Feeley & Driscoll, P.C. Certified Public Accountants / Business Consultants

Transcription

1 CONTRACTOR March > April ways contractors can reduce their insurance premiums Detect the defects Six Sigma can help take customer service to the next level Plus! Construction Success Story Improving job-site logistics puts project on fast track Is an ESOP a good fit for your construction company? Feeley & Driscoll, P.C. Certified Public Accountants / Business Consultants 200 Portland Street Boston, Massachusetts Broad Street Nashua, New Hampshire

2 Is an ESOP a good fit for your construction company? With many contractors reaching retirement age over the next 10 years, succession planning is understandably top of mind for many of them. One approach to succession planning that has received quite a bit of attention for some time is the employee stock ownership plan (ESOP). But do these arrangements fit the distinctive aspects and challenges of a construction business? It s a question worth asking. Considering the concept An ESOP is a type of employee benefit plan, similar in many ways to a profit-sharing plan. To set up an ESOP, a company establishes a trust fund and contributes either new shares of its own stock or money to buy existing shares. The shares in the trust are then allocated to individual employee accounts, based on compensation, and the employees become vested in the accounts over a specified period of service years. An ESOP can serve to motivate staff to work harder toward the company s success, because they re part owners. One reason for companies to establish an ESOP is to buy the shares of an owner who wants to retire. In many closely held or family-owned businesses, including construction companies, there isn t a family or staff member who s capable of or interested in taking over when the founder is ready to leave. In such cases, the company can make tax-deductible contributions to an ESOP to buy the owner s shares or have the ESOP borrow money to buy shares. Either way, the company enjoys tax advantages while helping to deal with the succession issue. A retiring owner also can cash out over time, keeping a seat on the ESOP trustee board and, thus, retaining voting rights in management decisions during the transition. In this manner, businesses with an ESOP are often better able to keep valuable and experienced staff on board through management changes. In addition, an ESOP can serve to motivate staff to work harder toward the company s success because they re part owners. Reaping tax advantages The tax advantages of ESOPs are considerable. All contributions to the plan are tax-deductible, including shares of stock, cash contributions (whether they re used to buy stock or to build up 2

3 a cash reserve) and any payments made to repay loans taken out by the ESOP. In addition, in C corporations, sellers are eligible for a tax deferral. Once the ESOP owns at least 30% of the company s shares, the seller can reinvest sales proceeds in other securities and defer taxes on the gains as long as the rollover is executed within a specified time. ESOPs and surety bonds Contractors particularly those that bid on public projects rely on their ability to secure surety bonds, which guarantee to a project owner that the company will perform its work in compliance with the contract terms. As you know, surety brokers evaluate your company carefully before issuing bonds to ensure you re well managed, generally able to meet your obligations and, preferably, profitable. In S corporations, the percentage of ownership held by an ESOP is taxexempt at the federal and usually at the state level as well. When an ESOP holds 30% of an S corporation s stock, 30% of profits are tax-exempt. When the ESOP holds all of the S corporation s stock, there s no income tax owed on any of the company s profits. Last, ESOPs are allowed to borrow. When the plan does so to buy new or existing shares, the company can then make tax-deductible contributions to the ESOP in repayment. In such a case, both principal and interest are deductible. Assessing the downsides ESOPs incur considerable startup and maintenance costs that can run into tens of thousands of dollars, even for small businesses. Midsize to larger companies may face even higher expenses based on the complexity of the arrangement. A greater potential risk is the pool of money needed to buy back shares of departing employees at an independently established fair market value. So the company or ESOP must maintain enough liquid assets to repurchase the shares of employees who leave. If the stock price appreciates substantially, On the plus side, a well-designed employee stock ownership plan (ESOP) can show that a contractor has a continuity plan in place and cares about retaining key employees. By reducing the company s corporate income tax burden, an ESOP may also boost cash flow and net worth, which can help with bonding capacity, too. On the down side, should you need to borrow money to meet the ESOP s financial obligations, that loan will be recorded as a liability on your balance sheet. In turn, your net worth will be negatively affected and your bonding capacity quite possibly will be impacted. doing so can be a tall order for contractors, who commonly face cash-flow dilemmas associated with the unpredictable nature of construction projects and backlog. An ESOP can also substantially affect your bonding capacity. (See ESOPs and surety bonds above.) So be sure to consider these risks with your surety representative before creating an ESOP. Discussing the implications Make no mistake establishing an ESOP is a major undertaking for any construction company. So be sure to discuss the implications beforehand with your financial advisor, legal counsel and, as mentioned, bonding provider. n 3

4 5 ways contractors can reduce their insurance premiums Construction is a risky business with typically slim profit margins. Most contracts, as well as simple common sense, dictate that contractors carry various forms of business insurance. Still, there s no reason to pay unnecessarily high premiums just to obtain adequate coverage. Here are five ways to reduce your costs without sacrificing the quality of your policies: 1. Shop around. Spend some time and effort to compare coverage and the costs you can expect from your insurers. To facilitate the process, ask your financial advisor for a referral to a construction insurance specialist preferably one who represents a number of insurers. Together, they can help you weigh the total, true costs of the various policies and advise you without a vested interest in selling you a particular product. 2. Review coverage periodically. Make sure existing policies reflect your current circumstances. If you ve sold or retired some equipment, for example, remove it from your schedule of current assets. If you ve reduced the number of workers on your payroll, adjust workers compensation estimates accordingly. On the other hand, if you ve added vehicles or staff, see that they re appropriately covered. Be prepared to question any rate adjustments when your workers comp insurer audits your experience each year. 3. Understand and manage workers compensation rates. Of all the forms of insurance you must buy, workers compensation insurance can be the most substantial. When an agent gives you a quote, the estimated premium is determined by your projected payments to employees and uninsured subcontractors (if you re a general contractor) over the next 12 months. When making projections, be sure to distinguish among the types of work you expect to pay for. Different premium rates apply to different types of work. Another important element is your experience modification factor. This adjustment, based on claims history, is applied after one or two years of paying premiums, resulting in either a discount or a penalty surcharge. If the amounts paid out are less than average for the type of work in your state, you get a discount; if they re greater than average, you re penalized. Be prepared to question any rate adjustments when your workers comp insurer audits your experience each year especially if the actual payroll costs and types of work performed differ considerably from your projections Increase deductibles. If you re comfortable assuming some additional risk yourself, and have resources you can draw on if they re needed, see what you can save on premiums by raising the deductibles on your policies. If the savings

5 keep a contingency fund in reserve rather than pay out higher premiums, this might be a good option for you. are enough to cover the deductibles on a claim or two, it s probably worth making the change. Likewise, if you can afford and would prefer to 5. Prioritize safety. Safety on the job site is a worthy goal in itself, of course. But emphasizing its importance to supervisors, crew members and subcontractors can also affect your company s insurance costs, because the premiums you pay are based in part on your claims history. By offering regular safety training, providing personal protective equipment and strictly enforcing safe work practices, you can reduce the risk of on-site accidents and minimize damage and injury claims. n Detect the defects Six Sigma can help take customer service to the next level The construction industry faces a distinct challenge when it comes to customer service. Few other businesses have the customer standing right in front of them while the product in question is being assembled. Yet that s the case in construction, where many owners pay regular site visits to monitor and sometimes micromanage the building process. For this reason, it can benefit contractors to pay close attention to customer service and, if necessary, think creatively for ways to avoid costly conflicts. One approach to consider is Six Sigma a disciplined, data-driven methodology for improving any business process, but particularly useful in improving customer service. What s the purpose? Six Sigma is all about identifying and eliminating defects. The word defect doesn t refer only to mistakes but also to any result that fails to meet customer specifications or could lead to a process likely to dissatisfy customers. Companies that implement Six Sigma should expect to undertake continuous efforts to achieve stable and predictable process results. For contractors, these efforts could apply to every stage of a construction project from sales to bidding to on-site operations and in-house financial management. Like so many of today s business-improvement models, the practice is also heavily focused on statistics. A tenet of Six Sigma is that every company s processes have characteristics that can be measured, analyzed, improved and controlled. Accomplishing this objective, however, calls for a total organizational commitment particularly from you, the owner and other toplevel managers. 5

6 3. Analyze the data, looking for cause-andeffect relationships. Here, you ll put on your investigator s hat and look for the root of the defect you re seeking to eliminate. 4. Improve the current process. Six Sigma will recommend data analysis techniques for using the information gathered and reconfiguring the process in question. You can then set up tests to establish whether the improvement is real. 5. Control the process going forward. You ll be guided through steps to set up systems for monitoring the improved process once you ve implemented it. Will we find answers? A carefully executed Six Sigma program should provide specific answers about what you can do to better serve customers. Eliminating defects means you ll spend less time putting out fires and more time completing quality work. In turn, you ll be able to stay within your cost estimates and thereby improve your odds of getting more referrals and repeat business. 6 How does it work? Businesses that undertake a Six Sigma program generally must choose from two primary methodologies. For improving an existing business process, you ll navigate DMAIC, an acronym for define, measure, analyze, implement and control. For creating a new product or process, you ll deal with DMADV, an acronym for define, measure, analyze, design and verify. Because most contractors are likely looking to improve an established approach to customer service, let s focus on DMAIC. It will ask you to follow five stages: 1. Define the problem you re trying to solve. Don t just look at it from your own perspective. You ll need to speak in the voice of your customers and point to specific goals. 2. Measure key aspects of the process. Target metrics that will enable you to measure progress toward the stated goal, by collecting relevant data. Plus, Six Sigma s control phase often allows contractors to tighten their financial management procedures. These could enable you to free up cash flow and better leverage the growth value of your existing customer relationships. Eliminating defects means you ll spend less time putting out fires and more time completing quality work. Next steps Are your construction company s sales lagging? Are you losing time and money to conflicts and miscommunications with customers? If so, Six Sigma may be a way to overhaul your customer service process, untangle the snags slowing you down, and work more efficiently and profitably. Of course, there are no guarantees. So, before jumping in, spend some time researching the deeper details of Six Sigma to make sure it s for you. If it is, then set a budget for how much money you ll invest in the effort. n

7 Construction Success Story Improving job-site logistics puts project on fast track A concrete subcontractor noticed that he was repeatedly falling behind schedule on his projects. Sometimes this resulted in his being penalized financially for the delays. Other times it meant forfeiting incentives he could have earned for completing work early. While he reviewed project records with his financial advisor, it became clear that deliveries of materials were usually on time, and late-breaking change orders rarely were responsible for delaying construction. Whatever the cause might have been, he knew that increasing overtime for his crews might get the work done faster. But doing so would also eat up any potential profit from his projects. As one possible solution to the problem, the financial advisor suggested that the contractor re-examine his job-site logistical practices to see whether he could find more streamlined ways of working. She also urged him to research the principles of efficient job-site management. Learn the basics As he delved into the basics, the contractor learned a set of principles to follow that would promote efficiency and make his crews more productive. Essentially, a good job-site layout should: y Reduce equipment movements around the site, efficiency. So he needed to control waste, breakage and theft of materials and equipment. The contractor also had to place controls over worker tardiness and productivity, while maintaining a safe working environment. Network with others Because overall responsibility for job-site layout belongs to the general contractor, the financial advisor urged the subcontractor to proactively provide input toward helping jobs run smoothly and efficiently. As one of the first trades on a site, a concrete contractor often can influence the placement of access roads, office trailers, restrooms, and storage and other facilities. To help matters further, the financial advisor referred the subcontractor to a general contractor client who was willing to share tips on jobsite efficiency. One suggestion was to set up project peer reviews, in which a network of local industry professionals reviews a site for safety, quality and logistics. Add and refine By adding some researched best practices to his job sites and refining some of his existing policies, the subcontractor saw big improvements over the ensuing six months. He was able to complete tougher projects on time and easier ones early, all the while lowering his expenses and increasing his profitability. n y Minimize storage of materials, y Decrease distances from storage areas to point of use, y Reduce bottlenecks to provide a uniform flow of materials, and y Eliminate duplicate handling of materials. Of course, human assets on the contractors job sites also have a huge impact on project This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and accordingly assume no liability whatsoever in connection with its use CONma15 7

8 Thomas M. Feeley