Contractors Center Point

2012 Construction Forecasts Provide Mixed Review

Multiple reports from various sources have been published in the last few weeks regarding the 2012 forecast for the construction market. All reports point to a continued slow recovery of the construction sector of the economy with one report showing 0 percent growth in 2012.

Associated Builders and Contractors

Associated Builders and Contractors (ABC) expects 2012 to be a year of gradual advancement in the industry, primarily driven by private construction. ABC is forecasting that nonresidential construction spending will increase approximately 2.4% in 2012. This is following a decrease of 2.4% in 2011. Along with this increase in nonresidential construction spending, employment is also expected to increase, but very little, at a rate of 0.4%. This increase follows a 2011 year which saw employment in this sector increase by 0.6%.

ABC believes that the increase in nonresidential construction will be driven by the energy and health care sectors of the United States economy. Construction related to the nation's power industry is expected to increase 9% in 2012 and is forecast to end 2011 with a 11.4% increase. States that are expected to see the majority of this construction spending are Texas, Oklahoma, North Dakota and Pennsylvania. Health care is also expected to expand with a projected increase in 2012. With continual changes in demographics, health care reform and overall thawing credit markets, construction in this sector is projected to increase 8% in 2012. Other areas of increase are expected in lodging and office construction but minimal.

These increases are expected to be offset by declines in public spending and education. With state and local government budgets continuing to be squeezed and school districts under pressure to hold the line on spending, public improvement projects in these areas are expected to decline in 2011 by 4%. Overall, ABC forecasts public nonresidential construction spending to slip 2% in 2012.

President Signs 3 Percent Withholding Tax Repeal Into Law

Repeal of the three percent withholding tax repeal contained in section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed into law by President Barack Obama on Nov. 21.

The bill, H.R. 674, was passed in a 422-0 vote by the U.S. House of Representatives on Nov. 16 and was approved a week earlier by a unanimous vote in the Senate. The bill amends the Internal Revenue Code to repeal the 3 percent withholding tax for government contractors.

The withholding mandate, hidden in the fine print of TIPRA, would have required 3 percent to be withheld on all payments for goods and services made by federal, state and local governments with total expenditures of $100 million or more beginning Jan. 1, 2013.  Implementation of the provision had been subject to annual delays by Congress and regulators, respectively, until bipartisan support for repeal coalesced during the recent focus on jobs legislation. 

To learn more about legislative happenings within the construction industry, please contact Associated Builders and Contractors at www.abc.org or the construction professionals of McKonly and Asbury, LLP.

Construction Backlog Indicator Shows Stagnant Third Quarter Activity

On Tuesday November 15, 2011, Associated Builders and Contractors (ABC) today released its Construction Backlog Indicator (CBI) for the third quarter of 2011. At 8.1 months, the third quarter CBI remained unchanged from the previous quarter, but was up 16.3 percent from a year ago. CBI is a forward-looking economic indicator that measures the amount of construction work under contract to be completed in the future.

“The lack of increase in the CBI last quarter appears to be a symptom of the soft patch in economic momentum experienced in the middle of this year, as well as the ongoing and elevated level of uncertainty regarding Europe, financial markets and other aspects of economic life,” said ABC Chief Economist Anirban Basu.

“A backlog of less than 8 months is associated with construction spending declines, while a backlog exceeding 8 months is statistically associated with future construction spending increases,” said Basu. “Today’s level of backlog is consistent with flat construction spending.

“The implication of the most recent CBI data is that momentum in the U.S. nonresidential construction industry is in the process of stalling,” said Basu. “The question remains: Will the nation’s commercial and industrial construction industries face a long-term slump or become reinvigorated in the new year?”

Regional Highlights

• Regional construction backlog grew in the Northeast and the South from the second quarter to the third quarter, but shrank in the Middle States and the West. On a year-over-year basis, backlog is higher in every region of the nation with the exception of the Northeast.
• The South continues to report the lengthiest construction backlog of any major region at 9.41 months, and is 35 percent higher than one year ago.
• Construction backlog in the Middle States continues to be the shortest at 6.5 months.

Industry Highlights

• Average construction backlog in the nation’s infrastructure industry surged during the third quarter, with backlog expanding from 7.9 months a quarter ago to 9.2 months.
• In the commercial and institutional category, construction backlog took a step back, falling from 8.6 months during the second quarter to 8.4 months in the third quarter.
• Construction backlog rose in the heavy industrial category to 5.9 months during the third quarter, but is still down from year-ago levels and is lowest among all categories monitored by ABC.

Highlights by Company Size

• During the past quarter, firms in the $100 million or more category experienced the largest construction backlog at 9.8 months – the highest level for this category in the history of the CBI.
• For firms with annual revenues of less than $30 million, construction backlog declined from 7.5 months to 7.1 months.
• Construction backlog for firms in the $30 million to $50 million category saw a slight decrease from 9.8 months in the second quarter of this year to 9.7 months in the third quarter.

For more information on the CBI please contact Associated Builders and Contractors at www.abc.org or contact the construction professionals of McKonly and Asbury, LLP.

 

New Local Tax Withholding Requirements for Contractors

As we approach 2012, there has recently been much attention given to the new local earned income tax requirements that take effect for employers operating in Pennsylvania.  Act 32 was passed in 2008 but has not received much attention until now as the full implementation will be effective 1/1/2012.  We recently published an article on our M&A news blog with general guidelines for the new program (click here to view article). 

The main purpose of Act 32 is to streamline local earned income tax and make the process more efficient.  In doing so, Act 32 will require every employer to withhold the correct rate from every employee who works in Pennsylvania and remit the tax to the proper jurisdiction.  The correct rate is determined by taking the higher of: 1) the jurisdiction nonresident rate where the business employer is located (the location where the particular employee works), or 2) the jurisdiction resident rate where the employee resides (is domiciled).  Typically, the rate where the employee resides will be higher than the nonresident rate of the employer’s location, because a number of jurisdictions’ nonresident rates are only 1%. 

So how will Act 32 specifically affect contractors?  Many contractors have employees on different job sites for a given period of time.   There are a few different issues to consider when determining the correct jurisdiction and rate to withhold: 

• First, if the employee is working at a jobsite that has a temporary trailer and job orders are also given from the trailer, the employer location in this case is considered to be the jobsite of the trailer regardless of the length of assignment for the employee. 

 

• Second, if the employee is at a jobsite that does not have a trailer and the job orders are given from the main office located in a different jurisdiction, it depends how long the employee is working at this jobsite.  If the job assignment is for three continuous months or longer, the jurisdiction is the worksite location.  If the assignment is for less than three months, the jurisdiction will be the location of the main office.   A potential issue could exist with localities if delays occur during a job where an employee has to remain on site longer than three months when initially it was anticipated that the assignment would be less than 3 months.

 

• Lastly, if the employee is assigned to a worksite in Philadelphia, the Philadelphia wage tax should be withheld in lieu of local earned income tax regardless of the length of the assignment.

 

For the situations described above where withholding is required for multiple jurisdictions, the employee must provide the employer with a properly completed Residency Certificate for each location.  As with all Residency Certificates, the employer must keep these for its records and have them made available if requested by a locality.

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

Highlights of the McKonly & Asbury, LLP Fall Construction Seminar

On Tuesday morning November 1st at the Radisson Harrisburg/Hershey, McKonly and Asbury, LLP held its Fall Construction seminar. This well attended event featured speakers from McKonly & Asbury, LLP, Reager & Adler PC and McConkey Insurance & Benefits. 

The morning started with a very informative accounting and tax update from presenters from McKonly & Asbury, LLP. Michael Hoffner, Audit and Assurance Partner, discussed a number of different accounting and auditing related matters as it pertains to pension plan disclosures for contractors, changes to goodwill and intangible asset valuation timing and other exposure draft related matters regarding revenue recognition and equipment leases. Jason Skrinak, State and Local Tax Principal, discussed current changes in local income tax collection with ACT 32 as well as an update on business privilege tax with local municipalities. Lisa White, Construction Tax Senior Manager, discussed changes in the federal tax code for 2012 that will impact contractors.

Tom Williams, Partner, with Reager & Adler PC, helped attendees with guidance on how to identify if an employee is a contract employee versus a W2 wage employee with his discussion on the Employee Misclassification Act. Mr. Williams discussion was followed by a very insightful discussion by Greg Marco and Karen Mummert, Account Executives, with McConkey Insurance & Benefits as it relates to Reducing Contractor Financial Risk. Finally, the day was ended with a presentation from Sam BowerCraft, Senior Manager, of McKonly & Asbury, LLP. Mr. BowerCraft discussed issues regarding Fraud in the Construction Workplace and techniques and methods to detect and prevent fraud.

Click here to download a copy of the the presentation. 

To learn more about this event or information impacting the construction community, please contact the construction professionals of McKonly & Asbury, LLP.

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:

•  
  • 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.