At a time when the construction industry is faced with unprecedented economic conditions, companies must do everything possible to remain profitable and maintain positive cash flows. Consider the following tips to help your clients in this industry:
Take every available tax credit. These include, for example, various Enterprise Zone tax incentives, credits and deductions for placing in service energy-efficient properties, and taking advantage of cost segregation. This technique allows taxpayers to depreciate certain components of a building faster than the 39 years generally required for real property. By classifying certain building components (for example, non-load-bearing walls or lighting systems) as five-, seven-, or 15-year personal property, taxpayers can take higher depreciation deductions. However, taking full advantage of cost segregation generally requires a componentization study, the cost of which should be weighed against the potential tax benefits.
Save on workers’ compensation insurance with safety programs. Make sure your client’s insurance agent files for the appropriate credits on your client’s workers’ compensation policy, such as the Drug Free Workplace Credit, Safety Credit and the Contractors Premium Rate Credit. Also, double-check the accuracy of the National Council on Compensation Insurance (NCCI) Mod Factor Rating.
Update overhead percentages. Occasionally, builders complete several projects with no cash at the end. This could indicate that the contractor is applying overhead rates that could have become obsolete from the aggregate effect of many small increases to overhead costs.
Hold a weekly collection meeting. Have a collection meeting to review overdue receivables. Keep a close eye on retainage (final payment held by the owner). Promptly prepare written requests when contractual requirements have been completed to receive retainage as quickly as possible.
Manage subcontractors and material suppliers to the project schedule. If someone falls behind schedule, issue 24-hour, 48-hour and 72-hour notices after which your client can exercise the right of self-performance to keep the project on schedule.
Partner with subcontractors and suppliers to win bids. Occasionally, to become low bidder, all trades may have to join together and accept less of a markup in order for the general contractor to obtain the contract.
Set up a rolling cash flow projection. Outline cash flow 12 months in advance and update it weekly. Also set up a sweep account applying the extra cash on hand against lines of credit, reducing interest expense.
Close out pending change orders and backcharges weekly. Typically, change orders increase the contract amount and the contractor’s profit and cash flow. All too often change orders are not processed until month-end or even longer.
Take advantage of the U.S. Small Business Administration’s new American Recovery Capital (ARC) Loan Program. ARC loans provide an immediate cash infusion to small businesses to assist with making payments of principal and interest on existing debt. These loans allow borrowers to redirect cash flow from making loan payments to investing in their businesses. The maximum loan amount is $35,000, and the first payment is deferred for 12 months and is interest-free over a five-year term.
—By Michael J. Otis, CPA, president of Construction Accounting & Development Financing Inc. He is a licensed builder in Florida, Massachusetts and Rhode Island. His e-mail address is firstname.lastname@example.org.