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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 aren’t 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 price-of the contract. 

    Train your project managers to submit regular reports to you regarding job costs to determine whether overruns are imminent. Today’s 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 it’s 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 it’s 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. •

2017 – 12/26 – Tax Cuts and Jobs Act: Key provisions affecting businesses





The recently passed Tax Cuts and Jobs Act includes a multitude of provisions that will have a major impact on businesses. For example, it creates a flat corporate rate of 21% and temporarily provides a new 20% qualified business income deduction for owners of flow-through entities (such as partnerships and S corporations) and sole proprietorships. It also enhances some breaks, but it limits or eliminates many others. The changes generally apply to tax years beginning after December 31, 2017. Contact us for more details and to discuss the impact on your business.

Reduce your 2017 tax bill by buying business assets


Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.

Section 179 expensing

Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.

The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.

Under the initial version of the House bill, the limit on Section 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.

The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.  

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.

The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).

The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.

Year-end planning

If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum 179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.

© 2017

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

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.