Contractors Center Point

FASB Makes Final Decisions on Revenue Recognition - How Does This Impact Construction?

In the July 2012 addition of the ABC Spokesman, I reported to you the new proposed revenue recognition guidance and how it will impact the construction industry. Since then, the Financial Accounting Standards Board (FASB) and interested parties in this proposed  revenue recognition guidance have met to discuss this new proposed standard and to try to finalize the guidance for all industries. On February 20, 2013, the FASB and its interested parties concluded there discussions to produce what is believed to be final revenue recognition guidance. The new standard titled “Revenue From Contracts With Customers” is the outcome of these meetings and deliberations.

While the original and reissued exposure draft outlined numerous accounting changes for the construction industry, the proposed new guidance appears to provide a revenue recognition model that will produce results similar to results from the current model for many construction-type contracts. The new guidance will continue to recognize the use of percentage-of-completion accounting and other currently used accounting methods  familar to those in the construction industry with some changes. Overall the final outcome of this project appears to be positive for the construction industry.

While most of the new proposed guidance is consistent with the current model, there were some changes that are different and will require additional analysis in order to meet the new standard. The following is a summary of the key changes between the new revenue recognition model and that initially proposed:

• Collectibility (bad debt): Impairments from customer receivables will need to be presented     prominently as an expense in the statement of comprehensive income.
• Uninstalled materials and inefficient costs: Clarifying language will be provided to assist in determining how uninstalled materials and inefficient costs will impact a cost-to-cost measurement model of satisfying a performance obligation over time.
• Variable consideration (claims, awards, etc.): Construction entities will recognize revenue only up to the amount that should not be subject to significant future reversals. This constraint would be applied to the measurement of the transaction price (i.e., contract revenue).
• Onerous performance obligations (loss provisions): Existing guidance relating to the accounting for loss contracts will be retained.
• Transition method: A company has two options for transition (1.) Retrospective basis, or (2)
       Practical expedient approach. The practical expedient approach would permit an entity to:
  • Apply the standard to all existing contracts as of the applicable effective date (by recognizing the cumulative effect in opening retained earnings rather than restating comparative years) and to new contracts going forward; and
  • Disclose and explain the impact of adoption through this practical expedient on all relevant financial statement line items in the period of adoption.

This proposed standard will be effective for annual reporting periods beginning on or after January 1, 2017 for public entities and delayed one year to January 1, 2018 for non-public entities. The FASB will not permit early adoption of this proposed new standard. The finalized  standard is expected to be released in the second quarter of 2013.

To learn more about this new proposed standard contact the construction professionals of McKonly and Asbury, LLP.

Changes to Multiemployer Retirement Plan Disclosures

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update No. 2011-09, Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan. The Update is intended to lead employers to provide more information about an employer’s financial obligations to multiemployer pension plans.

Multiemployer pension plans commonly are used by an employer to provide benefits to union employees who may work for many employers during their working life, thereby enabling them to accrue benefits in a single pension plan for their retirement.

As announced in July, the new disclosures include:

• The amount of employer contributions made to each significant plan and to all plans in the aggregate.
• An indication of whether the employer’s contributions represent more than five percent of total contributions to the plan.
• An indication of which plans, if any, are subject to a funding improvement plan.
• The expiration date(s) of the collective bargaining agreement(s) and any minimum funding arrangements.
• The most recent certified funded status of the plan, as determined by the plan’s so-called “zone status,” which is required by the Pension Protection Act of 2006. If the “zone status” is not available, an employer will be required to disclose whether the plan is:
  • Less than 65 percent funded
  • Between 65 percent and 80 percent funded
  • At least 80 percent funded.
• A description of the nature and effect of any changes affecting comparability for each period in which a statement of income is presented.

Prior to the issuance of this Update, employers were required to disclose only their total contributions to all multiemployer plans in which they participate.

For public entities, the enhanced disclosures will be required for fiscal years ending after December 15, 2011. For nonpublic entities, the enhanced disclosures will be required for fiscal years ending after December 15, 2012. Early application will be permitted.

For more information please contact the construction professionals of of McKonly and Asbury, LLP

Construction Fraud Series - Part 2 - Types of Construction Fraud

According to the Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse, construction companies endured a median loss of $300,000 per incident. There are three basic types of accounting fraud: asset misappropriation, financial statement misrepresentation, and corruption. As a CFM, you should be aware of the differences.

Asset misappropriation occurs when an employee uses the company’s assets, such as cash or inventory, for any reason other than the asset’s intended purpose. Types of asset misappropriation include check forgery, larceny, and inventory theft.

For example, Subcontractor X sells plumbing services to its customers. The subcontractor’s A/P clerk has the ability to input invoices and print checks from the accounting system. She occasionally prints checks to herself, then inputs a fake invoice in the accounting system to make the check look like it was paid to a legitimate vendor.

What makes this potentially fraudulent? The A/P clerk is misappropriating the company’s asset for her own benefit and representing to the company that the check was written for the vendor listed in the accounting system, not herself. Subcontractor X is relying on this representation for its own internal purposes.

Financial statement misrepresentation occurs when an employee falsifies items in the company’s accounting records or financial statements. This could be amounts in the balance sheet or income statement, or disclosures in the financial statement notes.

Suppose Subcontractor X’s corporate division manager is under pressure to increase his division’s operating income. Instead of looking for areas where the division could operate more efficiently, he decides to code certain supply expenses and repair and maintenance expenses as fixed assets in the company’s accounting system to make it appear as if his division’s operating expenses are less than they actually are. Similar to the last scenario, this employee is misrepresenting his division’s expenses to the company. Users of the financial statements may rely on this information for various reasons, so the company may be damaged by these actions.

Corruption is more often associated with government officials than employees of a corporation, but corruption can occur in both types of organizations. Types of corruption schemes include kickbacks and bribes. If Subcontractor X’s purchasing agent periodically receives nominal payments or lavish gifts from one of the company’s largest vendors without the company’s knowledge, this could be a kickback. This employee may be more inclined to give more business to this vendor, even if it is not in the best interest of the company.

Awareness is the first step in fraud prevention. Be sure you are aware of these three types of fraud in order to protect your business.

This post was first seen on the CFMA Newsletter. The post was written by Marcelle H. Piglia and Robert Berger of Anders Minkler & Diehl LLP. Both can be reached at mpiglia@amdcpa.com and rberger@amdcpa.com or 314.655.0170. 

To learn more about fraud prevention and awareness contact the construction professionals of McKonly and Asbury, LLP. 

Construction Will Edge Up 6 Percent in 2013, But Uncertainty Remains, McGraw-Hill Reports

McGraw-Hill Construction (MHC) has released its 2013 Construction outlook at its 74th annual Outlook Executive Conference in Washington D.C. Its 2013 Dodge Construction Outlook reports that total U.S. construction starts for 2013 to rise 6 percent to $483.7 billion, slightly higher than the 5 percent increase to $458 billion estimated for 2012. Total nonresidential building construction, MHC predicts, will decline 10 percent in 2012 and grow 5 percent in 2013. While overall commercial building construction is expected to grow 5 percent in 2012 and 12 percent in 2013, office construction
will “remain the laggard, as business hesitancy and lackluster employment growth deter new development,” MHC says. Office construction will be down 2 percent in 2012, MHC predicts. “Subpar economic growth, weak employment gains, and tepid improvement in office rents and vacancies created a less than supportive environment for office development,” MHC says. “The main drag, however, remained the disappointing labor market.”

MHC says the volume of deferred projects is easing, vacancies are retreating after peaking in 2012, and corporate earnings have been strong. MHC also sees signs that speculative development is “slowly stirring.” MHC predicts 8 percent growth in 2013. Store construction is on track to grow by 15 percent in 2012, despite a pullback in development by major stores like Walmart and Target. MHC expects store construction to grow 18 percent in 2013, as the housing market continues to strengthen, foreclosures wane and prices bottom out. Driven by construction of regional facilities for Amazon, warehouse construction will grow 38 percent in 2012, MHC says, followed by 10 percent growth in 2013.

Hotel construction is experiencing more positives these days, such as improved business travel and stronger industry financials. MHC predicts 23 percent growth in 2012 and 12 percent in 2013. Health care construction, MHC predicts, will drop 16 percent in 2012, but will slowly rebound 2 percent in 2013. Institutional building construction will be down 13 percent in 2012 and level off for 2013. Manufacturing construction will decline a steep 31 percent in 2012, MHC says, as manufacturers cancel new investments, due to “concerns that Washington, D.C., policymakers won’t be able to take the necessary steps to avert the fiscal cliff.” MHC expects 8 percent growth in 2013. “With capacity utilization still relatively high, there’s incentive for manufacturers in 2013 to revisit plant expansion plans that may have been deferred this year,” MHC says. MHC forecasts public works construction
to decline 3 percent in 2012 and another 1 percent in 2013.

Highway and bridge construction is on track to slide 10 percent in 2012, due to “reduced federal support,” but will rise 3 percent in 2013, “helped by the support coming from MAP-21 [“Moving Ahead for Progress in the 21st Century”] and other financing means.” Electric utility construction is predicted to drop 31 percent in 2013 after reaching a record $51 billion in 2012, MHC says. “This year was boosted by the start of two very large nuclear power plants, and projects of similar magnitude are not expected for 2013,” MHC says. “The expiration of federal loan guarantees for renewable energy projects would also dampen construction in 2013.”

To learn more about this report, contact the construction professionals of McKonly and Asbury, LLP.

Profit Is Not a KPI

Sales, revenue, and profit are three of the most common financial indicators that CFMs monitor. Regularly examining this type of information is critical to assessing company performance and trends. However, it is also important to recognize that this type of data is historical and more of a lagging indicator than a leading one.

To accurately determine how these financial measures can be improved, both GCs and subcontractors must determine the key performance indicators (KPIs) that impact those outcomes. In this way, contractors can influence these variables, address issues, and create intentional outcomes.

The more a KPI can deliver information in advance, the more opportunity a contractor will have to correct problems. Furthermore, it is important to recognize that no one KPI can tell the whole story.  Multiple KPIs that relate to all critical business variables should be collected and reviewed. The key to finding your KPIs is to look at successes, find out what went right, and create metric expectations that make similar outcomes likely.

The first example of this type of analysis is related to the buyout process. When a GC wins a new project, it should immediately begin the process of fixing the costs. Most often, this is done through a buy-out process where subcontractors are formally contracted. KPIs that measure how quickly the work is bought out can be identified. Does it take a few days, a week, a month, or more? Similarly, GCs can monitor the final quantity of work that is bought out. For the profitability of a project to be maximized, should it be 60% bought out, or 90% bought out at a particular point in time? A baseline and/or goal for these types of KPIs can be helpful in driving change.

A subcontractor may also use the project schedule as a measure of its performance. A KPI that captures the timeliness of buyout of materials and the efforts that ensure an accurate work schedule can be extremely valuable drivers of success.

This post was first seen in the CFMA Update dated October 2nd. The writers of the post are Shane Brown and AJ Steger, partners with EKS&H. To learn more about this post visit www.cfma.org or contact the construction professionals of McKonly and Asbury, LLP. 

‘Lean’ Construction, Prefabrication/Modularization, and BIM Are Keys to Productivity, FMI Reports

Construction firms of all sizes are recognizing that reduction of waste — such as defects, overproduction, and waiting — is becoming “an essential strategic imperative,” according to FMI Corp. “Efficiency is quickly becoming the mantra across construction organizations,” FMI reported in its white paper, “The Science of Efficiency and Productivity: Construction 2.0 in the New Normal,” released on July 11.

FMI examined how “lean” construction, prefabrication and modularization, and building information modeling are affecting the construction marketplace. “There are many misconceptions about these new tools and processes,” FMI said. “The first is the belief that only large, sophisticated contractors can benefit from construction systems such as prefabrication or elaborate modeling systems such as BIM. In all cases, there are levels and gradations from which contractors of all sizes can benefit.” FMI said that 77 percent of respondents to its 2012 Productivity Survey experienced some level of productivity enhancement as a result of their “lean” initiatives. “For contractors that achieve as low a net income as 2 percent to 3 percent, a 5 percent to 10 percent improvement in labor productivity has the ability to double the bottom line dramatically,” FMI noted.

Dramatic changes in the design of projects, FMI said, have had “one of the most influential changes” on contractor productivity: “Interestingly enough, the groundswell in this design enhancement has been led by trade contractors, not by the designers. Recognizing the need to compensate for poor or inadequately designed structures and systems, contractors assumed the reins of this three- or four-dimensional design tool to control their risk and delivery higher quality finished projects.” FMI said that 63 percent of the survey respondents have engaged in a project on which BIM was used and that 62 percent said they experienced some increase in their labor productivity relating to the application of BIM. “From a strategic perspective, firms must make a serious commitment to the long-term use of BIM,” FMI said. “Many firms view the costs associated with rework, inefficiency and poor coordination as enough motivation to consider integration of such a system.”

FMI added that prefabrication and modularization are revolutionizing the construction industry. “Many contractors are examining their projects from the perspective of what they can prefabricate rather than what they cannot,” FMI said. FMI noted that 69 percent of survey respondents have engaged in some sort of prefabrication on their projects, 98 percent of which achieved at least a 1 percent labor savings.

To learn more about this report, please vist the FMI website at www.fmi.org . To learn more about LEAN, its terms and concepts and how it can benefit the construction industry, please visit McKonly and Asbury, LLP’s LEAN Accountants Blog at www.leanaccountants.com.

SBA Issues Final Rule to Streamline Surety Bond Guarantee Program

Small construction contractors will have improved access to bonds beginning Aug. 15 under the U.S. Small Business Administration’s Surety Bond Guarantee Program, thanks to a new, streamlined application process. The SBA issued a final rule on July 16 to implement its “Quick Bond Guarantee Application and Agreement.”

The rule simplifies the SBG program paperwork for construction contracts of $250,000 or less, combining two existing forms, the SBA Form 994 (Application for Surety Bond Guarantee Assistance) and the SBA Form 990 (Surety Bond Agreement), and eliminating an obsolete reference to SBA Form 994C. In addition, SBA will not require the principal to complete and submit two other forms for these small contract amounts, SBA Form 994F (Schedule of Work in Process) and SBA Form 413 (Personal
Financial Statement).

To learn more about this new SBA Surety bond Guarantee Program, contact your financial advisor or the construction professionals of McKonly and Asbury, LLP.

Lease Versus Own - Which is Best For You

The following post was first seen on the Construction Financial Management Association February 2012 Update email. The post was written by Steve Usselman, Senior Vice President, Enterprise Fleet Management. Steve can be reached at steve.usselmann@efleets.com.

In any economy, smart business owners look for ways to ensure that their companies are running at peak efficiency. This has been even more evident in the past few years, as many companies have placed an increased importance on controlling costs. For many contractors, a vehicle fleet represents one of their largest costs, requiring a considerable amount of money, time, and resources. But, with sound planning and effective fleet management, controlling the costs of a commercial fleet is something that all contractors can accomplish.

One way to control fleet costs is to look into the different ways to acquire vehicles. Leasing cars, vans, and light duty trucks under a tailored fleet management program offers an alternative to an outright or financed purchase.

Leasing Can Increase Cash Flow
One option is to fund vehicles through a full-service fleet management company. This can make it possible to establish a separate line of credit and avoid tapping lines of credit at a bank to fund rapidly depreciating assets, such as a fleet of vehicles. Also, while traditional forms of financing or outright purchase generally require a complete payback of principal, most leases do not require a complete payback of the principal balance of the vehicle, which could have a positive impact on cash flow, depending on an individual company's cost of capital.

Cycling Extends Cost Savings
While saving money through the acquisition of vehicles is one way to cutting costs, contractors must also consider long-term decisions, such as how to save money on the back end of a vehicle’s life cycle. The goal is to minimize the net depreciation and operating costs of the vehicle by managing its life cycle. Many fleet services companies have vehicle replacement cycling systems that ensure vehicles are replaced at appropriate intervals to achieve optimum performance and resale value, and remarketing professionals who can help business owners take the guesswork out of this process.

No matter which method of vehicle funding your company chooses, there are many other benefits of fleet management – including saving time, decreasing management responsibilities, and making it easier to monitor fleet operation.

To understand more about lease versus own options or to consult professionals on other finance related matters, please contact the construction professionals of McKonly and Asbury, LLP.

Firm Billings Continue Rise in December

December marks the second straight month that the AIA’s Architecture Billings Index (ABI) increased, and the first two-month gain since February and March of 2011. At 52.0 (the same score as the previous month), the billings figures were strong enough to generate growth in most regions of the country and in most major construction sectors. Architecture firms in the Northeast, Midwest, and South all reported average billings scores of more than 50 for December, the threshold that indicates an aggregate increase in firm billings.

Likewise, firms specializing in residential, commercial/industrial, as well as institutional projects all reported gains with their preliminary December scores. That leaves only mixed-practice firms (ones without a majority of their billings in any single major construction sector) reporting declines in December. For institutional firms, December saw the first ABI score above 50 since January 2011, and the highest reading since mid-year 2008.

While the ABI numbers point to continued growth in the months ahead, they seem eerily similar to the pattern established in late 2010. In that case, strong ABI numbers in the fourth quarter of 2010 were followed by modest gains in the first quarter of 2011 before diving downward again in the second quarter of the year.

Economic growth strengthening

The national economy has been moving towards a modest upswing. According to a report by the Federal Reserve Board, most of the 12 Federal Reserve districts report economic activity expanding at a moderate pace from late November through December. Activity remained sluggish for residential real estate markets in most districts, and commercial real estate markets remained somewhat soft overall, but showed signs of ongoing improvement in several districts.

The general improvement in the economy was reflected in the December employment report. The national unemployment rate fell to 8.5 percent, the lowest reading since early 2009. Conversely, this number might overstate the underlying improvements in the employment situation, since in recent months the overall labor force has shrunk, lowering the unemployment rate.

However, the separate U.S. Department of Labor payroll report does indicate that payroll jobs have been increasing at a healthier pace recently. National payrolls increased by 1.3 million in 2011, and by over 400,000 in the fourth quarter. Construction payrolls increased in December, but were down very slightly for the entire year.

This general improvement in economic conditions is helping the consumer outlook. This past year ended with four straight monthly increases in consumer sentiment, according to the University of Michigan, and the preliminary January rate shows healthy growth over the December reading. Retail spending (even with some moderation in growth toward the end of the year) increased 7.7 percent in 2011 over 2010 levels, the strongest rate of increase since 1999.

Design fees still under pressure

While firms might be seeing the beginning of an upturn in revenue, most report that design fees as a share of construction costs are still suppressed. For well over 60 percent of firms, 2011 project fees as a share of construction costs are below the rates for pre-recession projects in 2007. Most other firms indicate that design fees are about the same. Fewer than one in 10 report that fees were higher in 2011. This trend is true in comparable proportions for firms of all sizes and in all construction sectors.

As a result, most architecture firms are reporting that profitability as a percent of gross revenue was lower last year than in 2007. Over half (51.5 percent) of all firms report that profitability was significantly lower in 2011, while an additional 17.1 percent report profitability to be only somewhat lower. Still, almost 11 percent of firms report that profitability was somewhat higher in 2011, and an additional 7 percent report that profitability was significantly higher.

To learn more about the Architectural Billing index please contact the construction professionals of McKonly and Asbury, LLP or visit the American Institute of Architects at www.aia.org.

 

 

Understanding Fiduciary Responsibility in an Employee Benefit Plan

Having an employee benefit plan (EBP) can be a crucial aspect of attracting top talent as part of an organization’s benefit package.  Participants in plans such as 401(k)’s can reap the benefits of potential employer matching contributions as they try to pad their savings for retirement.  However, it is not to be overlooked that EBP’s also require a great deal of diligence on the part of the plan sponsor in maintaining fiduciary responsibility.  There are strict regulations stemming directly from the IRS and Department of Labor (DOL), and noncompliance can lead to serious consequences.

A fiduciary is essentially any party who can exhibit control and make decisions in some manner relating to the plan.  This can include many different parties, which will vary based on the organization and the plan, but the plan administrator, custodian, and trustee are generally the most prominent.  Fiduciary responsibility begins with an understanding of the roles and responsibilities of the plan sponsor.  The plan sponsor needs to adhere to their ownership of the plan, and the responsibility to ensure proper administration and regulatory compliance that comes with the ownership.  This aspect can tend to be violated when a plan sponsor tries to push responsibilities to a custodian or trustee or fails to keep up with changing regulations.

Similar to other areas of a company’s business, internal controls are also an integral part of an EBP.  It is the plan sponsor’s responsibility to design and maintain effective internal control practices to help identify errors and minimize the possibility of fraud from occurring.  An effective internal control system will ultimately minimize the risk associated with the plan and help ensure that participant’s funds are being handled properly.  Adherence with these aspects of fiduciary responsibility will ultimately point a plan in the right direction towards compliance with IRS and DOL regulations.