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

• SUBCONTRACTOR BONDS are performance and payment bonds issued by thesubcontractor to the general contractor to guarantee the subcontractor'sperformance and payment of obligations required under the contract.State and federal contracts usually require surety bonds. In other cases, collateralbonds in which the contractor pledges real or personal property as collateral with valueequivalent to the contract price may be used. When a performance bond is defaulted, itis not unusual for the insurer or bonding company to hire the defaulted contractor tocomplete the job, because they are familiar with the project. Most bond defaults resultfrom financial difficulties with the project at hand, rather than from the lack of technicalability on the part of the contractor. Thus, the bonding company can act as anotherthird-party control on the business and accounting practices of the contractor.BUILDING PERMITSBefore construction can begin on a project the necessary building permits must bereceived from the appropriate municipality. The specifications and blueprints of theproject are turned into the Building Department, along with an application for a permit.The issuance of a permit may take time, because the approval process is likely quiteinvolved, especially in the case of new construction. The general contractor or ownermay have to submit results of soil testing, environmental impact studies, or otherinformation. Sometimes a public hearing is mandated, if opposition to the project isknown. However, in most cases, the permit is issued within a few months. The cost ofthe permit may be the responsibility of the general contractor. The owner may pay forit, however, along with the costs of any related studies. Construction projects follow thestandards of the Uniform Building Code. A Building inspector examines the project atvarious stages to verify that the project is being constructed according to this Code.NOTICE OF COMPLETIONOnce the building is completed, a Notice of Completion is requested. The project mustpass a final inspection. Once the project passes that inspection, a Notice of Completionis issued by the municipality, along with a Certification of Occupancy. Thesedocuments are recorded at the office of the local recorder. At this point the property isappraised for property tax purposes. Note: Several appraisals are made throughout theconstruction process that address timing or allocation issues.Table of Contents / Chapter 2Internal Revenue Code Search / Revenue Ruling Search / Treasury Regulations Search1-10