Nail a Construction Niche

Take a closer look at the structure of the building business.
BY SARAH PHELAN

EXECUTIVE SUMMARY
CONSTRUCTION OFFERS A DIVERSE MARKET TO CPAs. Major contractors handle federal government projects (such as dams and military buildings) and other heavy construction work including refineries, power plants and utilities, highways, municipal centers and international ventures. Each subcontractor for discrete phases of such projects (wiring and plumbing, for example) is a potential client, too.

EVERY CONSTRUCTION JOB’S LEGAL, REGULATORY and bidding requirements are highly detailed, and the complexity scales up in proportion to the project. A CPA serving contractors handles jobs that vary enormously in the kind of materials used, the types and numbers of workers employed, and the sums of money and financing arrangements involved.

PRACTITIONERS WITH CONSTRUCTION expertise make sure tax returns properly account for the variables of building projects that are carried out over a period of years, help with equipment/fleet management issues, see that money is spent at an appropriate rate over the life span of a project, perform inventory control review and advise on estate and succession plans.

AN EXPERIENCED CPA ADDS THE MOST VALUE to a contractor’s profitability by ensuring the company’s financial statements enable it to maintain maximum single and aggregate bonding limits. Sureties rely on financial statements to determine whether to issue a bond. Such bonds guarantee a bridge project won’t fizzle halfway across a river.

SURETIES KNOW WHAT THEY WANT TO SEE and will send a contractor whose character and track record are good but whose financial statements are sloppy, incomplete or otherwise flawed to a CPA to fix the problem. This “referral” constitutes a kind of prescreening for client reliability.

IN THIS SELLERS’ MARKET, contractors need to showcase their financials as well as control costs. The industry is a huge and healthy one, subject to cyclical downturns but always rebounding.

SARAH PHELAN, JD, is a New York-based attorney and writer. Ms. Phelan was formerly a senior manager with Deloitte & Touche and a technical manager in personal financial planning at the AICPA. Her e-mail address is Phelanlaw@prodigy.net .

ext time you’re stuck in traffic because of construction, take a deep breath, look around and ask yourself a few questions: Those orange cones over there—who’s providing them: Is it a general contractor or traffic-safety subcontractor? Does the supplier do enough business to qualify for the completed-contract method of accounting for tax purposes? How will the contractor handle the sudden payroll spike for those folks with flags? What about that bulldozer (or backhoe or crane)—did the heavy-equipment contractor buy it or finance it? How? What sort of hit did his working capital take? How will that look to his lenders? And that bridge—how does the state or county paying for it know the builder won’t run out of money and leave a span halfway across?

A CPA who advises clients in the $450-billion-a-year construction industry will be aware of—and know the answers to—many such questions. To determine whether the niche is right for you, learn more here about the services contractors need and the resources available to give you the knowledge you’ll require (see “ Tools of the Trade ”).

SURVEYING THE FIELD
Low interest rates have fueled a construction boom for several years, with homebuilding the strongest industry segment in 2001. Buildings continue to go up—and contractors of all types need CPAs to help with taxes, bonding and borrowing services. In leaner periods, they need assistance with cost controls, ways to maximize tax savings and strategies for obtaining credit. “There’s plenty of work out there,” says Peter McGuigan, CPA, head of McGuigan & Co., a four-professional firm in Wall, New Jersey. The firm has specialized in construction since its 1990 inception and also does technology consulting; individual, corporate and estate tax work; and retirement planning.
A Solid Foundation

Builders completed 1,566,700 housing units in 2001, a figure essentially unchanged from the previous year. Of them, 1,252,600 were single-family units, an increase of 1% from 2000. Multifamily completions totaled 280,400, 8% below the previous year.

Source: Department of Housing and Urban Development, www.hud.gov .

The market. Construction offers a diverse market for CPAs. Major contractors undertake federal government projects (such as dams and military buildings) and other heavy construction jobs including refineries, power plants and utilities, highways, municipal centers and international ventures. Each subcontractor for discrete phases of such projects is a potential client, too. These include ironworkers, masons, cement workers, electricians, sheetrock installers, plumbers and painters, as well as elevator and fire-sprinkler installers and heating, venting and air conditioning (HVAC) specialists. Other types of subcontractors—such as those for highway construction—move dirt, lay pavement, operate heavy equipment, coordinate traffic safety and install work lights.

Tools of the Trade

According to Mike Mimovich, CPA, a 30-year veteran in this field, “A beginner needs to network and form alliances so that he or she knows where to get answers.” To start building industry knowledge and contacts, use the following resources.

Associations

Contractors’ associations have state and local or regional chapters; generally they welcome participation by their “suppliers,” including CPAs. Specialty contractors (pavers, for example) have their own associations.

Associated Builders and Contractors
1300 N. Seventeenth Street
Suite 800
Rosslyn, Virginia 22209
703-812-2000
www.abc.org

Associated General Contractors of America
333 John Carlyle Street
Alexandria, Virginia 22314
703-548-3118
www.agc.org ; info@agc.org

Construction Financial Management Association
29 Emmons Drive
Suite F-50
Princeton, New Jersey
609-482-8000
www.cfma.org ; info@cfma.org

Construction Industry CPAs/Consultants Association (CICPAC; an organization of about 70 firms)
One Valmont Place
Omaha, Nebraska 68158
888-475-4476
www.cicpac.com

Industry publications

CFMA Building Profits (bimonthly magazine); to see samples and subscribe, www.cfma.org .

Constructor Magazine (monthly); currently in its 82nd year of publication, www.agc.org .

Financial Management and Accounting for the Construction Industry (2 vols., 1,600 pages; published by Matthew Bender & Co.). Contains sample financial statements and illustrative cash management alternatives, www.cfma.org .

Guide to Construction Contractors (three volumes; available in print, on CD-rom and on the Internet), www.ppcnet.com .

Industry publications (cont.)

Construction Contractor Taxation (one volume; available in print or on CD-rom). Addresses contract accounting rules for large and small contractors and homebuilders, the cash method, changing from a small to a large contractor, look-backs, the AMT and midcontract changes in contractors, www.ppcnet.com .

Construction Accounting & Financial Management by Palmer, Coombs & Smith (610 pages). Available from McGraw-Hill Professional Publishing, New York.

Construction Accounting Deskbook: Financial, Tax, Accounting, Management, and Legal Answers (1330 pages; available in print or on CD-rom). Carries information on revenue recognition, joint ventures, government contracting and project management procedures. Can be ordered online at www.cch.com or from Harcourt Brace Professional Publishing, New York.

Training and conferences

Basics of Construction Accounting (one-day workshop) and Beyond the Basics (one-day follow-up workshop), www.cfma.org .

AICPA’s 14th Annual Construction Industry Conference (December); call 888-777-7077 or go to www.cpa2biz.com .

CICPAC’s Annual Conference (three days in July; covers tax and auditing updates along with industry trends), www.cicpac.com .

CFMA’s Annual Conference and Exhibition (four days annually in May), www.cfma.org .

Web sites

Members of CICPAC can access CICPACnet, where CPAs can post queries and receive expert advice from noncompeting industry peers. Niedermeier and Mimovich use this tool. CICPAC’s site gives members a place to showcase their services.

The IRS Web site provides an industry overview and a cluster of resources that’s useful for owners of small companies, www.irs.gov/businesses/small .

Every construction job’s legal, regulatory and bidding requirements are highly detailed, and the complexity scales up in proportion to the project. Many contractors settle into a niche and stick with it; same-size jobs and familiar clients let them capitalize on acquired knowledge and lessen financial risk. However, sometimes a builder of individual homes suddenly lands a job to construct several hundred units. Or vice versa.

The CPA’s role. CPAs serving this complex segment are called on to handle engagements that vary in scope, materials and the types of workers employed as well as the sums of money and financing arrangements involved. They must understand how best to provide value based on a project’s location, financing and applicable accounting and tax laws (see “ Accounting for Construction Contracts ”). Basics include a thorough grounding in the provisions of IRC section 460 in order to master construction accounting and the unique tax rules (for example, the “small construction contract exception”) that apply to contractors and an in-depth knowledge of SOP 81-1 (see “ Blueprints ”).

CORNERSTONES OF SERVICE
Ensuring the company’s financial statements enable it to maintain maximum single and aggregate bonding limits is the most important value a CPA can add to a contractor’s profitability, says McGuigan, who started his career in a Big Five firm’s construction practice. Maximizing builders’ capacity to get bonding is crucial because bonding agents (called sureties) rely on financial statements to determine whether to issue a bond, some of which are immense. Surety bonds (generally backed by big insurers such as CNA and Travelers) are in a different league from the $5,000 or $10,000 sums state regulators require contractors to post as a bond.

Accounting for Construction Contracts

The Internal Revenue Code governs which accounting method(s) the taxpayer must use for its construction business. The choice depends on

The type of contracts the business works with.
A contract’s completion status at the end of the business’s tax year.
The contractor’s average annual gross receipts.

Most construction businesses use two different tax accounting methods: one for their long-term contracts and one overall method for everything else. (A long-term contract is any contract that isn’t completed in the year it’s started.) Most construction businesses use the accrual method for their overall system of accounting. A few are allowed to use the cash method.

A contractor must choose an accounting method for all its long-term contracts. There are several specialized accrual methods available, each of which has its own set of rules and limitations. These include

Percentage of completion.
“Old” percentage of completion.
Completed contract.

As a business grows and changes, it may have to use a different method of accounting. The IRS recommends taxpayers check every year to ensure they’re using a permissible method of accounting for their construction contracts.

Source: IRS, www.irs.gov/businesses/small/industries/ .

There are three bonds a contractor wants to qualify for: first, the bid bond, in effect “insurance” that the company is suitable to bid on a particular job; second, the payment bond, with which the bonding entity (insurer) backs up the contractor’s promise to pay employees, subcontractors and suppliers; and third, the performance bond, which commits the insurer to getting the job done if the contractor can’t. It is these bonds that ensure a community won’t have just “half a bridge” if unforeseen circumstances such as illness, a strike or a need for soil remediation sandbag a project, says Mike Niedermeier, CPA and partner in Nishball, Carp, Niedermeier, Pacowta. His firm, with offices in Shelton and Waterbury, Connecticut, has four staff members to handle construction, and he says membership in associations has helped the firm develop niche contacts and expertise.

Practitioners with construction expertise also

Apply correct tax rules for small and large entities. (Contractors with gross receipts of less than $10 million in a three-year period use a different accounting method for tax purposes than larger ones do. Because boom and bust cycles are common, builders may change their method from one year to another.)

Make sure tax returns appropriately account for the many variables of building projects that are carried out over a period of years.

Provide “CFO for hire” services as needed.

Help with rent-vs.-buy decisions and related equipment/fleet management issues.

Perform “job fade” analysis in which the CPA checks to see that money is being spent at an appropriate rate over the lifespan of a project.

Perform services such as overhead review and inventory control review.

Account for joint ventures and meet disclosure requirements for related-party activities.

Provide information-technology consulting. (Some practitioners say this specialty is still active, but Dan Holliday, CPA and managing partner of Carr, Riggs & Ingram, in Jackson, Mississippi, says it has fallen off since Y2K came and went. Holliday, who started at a construction company, later established his own firm and two years ago merged with Carr, Riggs & Ingram, which has offices in Georgia, Florida, and Mississippi.)

Blueprints

Essential information for any CPA in the field can be found in

AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, as updated. It’s crucial to have an in-depth understanding of this, say specialists.

IRC section 460, concerning construction-specific methods of accounting for tax purposes. CPAs in this field must know this cold, practitioners say.

AICPA Audit and Accounting Guide, Construction Contractors. Practitioners call this “the bible.”

Checklist Supplement and Illustrative Financial Statements for Construction Contractors (an AICPA financial accounting and reporting practice aid) or other similarly comprehensive materials.

To order AICPA materials, call 888-777-7077. The major tax information services, Commerce Clearing House and Research Institute of America, publish the Internal Revenue Code and analysis.

Sureties know what they want to see—so when a contractor’s financial statements are sloppy, incomplete or otherwise flawed, they will send him or her to a CPA to fix the problem. “Bankers and bond underwriters have told us they have a great degree of reliance on our financial statements. They trust the presentation to fit the way they analyze a contractor’s business,” Holliday says. Similarly, McGuigan says he hears from sureties who say, “I like this guy’s character and I’m interested in doing business, but his financials aren’t in the shape I need to get underwriting.” McGuigan then sees what he can do to organize the contractor’s financial information in a way that more recognizably portrays its strengths.

Sureties have their own ways of looking at financial statements. In many industries determining “working capital” from financial statements is a matter of simple arithmetic, but in construction sureties look at what they call “discounted working capital,” which involves special weighting of items like related-party receivables, deferred tax accounts and prepaid expenses. Different sureties look for different ratios, and CPAs who succeed in this field educate themselves about what each surety expects to see.

Contractors value this service as well as advice about how to structure their business in a surety-friendly way. For example, a CPA might advise a client to get long-term financing for an $80,000 backhoe rather than pay for it outright, since the financing preserves the working capital the surety wants to see on the financial statements.

Government agencies, which include state, federal, municipal and special-purpose authorities, also use financial statements to qualify contractors to bid on projects. In the case of federal government construction contracts (for port, marine or military work as well as for hospitals or prisons, for example) detailed federal acquisition regulations (FARs) apply (more information is available at www.arnet.gov/far ). A CPA with in-depth knowledge of FARs can advise contractors who don’t have enough regulatory expertise, says Peter Bratlie, CPA. Bratlie is a construction expert and a partner of Robertson, Bailes and McClelland, a five-partner Shreveport, Louisiana, firm; he developed his contractor expertise on the job after jumping in to help a client more than 20 years ago.

SYNERGIES WITH OTHER PRACTICE AREAS
Union construction workers have good pensions, but owners and key employees may not, which makes CPA help with compensation planning and deferred compensation planning especially useful to management. Contractors’ payroll issues can be complex, involving spikes in staffing (from 20 to 150 when a project starts, for example), per diems, travel allowances, relocation allowances and owner-supplied housing and vehicles. Moreover, CPAs can help client contractors who operate in more than one state reap big savings with multistate income-tax and sales-tax planning. CPAs also can help clients minimize use and franchise taxes.

Sureties and bonding companies, which might need to ante up the money to get a two-, three- or four-year project done, want to ensure they won’t have to. So they (along with banks and employees) want contractors to have business continuity planning in place. Accordingly, CPAs may consult on a life insurance purchase for the owner and key personnel as well as advise on cost-effective disability insurance, says Russ Agosta, CPA and director of construction services for Grant Thornton. Agosta, who is based in Southfield, Michigan, started with Grant Thornton 33 years ago, went on his own for a while and then came back. He spends upwards of 90% of his time on construction-related matters, he says.

Capital-intensive contracting businesses by and large are privately held—the potential estate-tax exposure means there’s a need for estate and succession planning as well as for business valuation services. (Holliday is certified in business valuation, as are two of Bratlie’s partners, for example.) Successful contractors need to invest their profits, too, says McGuigan. Many seek to invest in real estate or construction-related businesses such as storage facilities which they understand. McGuigan advises clients on these ventures and sometimes assists them in obtaining financing.

RISKY BUSINESS?
Construction has a rougher ambience than the corporate world, McGuigan says. CPAs in this work shouldn’t expect wall-to-wall carpet and potted palms when visiting a client’s office. Instead, they are likely to be buzzed through a gate in a chain-link fence and ushered to an office in a trailer (sometimes quite cold) guarded by a Rottweiler or German shepherd or two.

Some CPAs regard construction clients as high-risk. Mike Mimovich, CPA and partner in the construction industry group of Atkinson & Co.—an 11-partner Albuquerque firm with a diverse client base throughout New Mexico—says, “Any contractor is only one job away from going out of business,” including the big ones. Agosta agrees and says, “Just one or two problem jobs can really sink a contractor—even one with a 50- or 60-year track record.” Other CPAs with experience in the field say construction clients present only an average risk. Mimovich, who is president-elect of CICPAC, a trade organization, says business peaks and valleys are a more frequent contractor ailment than going belly-up. He estimates his firm’s construction practice (composed of three partners, three managers and about seven staff) accounts for about 20% of firm revenues.

To screen construction clients, Holliday recommends looking carefully at the “three Cs” that sureties traditionally examine:

Capital. Do they have enough to pay their bills?

Character. Do they have a good reputation, references and management integrity? (He wants a positive answer to the question “Can we count on them?”)

Capacity. Do they have the track record and the necessary expertise? (A contractor who builds schools may not have the right know-how to build aircraft hangars, for instance.)

The CPA in the field also develops a feel for certain ratios that help him or her gauge whether a contractor’s costs for vehicles or salaries are honest.

A client referred to a CPA by sureties has, in effect, been prescreened, Jim Meinel, a CPA in Anchorage, Alaska, says. The sureties think those owners are worth further consideration and that their businesses are big enough to bid on jobs that require surety bonding. About 90% of his business is with contractors, and he gets enough sureties’ referrals to be able to consider yearends of prospective clients when deciding whether to take them on. (Fiscal years ending on dates other than December 31 allow him to spread out his workload.) Now a sole practitioner with an office manager and a part-time bookkeeper, he began with a firm that did about 50% construction work. He left, worked in the health care area until his noncompete period ended and then opened his own practice.

McGuigan says to be wary of potential clients who don’t ask how much your services will cost or who say cost isn’t a factor; such remarks may signal that paying is not a serious concern for them. Ask for a retainer up front, “and make it a significant amount,” he advises.

MARKETING AND NETWORKING
Word-of-mouth recommendations from contractors are important, but word of mouth among lenders is even more so. Sureties, bankers and bonding agents are the best source of business, practitioners say. When Meinel opened his Anchorage practice, he sent letters to sureties to let them know of his interest and his qualifications. Each year he flies to Seattle to call on underwriters, and he sends holiday gifts to the sureties in his community and sees to it that they get his firm newsletter. Meinel also advocates meeting annually with clients for yearend tax planning; clients like getting the call and the process distinguishes him from other CPAs. Because he uses value billing, the visit is at no extra cost to the client.

McGuigan annually sends out a glossy, well-produced marketing brochure. He uses a Dun & Bradstreet listing (by ZIP code) to locate sureties and bonding agents who have not yet sent him business.

For developing business, CPAs find it helpful to join industry and other professional associations. Holliday got to know underwriters through his national committee work for the Associated General Contractors (AGC); he also belongs to Associated Builders and Contractors (ABC), the Mississippi Road Builders Association and the Mississippi Asphalt Pavers Association.

Mimovich says every city or region has a chapter of the AGC or the ABC that a CPA can get involved with and that joining the American Subcontractors Association has brought business. Agosta is a longtime member of Michigan’s sureties and road builders associations. Niedermeier and Mimovich both are members of CICPAC, and through it have built expertise and contacts with CPAs in noncompeting markets.

NEAR-TERM AND LONG-TERM TRENDS
Contractors are being driven to the CPA’s door by the tightening in the surety and insurance markets that followed the World Trade Center disaster and proliferating Enron-type situations. In the current sellers’ market, builders need to showcase their financials. This requirement will encourage demand for CPA services and help to secure client relationships for the near term, as will the need to control costs—necessary in any economic slowdown. For the longer term, the construction industry is a large and healthy one, subject to cyclical downturns but always rebounding.

Construction Accounting Software

Using construction-specific software for record keeping, financial management and reporting can help contractors comply more easily with GAAP and IRS accounting requirements. There are basic software packages for small to midsize contractors ($50 million or less in annual revenues) and advanced packages for larger businesses. Systems vary, but CPAs can help clients choose one that appropriately combines capability for general ledger, accounts receivable, billing, accounts payable, payroll, direct deposit, service receivables, inventory, budgets, job cost, scheduling, purchase orders, subcontracts, change orders, equipment management, document control, financial review, job cost analysis, report writing, client tracking, proposals and estimating tasks. Ask the manufacturer about operating systems and platforms.

Source: Davidson & Golden, CPAs, Nashville.

Accounting 4 Construction, Software Constructors Inc. Average single-user cost, $2,200. www.accounting4construction.com .

Accu-Build, Accu-Build. Average single-user cost, $1,000–$8,000. www.accu-build.com .

Alpha Omega DataTrac, Alpha-Omega Consulting Group Inc. Average single-user cost, $3,000. www.aocg.com .

Bidtek ViewPoint, Bidtek Inc. Not available in single-user format; average four-user network cost, $25,000+. www.bidtek.com .

Cheetah Street Smarts, Cheetah Advanced Technologies Inc. Not available in single-user format; average four-user network cost, $20,000–$25,000. www.cheetahware.com .

ComputerEase, ComputerEase. Average single-user cost, $4,500. www.construction-software.com .

Computer Guidance, Computer Guidance Corp. Enterprise-wide systems start at $50,000. www.computer-guidance.com .

Construction Data Control, Construction Data Control Inc. Basic Builder is an accounting and job-costing package. Average single-user cost, $2,500. Profit Builder is an advanced accounting and job-costing package. Average single-user cost, $5,800. www.cdci.com .

Data-Maxx, Data-Maxx Software Systems Inc. Average single-user cost, $8,000+. www.data-maxx.com .

Dexter+Chaney Forefront, Dexter+Chaney. Average single-user cost, $9,550. www.dexterchaney.com .

Explorer, Explorer Software Inc. Average single-user cost, $3,000. www.explorersoftware.com .

Ferrell WinX, Ferrell Companies Inc. Average single-user cost, $15,000. www.ferrell.net .

Foundation Software, Foundation Software Inc. Average single-user cost, $7,500–$11,000. www.foundationsoft.com .

GEAC Starbuilder and The Construction Manager, GEAC AEC Business Systems. Average single-user cost, Starbuilder $5,500–$8,000, TCM $4,000–$6,000. www.geac.com .

Hard Dollar, Hard Dollar Corp. Average single-user cost per module: $1,000–$4,000. www.harddollar.com .

HCSS Heavy Bid, Heavy Construction Systems Specialists Inc. Average single-user cost, $1,900–$8,900. www.hcss.com .

ICE 2000, Management Computer Controls Inc. Average single-user cost, $8,500. www.mc2-ice.com .

Intuit Master Builder, Intuit Construction Business Solutions. Average single-user cost, $2,200–$5,000. masterbuilder.intuit.com .

J.D. Edwards OneWorld, J.D. Edwards & Co. Average software cost, contact vendor. www.jdedwards.com .

Niche Software Bid2Win, Niche Software Inc. Average single-user cost, $5,000. www.nichesoftware.com .

Oman Systems ProEst, Oman Systems Inc. Average single-user cost, $1,975–$3,950. www.omanco.com .

Timberline, Timberline Software Corp. Average single-user cost, $6,000–$8,400. www.timberline.com .

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