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.

Tax Savings Opportunities - Enterprise 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 enterprise zone as well as the green building tax deductions available. 

The credits for employees working in Enterprise 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 enterprise (or Federal 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.