The clauses requiring the most attention in a construction contract, whether it is a standard or customized contract, are progress payment and retainage clauses. Other clauses also deserve special attention from both the contracting parties and the practitioner because they have financial statement and tax implications.

Change orders

The change order clause permits additions, deductions, or changes to the contract after work has begun. If the change order clause is not included in a Fixed-Fee Contract, additional work will have to be negotiated. Typical reasons for change orders are as follows:

• Owner or designer change of opinion or preference
• Code changes
• Schedule slippage
• Unexpected weather conditions
• Change in owner available funding
• Design error or omission

Retention

As with most construction contracts the owner typically withholds or retains a percentage of the progress payments due the contractor until project completion. The contractor, in turn, retains a portion of the payments due subcontractors. The purpose of retainage is to provide the owner security for costs incurred to repair defective work, to settle claims from parties not paid by the contractor, and more importantly to ensure that work is completed in accordance with the contract. The contractor’s cash flow and profitability can be significantly affected if the retention is not received on a timely basis because the retention may be as much as, or more than, the contractor’s profit on the project.

Claims

Disputes sometimes arise between a contractor and owner when plans and specifications are not clear or when a work item not addressed by the plans are encountered. For example, there have been instances where structures have collapsed, resulting in personal injury or loss of life. In cases such as this the owner may believe that there were errors made during the construction phase of the project, whereas the contractor may believe that the problem was the result of a design flaw.

Regardless of the cause of the claim, the claims clause in a construction contract will stipulate the procedures that a contractor will need to follow in order to have a chance of being reimbursed for the additional unanticipated costs. If a claim cannot be settled agreeably then it is deferred until the project is completed, typically with the contractor working under protest. Generally, it is not a good idea for a contractor to cease working as he runs the risk of breach of contract by doing so.

Warranty

In construction contracts, the contractor is generally required to warrant that the work performed is free of defects in material and workmanship for a period of one year from completion. While the contractor warrants his own work to be free from defects, he does not warrant against failures that may occur prematurely due to design deficiencies.

Although the clauses discussed above are generally the most significant clauses, it is important to understand all of the contract terms and the impact they might have on the project and the related financial statements.

The importance of performing an in-depth review of the contract terms cannot be overemphasized. The contractor’s accountant, whether internal or a public practitioner, must have a thorough understanding of a contract’s terms in order to properly account for all activity throughout the contract’s life. An auditor must also review the basic terms of significant contracts during the planning phase of an engagement to properly plan the audit.

Julio Barina, CPA joined Hill, Barth & King, LLC in 2006 and serves as a supervisor in the Fort Myers, Florida office. Hill, Barth & King, LLC is the 71st largest public accounting firm in the country (Inside Public Accounting, 2011). Julio can be contacted by telephone at 239-482-5522 or via email at jbarina@hbkcpa.com.

Now I am not talking about changing estimating software, construction methods or even replacing personnel. As a CPA in southwest Florida serving many construction clients both large and small, many of whom have struggled over the last three years seeing revenues drop considerably to levels that most of us would care not to remember; especially in the Lee County markets. Surprisingly, this may have provided some contractors with the ability to change tax accounting methods to one that will allow them to defer taxes on new business as hopefully the rebound takes off with more robust activity in the construction markets.

If I have your interest, read on. First off, this opportunity still may not be available to all contractors. Generally speaking, contractors are required to account for long-term contracts on a percentage completion method of accounting. Small contractors, those with average revenue over the preceding three (3) years under ten (10) million per year, were able to make the election to report tax revenue on a completed contract basis. What happened during the construction explosion and real estate market run up was that many contractors were required to switch from the completed contract method to the percentage completion method because their average revenues grew in multiples. This was more than likely an unpleasant tax surprise to the business owners during the year that the change was forced upon them.

Second, those companies that were forced into the accounting change in the boom years now can look to changing back in the, lets say more challenging times, as long as they now can comply with the average revenue test. The IRS surprisingly makes this change fairly easy. In many cases changes to accounting methods require prior consent of the service but in this scenario, this is what we call in the tax and accounting world, an automatic change. IRS Revenue Procedure 2002-28 indicates that the method change simply needs to be disclosed on the next timely filed tax return for the business. The election indicating the method change and the dollar impact of the change must be disclosed on IRS form 3115, which must be attached to the business return.

Third, lets be clear about a couple points. This method change does not eliminate taxes but merely defers them to a later date. Generally, tax planning ideas try to accomplish two things; (1) accelerate deductions or in this case (2) defer income. You can almost never completely avoid the tax man. The best you can do is to keep him out of your back pocket for as long and for as much as possible. Also, this method change may not be permanent. Just like back in the boom era, if your company grows above the average revenue thresholds, you will be forced back into the percentage of completion method. Without proper planning, the tax sting may make you feel like an NFL linebacker that just got fined for helmet to helmet contact. The difference in this case is you get hit with both, the cash drain and maybe the concussion too.

Don’t take me the wrong way based on the last comment, we at Hill, Barth and King, a premier accounting, tax and consulting firm in Fort Myers, Naples and Sarasota in southwest Florida will almost always recommend a tax strategy that defers income but many factors can come into play when making this type of a decision. No decision should be made in a vacuum without adequate discussion with your tax advisor. Please contact me or any of our construction niche members to discuss this or any other tax planning ideas.

Gerald (Jerry) Kimble, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.  Jerry helps clients in Fort Myers, Cape Coral and other Southwest Florida communities.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1990.  Jerry can be contacted by phone at 239-482-5522 or gkimble@hbkcpa.com.

One of the most commonly missed tax credits for construction and warehouse activities is the Alternative Fuel Tax Credit for taxpayers that use propane powered forklifts. The forklift use qualifies for a 50 cent per gallon credit for both “C” corporations and pass-thru entities. To be eligible for the credit, a taxpayer must first register with the IRS. This is accomplished on Form 637, Application for Registration (For Certain Excise Tax Activities). This credit could be a significant benefit to any construction or warehousing operation. For Example, four forklifts that consume approximately 5 gallons per day for 250 days in a year, would typically consume approximately 5,000 gallons of propane. That equates to a $2,500 tax credit per year.

Form 637 is completed only one time to obtain the initial registration number. Once registered, the
company simply keeps track of the gallons of propane used and claims the credit on Form 4136 –
Credit for Federal Tax Paid on Fuels. Please contact a professional at Hill, Barth & King LLC if you
have any questions or would like assistance in preparing Form 637.

William E. North, II, CPA, CCIFP is a Principal in the Sarasota, Florida office of Hill, Barth & King LLC and is a member of HBK’s Construction Industry Group.

There is a color that has been steadily gaining prominence in our society over the past few years.  If you read the paper, listen to the radio, watch TV or let’s face it, if you interact with almost anyone, you will notice this color being mentioned more now than at any time in our history.

You have probably guessed that I am referring to the color Green.  Green Products, Green Jobs, Green Rated  and the all encompassing “Going Green” are phrases that we hear almost every day. We have even heard our President tell us that Green Jobs will play a part in our economic recovery.

Why has Going Green been propelled into the spotlight?  You can speak with multiple well informed people and come away with multiple answers, but one thing has become clear to me, Green, in one form or another, is here to stay.

As a CPA in the Fort Myers, Florida office of Hill Barth & King, I am charged with having a deep understanding of the industries that effect Southwest Florida and specifically Lee County.   Those industries are tourism, healthcare and construction.  Out of these three industries the Green agenda seems to have the greatest effect on the construction industry.  Through my involvement with the Lee County Builders Industry Association (BIA) and the Cape Coral Construction Industry Association (CCCIA) I am updated frequently concerning the Green initiatives that are already in place, as well as those that may be coming in the near future.  We are at a time in the Green movement that requires us all to learn as much as we can about how Going Green will affect our professions and our lives.

I am writing this series of articles in an effort to contribute to that educational process, and as a CPA I will limit my contribution to the area that I specialize in: tax planning.

As many of you know, when our government gets involved in something, you can be sure our system of taxation will be affected.  When the government is attempting to create jobs and promote an industry, the tax implications are almost always good for those businesses and individuals associated with, or doing business with, that industry.  In an effort to facilitate the creating of Green jobs the federal and state governments have offered a wide range of energy tax credit incentives that need to be explored.  Early planning is essential to maximizing many of the available energy tax incentives.

In the first installment of my Going Green series I am highlighting the energy-efficient commercial business deduction (Section 179D).  This new deduction allows businesses to deduct up to $1.80 per square foot of space in new or existing buildings where they install interior lighting, HVAC systems, or building envelope property that reduces power use to 50 percent compared to a reference building.

In order to utilize the full $1.80 per square foot deduction, all three phases of the property must be implemented.  This deduction must be certified using qualified individuals and specific types of software mandated by the government.   However, up to a $0.60 per square foot deduction is available for certain lesser reductions involving implementation of the building phases separately.

The most common of the three phases of the deduction is for energy efficient lighting.  There are currently special rules for lighting that make meeting the standards for up to $0.60 per square foot deduction easier to obtain.  In addition, if energy efficient commercial building property is installed on or in property owned by a tax exempt entity, the IRS may issue a regulation allowing the deduction to be allocated to the person primarily responsible for designing the property instead of the owner of the property. For purposes of taking the energy efficient commercial building property deduction, the person primarily responsible for designing the property is treated as the taxpayer. The provision expires for property placed in service after 2013.  What does this mean for a business who builds a 20,000 square foot building that qualifies for this deduction?  It means an additional tax deduction of up to $36,000.

To find out more about this opportunity please contact one of the CPAs in our Fort Myers, Florida office.  We are fully equipped to assist in both the tax implications and the certification process.

In the next “Going Green” article, I will highlight some of the energy tax credit incentives that are available to individual taxpayers.

Keith A. Veres, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.   Keith has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 8 years.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1991.  Keith can be contacted by phone at 239-482-5522 or email at kveres@hbkcpa.com.

Hill, Barth & King LLC is very proud to be an active and significant supporter of the local construction industry.  HBK was the 2010 Contractors Showcase Major Sponsor this year.  The showcase brought together more than 300 building industry professionals whose focus is the development of jobs for Lee County and the surrounding communities of Fort Myers, Cape Coral, North Fort Myers, Estero, and Bonita Springs.  The Lee Building Industry Association does an excellent job each year organizing the event and this is the second year that HBK has been actively involved.  HBK has already made a commitment to the Lee BIA for the 2011 Contractors Showcase and will again be the Major Sponsor.  Pictured from left to right are:  Samantha Howes, CPA Senior, HBK; Keith Veres, CPA Principal HBK, Libby Slater, CPA Principal, HBK; Gerald Kimble, CPA Principal HBK and Julio Barina, CPA Supervisor, HBK.