Contractors Center Point

Construction Will Remain Flat in 2012, McGraw-Hill Construction Forecasts

When U.S. construction starts leveled off in 2010, after plunging 24 percent in 2009, forecasters had hopes for renewed expansion in 2011. The recovery for the construction industry, however, has struggled to take hold (-4 percent in 2011), and McGraw-Hill Construction now forecasts that new construction starts will remain flat (0 percent) in 2012. “The backdrop for the construction industry is the fragile U.S. economy, which continues to see slow employment growth, diminished funding from federal and state governments, and pervasive uncertainty,” said Robert Murray, vice president of economic affairs, McGraw-Hill Construction. Murray discussed the forecast on Oct. 19 at the Outlook 2012 Executive Conference in Washington, D.C., where McGraw-Hill released its 2012 Dodge Outlook Report. “In 2012, the top-line numbers are not expected to show much change, but there will be variation within the major construction sectors, with some gains predicted for housing and commercial building assuming the U.S. economy avoids recession.”

McGraw-Hill forecasts commercial building starts to grow 6 percent in 2011 and 8 percent in 2012. Warehouses (18 percent in 2011, 17 percent in 2012) and hotels (34 percent in 2011, 17 percent in 2012) will see the largest percentage increases, but improvement for offices (-2 percent in 2011, 4 percent in 2012) and stores (0 percent in 2011, 2 percent in 2012) will be modest. Institutional building, McGraw-Hill reports, will slip 2 percent in 2012 after falling 15 percent in 2011. Tough fiscal environments for states and localities will continue to dampen school construction (-14 percent in 2011, -9 percent in 2012), and healthcare facilities building will decline 1 percent in 2012 after remaining flat (0 percent) in 2011.

September Architecture Billings Index Declines

Following the first positive score in four months, the Architecture Billings Index (ABI) reversed direction again in September. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the September ABI score was 46.9, following a score of 51.4 in August. This score reflects a sharp decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 54.3, down from a reading of 56.9 the previous month.

“It appears that the positive conditions seen last month were more of an aberration,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “The economy is weak enough at present that design activity is bouncing around more than usual; one strong month can be followed by a weak one. The economy needs to be stronger to generate sustained growth in design activity.”

Key September ABI highlights:

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  • Regional averages: Midwest (51.0), Northeast (50.8), South (47.3), West (46.7)
  • Sector index breakdown: commercial / industrial (52.4), mixed practice (50.0), institutional (48.0), multi-family residential (46.4)
  • Project inquiries index: 54.3

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McKonly & Asbury’s 2011 Fall Construction Seminar – November 1

McKonly & Asbury will be hosting our 2011 Fall Construction Seminar on Tuesday, November 1! Join us and our event sponsor, the American Subcontractors Association of Central Pennsylvania, as we explore topics relevant to the construction industry. 

Topics and speakers include:

McKonly & Asbury

• Accounting and Tax Update – Michael Hoffner, Partner - Audit and Accounting Services; Jason Skrinak, Principal - State and Local Tax; and Lisa White, Senior Manager - Federal Construction Tax
• Fraud and Construction – Samuel BowerCraft, Senior Manager - Information Technology and Security 

Reager & Adler, PC

• Construction Workplace Misclassification Act – Thomas Williams, Shareholder 

McConkey Insurance & Benefits

• Reducing Subcontractor Financial Risk – Greg Marco, Surety Account Executive 

The seminar will be held at the Radisson Penn Harris at 1150 Camp Hill Bypass in Camp Hill, PA. Registration and breakfast will begin at 7:30am and the seminar will run from 8:00am until 11:30am. The cost to attend is $25, and CPE credits are available.

To register for this event, please contact us at events@macpas.com or by calling (717) 761-7910.

Legislation Would Expand Use of Completed Contract Method of Accounting

If legislation introduced by a group of bi-partisan legislators becomes law, more subcontractors would be able to pay income taxes at the conclusion of a job, allowing them to retain their capital longer. The American Job Builders Tax Reform Act of 2011 (H.R. 1993) would allow more subcontractors to use the completed contract method (CCM) of accounting by increasing the threshold for contractors from $10 million in average annual gross receipts to $40 million. Under current law, construction contractors with average annual gross receipts exceeding $10 million are required to use the percentage of completion method (PCM). CCM allows business to postpone the reporting of income and expenses until the contract is completed, while PCM requires contractors to estimate income and expenses on long-term contracts on a yearly basis. For more information, contact the construction professionals of McKonly and Asbury, LLP.

Liquidated Damages: A Contractor’s Boogeyman

Contractors often live and perform their contractual obligations under the specter of liquidated damages. The threat of liquidated damages causes sleepless nights; the assertion of liquidated damages devours profits. Liquidated damages provisions are common in construction contracts; particularly on public projects and large privately funded projects.  Subcontractors should take note that even if your contract does not contain a liquidated damages provision, you may be subject to liquidated damages by virtue of a flow down provision incorporating obligations and contract terms between your contracting partner and the owner of the project. 

            Just what are liquidated damages, and why are they so frightening?  “Liquidated damages” is a term of art used in construction industry parlance to describe a specific sum a party to a contract agrees to pay if it fails to timely perform its obligations under the contract.  Typically, liquidated damages are expressed by a set dollar amount per day for each day that the contractor fails to complete its work on a project.  This dollar amount is to be arrived at in good faith as an estimate made in advance of the actual damages that the project owner will likely incur as a result of the contractor’s breach.  Contractors that sign contracts containing liquidated damages provisions perform under justifiable trepidation until their work is completed inasmuch as the courts of Pennsylvania have consistently upheld such provisions.  Liquidated damages provisions are routinely enforced by the courts so long as the “liquidated” sum agreed to is a reasonable approximation of the expected loss, and not imposed as a penalty. 

            If a court case arises and it includes a dispute over liquidated damages, the party asserting the liquidated damages has the burden of showing that the other party failed to timely substantially complete its contract obligations, and that the period for which liquidated damages has been assessed is proper.  Once the party claiming liquidated damages has met its initial burden, the burden will then shift to the contractor who must then show that any delays in the substantial completion of its work were excusable and that it should be relieved of the assessment of liquidated damages.  If the contractor facing liquidated damages can show that the other party was actually the cause for the delays or that there were delays that were out of the control of the contractor, for example, extraordinary bad weather, or unforeseen conditions, the contractor may have the liquidated damages reduced or removed altogether. 

            Contractors should be vigilant in their documentation of delays and all conditions that impede their ability to complete their work.  Contractors should provide timely written notices of these conditions as this documentation will assist the contractor in refuting any future claims or backcharges from project owners for liquidated damages. 

For more information on liquidated damages, please contact Tom Williams of Reager and Adler, PC at twilliams@reageradlerpc.com or contact the construction professionals of McKonly and Asbury, LLP.

How Do You Measure Productivity?

In the construction industry, productivity has traditionally been measured using accounting methods and techniques. How often have you analyzed a job or project by looking at the gross margin? Due to the nature of accounting principles used to manage company profitability, most measurements of job productivity are actually bookkeeping measurements of production. 

Current methods of productivity assessment focus on after the fact accounting and reporting. These methods have traditionally offered no real time information on projects in order to assess true productivity and to provide information to make quick changes to a project. In most cases, the use of traditional methods for analyzing productivity often fall short as they rely on measurements of output such as hours worked or quantity installed and not the outcome of the construction as accepted by the customer.