Reviewing Cost-Plus vs. Fixed Price Contracts

After 10 years in the field, a remodeling contractor had worked on quite a few jobs. Some had been set up as fixed-price contracts and others had been performed on a costplus basis. Looking to improve his companys financial performance, he asked his CPA to review the pros and cons of both formats and to recommend the best approach.

 

“Both types of contracts can work if you have a reasonable client with clear and realistic expectations, she began. They both agreed, however, that this ideal situation wasn’t always the case.

 

Further info required

Under a fixed-price arrangement, the contractor establishes a set price for the job regardless of the actual time and materials used. This type of contract requires a detailed and accurate estimate. The CPA advised the contractor to:

 

  • Assess his confidence in his own estimates,
  • Examine the calculations he was using to forecast job costs, and
  • Arrive at an appropriate markup to cover over­ head and profit.

In addition, he needed to re-examine his change order process.

When you have sufficient information going in, a fixed­ price contract will ensure that youll be compensated adequately. It also gives your client the assurance that his or her budgeted amount will get the job done, barring any major changes (which is why it’s important to have a good change order process in place).

On the other hand, the CPA said, its risky to submit a fixed-price bid and sign a contract when too many details remain unspecified. Clients repeatedly ask to set a price before specific fixtures and finishes are decided, for example. So the contractor is continually at risk for underestimating and losing money. Again, it comes down to whether the contractor can establish detailed specs at the outset.

Costly disputes
On a cost-plus job, the client agrees to pay job­ related expenses plus an additional percentage or lumpsum amount to cover overhead and profit. When only limited information is available at a project ‘ s outset, this approach allows the contractor to bill for actual costs incurred rather than having to estimate ahead of time.

 

The CPA noted that, in the past, cost-plus arrangements have enabled the contractor to find the best prices on building assets saving clients’ money. She also noted that the company has experienced several expensive and time-consuming customer disputes. Thus, the contractor needed to evaluate whether the fallout from these conflicts was worth the greater pricing flexibility.

Better approach
In this case, the contractor and CPA were able to go back several years and, using historical company data, perform a cost-benefit analysis for both approaches. They decided that, because of his advanced estimating methods, fixedprice contracts were likely better. But this may not be the case with every construction company.


Updates Available: Hot Apps for Contractors

In the construction industry, most of the day-to-day action takes place in the field. So it’s only natural that contractors are eager to find mobile apps for smartphones and tablets that can help them work better.

 

Developers have responded with a wide range of products designed to suit a variety of job functions. Of course, that doesn’t mean you should rush out and download everything under the sun.

 
Big picture vs. small

For decades, traditional software companies have worked hard to develop comprehensive, integrated packages for contractors in areas such as project management, financial analysis and reporting, and fleet management. Many of these products have become useful front-office tools; however. They don’t always adapt well to a mobile platform.

 

For this reason, some of the most useful construction apps focus on specific tasks. When shopping for mobile solutions, think carefully about which aspects of your jobs could benefit from the enhanced data efficiency offered by today’s apps.

 

3 hot areas

There are many different types of construction apps available at the moment. But three of the hottest areas right now are:

 

  1. Safety management. These can facilitate job­ site inspections by providing both standard and customizable checklists as well as audit report templates. Some products can feed information directly into your company’s main database to help you integrate safety data with other project factors. Others facilitate safety training by recommending topics and documenting meetings.

    Some safety apps are free; others charge a modest fee for premium services. Various options are available on either the iOS or Android platform. Try the search term “construction safety inspection.”

  2. Tool tracking. Products in this category typically work with bar codes or RFID tags that are affixed to each tool and used to record who has a tool and for which job it’s being used. The solution maintains a record of who’s responsible for the asset at any particular time. It can also track rented tools so you can charge back rental costs to the appropriate project and return the items promptly when the rental period ends.

    Again, various products are available on iOS or Android. Try the search terms “tool tracking” or tool tracker.”

  3. Field management. Does your company need a quick and easy way to handle more comprehensive project management functions using smartphones or tablets? If so, these apps facilitate timely communication between field and office staff. They enable field personnel to keep jobsite diaries, take pictures, report employee and equipment time, and log material quantities used.

    These apps may particularly benefit smaller businesses and subcontractors who haven’t invested in a large project management system. Several different apps are on either iOS or Android. Start searching with the term “construction project management.”

 
Careful shopping

The cost of most construction apps is usually nominal. So its generally inexpensive to give one a try. But you’ve still got to be careful about disrupting your operations by implementing an app that your company isn’t ready to use. So shop carefully and proceed with caution.


2017 – 06/12 – Dot the “i’s” and cross the “t’s” on loans between your business and its owners





Treating transfers of money between a closely held business and its owners as loans can provide tax advantages. But the IRS looks closely at such transactions, so it’s critical to establish that the transaction is truly a loan by 1) executing a promissory note, 2) charging a reasonable rate of interest, 3) establishing and following a fixed repayment schedule, 4) securing the loan using appropriate collateral, 5) treating the transaction as a loan in the company’s books, and 6) making reasonable efforts to collect in case of default. Contact us for more details.

2017 – 06/26 – 3 breaks for business charitable donations you may not know about





Here are three lesser-known income tax breaks for charitable donations by businesses: 1) deduction for donated food that equals the lesser of the food’s basis plus one-half the fair market value in excess of basis or two times the basis, 2) deduction for qualified conservation contributions by qualified C corporation farming and ranching operations of up to 100% of adjusted taxable income, and 3) favorable tax basis rule for shareholders of S corporations that make donations of appreciated property. Think you may be eligible? Contact us to learn more.

The Section 1031 exchange: Why it’s such a great tax planning tool

Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely.

How it works

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Executing the deal

Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.

© 2017

Reporting Unclaimed Property

Most businesses have unclaimed property resulting from normal operations. Any asset, tangible or intangible, belonging to a third party that remains unclaimed for a specified period of time is considered unclaimed property. For example, uncashed payroll checks must be turned over to the State after one year; most other property types, such as vendor checks and accounts receivables credit balances, must be turned over after three years. Government entities must turn over all unclaimed property, regardless of property type, after one year.

Michigan’s Uniform Unclaimed Property Act, Public Act 29 of 1995, as amended, requires businesses and government entities to report and remit to the Michigan Department of Treasury abandoned and unclaimed property belonging to owners whose last known address is in Michigan. In addition, every business or government entity that is incorporated in Michigan must report and remit abandoned property belonging to owners where there is no known address.

New for 2017
Entities without unclaimed property to report under the Michigan Uniform Unclaimed Property Act (Public Act 29 of 1995, as amended) are strongly encouraged to file a zero or negative report. Beginning in 2018, all entities registered to do business in the State of Michigan with nothing to report will be required to submit negative reports. All entities have the ability to both report and remit payments electronically.

Information taken from the Michigan Department of Treasury. http://bit.ly/2rzVXzV


Form 5278 Filing Deadline Extension – May 31, 2017




Governor Snyder signed legislation today stating that employers with eligible manufacturing personal property can now file for tax exemptions until May 31, 2017.

According to the Michigan Department of Treasury, this Public Act 42 of 2017 establishes a second 2017 filing deadline to file Form 5278 – Eligible Manufacturing Personal Property Tax Exemption Claim, Ad Valorem Personal Property Statement, and Report of Fair Market Value of Qualified New and Previously Existing Personal Property (Combined Document) .

The deadline to file was February 21, 2017.

For those eligible, that did not timely file, they may claim the EMPP exemption no later than May 31, 2017. The form must be received by the assessor on or before the filing deadline. Postmarks are not acceptable.

If the form was filed, but received on or after February 22, 2017, the claimant must refile with the assessor.

Any questions about the Form 5278 Deadline Extension, please contact your accountant or Brian McFarren.


IRS 13 Targeted “Campaigns” for Large Businesses

Recently, the IRS’s Large Business and International Division issued guidance for business taxpayers which laid out 13 “campaigns” it plans to target in 2017. While this lists targets last businesses, it will likely trickle down to small and mid-sized businesses as well.

The 13 “campaigns” or areas they plan to target are:

  1. examinations of the energy credit described in Internal Revenue Code 48C;
  2. declines and withdrawals from the offshore voluntary disclosure program;
  3. related-party transactions;
  4. repatriation of income from overseas locations;
  5. foreign companies doing business in the United States that are not filing appropriately;
  6. transfer pricing associated with inbound distribution of goods from related parties outside the United States;
  7. deferred variable annuity reserves and life insurance reserves;
  8. basket transactions that seek to treat ordinary income and short-term capital gain as long-term;
  9. micro-captive insurance contracts;
  10. the completed contract method of accounting applied by land developers;
  11. application of the domestic production activities deduction to certain entertainment products;
  12. risks associated with larger, more complex pass-through partnerships; and
  13. losses claimed in excess of basis in S corporations.The IRS did not provide detailed information on how they plan to address these areas. For more information, please contact us.

FLSA Overtime Rule Blocked

On November 22, a federal judge in Texas blocked the Obama administration’s  rule that would extend overtime eligibility to over 4 million Americans. This follows 21 states who sued to block the rule before it went into effect.

This new overtime rule was announced by the Department of Labor on May 18, 2016; it stated that any salaried employee earning less than $47,476 annually would qualify for overtime pay when they worked over 40 hours a week. The current threshold is $23,660.

The rule was to go in affect on December 1, 2016. The Department of Labor is weighing options; but, for now, employers can continue to use the $23,660 threshold.

Read more about the announcement.

Misleading Annual Records Solicitation Form

We would like to bring to your attention a misleading “Annual Records Solicitation Form” targeted at businesses.

This document is not an official government form, although it is made to look that way. This form is a solicitation of services from a private company. When reviewing the document, an indicator that it is not an official government form is that it states “Michigan Council for Corporations is not a government agency…”.

If you receive such a form, you do not need to complete the form and send in the $150 dollars, unless their services are wanted/needed.

If you have any questions, please contact Brian McFarren at bmcfarren@brickleydelong.com or (231) 726-5815.

2016 Annual Records Soliciation Form