SUBCONTRACTORS NEWS Bringing New York’s Union Subcontractors Together to Build a Stronger Construction Industry IN THIS ISSUE
2 President’s Message By Robert J. Ansbro
3 Connecting With Our Membership In 2016 By Hank KITA
5 N.Y Appellate Court Supports Subcontractor “Walking Off” For Non-Payment By Henry L. Goldberg
11 The Top 3 Tax Planning Techniques for Construction Contractors By Joseph Molloy
15 STA Technology
Committee Gears Up for 2016
17 Succession Planning Increases Bonding Capacity By Daniel Castellano
21 A Board Room Discussion: Strategic Planning Around Information in the Construction Industry By Al Moldof
December 2015
Connecting With Our Membership In 2016
2
STA Subcontractors News
President’s Message December 2015
Dear readers, As I mentioned in my last message, the STA is gearing up for its 50th Anniversary in 2016. This is a very exciting time for the association as we dive back into our history, speak with long-time members and begin to plan the 50th Anniversary Celebration and Awards Dinner on Wednesday, April 6. Please look out for email notices on this celebration—we need your help in making this a success! The STA has continued to be active in the Building Trades Employers Association’s (BTEA) Safety Committee. Bud Griffis, Professor of Construction Engineering and Management in the Department of Civil and Urban Engineering at NYU Polytechnic School of Engineering, and Louis Coletti from the BTEA were on hand at the November 10 STA Board of Directors meeting to speak on construction safety and the ways for contractors to prevent accidents. Mr. Griffis and Mr. Coletti handed out a one page agreement for subcontractors to sign to show their commitment to the BTEA pilot program for the implementation of the NYC Zero Incident Safety Management Program. I hope everyone had a wonderful Thanksgiving! I would like to wish all STA members a wonderful Christmas, peaceful holiday season and joyous New Year! Sincerely, Robert J. Ansbro STA President
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December 2015
Connecting With Our Membership In 2016
BY HANK KITA, STA EXECUTIVE DIRECTOR
As we enter the final weeks of 2015, this would be the
The new year will be one in which the STA will bolster
appropriate time to look forward to what is in store
its communications in an effort to better connect with
for the STA in 2016.
our general membership. Look for a new, updated, and more interactive STA website in 2016. A new
2016 will mark the 50th Anniversary of the STA, which
format for our STA Subcontractor News newsletter
was incorporated in 1966. Plans are underway for
will allow for a more easily accessed and utilized
a 50th Anniversary Gala which will be held on the
document. We will also look to increase the frequency
evening of Wednesday, April 6 at the Pierre Hotel in
of contact with our members on emerging issues in
midtown Manhattan. Honorees will be announced
the local construction industry through timely email
in the next few weeks for this event. I look forward
bulletins. We will make more use of social media in
to the participation of not only our STA members at
communicating with our members utilizing vehicles
this Gala, but also other sectors of the New York City
such as Facebook, Twitter and Instagram.
construction industry, as we take a look back at the accomplishments of the STA over the past 50 years.
In addition to taking a look back at the 50 years of accomplishments of the STA in 2016, we will look
In addition to the 50th Anniversary Gala, the STA
prospectively to engage our membership on several
will hold several different seminars and programs
new fronts. In an effort to engage the next generation
during the course of 2016, examining the important
of our member construction professionals, the STA
role of the STA and its members in the New York
will form a “Young Professionals Group” in 2016.
City Construction Industry since 1966. Work on an
This group will allow the STA’s younger generation
“e-book” has begun, highlighting some of the STA’s
of construction professionals to network with each
long term members. Also, look for articles in the STA’s
other and hear presentations on a variety of issues
Subcontractor News highlighting the work of the STA
affecting the New York City construction industry.
in our dynamic industry over the past 50 years.
continued on page 4
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STA Subcontractors News
continued from page 3
Also in 2016, the STA will revive the work of its
renew their efforts to advocate for and inform our
Technology Committee to inform our members in an
members whenever possible in 2016. We will look to
effort to keep pace with the ever increasing importance
expand the involvement of our members in serving
of technology in the construction industry as well as
on these committees. I would like to personally
to share best practices. The STA will hold seminars and
appeal to you our members to become more active in
webinars on construction technology issues and will
our committees by reaching out to us here at the STA.
also produce a blog for issues in this area.
Please feel free to reach out to me at hkita@stanyc. com or by calling at 212-398-6220 with your thoughts
Other long standing STA committees such as
and ideas as we celebrate our past and look forward
Legislative, Public Agencies, SCA and Surety will
to the next 50 years of the STA’s future.
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December 2015
N.Y Appellate Court Supports Subcontractor “Walking Off” For Non-Payment HENRY L. GOLDBERG, MANAGING PARTNER, GOLDBERG & CONNOLLY, AND STA LEGAL COUNSEL
A recent New York appellate court decision took up
required notices to the general contractor under the
the age-old question of whether a subcontractor
subcontract of its intention to cease performance.
can, with impunity, safely walk off a project when payments are not forthcoming. This has never been
The facts were as follows: a general contractor on a
an easy issue.
school construction project entered into a subcontract with a roofer. After not being paid for three months,
For a number of reasons, the conventional wisdom has
despite repeated demands for payments, the roofer
been to avoid the complete suspension of services. As
ceased performing any further work.
a result, subcontractors will often reduce manpower
general contractor gave the roofer three days’ notice
as a clear message, but keep some labor on-site to
to cure its alleged default of, among other things,
avoid the appearance (and risk) of abandonment.
failure to provide workers on the job. Unfortunately,
In turn, the
the roofer was late in providing the general contractor Conversely, there is no obligation to continue to work
with the required seven days’ notice of its intent
without compensation, as a failure of payment is a
to suspend work for non-payment under Section
material breach by the contractor or owner, excusing
4.7.1 of the standard AIA subcontract form.
continued performance by the subcontractor.
general contractor declared the roofer in default and
The
terminated the subcontract based on abandonment It sounds easy in theory, but, given the dire
by the roofer.
consequences that could result from a subcontractor’s proceeding to “go nuclear,” careful thought is
At trial, the lower court was clearly sympathetic with
required. Once having left the project and having
the unpaid subcontractor. Furthermore it found the
been replaced by another company whose costs will,
general contractor’s testimony to be “conclusory”
almost certainly, exceed the cost to complete for the
and “unsupported by documentary evidence.”
original subcontractor that walked off the job, the
determined that the general contractor’s failure to
stakes can rise quickly and significantly. So what to do
pay was a material breach of the contract, thereby
– dig a deeper hole or stop the hemorrhaging? In this
excusing the roofer’s suspension of services.
It
case, the appellate court, refreshingly, sided with the subcontractor. Furthermore, it did so even though the
On appeal, the general contractor had little choice
subcontractor had clearly not acted properly in giving
but to acknowledge that it materially breached the continued on page 7
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STA Subcontractors News
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December 2015
continued from page 5 contract well before the last day the roofer’s forces
Furthermore, as the appellate court pointed out,
were on the job. Instead, it argued that the roofer
the subcontractor put itself at great risk since, if the
was precluded from recovery because it suspended its
court had determined that the general contractor’s
work on the project without complying with the above
nonpayment did not breach the contract, a work
described provisions of the AIA subcontract.
stoppage
This
without
compliance
with
the
notice
Section 4.7.1 states: “if the contractor does not pay the
provision of the contract would then be considered
subcontractor through no fault of the subcontractor,
a breach of contract leaving the subcontractor fully
within seven days from the time payment should
liable for all damages.
have been made as provided in the subcontract, the subcontractor may, without prejudice to any other available remedies, upon seven additional days’ written notice to the contractor, stop the work of the subcontract until payment of the amount owing has been received.
The subcontract provided it would
be “increased” by the amount of the subcontractors’ “reasonable cost of demobilization, delay and remobilization.” The roofer, as indicated, was not in compliance with this notice provision. The appellate court agreed with the trial court which had found that the general contractor’s failure to pay excused the subcontractor with having to comply with the notice provisions of AIA Section 4.7.1. As the appellate court correctly reasoned, the general contractor cannot preclude a subcontractor from recovering for the general contractor’s material breach of the contract by relying on the subcontractor’s subsequent failure to comply with a notice provision that, essentially, was contained in the AIA form for the benefit of the subcontractor. Ironically, it held that the clause had actually been designed to protect the subcontractor by enabling it to be fully compensated in the event it had to stop work and then remobilize. The subcontractor’s failure to comply with the clause would preclude it from recovering remobilization costs in the event it resumed work. However, that was not the same as the subcontractor not being entitled to be paid for three months of work which had been duly earned and approved.
G&C COMMENTARY This appellate case is noteworthy for a number of reasons. 1. It reinforced the established (albeit risky, as the court acknowledged) rule of law that a subcontractor can withdraw in response to a clear material breech by an owner or contractor for nonpayment. 2. In this age of “notice” hyper-enforcement, it was gratifying to see the appellate court apply common sense and look beyond subcontractor’s technical lack of notice to the general contractor. 3. For those of you who are regular readers of this column, you will recall our recent discussion about the “new” Prompt Payment Act.
It contains a
“safe harbor” to enable subcontractors to suspend performance for nonpayment, after twelve days’ notice by a subcontractor.
See General Business
Law §756-b which sets forth a procedure by which a subcontractor may suspend performance for nonpayment without being considered in breach of contract. The AIA form in this case and the new provisions of the Prompt Payment Act are quite similar. The risk in both remains as to whether the amount unpaid was approved or not. 4. In addition, it was clear that the appellate court had little use for the general contactor’s transparently continued on page 9
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STA Subcontractors News
E SAV THE E DAT
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December 2015
continued from page 7 pre-textual excuses for nonpayment. Paper-work-
Henry L. Goldberg may be contacted by email,
driven parties can always allege “reasons” for
hlgoldberg@goldbergconnolly.com or by telephone,
nonpayment. But in the harsh lights of a courtroom,
516-764-2800.
these excuses better “add up,” or the fortitude of the subcontractor which took the risk of suspension
©Goldberg & Connolly 2015
will be rewarded, Prompt Payment Act or not. This article has been prepared for informational 5. Finally, so what do we advise? Certainly, you must
purposes only. It is not a substitute for legal advice
have a clear, well documented, well established
addressed to particular circumstances. You should
entitlement to the unpaid funds. The work must
not take or refrain from taking any legal action based
have been approved, and, yes, you will need the
upon the information contained herein without first
careful advice of counsel weighing the unique factors
seeking professional, individualized counsel based
in each particular instance. However, you can protect
upon your own circumstances. The hiring of a lawyer
your interests, you can stop the hemorrhaging, and
is an important decision that should not be based
you can go on the offensive to collect all of your
solely upon advertisements. Before you decide,
receivables outstanding. So get up, dust yourself off,
ask us to send you written information about our
and get that money that is due you.
qualifications and experience
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December 2015
The Top 3 Tax Planning Techniques for Construction Contractors BY JOSEPH MOLLOY, GRASSI & CO. CPAS
As the year comes to a close, after all the gifts have
should take advantage of.
been opened and old acquaintances have once again been remembered, it’s—don’t say it—tax time! What
THE THREE IMPORTANT TAX PLANNING
will you pay? Or, better still, what will you be refunded?
TECHNIQUES FOR CONSTRUCTION CONTRACTORS
How you’ve positioned your construction contracting
ARE AS FOLLOWS:
company and what tax-planning techniques were implemented, if any, are key in filing for year-end. While it’s no secret that IRS regulations are complex in the area of construction, there are several accounting methods contractors can choose from when calculating taxable income. For the contractors whose average annual gross receipts for the last three years are over $10,000,000, they are required to use percentage of completion for an accounting method on long term contracts. While this method is preferred, as it is a more precise matching mechanism of revenues to costs incurred, the percentage of completion method, when employed properly under code section 460, can help the construction contractor to postpone paying income taxes, i.e. create a tax deferral. As a financial strategy, using income tax deferrals helps the contractor to keep more cash on-hand in order to help run the day-to-day operations of business. Deferring income to postpone remittance of income taxes is a business strategy that all contractors
1. Understand your deferral by reviewing the prior year’s income tax return and work papers: • First and foremost, the construction contractor should make sure the income tax reporting method being used is correct. Utilizing the right method is the only way to increase, decrease or maintain a valid deferral - be sure to consult with your tax advisor. • The simplest way to do the above is to double check the average annual gross; remember the key indicator—average annual gross receipts for the last three years of $10,000,000 or more. • If the proper method is still in place, then identify the prior year income deferred. – This is important because the income deferral is recalculated annually, and deferred income in one year is unwound and recognized in the following year.
continued on page 13
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STA Subcontractors News
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December 2015
continued from page 11 –Any current year deferral is then used to
of the owner(s) when considering current year
offset the prior year recognition.
deferral possibilities.
2. “Marry” your financial and income tax strategies:
3. There are opportunities non-deferral-based income tax savings:
• Consider your current year financial strategy and position. Your financial strategy should include
• Consider favorable timing differences such as the
having cash on-hand for day-to-day operations,
purchase of qualified machinery and equipment
a positive financial statement presentation for
which could be eligible for bonus depreciation
sureties, bankers and other creditors, as well as
and section 179 depreciation (assuming both are
positive ratios to support the procurement of
extended for 2015)
additional work. • There is also an array of potential income tax • Remember, your balance sheet is a snap shot in
credits available to the construction contractor
time; if there is a cash-intensive project or an
such as Research & Development and Fuel. A credit
investment in equipment on the horizon, an
is a real dollar-for-dollar reduction in the taxpayer’s
increase in the income deferral might be necessary
liability.
to help support an anticipated cash outlay. Tax time doesn’t have to be dreadful for construction • While income deferrals under the IRC are re-
contractors. Always reach out to your accountant
computed annually, they do exist on a job-by-
and financial advisors to learn of possible tax breaks
job basis. So it’s important, when increasing
and best practices for the upcoming year in order to
or maintaining deferrals, to ensure there is
properly position your company for the best possible
appropriate backlog in place supporting the
financial outcome at year-end. A little planning
deferral (A deferral is only a timing difference and
upfront can yield in great dividends in the end. As the
it will unwind completely when there is no work on-
saying goes, “pay now or pay later. ”
hand to be performed; the effect of which will be an income tax liability whereby there is no income
If you’re a construction contractor and you would like
to fund—one reason tax planning is so important).
more information on tax planning, contact Joseph Molloy, CPA, Director of Construction Taxation at
• It is also imperative to remember that the contractors’ corporate income tax return also has an impact on the owner(s) individual income tax return in flow-through situations. Consider the income (losses) of affiliates and other interests
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Grassi & Co., at jmolloy@grassicpas.com or call him directly at (516) 336-2412.
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STA Subcontractors News
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December 2015
STA Technology Committee Gears Up for 2016
The STA recently reactivated its Technology Committee
If you have any expertise in a technology field, please
and has named STA Member Michael Zucchi, CEO of
let us know! We invite all members to submit articles
the technology consulting firm ZBRELLA, as chairman.
for inclusion in the newsletter, help plan seminars or educate other members.
Mr. Zucchi, along with two other members of his firm, started their initial committee recruitment at the last
Furthermore, if you have any questions or concerns
STA General Membership meeting. On November 12,
about upcoming construction technology, do not
a meeting of the committee was held at the STA office
hesitate to contact the STA! The technology committee
to establish focus points and agenda items for the
is here to help and educate you. Feel free to email the
coming year.
STA office at info@stanyc.com or reach out to Michael Zucchi directly at Michael@zbrella.com.
With technology construction on the rise and programs like BIM being used more and more on the
Any STA member is welcomed to join the STA
job, the STA realizes the importance of education
Technology Committee, whether or not you consider
on new and incoming technology programs, devices
yourself experienced in this particular field of
and strategies. Planned for 2016 will be educational
construction.
seminars, both in-person and via online video platforms, and technology talks & panels. Among the topics to be tackled in the coming year are: • Digital Processes
• MEP Layers
• Document Handling
• SMART Equipment
• BIM
• Accounting/ERP Software
• Contractor expenses
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STA Subcontractors News
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December 2015
Succession Planning Increases Bonding Capacity BY DANIEL A. CASTELLANO, CPA, MANAGING PARTNER, CASTELLANO & KORENBERG
Performance bonds involve a three party arrangement:
Other options that a contractor could implement are
the Bond Company, the Contractor and the Project
as follows:
Owner. Risk occurs for the bonding company (“The Surety”) when the contractor is unable to complete a project. A replacement contractor must be brought in to complete the project within a specified period of time and the costs to complete the job will rise and will be much higher than budgeted. So the surety has greater risk if something should go wrong and the contractor has not done adequate succession planning. Construction owners may understand that succession planning is necessary but they are hesitant to implement a plan. Since most contractor owners spend the majority of their lives working, there is the fear of the unknown in giving up what they have created. The Surety, is analyzing risk potential, would want, at a minimum, a continuity agreement in place for key personnel to remain with the company to complete any contracts in progress in case an unexpected hardship (Death, disability, divorce or personal financial hardship) occurs. If a contractor that has quick turning smaller projects has a management completion agreement in place with its key personnel
TRANSFER OR SALE TO A FAMILY MEMBER A common practice in the industry is to perpetuate the Company by the sale or transfer of the contracting business to the next generation of the family. If a sale takes place, the surety will need to feel comfortable that any related debt will not severely impact the future cash flow of the business, as well as providing sufficient economic benefits to the new owner so that he/she isn’t working to merely service the debt. In the eyes of the surety this can only work when the family member has already been actively engaged in the contracting business and that the new owner has been well received by the contracting business community, including other credit grantors. Statistics show that only about 30% of family businesses survive into the second generation. The current owner will need to convince the surety that their family can beat the odds. BUY – SELL AGREEMENT
the surety will look upon this arrangement in a
In a multi-owned contracting business, the most
positive fashion.
common way to transfer equity is through the use of a
continued on page 19
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STA Subcontractors News
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December 2015
continued from page 17 buy-sell agreement. The mechanism to transfer equity
This allows the contractor to maintain significant
can be in the form of a cross- purchase plan, whereby
capital in the business for bonding purposes.
surviving owners can purchase equity directly, or through a corporate stock redemption, whereby the
The new company contracts all new work. Net earnings
Company re-acquires the shares. The purpose of the
for the new company are retained and capital is
buy-sell agreement is to safeguard the assets against
built in the new company. After a period of time the
death (usually funded by life insurance), disability,
new company can stand on its own for banking and
retirement or withdrawal. The agreed upon value
bonding purposes and the old company can make
of the business is defined in the buy-sell agreement
distributions of its capital to the old company and
and is updated by the owners periodically. The buy-
owner.
sell agreement usually prohibits any sales of stock to Sureties
inactive shareholders or outsiders.
favor
this
method
since
it
fosters
communication, bring them into the succession planning issue and enables the surety to be a partner
NEW ENTITY FORMATION Under this alternative, a 2nd entity is formed and is owned, either in full or in part, by the next generation or a mix of the old and new owners. Basically a
in the future plans of the business. SUMMARY
strong existing company remains in place along the
Failure to develop a succession plan can cost a
newly created company. The better capitalized older
construction company a contract if the bond for
company enters into an agreement with the surety
the prospective contract is denied. Begin the
and agrees to maintain a certain level of agreed upon
process, huddle with your advisors, develop a
capital to support the bonding of the new entities.
plan and execute it.
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STA Subcontractors News
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December 2015
THE CORNERSTONE
A Board Room Discussion: Strategic Planning Around Information in the Construction Industry BY AL MOLDOF, CPA & CONSTRUCTION CONSULTANT
This story is reprinted with permission from the Journal of Construction Accounting
Many construction contracting and subcontracting
executive management, field operations, and
firm owners are reluctant to jump on the
office-to-field IT infrastructure is one of the
bandwagon and spend money on the latest
hallmarks of the construction industry, the quick
technology
because
pace set by critical path field objectives. In many
construction firm spending is usually directed by
cases, the job pace is so brisk that fieldsmen will
firm owners onto products, processes, and direct
develop a “gut instinct” while working on-site
labor costs that show a visible impact on the job.
that gives them the ability to act through a keenly
Accordingly, the offices of many firms (along with
developed reflex rather than having to stop and
their communication devices and information
think about decisions they are making.
fads
and
trends.
That’s
technology (IT) infrastructure) are often kept purposely spartan.
Just as physics and engineering are sciences that cannot be felt and understood thoroughly
For instance, buying or leasing a piece of specialized
by utilizing only the attendant five senses,
industrial equipment to serve an innovative
accounting and operational IT with strategic
mechanical purpose, hiring a crew of higher-
planning processes, such as cash flow planning,
qualified field workers to run the new machines,
involve higher-order thinking that should occur in
and offering competency training and safety
a concerted way, such as in a boardroom.
programs to reduce the likelihood of accidents are highly visible jobsite initiatives. Because the
OBJECTIVES
impact of these initiatives is more easily seen
To be sure, foresight is worth more to a business
in the field than the impact of the purchase of
than hindsight. In fact, construction firms lose
new computers, higher-tech PC’s, more powerful
some of their differentiation and competitive
Internet and file-sharing networks, or company-
advantage when too much of the “hard-wired,
wide construction-specific mobile technology, the
gut instinct” reflex decision-making mechanisms
former may take precedence.
spill over into the strategic planning meetings (if
Compounding the sense of disconnect around
the firm has them) and into the boardroom when continued on page 23
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December 2015
continued from page 21 making financial decisions. Many small contractors
such as office rent, utilities, administrative salaries,
complain about running themselves into the
payroll, and IT.
ground, not keeping up with their firm’s demands, or not being able to get financially comfortable personally. Meanwhile, other contracting firm owners with the foresight I am about to advocate sit together to discuss business strategies and leave the day-to-day running of their businesses to their capable staff members without worry. The
difference
between
the
two
Therefore, categorizing as many costs as job costs as possible helps reduce the firm’s overhead by forcing the firm to identify its job costs more accurately, thereby spending more money on the jobs and less money on non-construction overhead. A metaphor might prove helpful in demonstrating this point. Tracking job spending in this manner
types
of
resembles an ironworker pushing a piece of metal
contractors just mentioned is that the one with
down onto the grinding wheel. The downward
foresight is open to higher-order thinking. Put
pressure on the metal is work, just as the downward
a different way, the catch phrases “don’t think
pressure by the controller on the job costs is work.
too much” and “all office spending is overhead”
Putting more costs onto the jobs (and off the non-
do have merit in our industry, to a degree. Still,
construction overhead) puts more of the metal’s
even the best field worker brought up welding or
surface area onto the grinding wheel. This leaves
driving a rig who starts his or her own construction
more profit to cover less overhead cost.
company cannot go from a set of plans for a new company to a $20 million revenue-burning firm without either higher education or being surrounded by people who know the ways and means of how construction firms (not buildings) are put together. These skills are necessary in order to operate effectively, become profitable, utilize best practices, and sustain competitive advantage. BACKGROUND Construction accountants are taught early that the more spending that can be classified as job costs, the better. Some do not know why this is true. However, common sense corroborates this formula because construction projects are the primary source of revenue for the firm as a whole. The margin of profit the firm produces on each individual job not only has to be sufficient to justify that job in its own right but also must cover the entire set of company-wide fixed expenses,
The second, but no less important, reason that it is better to identify more costs as job costs is a result of the Financial Accounting Standards Board revenue recognition model. Most contractors and subcontractors report their financial statements by the percentage-of-completion method. An experienced construction accountant knows that under
the
percentage-ofcompletion
method,
reported revenues are formulated through a complex series of rules-based calculations that involve scaling up job costs in proportion to the contracted revenues on each job. Put a different way, the more job costs attributed to a particular job, the more reported revenues for that job, which increases the aggregate gross sales revenue reported in the financial statements. In this way, capturing as many costs as job costs and allocating as much construction overhead to the jobs as possible improves gross sales on the income continued on page 24
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STA Subcontractors News
continued from page 23 statement in direct proportion.
One concrete example of an answer to Question 1
THE IT STRATEGIC PLANNING PROCESS
would
be
an
upgrade
from
off-the-shelf
general accounting software to one of the
How can IT spending be justified in construction
leading construction-specific accounting software
firms? Here is a series of questions that, when
packages. This upgrade will result in better books
taken as part of a boardroom discussion on the
and
evaluation of the IT status of a construction firm,
costing and access to preprinted standard forms
will help that firm develop a higher-order thinking
and reports. These benefits will thereby improve
about IT upgrades that can create and enhance
profits by closing off leaks in job cost reporting,
the
Hopefully,
attracting better-paying customers, and leading
the aforementioned framework of job costs and
to better lending and bonding terms due to the
profit-making will set the tone so that IT will
greater financial proficiency evinced by the firm.
firm’s
competitive
advantage.
records,
providing
more
articulated
job
assume its proper place in the construction firm as a tool to attain and maintain a significant level of
Question 2: What existing infrastructure (i.e., staffing,
profitability, helping the firm be sustainable. The
supportive
following questions can either be distributed to
necessary first?
the executive board for individual responses and then compiled for a boardroom presentation or distributed prior to a board meeting as part of an agenda so board members can come to the board meeting ready to discuss these points.
technology,
telecommunications)
is
Sometimes technological improvements must be preceded by certain staffing and IT infrastructure that need to be in place in order for the new technology to work. For example, if a firm has two physical locations, a headquarters and a separate warehouse in a different town, and
THE AGENDA Question 1: What technology can make builders more profitable?
wants to purchase a new software that will link the accounting for the inventory in the warehouse to the centralized accounting capabilities of the
A need sometimes drives this point. For example,
headquarters, one requirement would be the
outdated communication equipment may cause
existence of a VPN or other similar IT network that
communication
links the two sites in a private virtual network.
disruptions
among
project
managers or between the project managers and the office. Alternatively, this point may be driven
If the firm does not have a VPN or similar point-to-
by best practice awareness. For example, an
point network and tries to buy and implement the
executive attends a trade meeting where other
new accounting package, executives may find that
firms are utilizing more advanced technology. That
another significant capital outlay is required to
executive takes the newfound knowledge of the
get the existing systems up to snuff. Being backed
technology back to his or her own boardroom for
into these sometimes large afterthought costs can
internal development.
be avoided by brainstorming in the boardroom on Question 2 beforehand.
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December 2015
Sometimes an upgrade such as the one from off-the-shelf accounting software to a leading construction-specific
accounting
software
package will necessarily require new staff who are competent enough to run it. In some firms, a relative may be performing the bookkeeping function. In that case, if the firm wants to install a flagship accounting package, it will have to hire
take if ever leaving the firm. Regardless of who pays for it, any in-house training for existing staff members to attain proficiency with new software must be assessed for the cost to the trainer and the trainee during the training, plus the value both of these parties would otherwise produce in different activities. This is a hidden cost.
a controller with sufficient accounting education,
Question 4: Who can provide the technology?
construction experience, and experience with the
Who can provide the training?
specific software in order for that upgrade to become operational. This staff requirement should be considered beforehand as a prerequisite to the purchase.
Choosing what software, hardware, and mobile technology to implement is important because these implementations change the operational landscape of the firm. They can positively impact
Question 3: What training or proficiency will be
ongoing cash flows or possibly drain cash flows,
required?
depending on the execution and time before the
Sometimes new technology can be absorbed into the construction firm without any additional new staff hires because existing staff can develop the skills to utilize the new technology for its intended purpose. The discussion on this point should revolve around the proficiencies required. As stated earlier, most
leading
construction-specific
accounting
software packages cannot be run by an accountant who does not have expertise with that particular system. Training and proficiencydevelopment can be done in-house, or the training can be outsourced to help develop proficiency in current staff members, but that training all comes with a cost. The cost of training and proficiency development can either be fully absorbed by the firm or partially passed along to the employee, especially
implementation will pay for itself. However, the price and source of the construction technology Competitively
purchase
is
pricing
the
not
self-evident.
implementation
is
important for two reasons. First, it is always prudent to price a big purchase from more than one vendor or supplier. Second, some vendors will offer slightly different features, equipment, and service plans at different costs. Under this second point, because of the rapid innovation inherent in new technology, one vendor may offer a product or service that completely avoids a problem that another vendor grapples with, thereby causing two different IT vendors with virtually the same product and service combination to offer prices that are dramatically different from each other.
if the employee will be gaining a stand-alone
The discussion for Question 4 should revolve around
certification that has extrinsic value that they can
what benefit the construction firm will get, rather
continued on page 27
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STA Subcontractors News
Send Us Your Company Photos & News! The STA wants to showcase its members completed
As a reminder, the STA always welcomes articles about
projects and any industry awards or recognition
industry topics from its member companies to be
received in 2015! Send any photos from your company
included in the newsletter and any other publications
from the past year covering completed projects,
the association sends out throughout the year.
awards, charitable events and community service
Contact Samantha Sweeney for further information
activities to ssweeney@stanyc.com to be included in
or to discuss any topics at 212-398-6220 or via email
the association’s “Year in Review” publication.
to ssweeney@stanyc.com.
December 2015
continued from page 25 than a processoriented approach. For example, is
spent on (or lost due to) the IT implementation
the benefit to network all the project managers on
should be tracked. Even if the lead executive is
tablet PCs with access to site drawings with real-
saying “go ahead� and only giving the project
time commenting capability? Or is the benefit to
champion a budget but would rather not be involved
give foremen the ability to utilize new company
to any greater extent in the implementation, the
mobile devices to scan bills of lading and to report
champion should still track and manage these
payroll hours directly into a centralized, networked
costs because future boardroom discussions will
accounting software system so that corporate
undoubtedly arise where the payback and viability
headquarters has it ready to approve? This style of
of this project will be questioned.
discussion will help the board choose the IT vendor that will implement least expensively with the
Question 6: How long will it take to be running
fewest disruptions to either the contracting work
full bore?
or recordkeeping and financial reporting.
How long the implementation will take is an
Question 5: What is the cost of implementation?
often glossed-over issue that should be addressed
Consider such variables as equipment (purchase
concretely in a strategy meeting. Implementations
versus lease, new versus used, high-end versus
can sometimes be performed during night and
standard gauge, brand, make, and model), training
weekend hours when no one is on the systems, but
and lost hours, new staff required to run the IT,
sometimes concurrent books and records must be
and consultant time.
kept until the new system is running completely.
Calculating the true cost of an implementation beforehand only works if cooperation can be gained by all parties: the executives and board members of the contracting firm, the consultant or spearheading person within the firm, and the vendors who are bidding on the software or IT implementation. Giving stand-alone quotations is painful because, once those quotations are in writing, the vendor can be held to the terms of the quote like an agreement. That’s the purpose. Getting full quotes for all the work to be performed not only helps the champion of the implementation to sell the project to the construction firm owner but also helps contain the costs throughout the implementation. All proposed costs should be charted and all time
Backups need to be made throughout the process and uncertainty can arise as to how easily staff will take to new process improvements. Timelines are important because milestones can be set and consulted post-audit to determine if projections met the specified plans and to satisfy executives and board members of the success of the implementation. All decision and implementation achievement points should be identified and put in chronological terms so that process management becomes easier when the implementation starts. Attitudes become different when quantifiable financial data backs up an assertion by the lead expert to support the success of a project. Looking ahead to justify lost time in advance increases the financial accuracy of cost projections and can continued on page 29
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STA Subcontractors News
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December 2015
continued from page 27 increase the likelihood of owner buy-into new IT
person should be evaluated for suitability and
implementations.
theneed for training.
Question 7: How should the buy-in be incentivized
Question 8: What is the salvage value of the
(or sold) to management and staff? Who will be
disposal equipment, software, etc.?
required to participate in the new technology? What is each different position’s relation to the technology? How do the training, infrastructure, and lost hours play differently for the different positions?
It is often neglected that outdated or replaced technology often has a secondary market where it can fetch value in the form of revenue for the firm. Electronic wholesaling sites and online trading posts offer convenient, local, quick ways of
Incentivizing (selling) IT upgrades can take two basic
raising cash from selling replaced equipment and
forms. First, executives can be made to understand
IT infrastructure. Rather than have non-operating
what will happen if they don’t upgrade. Loss of
assets such as computers, printers, routers, faxes,
competitiveness,
and
PCs, and other furnishings and fixtures collecting
down-time of current systems, and increased cost
dust in a storeroom, these items should be assessed
of rent and maintenance are some factors. Second,
for their sales value. These cash inflows should be
executives can be encouraged to purchase new
built into the overall cost structure of the upgrade
technology because of the ROI of the upgrades.
package beforehand. In addition to being a selling
Better-run construction firms have no worries
tool to obtain buy-in from chief executives and
about the cost or sustainability of current systems,
board members, this series of questions can serve
so they have to be sold on the ROI.
as a follow-up list to make sure all operational and
increased
obsolescence
financial objectives of the upgrade are met. IT upgrades can be perceived as a disruption to normal operations of the business. This occurs
Question 9: What are the benefits of the new
especially
current
technology? Some examples include reducing
staff will be required to utilize the new systems.
storage space, providing more reliable/easier
Some substantial resistance can arise before the
access
upgrades are decided upon. To defray some of
broadening access to data, facilitating higher
the anticipated resistance, it is helpful to identify
order
each participating person’s direct relation to the
attractive workspace, attracting young talent,
new IT system in terms of utilization, training
tying in with customer IT systems, improving the
requirements, and proficiency. Identifying those
quality of submittals, improving the timeliness of
who will not be directly using the system can be
delivery, and reducing waste. Quantify!
if
substantial
numbers
of
helpful to reduce resistance. A depersonalized approach is best (i.e., separating the position from the individual). Each position’s utilization of the new system should be described, and each staff
to
data,
intelligence,
quickening creating
response a
cleaner,
times, more
The resistance from construction firm owners to investing cash in IT systems stems from their not weighing the benefits heavily enough against the continued on page 30
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30
STA Subcontractors News
continued from page 29 costs (in time, energy, and lost wages of those
showing them the true cost of the upgrade, the
designing and implementing the upgrade) and
timing of cash outlays, and an anticipated break-
the risk or uncertainty associated with them. As
even point. Second, it provides the spearheading
owners of buildings and properties fear change
party a tool for managing the implementation.
orders that can significantly increase the cost of
Any variance in cost can be identified quickly, and
construction projects due to unforeseen details
responsible parties can be called to order on the
overlooked in the design stage, so do construction
cost changes to attribute those variances to the
firm owners fear the possibility of cost increases
proper parties for payment.
due to cost estimates of IT upgrades, especially when the spearheading person fails to take
A
break-even
analysis
responsibility for capping the cost at the agreed
implementation
upon price.
discounted cash outflows and cash inflows that
timeline
monetizes with
simple,
the non-
result from cost savings. This identifies the length A benefits-led approach should counteract this.
of time that is required for the new IT system
All the benefits of the new technology should be
to operate before the aggregate cost savings
listed and their value quantified in financial terms
outweigh the entire financial investment in the
such as rental costs, service plan fees, payroll cost
upgrade. Monitoring the actual implementation
savings, and procurement opportunities in new
costs and savings afterward will help justify the
jobs; this should include savings through reduced
upgrade when evaluated by the chief executive
re-work and double-duty on contract submittals
officer and the board. This will also help create a
and quicker agency acceptance of electronic versus
track record for selling similar future upgrades at
paper forms.
the same construction firm or others.
Question 10: Can you create a timeline for the
AL MOLDOF runs a construction consulting
benefits and put the upgrade in financial terms
business at www.ConstructionConsultingController.
by using a break-even analysis?
com and an online construction accounting training
Pictorially representing the IT upgrade along with milestones and achievement points that are monetized (identified for cost to the construction firm) can serve two purposes. First, it can create a selling tool to obtain buy-in from firm owners by
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program at www.ConstructionAccountingTraining. com. The consulting business focus is threefold: f in an c ial an al y s is c o n s ul t in g , m an ag e m e nt consulting, and technical performance. The online training is intended to certify accounting students in construction accounting.
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December 2015
STA Subcontractors News
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Subcontractors Trade Association 1430 Broadway Suite 1106 New York, NY 10018 T: 212.398.6220 F: 212.398.6224 e-mail: info@stanyc.com website: www.stanyc.com Officers Robert J. Ansbro President The New York Roofing Company Robert Weiss 1st Vice President A.J. McNulty & Co. Inc. Peter Cafiero 2nd Vice President Island Painting John A. Finamore Treasurer Jordan Panel Systems
Joseph Leo Secretary Atlantic Contracting & Specialties, LLC Hank Kita Executive Director Subcontractors Trade Association
Gary Segal (Honorary) Five Star Electric Corp. Lawrence Weiss A.J. McNulty & Co., Inc. Scott Rives Woodworks Construction Co, Inc.
Henry Goldberg Legal Counsel Goldberg & Connolly
Board of Directors
Active Past Presidents
Christine Boccia JD Traditional Industries
Greg S. Fricke, Jr. Leonard Powers, Inc. Jerry Liss A. Liss & Co. Inc. Alan Nathanson (Honorary) Forsythe Plumbing & Heating Corp.
Joseph Azara Jr. C.D.E. Air Conditioning
Dan J. DeVita Penava Mechanical Corp.
Sandra Milad Gibson Milad Contracting Corporation Craig Gilston Gilston Electrical Contracting Maureen O’Connor Center Sheet Metal, Inc. Randy Rifelli United Iron, Inc. Guy VandeVaarst Firecom Inc. John Villafane Eldor Electric
John Dierks Dierks Heating Company, Inc Brent Fleisher Environet Systems
O U R M I S S I O N S TAT E M E N T
Lawrence Roman WDF, Inc.
Patrick Gallagher Cannon Mechanical
trengthen New York’s construction industry
Arthur Rubinstein Skyline Steel Corp.
Stephen Gianotti Arcadia Electrical Co., Inc.
dvocate to preserve subcontractors’ rights
Robert Samela A.C. Associates
Anthony Marino BP Mechanical Corporation
each member firms to increase business opportunities
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For more than 30 years, Grassi & Co.’s Construction Practice has been assisting contractors, engineers, suppliers and distributors minimize their tax liability, uncover potential savings, and build a successful future. Manhattan 212-661-6166
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