Work Opportunities Tax Credit (WOTC)

Especially in a time when cash flow is critical, finding areas to save money is key.  The government has many programs available to foster certain activities and provide benefit to those engaging in such activities.  The WOTC is a federal tax credit meant to incentivize employers to hire and retain individuals from targeted groups whom the government is looking to foster employment and promote economic self-sufficiency.  When an employer hires from these groups, they are eligible to receive tax credits ranging from $1,200 to $9,000 per qualifying employee.  This program has been extended through August 31, 2011.

One key point to note is that the credit must be applied for using the appropriate forms within 28 days of the new hire’s start date.

If you would like to learn more about this program please contact me and I’ll provide you with any additional information you need.  Of course we can help you process the applications and train you or your HR department to incorporate this analysis as part of your normal on-boarding process.

Goal Setting

As we head towards the fourth quarter of 2010, we’re hopeful for a better 2011 and, if you haven’t started doing so already will begin mapping out our plans for our businesses and team members for next year.  It’s the time of year to meet with our teams and begin planning for the next one to two years and beyond.  It’s an important and sizeable task businesses face each and every year however many don’t have a framework for how to go about establishing a strategic plan and/or individual goal setting.  This article will focus on how to go about individual goal setting for each of your key management members.  Once you have a plan and direction for your business, it’s important to have all key members of management structure personal goals in order for the company to achieve its objectives as well as the individual having a better defined road map for success.  I hope to provide some insights and ideas about how to go about doing just that in a meaningful and effective way.

A widely used methodology for structuring goals is referred to as the “SMART” method.  SMART is an acronym for the following words: Specific, Measurable, Achievable, Relevant and Time-Bound.  One of the “dirtiest” words in the English language is “accountability”.  We are all comfortable having others be accountable however when it comes to our own performance, being accountable isn't always so comfortable.  I believe it’s this concept that often times leads to vague, non-quantifiable, subjective goal setting that is generally the norm when people are asked to create goals.  The SMART method, when applied properly, will mitigate (if not eliminate) the “softness” of the goals being set.

Specific…in order to understand what it is that one is looking to achieve, or what is being asked of someone, it must be specific and clear.  The stated objective should be concise and clearly understood by both the individual tasked with meeting the objective as well as the individual that person reports to.

Measurable…generally some element of quantification.

Achievable…if a goal is not achievable then it’s not a goal, it’s a pipedream.  Intelligent people generally don’t waste energy chasing pipedreams.

Relevant…is the goal relevant to the furthering of the company’s overall stated objectives?  Does the goal make sense within the overall business?  Is that goal being pursued by others already thereby making this person’s efforts in achieving the very same goal irrelevant?

Time-Bound…when will the goal be achieved?  The timeliness of the achievement of the goal will obviously have a bearing on the success of the overall organization as well as the individual.  As importantly, setting a deadline for achieving a goal creates both an urgency in achieving it as well as communicating when success is expected.  Further it provides a timeline against which the individual can benchmark his or her path towards success.

There are generally a handful of areas within a business that people must be successful and proficient in order for the business to do well.  These areas include Sales and Marketing, Operations, Financial Management, Training, Leadership, etc.  Creating these categories and establishing goals within each category, using the SMART method discussed above, will provide a good framework for your goal setting process. 

Good luck with your strategic planning and goal-setting as we head towards 2010Q4!!!

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.