Construction Industry - Audit Technique Guide - Uncle Fed's Tax ...

3. Owning the property or an interest in a joint venture as an individualResidential Construction DeveloperThe examination of residential developers is different than the examination of acontractor who builds in accordance with a contract between himself or herself and anowner. The developer is generally the owner of the residential development as well asthe builder. The developer acquires land, obtains approval, secures constructionfinancing, and begins construction of the residential development in stages or phases ofconstruction. The initial phase is sold, and the construction process begins on the nextphase. This process requires that the builder allocate a per-unit cost to each unit sold.The cost of each unit (on-site costs, such as direct materials and labor, and an allocatedportion of off-site costs such as streets and amenities) must be matched with the salesprice of each unit sold. The sales price is often based on what the market will bearunder the current economic environment. During periods of low interest ratesresidential construction usually booms, while high interest rates cause the market torecede.SubcontractorsThe largest number of taxpayers in the Construction Industry are specialtysubcontractors. They can range from one-man operations to nationwide, publicly tradedcorporations, or divisions of larger corporations. Over 70 percent of the constructionreturns filed are Schedule C returns by individuals. Subcontractors are distinguishedfrom the general contractor by the limited scope of their work, which usually involves aspecial skill, knowledge, or ability. Subcontractors include specialists, such as plumbers,electricians, framers, and concrete workers. They generally enter into contracts with thegeneral contractors, and may provide the raw materials used in their specialty areas.The general contractor, not the owner of the property, will usually pay thesubcontractors. Materials purchased by the subcontractors are generally delivereddirectly to the job site. The subcontractors' work may be completed in stages, or it maybe continuous.Highway ContractorsHighway and street contractors require specialized equipment and techniques. Theequipment includes bulldozers, graders, dump trucks, and rollers. Examples of highwayconstruction include city streets, freeways, country roads, highway bridges, and tunnels.Heavy Construction ContractorsHeavy construction contractors require large and complex mechanized equipment, suchas cranes, bulldozers, pile drivers, dredges, and pipe-laying devices. Some examples ofprojects in this category include dams, large bridges, refineries, petrochemical plants,nuclear and fossil fuel power plants, pipelines, and offshore platforms. Most industrial1-4