Perspectives on the Construction Industry

Transcription

1 Perspectives on the Construction Industry Summer 2015 Developments in Tax and Business New Expanded Definition of Floodplain President Obama issued an executive order earlier this year that expands the definition of floodplain. All federal agencies must use -- and construction companies must follow -- this definition for all federally funded or approved projects. According to the new Federal Flood Risk Management Standard, federal agencies must update their flood risk reduction strategies and expand the flood elevation and hazard areas used when making decisions concerning new development, redevelopment, and construction. A Snapshot of the U.S. Construction Industry According to the U.S. Census Bureau, the United States has 729,345 construction companies that employ 7,316,240 workers and generate $1.731 trillion in revenue. The top five states with the most construction companies are California, Florida, New York, Texas, and Illinois. Are There Gaps in Your Insurance Coverage? Construction is by its very nature dangerous, unpredictable, and subject to a variety of industryspecific risks. That s why it s so important to have the proper insurance coverage. Insurance protects against the financial consequences of unanticipated events. Knowing what types of insurance are available and which ones your business may need is essential. Some owners and governmental entities will insist that your firm have certain insurance policies in place before they ll consider a bid. The following insurance overview can help you determine whether there are any gaps in your coverage. General Liability Insurance General liability insurance protects your business assets in case your business is sued for something it did (or did not do) that caused a personal injury or property damage. General liability insurance typically covers a variety of claims, including bodily injury, property damage, personal injury, and even damage from slander or false advertising.

2 Professional Liability Insurance Because of the rise in lawsuits, more businesses are buying professional liability insurance in addition to general liability insurance to protect them from claims that may be filed by clients or third parties. Typically, professional liability insurance covers claims of negligence, misrepresentation, violation of good faith and fair dealing, and inaccurate advice. A policy covers the cost of your legal defense against claims as well as the payments of judgments against you, including court costs, up to the limit of the policy. Professional liability insurance coverage typically does not extend to nonfinancial losses or losses caused by intentional or dishonest acts. Surety Bonding A surety bond deals with the performance of some or all stages of a construction project. In situations where your firm can t successfully meet the terms of a contract, the surety assumes your financial responsibilities until the project is completed. You may find it impossible to obtain work on certain projects without first obtaining surety bonding. Key Person Insurance Key person life insurance is designed to protect your business if you, a partner, or other key employee were to die. Consider buying life insurance to fund a buy-sell agreement if you operate your business with multiple partners. In addition, you should also consider buying disability insurance for you and your key people. Property Insurance Basic property insurance is intended to protect the physical assets of your business, such as buildings, trucks, machinery, inventory, and furniture. Umbrella Insurance Umbrella liability or excess liability adds another level of protection to any of several other policies you may have (e.g., general liability, employer s liability, and auto liability policies). Workers Compensation Insurance Workers compensation coverage protects you from worker lawsuits arising from injury related to accidents on the job. In general, it provides benefits, including medical treatment and compensation for your injured employee s lost income.

3 Builder s Risk Insurance Builder s risk insurance protects owners and contractors against damage to structures in the course of construction. It indemnifies for loss or damage to materials used in a project, such as plumbing, lighting fixtures, electrical equipment, or appliances, due to fire, lightning, wind, hail, or vandalism. Pollution Liability Insurance Pollution liability insurance provides protection for contractors for a wide range of pollution risks, such as the accidental release of fuel oil, gases, or chemicals from ruptured pipelines and fuel tanks on a project. Policies may provide insurance for third-party claims for bodily injury and property damage as well as for remediation costs that stem from pollution incidents. Wrap-up Insurance Wrap-up insurance plans consolidate insurance coverage for general contractors and subcontractors working on a single project. It s purchased and managed by a single sponsor, either the owner or the general contractor. A wrap-up policy typically extends to workers compensation, general liability, excess liability, builder s risk, and pollution liability insurance. Manage Change Orders More Effectively Change orders can be disruptive. They can turn a project from one that s on track to earning a profit to one that may end up losing money. They also can cause delays, eat up valuable management time, and create additional work for estimators and other team members. Contractors can t make change orders disappear, but they can limit their prevalence and minimize their financial impact. The key is to develop a process that identifies the causes of the change order, communicates the change to all involved parties, and factors in the cost of the labor, time, and materials of the required change. Identify the Causes Change orders typically fall into three main categories: Owner Changes. These are fairly clear-cut. They occur when the owner requests a change, an enhancement, or an addition that was not included in the original contract or in the project drawings. Design/Specification Changes. Change orders also result from designer clarifications or changed specifications. Architects, engineers, or designers will sometimes recommend a change in the materials used in certain parts of the building or want to add an architectural feature that was not included in the original project blueprints.

4 Unforeseen Conditions. If soil conditions on the site are different than were originally outlined in the specifications and require significant remediation, then a change order would be necessary. As a contractor, you can minimize the possibility of a change order negatively impacting profits by taking a few steps. First, go over the contract. Make sure terms and conditions for change orders are clearly spelled out. Next, make sure supervisors are aware of what is and what is not included in the contract. If an owner requests changes in the middle of a project, your supervisors will be able to follow a series of prearranged steps to get the changes approved and ensure the changes are billed. Automate the Process and Communicate the Changes Once changes have been requested or identified, you need to contact the customer to confirm them. It can help if you automate the process. Doing so allows you to keep track of potential changes, change orders, and contract modifications so you can communicate these changes to supervisors, suppliers, designers, and subcontractors. Communicating with all involved parties as soon as possible is critical in order to halt work in the change area and limit additional costs to that change. In addition, a good system allows you to update project information in real time and quantify and record all work as it is completed. Ensure Accurate Payment Do not process change orders until you and the customer have reviewed and approved billing rates for the extra work. If the contract does not offer pricing guidance for change orders, you have to be sure that you include both direct and indirect costs. Don t let change orders disrupt your business. Take steps now to manage change orders more effectively. Handling Fast-track Projects Unhappy with extended conventional schedules for their projects, an increasing number of owners want their projects fast tracked. Fast tracking compresses the project s schedule by running some phases of design and construction simultaneously. It s a process that has the potential for numerous problems, but the prospect of reducing costs makes it attractive to owners. If your firm is considering getting into this part of the business, you may wonder how you can meet compressed deadlines without squeezing profit margins or burning out team members. The following strategies may help your company handle fast-track projects more efficiently. Scrutinize the Contract You want to ensure your financial interests will be protected whenever you participate in a fasttrack project. The best way to achieve this goal is to review the contract carefully and negotiate to include or exclude items that are important to your bottom line. For example, the contract

5 should clearly spell out the responsibilities, the scope, and the costs involved in every stage of the project. Moreover, the contract should specify how change orders, extras, and back charges are to be handled and who bears ultimate financial responsibility for these charges. Carefully Review Plans A major, unexpected design change could stall the progress of the project and end up costing you dearly. That s why it makes sense to study the project s engineering specifications long before the project s start date. By carefully reviewing the plans, you can identify imprecise or flawed design assumptions and insist on changes before they impact your schedule and your profits. Emphasize Technology Technology is a key driver in the successful completion of fast-track projects. Utilizing accounting and project management software can help you meet the accelerated timelines of fast-track projects. Focus on Experienced Partners Since large, fast-track projects require numerous skilled trades working alongside each other, be sure you choose your partners carefully. You want to work with highly experienced people who can work quickly and collaboratively with your employees and others involved in the project. Using Demographics To Grow Your Firm Demographic and economic data can be used to figure out where people will live, work, and shop in the future. Construction firms should consider incorporating this data into their strategic planning so they can take advantage of emerging trends. One of the most significant demographic trends that has occurred over the last decade has been the reurbanization of many of America s cities. The Revival of Urban Living The death of the American city has been exaggerated. The massive migration of individuals, families, and empty nesters to suburbia appears to be moderating somewhat while America s urban centers are witnessing a significant demographic shift. According to the U.S. Census Bureau, the urban population of the country increased 12.1% from 2000 to 2010, a far greater rate of growth than the overall 9.7% national rate. Lifestyle preferences and access to employment opportunities are the primary drivers of this shift to urban living for younger, college-educated people. Importantly, this shift to urban living is not a localized phenomenon: It affects every region in the country. The reurbanization of many of America s cities is resulting in a significant uptick in new apartment construction and the rehabilitation and conversion of many older commercial buildings into apartments.

6 Empty nesters and retirees have also been moving in large numbers to urban areas over the past decade, adding to the demand for apartments and condominiums. Access to world-class health care and greater cultural and entertainment opportunities are largely responsible for this demographic shift. Nonresidential Construction Opportunities This shift to urban areas has major implications for the mass transit, water/sewer, public safety, and educational segments of the construction industry. Dining, entertainment, and office construction are also areas of great potential growth. It s impossible to predict whether this shift in living preferences will continue or weaken over time. However, the decisions made by the members of Generation Y -- who are marrying and having children later in life -- will very likely determine whether the shift to urban living will continue.