CONSTRUCTION AND REAL ESTATE projects are often complex, and the story behind the numbers is obscured by a lack of clarity and relevant data. Real-time financials combined with software that can help determine whether a deal is profitable are very important tools. But accounting firms are also vital resources in this process. The following case studies show the value that a CPA can bring to the table during these deals and transactions.
Many business owners are often so busy managing the day-today issues affecting their company that they overlook the importance of longterm planning. Would the company be able to continue if they were to retire? Are there people in the pipeline who are capable of stepping in to keep things moving forward? We routinely stress the importance of having a wellcrafted, written succession plan in place. Such a plan can provide a roadmap to guide a company through such a transition. This includes identifying the key leadership positions that may require a successor, as well as an estimated timeline for the transition. Once successor candidates are identified, the strengths and weaknesses of each candidate should be benchmarked against the skills and talents required for the position. Candidates should be groomed and provided with opportunities to gain the skills they need. The ultimate effectiveness of any succession plan depends on how smoothly the successor can transition into the new role without skipping a beat. A comprehensive succession plan can give current owners peace of mind knowing that the future of the company they have spent their lives building is secure, while also protecting their personal wealth.
A multi-generational New Jersey general contractor looked to us for advice related to timely financial reporting. They were in the beginning stages of succession planning, and as part of their overall strategy, they wanted to implement a performance-based bonus program for project management personnel. Previously, their long-standing financial reporting practices were aimed at compliance, and they were able to produce financial information that complied with bank and bonding deadlines, as well as tax reporting requirements. The challenge they faced was to produce “realtime” financial information that could be used in conjunction with the new bonus program. Our advisory practice assisted them with the implementation of business intelligence software and designed custom reports that were tailored to provide our client with the analytic tools they desired. Using these customized reports, which gather and integrate information from accounting, project management, and other software packages, the client is now able to pull up real-time analytics that allow them to make informed decisions regarding the bonus program as well as project progress, profitability and cash position.
Deloitte serves a large variety of real estate and construction clients, both large and small. No matter the size of the organization, real estate and construction executives are typically entrepreneurial, and often execute transactions to address organization investment objectives, resulting in potential tax and financial accounting implications. One of the unintended consequences of complex real estate transactions can be that an entity might own less than a majority of an asset through a joint venture, but might be required to reflect an entire investment property and related debt on its financial statements due to the features of the venture agreement. For example, we frequently encounter situations where minority partners in joint ventures include what they consider to be protective rights in their agreements, such as the ability to remove a majority or general partner under certain conditions, or requirements that limited partners approve capital transactions. Under accounting rules, these features require companies to evaluate who really controls and must therefore consolidate the venture assets and liabilities. Although no two agreements are the same, we have assisted our clients in negotiating their venture agreements to address tax and financial accounting implications, while still meeting their investment objectives.
One of our construction clients quickly realized they would need additional financing to finish a job. Unfortunately, the finance company wasn’t convinced they could complete the job. Not only did they refuse the construction company’s request for additional financing, they threatened to call their loan. The bonding company stood to lose millions on an uncompleted contract, yet sided with the financing company not to assist in additional financing. Why put good money into a project they sensed was going bad? That’s when Goldstein Lieberman intervened. We convinced both the bank and the bonding company that our client was the best alternative to get the bank repaid and the bonding company off the hook in completing the job. We presented a realistic look at the options—if a new construction company was brought on board, there would be significant delays and additional costs that would translate into financial losses. Goldstein Lieberman negotiated on behalf of our client and persuaded the finance and bonding companies that it was in their best interest to lend our client the additional funds to complete the job. Today, our client has risen to the top of the construction industry and has repaid our help with their loyalty. As for the bank and the bonding company? We have enjoyed a long and prosperous referral relationship with both of them.
During the previous tax filing season, we discovered one of our real estate clients with a large commercial building replaced two of their 15 roof-mounted HVAC units. Under previouscase law, most practitioners would have capitalized the cost of the two new units and depreciated them over a 39-year period. However, the firm researched in-depth the IRS’s newly issued Tangible Property Regulations (TPRs) on behalf of our client. Under the TPRs, all 15 HVAC units are considered a single unit of property. The newly issued TPRs did not require the cost of the new HVAC units to be capitalized under our facts and circumstances. Replacing only two of the 15 HVAC units was not sufficient to cause the taxpayer to capitalize the costs, and the taxpayer was entitled to a current deduction.
One of the firm’s clients, an electrical contracting company, was going through a robust growth spurt, winning contracts and working at full speed on a steady pipeline of new projects. That was the good news. The problem was that as the projects were completed, they were not meeting the original estimates and the jobs were not as profitable as the company’s owners had expected. Based on our industry knowledge, they called us and expressed their concerns, asking for advice and guidance. After reviewing their accounting and job costing system, which was not contractor-specific, we realized it was not an adequate tool to provide them with the information they needed to estimate the job costs accurately. Instead, we conducted a search for contractor-specific systems that would enable them to track and analyze costs incurred during the project to avoid any unpleasant “surprises” at the job’s completion. We drew on our experiences with other clients and shared their best practices with our electrical contractor to help the company make an educated choice that would be more appropriate as they continued to grow and expand.
The worst feeling for a construction contractor is losing an existing, long-term contract or a bid that you thought you should have won, but your contract price was too high. How do you have enough cash flow to pay your employees and still make a reasonable margin for yourself? The answer: a job cost overhead analysis. A maintenance contractor who was break-even for several years engaged our services to help better understand how to retain existing clients and win new contracts. Costs were broken into three different categories: direct labor, semi-variable costs and indirect overhead. The direct labor costs factored in maintenance workers’ salaries, benefits and vehicle costs, while semivariable costs accounted for the regional managers’ expenses. The final and perhaps the most overlooked cost, indirect overhead, factors in the “other” costs of operating the business. Based on the analysis, we were able to establish a true hourly billing rate for each maintenance worker. The owner was able to understand which jobs were profitable or losing money and better align direct labor and margins. The company won new contract work and increased pricing where needed.