What faces our industry is a period of great opportunity balanced with some real concerns. In the recent Associated General Contractors of America labor results, each state varies with construction labor growth, but, overall, most are troubled by the decline in available, qualified labor in the construction industry. Most construction organizations can attest to that. The work programs have just not come out consistently. That being said, the infrastructure needs are great; and there are active discussions of an increase in the federal gas tax. How are owners, CFOs, or key management members ready for what is ahead in this quickly changing accounting, tax, and technology environment?
The Tax Cuts and Jobs Act are in effect, and we will see the impact on our forthcoming tax returns. I hope by this time each of you has met with your financial advisor to discuss how you, your business, and employees are likely to be impacted by these wide-ranging changes. The actual limits on state and local tax deductions will be a tough pill for our clients to accept. On the positive side, the 100% expensing for new and used equipment and the 20% QBI deduction should be substantial benefits for our business owners. These issues are complex, and you need to walk through them closely to be certain you maximize the advantage.
For some time now, we have considered the new accounting pronouncements on revenue, recognition, and lease accounting. Revenue recognition is now in effect. Public contractor clients had to implement in the first quarter of 2018, and our private contractors must implement this new standard for their 12/31/19 financial statements. You need to be working with your clients now to understand how the new revenue recognition standards will impact your company. And, for the surety companies, you need to be able to understand how it impacts their changing financial statements.
The public contractors have given us some insight. While a few had substantial changes, both positive and negative to reported earnings, several others claimed no significant impact. In a few of those cases, the SEC has issued comment letters questioning those determinations. You should monitor these issues and assess their individual impact. The standards are too complex to detail here, but the most significant issues to be aware of are the potential changes to prepaid items, such as surety bonds, materials stored in place, and mobilization, that may now need to be treated differently. These may need to be capitalized and amortized over the life of the contract. The other area that will affect all contractors is the treatment of contract modifications.
The dreaded change orders, liquidated damages, and completion bonuses must all be addressed on a real-time basis, and management policies and procedures will need to be established and documented. The game has changed, and you need to know how your company will be impacted. In the 35 years I have represented contractors, we have been guided by the principles of percentage of completion accounting. We now have new guidelines to operate under.
Lease accounting is a year away, but that will potentially have a more significant impact on contractors’ balance sheets. Again, in its simplest terms, Contractors will need to book operating leases as an asset and liability on their balance sheet. It will impact working capital ratios, and thus will impact prequalification and surety ratings. You should now plan for this coming accounting change, which will impact your December 31, 2020 financial statements and to understand the mathematical computations that will be required. You need to understand how these changes could impact your bank covenants and your prequalification ratings so you can start discussions and planning now.
The speed at which technology is changing the construction work place is unprecedented. In the past 20 years, we went from little connectivity through computers to almost full adoption of smart, interconnected devices, much of which is through our smartphones. If you remember phone booths, fax machines, and local hardware stores, then you are closer to my age than you think. In the polls I have seen, the construction industry has been one of the industries with the lowest investment in technology. It is time for our construction industry to take a hard look at our technology and incorporate efficiencies and time-savings that they can bring. A number of questions contractors (and their key consultants and insurers) should be asking:
When did you last upgrade your accounting software? Is your accounting software able to handle the new revenue recognition and lease accounting changes? Are you using remote devices to capture field information and integrating that back with the office accounting software? Are you taking advantage of BIM, project estimating, and management software? When did you last evaluate your IT environment to assess its viability and its security? Have you performed a cybersecurity assessment? Owners are building cyber protection requirements in their contracts, and the cases of computer hacking has become a rampant issue in the construction community.Have you implemented policies and procedures regarding use of phones and technology to meet worker safety concerns as well as protecting the overall system security?
Are we ready as an industry to meet the technology demands of the next generation of employees? Just as we moved away from using manual spreadsheets to excel schedules, this next generation will want to have access to the latest technology to streamline their day-to-day operations. You must be ready to address these technology needs. The labor shortages will continue to get worse, and there are ways to use technology both in the field and the office to streamline many of the labor-intensive processes.
It is our responsibility to get the conversation started. Meet with your team of trusted advisors, take a hard look at your existing technology, and then listen to the needs of your workforce and plot out your long-term strategy and investment.
As you prepare for your financial statement and tax preparations, use this time to address these critical factors. You must assure your company is positioned to handle what the future sends our way. 2019 should be a fascinating year.
This article is authored by Jack Callahan, Construction Industry Leader of the CPA firm CohnReznick. With more than 25 years of experience, Callahan has significant knowledge and experience in accounting, corporate taxation, and business consulting matters within the construction community. Callahan serves clients in most construction sectors, including heavy highway, general contractors, construction management, specialty contractors, building trades, and building supply and equipment companies. He has worked extensively with public agencies and major construction owners to develop successful fiscal and integrity monitoring programs that enable contractors to improve the profitability, safety, and integrity of construction programs. He was a lead partner for CohnReznick on the monitoring and investigative work performed at Ground Zero and at the new World Trade Center Transportation Hub. Callahan also participates on the NASBP CPA Advisory Council. He can be reached at email@example.com or 732.380.8685.