void, and unenforceable.  Civ. Code §2782.05 (c)-(d).

Consequently, contractors must be especially mindful of the new law to ensure that any indemnification provisions included in their construction contracts or subcontractor agreements, entered into after January 1, 2013, are in compliance with the new law; and contractors must understand they can no longer shift liability for their own active negligence to downstream contractors and suppliers.