Are you managing project scope – or is it managing you?

Contractors by their nature and occupation have a need to be in control. Nearly every project includes a struggle to maintain control of costs, safety and quality.

 

To put it a different way, what you’re trying to manage on every job is its scope. When you can keep the project confined to its contractual parameters, the job will likely turn out fine. Unfortunately, the scope often has a funny way of expanding its reach, pushing you aside and taking over a job. The results usually arent very positive.

 

3 parts to the story

Every contractor needs to stay on top of his or her scope management procedures to prevent the job from getting out of hand. These are active and ongoing steps to monitor a project and to keep the job within reasonable limits. They should ensure that, if the scope does significantly expand, you get paid for it. Think of scope management as three parts of a story:

  1. The beginning. During the planning phase, you need to comprehensively define the scope you’ll undertake and be sure it‘s clearly stated in the contract. For example, if the plans show 25 windows in a building, the contract should say that you’ll install any extra windows at a specified additional cost.

    This is where experience and keeping historical job data can be really beneficial. If you’ve worked on a similar project and the scope seems untenable, raise this issue with the owner and give yourself a chance to settle on reasonable guidelines for the project.

  2. The middle. As the job gets started, your scope management efforts should involve applying a systematic, consistent approach to managing the work. Financially speaking, this means continually evaluating what you’re doing to ensure it s within the parameters and priceof the contract. 

    Train your project managers to submit regular reports to you regarding job costs to determine whether overruns are imminent. Todays mobile technology can make doing so much more efficient. Integrate job costing into your accounting system or simply download an app that enables easier field reporting.

  3. The end. Scope management is perhaps the most important at completion. When that punch list materializes, it’s all too easy to get dragged into an endless series of extra tasks.

    One savvy scope management rule of thumb: Identify the people responsible for closing out the job up front. Doing so will prevent new faces from joining the project at the last minute, which could slash profitability as these individuals eat up valuable time getting up to speed.

    Also, make sure your punch list is truly universal. Today’s cloud-based technology should allow everyone on the job from the general contractor to subcontractors to inspectors and engineers to look at the same document and update it in real time.

Additional thoughts

When many contractors first discover scope management, they immediately clamp down on even the slightest aberration to a contract. Sometimes they’re too rigid in their approach, which could rub an owner the wrong way or cause them to miss out on a profitable change order.

 

This brings to mind an important catch about scope management: It’s not so much about limiting the amount of work you perform on a project as it is about assessing opportunities and making the most of them.

 

When a prospective job revision arises, immediately call a meeting with the project manager and any other necessary parties. If its a nonessential change, determine whether, though potentially profitable, it drives you too far out of the scope of the contract. If it’s an essential revision, decide whether its far enough outside the scope to warrant additional negotiation. Having a formalized and effective change order process is essential.

 

On the lookout

Being in control is a badge of honor in the construction business. Don’t leave your scope management procedures to chance. Put them in writing, discuss them with your project managers and advisors, and always be on the lookout for ways to improve them.


Seasonal business? Optimize your operating cycle

Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, if your company defines itself as such, it’s important to optimize your operating cycle to anticipate and minimize shortfalls.

A high-growth example

To illustrate: Consider a manufacturer and distributor of lawn-and-garden products such as topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. So the business begins amassing product in the fall, but curtails operations in the winter. In late February, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company until customers pay their bills around June. Then, the company counts inventory, pays remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

The power of projections

Sound familiar? Ideally, a seasonal business such as this should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough — especially for high-growth companies.

So, like many seasonal businesses, you might want to apply for a line of credit to avert potential shortfalls. To increase the chances of loan approval, compile a comprehensive loan package, including historical financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, draft a formal business plan that includes financial projections for next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. You need to develop budgets, systems, processes and procedures ahead of the peak season to effectively manage your operating cycle.

Distinctive challenges

Seasonal businesses face many distinctive challenges. Please contact our firm for assistance overcoming these obstacles and strengthening your bottom line.

© 2017

4 digital marketing tips for every business

You’d be hard pressed to find a company not looking to generate more leads, boost sales and improve its profit margins. Fortunately, you can take advantage of the sales and marketing opportunities offered by today’s digital technologies to do so. Here are four digital marketing tips for every business:

1. Add quality content to your website. Few things disappoint and disinterest customers like an outdated or unchanging website. Review yours regularly to ensure it doesn’t look too old and consider a noticeable redesign every few years.

As far as content goes, think variety. Helpful blog posts, articles and even whitepapers can establish your business as a knowledge leader in your industry. And don’t forget videos: They’re a great way to showcase just about anything. Beware, however, that posting amateurish-looking videos could do more harm than good. If you don’t have professional video production capabilities, you may need to hire a professional.

2. Leverage social media. If you’re not using social media tools already, focus on a couple of popular social media outlets — perhaps Facebook and Twitter — and actively post content on them. Remember, with some social media platforms, you can create posts and tweets in advance and then schedule them for release over time.

3. Interact frequently. This applies to all of your online channels, including your website, social media platforms, email and online review sites. For example, be sure to respond promptly to any queries you receive on your site or via email, and be quick to reply to questions and comments posted on your social media pages.

4. Tie it all together. It’s easy to end up with a hodgepodge of different online marketing tools that are operating independently of one another. Integrate your online marketing initiatives so they all have a similar style and tone. Doing so helps reassure customers that your business is an organized entity focused on delivering a clear message — and quality products or services.

When it comes to marketing, you don’t want to swing and miss. Our firm can help you assess the financial impact of your efforts and budget the appropriate amount to boosting visibility.

© 2017

The “manufacturers’ deduction” isn’t just for manufacturers

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t ― unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

• Tangible personal property (for example, machinery and office equipment),
• Computer software, and
• Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

© 2017

Looking for concentration risks in your supply chain

Concentration risks are a threat to your supply chain. These occur when a company relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region. If a key customer or supplier experiences turmoil, the repercussions travel up or down the supply chain and can quickly and negatively impact your business.

To protect yourself, it’s important to look for concentration risks as you monitor your financials and engage in strategic planning. Remember to evaluate not only your own success and stability, but also that of your key customers and supply chain partners.

2 types of concentration

Businesses tend to experience two main types of concentration risks:

1. Product-related. If your company’s most profitable product line depends on a few key customers, you’re essentially at their mercy. Key customers that unexpectedly cut budgets or switch to a competitor could significantly lower revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, it could cause your profits to plummet. This is especially problematic if your number of alternative suppliers is limited.

2. Geographic. When gauging geographic risks, assess whether a large number of your customers or suppliers are located in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also potential risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a significant impact. And these threats increase substantially when dealing with global partners, which may also present risks in the form of geopolitical uncertainty and exchange rate volatility.

Financially feasible

Your supply chain is much like your cash flow: When it’s strong, stable and uninterrupted, you’re probably in pretty good shape. Our firm can help you assess your concentration risks and find financially feasible solutions.

© 2017

What are the most tax-advantaged ways to reimburse employees’ education expenses?

 

Reimbursing employees for education expenses can both strengthen the capabilities of your staff and help you retain them. In addition, you and your employees may be able to save valuable tax dollars. But you have to follow IRS rules. Here are a couple of options for maximizing tax savings.

A fringe benefit

Qualifying reimbursements and direct payments of job-related education costs are excludable from employees’ wages as working condition fringe benefits. This means employees don’t have to pay tax on them. Plus, you can deduct these costs as employee education expenses (as opposed to wages), and you don’t have to withhold income tax or withhold or pay payroll taxes on them.

To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the employees’ current occupations and not qualify them for new jobs. There’s no ceiling on the amount employees can receive tax-free as a working condition fringe benefit.

An educational assistance program

Another approach is to establish a formal educational assistance program. The program can cover both job-related and non-job-related education. Reimbursements can include costs such as:

  • Undergraduate or graduate-level tuition,
  • Fees,
  • Books, and
  • Equipment and supplies.

Reimbursement of materials employees can keep after the courses end (except for textbooks) aren’t eligible.

You can annually exclude from the employee’s income and deduct up to $5,250 (or an unlimited amount if the education is job related) of eligible education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or withhold or pay payroll taxes on these reimbursements.

To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated employees, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available.

Train and retain

If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Please contact us for more details.

© 2017

Mergers and Acquisitions Growing Amongst West Michigan Manufacturers

John Wiegand, in a recent article published in MiBiz, discusses how manufacturers are increasingly looking to acquisitions as a way to add capacity and adhere to customer demand.

Prior to this, because of the recession, manufactures were forced to run their businesses as lean as possible. Now, as the economy improves, manufacturers are increasingly making acquisitions that may be international expansions or related to new automation/technology.

M&A advisors are stating that it is currently a seller’s market, but predict this to be changing.

To read the full referenced article, click here. For information on mergers and acquisitions or business valuations, please contact Patrick Mutchler at (231) 726-5870 or pmutchler@brickleydelong.com.