Construction Accounting Newsletter February 2011 - Feeley ...

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Construction Accounting Newsletter February 2011 - Feeley ...

CONTRACTORJanuary > February 2011Are you mishandling yourindependent contractors?The IRS is watchingmore closely than everGet your employees involvedin accident preventionPlus!Construction Success StoryCompetitive contractorlooks to labor burden costsPrevailing atprocurementTips for succeeding infederal government contractingFeeley & Driscoll, P.C.Certified Public Accountants / Business Consultants200 Portland Street Boston, Massachusetts 02114154 Broad Street Nashua, New Hampshire 030611-800-392-6192www.fdcpa.com


Prevailing at procurementTips for succeeding in federal government contractingIt’s no secret that federal procurement isincreasing. The passage of the AmericanRecovery and Reinvestment Act of 2009allocated $787 billion for infrastructure (andother) projects, according to the government’sRecovery.gov website.Winning bidders of federal jobs typically enjoysubstantive contracts, steady work and assuredcompensation, making the arduous procurementprocess worthwhile. So how do you get in onthe action? Read on.Get a feel for itFirst, review what contracts have been awardedin your region and the specifics of the winningbids. Sites such as FedSpending.organd USAspending.gov will help you determinewhether federal construction opportunitieswould be attractive — especially consideringthe time and effort it takes to prepare a bid.Different federal agencies buy different services,so the next step is determining whichagency is most likely to need your constructioncompany’s work. An SBA Procurement Centerrepresentative can be a big help in this regard.Resources are available at your local SBA officeor by visiting SBA.gov.Although websites provide valuable informationabout how to work within the system, face-tofacenetworking is also a good idea. And this isparticularly true for contractors who are new tofederal work. Attending networking and federalcontracting events can generate valuable insightson winning a bid and carrying out a job smoothly.(For some ideas of where to find networkingopportunities, as well as other pertinent information,see “3 networking resources for federalcontracting” on page 3.)Register early, update oftenTo formally submit a bid for a federal contract,you’ll first need to register with the CentralContractor Registration (CCR). This is the federalgovernment’s primary registrant database,which you must be in to do business with —and get paid by — the federal government.The registration process requires a nine-digitDun & Bradstreet (D-U-N-S) number, whichyou can obtain at http://fedgov.dnb.com/webform/index.jsp. You’ll also need a five-digitCommercial and Government Entity (CAGE)Code, which is available at https://www.bpn.gov/ccr/default.aspx.Federal procurement laws mandate that contractorsrenew and update their CCR profilesat least once annually. You also must completean Online Representations and CertificationsApplication (ORCA) at https://orca.bpn.gov.2The ORCA system centralizes the storage andcollection of contractors’ representations andcertifications in an online system, eliminatingthe need for the paper copies that were oncesubmitted with each bid. You’re also requiredto update your ORCA every year.


3 networking resources for federal contractingDo you want to log some valuable networking time with other contractors who have experiencedthe joys and travails of government contracting? A variety of organizations can hook you up withcontacts and other information to make it more likely that you’ll succeed in the public sector.Three examples are:1. Business Matchmaking Online Network (BMM; businessmatchmaking.com). From procurementworkshops to online training, BMM has generated more than 75,000 seller-buyer meetings, whichhave resulted in billions of dollars’ worth of contracts. And many of these jobs have fallen within thegovernment realm.2. The Association of Procurement Technical Assistance Centers (aptac-us.org). This nonprofitcan provide technical assistance in submitting your Invitation for Bid. (See main article.) It can alsoput you in touch with other construction business owners who are working through the process.You might develop relationships that can help you win future bids.3. Give Me 5 (giveme5.com). Sponsored by Women Impacting Public Policy and American ExpressOPEN, this partnership program serves women business owners. Its intent is to teach participantshow to apply for and secure federal procurement opportunities.Once you’ve completed the required registrations,you can start looking for projects tobid on. Discover what Invitations for Bids(IFBs) are available through sources suchas https://www.fbo.gov. The U.S. GeneralServices Administration (gsa.gov) publishesnotifications of the largest federal contractsas well. Keep in mind that, when a federalagency issues an IFB, it’s seeking a clearlydefined service at the best possible price.Be responsibleFederal contracts can be awarded only to“responsible” bidders. To be consideredresponsible, you must meet various criteria,such as having:n Adequate financial resources to perform thecontract,n A satisfactory performance record (though alack of relevant experience won’t automaticallydisqualify you),n An acceptable record of business ethics,n Appropriate operational controls in place, andn The necessary equipment to complete thejob (or the capacity to access it).Be sure you have proper bonding lines in placeas well. Some agencies even require auditedfinancial statements, which typically allow morecontract work to be awarded than if you provideonly reviewed financial statements.When a contract is awarded, the lowest biddertypically wins. But be careful: If your companycomes in as the low bidder and is then found“nonresponsible,” it could harm your reputation —both in the public and private sectors.Be sure you have properbonding lines in place.Construction businesses with special certificationsmay have a better chance, because acertain percentage of federal contracts mustgo to such companies. Examples include businessesowned by women or veterans, located inHistorically Underutilized Business (HUB) zonesor certified in the SBA’s 8(a) program. Of course,simply qualifying under one of these categoriesdoesn’t automatically mean you’ll win a bid.Take a lookMake no mistake, bidding and executing a federalcontract will call for some hard work. But with theconstruction environment remaining ultracompetitivein many regions, few contractors can affordnot to take a look at the opportunities Uncle Samis offering up. n3


Are you mishandling yourindependent contractors?The IRS is watching more closely than everFor many years now, the IRS has beenmonitoring, in some cases challenging,employers’ handling of independentcontractors. At issue: the agency’s contentionthat some companies are misclassifyingemployees as independent contractors.The IRS has gone as far as to undertake aformal national research project to studyindependent contractor use as well as fringebenefits and various payroll issues. And constructioncompanies — with their varioussubcontractor and project-specific, specialistrelationships — are particularly in danger ofrunning into classification troubles.Paying the taxesOne of the major differences between a conventionalemployee and an independent contractorcomes down to taxes.Payments you remit to independent contractorsaren’t subject to withholding of payroll or incometaxes, and you don’t have to pay the employershare of FICA or Medicare taxes either. You alsoaren’t subject to unemployment or workers’ compensationinsurance requirements.What is prompting all of the IRS attention tobusinesses’ use of independent contractors?Worker misclassification diminishes federalincome revenue by billions of dollars annually,according to the IRS. This is likely because,even though workers classified as independentcontractors are subject to self-employmenttaxes, they tend to underreport their incomeand often don’t pay into unemployment andworkers’ compensation programs. Naturally,states also lose tax dollars — and many aretaking action.Making the distinctionWhen scrutinizing a company’s independentcontractor arrangements, the IRS typically looksat three general categories.The first one is behavioral control: When,where and how a job gets done. If you directthe work — meaning you require the individualto perform the work on your job site or at youroffice, at a set time and according to yourprocesses or on your equipment — that personis more likely to be classified as an employeeby the IRS. If you define only the outcome ofthe work and the worker is free to achieve thatoutcome as he or she sees fit, the individualprobably is an independent contractor.4


The second category is financial control. Here theIRS examines how much an individual controlsfinancial aspects of his or her work. For example,if a worker has ongoing expenses that aren’treimbursable (such as investments in facilities,tools or equipment), can market his or her servicesto others, and is in a position to experiencea profit or loss on a particular project, the personlikely is an independent contractor.Worker misclassificationdiminishes federal incomerevenue by billions ofdollars annually, accordingto the IRS.The third and final category covers the relationshipbetween the parties. This category considershow the business relationship is structured.Independent contractor arrangements typicallyinclude a contract for a particular timeframe anda specific outcome for a set fee. Conversely,employees generally handle a broader array ofduties and may be paid benefits in addition towages or salary.Correcting the mistakeIf you fear you’ve misclassified an employeeas an independent contractor, don’t panic.Internal Revenue Code Section 3509 may allowyou to reduce or escape liability by correctingthe mistake and submitting proper documentationto the IRS.You might also look to Sec. 530 of the RevenueAct of 1978 for relief of employment tax liabilityfor worker misclassification. Under it, you mayescape penalties if you can show you had areasonable basis for classifying the worker asyou did, treated the worker and all similar workersas independent contractors and filed Form1099-MISC for the worker.Remaining vigilantYou may have grown comfortable with yourhandling of subcontractors or other short-termspecialists who work on your job sites or in youroffice. But you’ve got to remain vigilant: A longtermproject or a key technicality in the arrangementcould draw IRS attention.If you’re concerned some of your independentcontractors could be reclassified as employees —or you’re not sure whether a new worker qualifiesas an independent contractor or should be treatedas an employee — your tax advisor can help youassess the situation. nGet your employees involvedin accident preventionAccidents and injuries lead not onlyto detrimental medical and moraleconsequences, but also to financialand, often, legal ones. Naturally,there are a variety of ways to encourage safety.But few of them are likely to be effective withoutone key ingredient: the participation of youremployees.Train and supervisePreventing accidents begins with knowledge.So, first and foremost, you need to providesafety training to your workers. One way toincentivize participants to view these sessionsas more than just time off from the job site is toaward bonuses to those who reach measurablesafety goals.5


For example, designated teams could receivea free lunch or small amount of cash for goinga specified number of days accident-free. Youmay be able to further engage them by invitingsuggestions about how to make job sites safer.Instruct your foremen orproject managers to performroutine walkthroughs to seewhether workers are followingsafety guidelines.When a project gets underway, hold an initialsafety meeting to address the specific dangersof that location. Thereafter, schedule additional“safety update” meetings or, at minimum, do soif an accident occurs — or almost occurs.Don’t forget subsIf you’re a general contractor, subcontractorsplay key roles in your projects and can do justas much as your own workers in preventingaccidents. Be sure subcontractors are wellaware, on arrival, of your safety policies andprocedures.In addition, insert clauses into your subcontractsrequiring subs to comply with your safety program.Along with safeguarding your constructionbusiness against financial loss, such clausesgive you enforcement leverage — especially ifsubs know they’ll be fined for violations.Maximize your effortsFew, if any, construction companies are able toavoid accidents entirely. But you can maximizeyour efforts to prevent them and, when they dooccur, manage their outcomes for the best possibleresults. A big part of winning this battle ismaking sure your employees are just as passionateand committed to safety as you are. nAs the job goes on, instructyour foremen or project managersto perform routinewalkthroughs to see whetherworkers are following safetyguidelines. (If financially feasible,you may even hire adedicated safety manager toconduct walkthroughs and otherwiseoversee your program.)Is the job site relatively cleanand orderly in terms of constructionwaste and equipment/materials storage? Is everyonewearing protective gear?Require supervisors to shutdown work if workers don’tcomply with the safety program.If an accident does occur,require employees to reportit immediately. A failure orhesitation to report mishapscan be one downside to offeringsafety-related bonuses,so levy stiff consequenceson anyone who doesn’t followthe immediate-notification rule.6


Construction Success StoryCompetitive contractor looks to labor burden costsIn a slowly recovering but still challenginglocal economy, a midsize excavation specialistwanted to bid on every job that came along.But he knew the dangers of overcommittinghis company.When a request for proposal (RFP) for apotentially lucrative job came along, hewanted some input on where he shouldfocus his attention to stay within his meansbut still be competitive. So he turned to hisfinancial advisor for guidance.Beyond compensationThe first thing the advisor suggested was tolook at the labor burden cost per productionhour. Putting a hard number to this conceptcould help the contractor determine his truecosts and prepare a feasible bid.Calculating the labor burden cost per production hour would entail applying the following formula:The total cost of the employee / number of actual production hours =Employee labor burden cost per production hourSo, the advisor continued, say you have an employee who earns $18 per hour for $37,440annually. And say indirect costs include $3,200 in payroll taxes, $3,700 in workers’ compensation,$4,500 in health insurance, $1,100 in retirement benefits, $3,500 for company vehicle use,$1,000 for cell phone costs and $500 in training fees. These indirect expenses total $17,500,making the annual cost of this $18-an-hour employee $54,940.Next, the advisor said, it’s necessary to determine the actual number of production hours. To dothis, you first multiply 52 weeks per year by 40, the number of hours in his workweek, resulting in2,080 annual hours. Then you subtract any unproductive time. After factoring holidays, vacationdays, sick time and training, say the worker’s estimated average labor time is cut by 300 hoursannually, leaving him available for approximately 1,780 hours of production work.The advisor went on to explain how dividing the total cost of the employee ($54,940) by actual productionhours (1,780) shows that the employee actually costs the contractor $30.87 per productionhour — nearly 72% more than his $18 per hour gross hourly labor rate.Closer attentionAfter calculating the labor burden cost per production hour for all of his employees, the contractorfound that his workers were typically costing him 50% to 150% above their gross hourlylabor rates. Clearly, he agreed, this issue warranted closer attention. His advisor suggested thecontractor review his labor burden cost per production hour every six months or whenever otherpertinent changes occur (such as insurance cost fluctuations).This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professionaladvice or opinions on specific facts or matters, and accordingly assume no liability whatsoever in connection with its use. ©2010 CONjf117

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