Contractors Center Point

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

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.

Revenue Recognition: Financial and Project Management Must Come Together

In order to use the percentage of completion method of accounting for revenue recognition, contractors must have the ability to produce reasonably dependable estimates.  One of the biggest estimates is the estimated costs to complete.  Inaccuracies in these estimates can cause significant swings in revenue recognition and misstate monthly financial statements.  Management’s reliance on this inaccurate data can cause poor decisions.  In this economic climate contractors cannot afford to make mistakes that can be avoided. 

While the financial/accounting groups are the ones that perform the revenue recognition calculation, this is an “all hands on deck” process requiring the project manager’s knowledge of each project. Best practice is to develop standard policies and procedures to ensure that project information gets into the hands of the accounting group in a timely and efficient manner. 

ACCURATE COSTS TO DATE

The first step of getting good estimates to complete is having accurate project costs to date.  As invoices come in, project managers must accurately identify which project is using the goods or services and communicate to accounting.  In addition, project managers must be aware of goods/services performed near month.  Accounting may not know about the week of subcontractor’s services or large shipment of supplies received on-site, due to the invoices not arriving until a later date.  Significant costs incurred at month end must be communicated to accounting in order for them to be accrued and reflected in the project costs to date.

IRS increases Mileage Rate to 55.5 Cents Per Mile

In a move that many expected, the IRS announced today an increase in the mileage rate effective July 1^st.

This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011. 

The medical and moving rate will also increase to 23.5 cents. 

The IRS normally updates mileage rates once a year in the fall for the next calendar year, but with recent increases in fuel prices decided to make this mid-year adjustment. 

The announcement can be found at this link on the IRS website.

How Surety Underwriters look at The Work In Progress Report (WIP)

There seems to be some mixed messages being communicated in the bonding world regarding surety credit.  On one hand the surety underwriters are getting nervous about their clients balance sheets, suggesting they look elsewhere for surety credit.  On the other hand there are surety companies with capacity willing to take on struggling companies because the company has stabilized, are well managed and possess a backlog of work to move forward.  

The upside for sureties willing to take on a more risky client is that they will have gained a client that would have never moved if things were booming.  However, a company’s Work in Process (WIP) report becomes a crucial determining factor during both boom and bust markets for a company to obtain surety credit. 

The WIP report is perhaps the most important report a contractor has to manage the profitability of the jobs it has in the backlog.  Surety underwriters, on a per job basis, want to see the original contract amount, revised contract amount (takes into account any approved change orders), original estimated cost on a given project, and the original estimated gross profit.  

Buy Some Time By Learning How To Deal With Your Lender

We at McKonly and Asbury, LLP have seen over the past 12 to 18 months, a number of those in the construction community that are suffering from the poor economic conditions within the construction market. While backlog is down and jobs being bid are at a premium, construction company's, contractors, subcontractors and those servicing the construction market are doing everything they can to perserve cashflow in order to stay afloat. Because of this, many companies in the construction community are having problems satisfying bank loans, credits, vendors and other lenders. This is causing the primary lender to be nervous.

Here are some recommendations for persuading your lender to remain cool:

Don't deny reality. First, show your banker that you understand the problems. It's important to do this quickly. If your version isn't convincing, things may unravel fast. In all likelihood, the banker will push to liquidate your assets.

Stay Focused While Reaching Goals

Profit growth and business expansion are two key goals for construction companies. But in order to successfully reach your targets, growth must be controlled. If you allow undisciplined expansion, you run the risk of diluting resources, leaving projects unfinished and destroying morale.

Whether you are planning an expansion, developing a new growth strategy or looking to make changes to spark revenue growth, plan your moves carefully and continually evaluate the game plan by asking the following questions:

	Growth Checklist
	Is the plan financially sound? Does it fall within your core business? If not, should you proceed or do you need to change your business focus? Notes:
	How will you allocate resources? Notes:
	Have you arranged to provide adequate training to ensure your employees have new skills they might need? Notes:
	Are you paying attention to critical aspects of your business, rather than letting the upheaval dilute your focus? Notes:
	Are you continually evaluating progress to ensure that individual elements of the overall plan are completed on time? If too many projects are not complete, determine why and revise procedures appropriately. Notes:
	Have you instructed managers to set priorities for staff members to keep them focused on the most important projects? Notes:
	Have you clearly communicated your goals and the relevant timeframe to staff members and any outside help that might be involved? Notes:
	Are you keeping managers current on the status of the project and setting up procedures to maintain accountability? Notes:
	Have you solicited insight from everyone who could make a valuable contribution in both evaluating the strategy and deciding if and when to proceed? Notes:
	Have you established a contingency plan to deal with problems? Notes:
	Have you ensured that all employees understand what the company does, the rationale for the changes and how they fit into the company's ultimate goals? Notes:

For more information on this post as wel as other construction related matters, please contact our construction professionals at McKonly and Asbury, LLP.

Eliminating Waste Through the use of LEAN Principles

LEAN is a concept that has been rooted in the manufacturing environment for many years. Based upon the management concepts made popular by Toyota in the 1980’s, LEAN is an approach to streamline workflow, minimize inventory and improve end-product quality. The ultimate goal of LEAN is to eliminate waste within the process.

 

You may be asking “How does LEAN impact Construction?” Primarily, LEAN construction aims to reduce the waste caused by unpredictable workflow. As most executives know, the industry can be susceptible to wasteful spending, delays and project inefficiency. LEAN’s focus is to build the project while maximizing value, minimizing waste and pursuing perfection, for the benefit of all project stakeholders.

 

LEAN construction, as defined by the non-profit LEAN Construction Institute (LCI), is a production management-based project delivery system emphasizing the reliable and speedy delivery of value. As stated above, LEAN focuses on waste within the workflow process. There are eight waste considered “deadly” to any project. Those waste are:

 

• Defects
• Over Production
• Waiting Time
• Non-Value added Processing
• Transportation Waste
• Inventory Waste
• Motion Waste
• Employee/People Waste

 

By focusing on these wastes and understanding how they can impact a project is the start to understanding LEAN.

 

Subcontractors to Benefit From Provisions of Small Business Jobs and Credit Act

On Sept. 23, the U.S. House of Representatives gave final approval by a 237-187 (yeas-nays) vote to legislation (H.R. 5297) that allows businesses to:

• Expense up to $500,000 on capital expenditures in 2010 and 2011. The write-off phases out for capital expenditures of $2 million or more.

• Write off up to $250,000 on improvements to qualified rental, restaurant and retail properties in 2010 and 2011.

• Write off 50 percent of the cost of new tangible depreciable property, including qualified construction equipment, purchased and placed in service in 2010.

• Deduct from self-employment tax the cost of health insurance incurred in 2010 by business owners and their family members.

• Deduct or depreciate the cost of cell phones and similar equipment without the onerous record-keeping needed to substantiate their “business purpose.”

• Benefit from bonus depreciation for contracts not completed in the same year they are entered.

The bill also includes provisions to: require prime contractors that develop small-business contracting plans to explain to contracting officers reduced or late payments to subcontractors, and require contracting officers to record and disseminate information about such prime contractors that have “a history of unjustified, untimely payments to subcontractors.” President Obama is expected to sign the bill on Sept. 27. For more information, contact ASA at (703) 684-3450, Ext. 1333, or GovernmentRelations@asa-hq.com or contact the constructoin professionals at McKonly and Asbury, LLP.

Look-back – A Contractor’s Favorite Fun-Word

Now that the corporate tax-filing extended deadline has just passed, and the individual tax-filing extended deadline is fast approaching, it’s time to reflect on all those tax-filing requirements applicable to those who are subject to percentage-of-completion.  Chances are one small – yet required – regulation may have been overlooked: Look-Back.

 

First, the "why":  When Section 460 was written by the IRS, one of the concerns the IRS had was that contractors would manipulate estimates in order to lower their percentage-of-completion percentage, thus underreporting income.  What the service failed to consider was that contractors are usually more concerned with showing a strong financial position, than with minimizing taxes.  In any case, look-back was implemented to mitigate this exposure.

 

Next, the "who": Broadly, if you're a contractor with long-term contracts, and you're using the percentage-of-completion method of accounting, then you're subject to the look-back rules.  Specifically, if you have a contract that 1) straddles two or more years and 2) is greater than the lesser of $1million or 1% of your average annual gross receipts for the three prior years, then you have a contract subject to (or eligible for, depending on how you consider it) look-back. 

 

Lastly, the "how":  There are two methods by which to apply the look-back rules.  In each, there are three main steps, and two of these steps are the same in both methods. 

n   Step 1: In the year the contract is complete, an analysis is done comparing what was actually reported in all the years the contract existed vs. what should have been reported using actual numbers instead of estimates.

n   Step 2: A hypothetical over/under payment of tax is calculated based on the findings in Step 1.  For C-Corporations, this is done at the entity level.  For pass-throughs (partnerships or S-Corporations) this is done at the individual level.

n   Step 3: Interest is then calculated on the over/under payment of tax.  (The interest rate used should be the adjusted overpayment rate, and it should be compounded daily.)