Trump’s Tax Policy in 2025 and Its Impact on Construction Contractors

Trump’s Tax Policy in 2025 and Its Impact on Construction Contractors

In 2025, President Trump’s tax policy will likely reflect a blend of previous initiatives, with several potential changes that could impact construction contractors. This article explores what construction contractors can expect from Trump’s tax policy.

Corporate Tax Rates and Pass-Through Entities

One of the most significant aspects of President Trump’s tax policy in recent years has been the reduction in corporate tax rates. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the corporate tax rate was reduced from 35% to 21%. In 2025, contractors operating as corporations will continue to benefit from these lower corporate tax rates. Trump has proposed further reducing the corporate tax rate from the current 21% to 20%.
Furthermore, President Trump has proposed reinstating a form of the Domestic Production Activities Deduction (DPAD) at 28.5%, which effectively lowers the corporate tax rate for domestic producers from 21% to 15%. This deduction, which previously provided tax relief for domestic manufacturing activities but was eliminated under the 2017 tax law.

Changes to pass-through entities, which many construction contractors utilize, will also be of interest. Construction contractors often operate as pass-through entities like S-corporations, LLCs, and partnerships, which allow business income to be taxed at individual tax rates. Under the TCJA, a deduction of up to 20% of qualified business income from pass-through entities was established, commonly referred to as the Qualified Business Income (QBI) deduction. In 2025, this deduction could be expanded or restructured, depending on legislative changes. If the QBI deduction remains intact or increases, many construction contractors will see a favorable tax benefit, especially small and mid-sized companies.
These anticipated changes could provide significant tax savings for construction companies, particularly those involved in domestic manufacturing of construction materials and equipment.

Depreciation and Section 179 Expensing

Construction contractors typically invest heavily in equipment, machinery, and vehicles, which can be expensive. Under the Trump administration’s tax policy, there have been favorable rules surrounding depreciation. One key provision is the Section 179 expensing rule, which allows businesses to deduct the full cost of certain capital expenditures in the year they are purchased rather than depreciating them over several years. In 2025, this provision is expected to remain intact, enabling contractors to quickly write off large equipment purchases, which can significantly improve cash flow. There are limits to the Section 179 deduction. The maximum Section 179 expense that can be taken in 2025 is set to be $1,250,000. This deduction begins to be phased out if purchased property exceeds $3,130,000 in 2025.

Bonus depreciation, which permits immediate deduction of a percentage of qualifying asset purchases, is being phased out under the TCJA provisions. Under current law, in 2024 the deduction will reduce from 80% to 60%. The deduction will drop to 40% in 2025 and sunset after 2026. President Trump has proposed to reinstate the 100% bonus depreciation deduction for new and used assets. This provides contractors with immediate tax benefits when they acquire new construction equipment, and allows for a more flexible and efficient approach to managing large capital investments.

Labor and Employment Tax Considerations

Construction contractors, particularly those who hire a significant workforce, will also be impacted by changes to labor and employment tax policies under Trump’s tax plan in 2025. Efforts to reduce payroll taxes, expand the reach of tax incentives for hiring veterans or disadvantaged workers, and enhance retirement savings options for workers could offer advantages to construction companies.

Additionally, any changes to the tax treatment of independent contractors versus employees could have implications for the industry. Many construction workers are classified as independent contractors and shifts in tax policy regarding how these workers are treated could impact hiring practices, employment classifications, and overall tax liability for contractors.

Tariffs and International Trade

Trump’s tax policy also includes a proposal to impose a universal 20% tariff on all imported goods, with a higher rate of 60% for imports from China. This could have mixed effects on the construction industry:

  • Higher Costs for Imported Materials: Construction companies that rely on imported materials may face higher costs, which could impact project budgets and timelines.
  • Shift to Domestic Suppliers: The tariffs could encourage a shift towards domestic suppliers, potentially benefiting U.S. manufacturers and reducing supply chain disruptions.

President Trump’s tax policy in 2025 presents a mixed bag for construction contractors. On the one hand, tax cuts and depreciation incentives could offer financial benefits for construction businesses. On the other hand, any changes to capital gains tax, labor regulations, or tax rates could introduce new challenges. Regardless of the policy changes, construction contractors will need to stay informed and adapt their strategies to navigate the evolving tax landscape effectively.

Kirsten Sokom

Kirsten Sokom

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

Nikki Allen

Nikki Allen

Tax Manager
Preparation of individual, small business, partnership, S Corp, and corporate tax returns.

How to Prepare for a Smooth Engagement During Busy Season

As the holiday season comes to an end, in many cases this can mean your accounting firm will soon be knocking on the door to begin your company’s compilation, review or audit. A few steps taken after year-end can make this process smooth for both parties. Reconciling accounts and posting journal entries prior to providing a trial balance to the engagement team can reduce follow-up questions and proposed adjustments. Communicating any changes in the business or unusual transactions during the year can also assist the engagement team in understanding any fluctuations they identify during the engagement.

For audit engagements, the engagement team will provide testing selections for various areas. Providing timely support for these transactions can keep the engagement moving and avoid delays. Our teams strive to improve efficiency each year and are always open to suggestions. Let your engagement team know if you have ideas that could improve the process. We have implemented Suralink in recent years which provides an online interactive request list. Our clients have found this helpful in tracking items needed throughout the engagement. If we are not using this feature on your engagement and you are interested, ask you contact at CSB and they will be happy to set that up for you.

A smooth engagement ultimately comes down to good communication from both parties. We believe that few items mentioned can help these engagements stay on schedule and provide less inconvenience for you. We look forward to working with our clients in 2025. If you have any questions or concerns, please reach out to you CSB contact.

Andrew Finnorn, CPA

Andrew Finnorn, CPA

Manager
Audit services for construction, manufacturing, and oil and gas support services.

Preparing for Potential Tax Law Changes

A Guide for Construction Business Owners

As the expiration of several key provisions of the Tax Cuts and Jobs Act (TCJA) looms, construction business owners must brace for significant tax law changes. The TCJA, enacted in 2017, brought numerous benefits, but many of these are set to expire after 2025, potentially reverting to pre-TCJA levels. Here are the critical areas to watch:

1. Individual Tax Changes

Key individual provisions set to expire include:

  • Top Individual Income Tax Rate: Increasing from 37% to 39.6%, which could affect construction business owners’ personal tax liabilities.
  • Standard Deductions: The TCJA nearly doubled the standard deduction and eliminated personal exemptions. If the TCJA expires in 2025, the standard deduction for a married couple filing jointly in 2026 could substantially decrease from approximately $30,000 to $13,000 before being indexed for inflation. Meanwhile, the personal exemption is expected to increase to approximately $5,300 per individual. These changes could potentially increase taxable income, making itemizing deductions more advantageous.
  • Gift and Estate Tax Exemptions: Reducing significantly, impacting estate planning strategies for family-owned construction businesses.

2. Impact on Pass-Through Entities

The Section 199A deduction, which allows a deduction of up to 20% of qualified business income for pass-through entities, is at risk of expiration. If this deduction sunsets, small businesses will lose the deduction and face higher taxable income, leading to increased tax liabilities for owners of pass-through entities. The increase in the tax liability would require larger tax distributions for owners and thereby reduce the amount of capital available for reinvestment in the business, such as purchasing new equipment, hiring additional staff, or expanding operations.

3. Accelerated Depreciation

Bonus depreciation, which permits immediate deduction of a percentage of qualifying asset purchases, is being phased out. In 2024, the deduction will reduce from 80% to 60%, affecting capital investment strategies. The deduction will drop to 40% in 2025 and sunset after 2026. For construction companies, this means higher upfront costs for purchasing new equipment and machinery, potentially impacting project budgets and timelines. Decisions to delay or reconsider purchasing new equipment due to the reduced immediate tax benefits could impact the overall productivity and efficiency of operations, as older equipment may require more maintenance and be less efficient.

Businesses might turn to alternative financing options, such as leasing, to mitigate the impact of reduced bonus depreciation. Leasing can spread the cost of equipment over time, potentially offering more manageable cash flow implications. However, this approach may also come with higher long-term costs compared to outright purchases.

The phase-out could affect the competitive landscape, particularly for smaller construction firms that rely heavily on bonus depreciation to manage their tax liabilities. Larger firms with more robust financial resources may be better positioned to absorb the impact, potentially widening the competitive gap.

Keep in mind that your construction company can potentially combine bonus depreciation with the Section 179 deduction within the same tax year. As bonus depreciation phases out as planned, contractors may still be eligible to claim Section 179 deductions.

4. Employer Credit for Paid Leave

The tax credit for employers providing paid family and medical leave is also set to expire unless extended by Congress. This credit has been a valuable incentive for construction companies to support their employees’ well-being, which is crucial in an industry known for its demanding work conditions.

Strategic Tax Planning

Given these impending changes, it is vital for construction business owners to proactively adjust their tax strategies. Consulting with tax professionals and financial advisors can help navigate these transitions and optimize tax positions.

By staying informed and planning ahead, construction businesses can mitigate the impact of these tax law changes and continue to thrive in a shifting economic landscape.

Kirsten Sokom

Kirsten Sokom

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

Nikki Allen

Nikki Allen

Tax Manager
Preparation of individual, small business, partnership, S Corp, and corporate tax returns.

The Importance of Strategic Financial Planning

Construction firms can foster long-term sustainability and gain a competitive edge through strategic financial planning. By gaining an understanding of its current financial position, influence of external factors, and internal capabilities, a company can develop its blueprint for financial growth.

Evaluate Current Financial Position

To derive an effective process towards meeting desired objectives, a company should first assess its current financial position. This process involves analyzing past financial statements to understand revenue trends, expense patterns, and profitability as well as evaluating current assets, liabilities, equity and cash flow to identify strengths and weaknesses. Examining Key Performance Indicators (KPIs) is another effective method of measuring and tracking financial performance. The table below summarizes several relevant KPIs for construction firms and their importance:

KPI
Importance
Gross Profit Margin
Indicates the efficiency of project execution and cost management
Net Profit Margin
Reflects overall profitability and financial health
Cash Flow
Essential for maintaining liquidity and ensuring the ability to meet financial obligations
Change Order Rate
High rates may indicate issues with project scope definition or client communication
Current Ratio
Measures the ability of a company to cover its short-term obligations with its short-terms assets
Job Cost Variance
Helps identify discrepancies and areas for improvement in estimating and budgeting
Backlog
Indicates future revenue and workload, aiding in capacity planning
Equipment Utilization Rate
Indicates efficiency in equipment management and helps minimize costs
Here you will find a summary of some important KPI's that every contractor should monitor, published by RSM

The understanding and ongoing evaluation of relevant financial metrics and current financial position provides valuable insight into a company’s financial trajectory. This knowledge enables owners and management to make informed and timely business decisions while also developing and updating strategies that align with short-term and long-term financial goals.

Management should also perform trend analysis which offers insights into the factors driving financial performance. This comprehensive assessment of a company’s current financial position and underlying drivers establishes a solid foundation for effective financial modeling. A clear grasp of current financial metrics and trends allows for more accurate projections and enhances the reliability of the financial models informing strategic planning and risk management.

Develop Financial Models

A vital component of strategic financial planning is performing scenario analysis. This proactive process allows companies to explore how various changes in assumptions–such as project costs, delays, or economic shifts–could impact financial outcomes. By forecasting best and worst-case scenarios and reviewing the financial models reflective of these potential outcomes, a company can derive effective strategies to navigate potential challenges. It is important to keep in mind industry trends and internal capabilities while developing financial models to ensure realistic expectations of projected outcomes. The valuable insights gained from this analysis empower decision-makers to make informed choices about project selection, investment opportunities, and resource allocation. Regularly updating financial models as new data and market conditions emerge ensures that companies remain agile and ready to seize opportunities for growth.

Strategic financial planning offers several advantages and it is never too late to get started. Involving owners, management, and project managers in these processes assists in developing a collective understanding of financial performance metrics and encourages a collaborative effort in monitoring and achieving financial goals. Crow Shields Bailey provides assistance with strategic financial planning. Please let us know if our team of skilled professionals can be of service.

Savanna Wood

Savanna Wood

Senior Accountant
Audits of construction contractors, manufacturing and distribution companies, and employee benefit plans. Review and compilation services for non-public companies.

The Impact of Fade Analysis on Project Management

In the construction industry, contractors are constantly juggling multiple projects, tight deadlines, and unforeseen challenges. One tool that can significantly aid in managing these complexities is fade analysis.

Fade analysis is a project management technique used to track the performance of a project over time. It involves comparing the initial profit margin of a project to the actual profit margin as the project progresses. The difference between these two margins is known as the ‘fade’. A positive fade indicates an increase in profit margin, while a negative fade signifies a decrease.

Why is Fade Analysis Important?

Profitability Tracking

Fade analysis allows contractors to monitor the profitability of their projects in real-time. By comparing the initial and current profit margins, contractors can identify if a project is on track to meet its financial goals or if it’s ‘fading’ and needs intervention.

Risk Management

Fade analysis can serve as an early warning system for potential issues. A negative fade might indicate problems such as cost overruns, delays, or scope creep, allowing contractors to address these issues before they escalate.

Performance Evaluation

Fade analysis can also be used to evaluate the performance of project teams. If a particular team consistently delivers projects with positive fades, it might indicate effective management and execution. Conversely, a team with negative fades might need additional training or resources.

Strategic Decision Making

By providing a clear picture of project performance, fade analysis can inform strategic decisions. For example, if a contractor notices a pattern of negative fades in a particular type of project, they might choose to bid more cautiously on similar projects in the future.

What Causes Negative Fade?

Negative fade is often attributable to the following issues:

  • Incomplete or optimistic cost estimates
  • Supplier or subcontractor performance issues
  • Inadequate field supervision, resources or training
  • Adverse weather conditions

Project management can mitigate diminished profit by regularly monitoring its job costing system and improving job costing processes to enable more accurate cost estimations.

Fade analysis is a powerful tool which provides real-time insights into project performance. Routine monitoring of construction projects provides contractors the ability to make more informed decisions and improve cost estimation ability. As such, contractors should prioritize fade analysis as an integral part of their quality control and risk management strategies.

CSB Fade Analysis Workpaper Template
Kirsten Sokom

Kirsten Sokom

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

Accurate Cost Estimation and Its Value to Contractors

Accurate cost estimation is crucial for the financial viability of construction projects. For high-earning construction company owners, mastering this aspect is essential to prevent budget overruns and ensure projects remain financially sustainable. By accurately forecasting expenses, including materials, labor, equipment, and overhead, construction professionals can confidently manage project complexities. Integrating historical data and industry benchmarks into cost estimation processes helps predict challenges and allocate resources effectively, enhancing project profitability. Additionally, tools like the contract schedule and fade analysis are vital for maintaining accurate estimates throughout the project lifecycle.

Key Components of Cost Estimation

Material Costs

Accurately estimating material costs involves considering market prices, supply chain stability, and project-specific requirements. Strategies include:

  • Updating price lists and supplier quotes regularly.
  • Using historical data from past projects to identify trends.
  • Implementing bulk purchasing agreements to secure favorable rates.
Labor Costs

Labor costs significantly impact the budget. Effective estimation requires:

  • Analyzing wage rates, productivity levels, and labor market conditions.
  • Utilizing time tracking and project management tools to monitor efficiency.
  • Conducting thorough job analyses to understand task complexity.
Equipment Costs

Predicting equipment expenses involves:

  • Categorizing equipment into owned, leased, and rented.
  • Factoring in maintenance, fuel, and operational costs.
  • Using historical data to anticipate equipment usage and wear-and-tear. 
Overhead Costs

Understanding fixed and variable overheads is essential. Fixed costs, such as rent and salaries, remain constant regardless of project size or duration. Variable costs, like utilities and materials, fluctuate based on project scope and activity. Understanding the difference and being able to project and budget these costs is imperative. Techniques to incorporate these into estimates include:

  • Allocating overhead costs proportionally to each project.
  • Regularly reviewing and adjusting overhead rates.
  • Incorporating indirect costs such as administration, utilities, and insurance.
Integrating Historical Data and Industry Benchmarks

Historical data and industry benchmarks play a crucial role in refining cost estimates. Analyzing past projects helps identify patterns and anomalies, leading to more accurate forecasting. Industry benchmarks provide a comparative framework to assess performance and costs against peers.

Role of the Contract Schedule

The contract schedule is an indispensable tool for accurate cost estimation. It outlines the sequence and timing of costs and billings, it summarizes where the job stands and finally it helps project future financial key metrics. Key elements include:

Financial Reporting:

  • Revenue Recognition: Allows for periodic recognition of revenue based on project progress.
  • Expense Tracking: Tracks costs against the budget to ensure the project remains within financial constraints.

Cash Flow Management:

  • Monitoring Billings: Helps track over-billings and under-billings, which affects cash flow.
  • Forecasting: Assists in cash flow forecasting based on billing cycles and project progress.

Project Performance Evaluation:

  • Assessing Efficiency: Measures how efficiently the project is progressing compared to the budget.
  • Identifying Issues: Helps identify issues early, such as cost overruns or delays.
Technology and Tools for Cost Estimation

Digital tools and software enhance cost estimation by:

  • Providing automated calculations and real-time data integration.
  • Improving collaboration with centralized data platforms.
  • Streamlining estimation processes and reducing manual errors.

Best Practices for Accurate Cost Estimation

Best practices include:

  • Continuously learning from past projects and industry developments.
  • Encouraging collaboration among project stakeholders.
  • Regularly reviewing and updating cost estimates.

Additionally, incorporating fade analysis provides insights into project performance, helping to identify discrepancies between initial estimates and actual costs, allowing for timely interventions to correct course.

Accurate cost estimation is the cornerstone of successful construction projects. By adopting best practices, leveraging technology, and utilizing tools like the contract schedule and fade analysis, construction firms can ensure financial viability and project success. Utilizing Crow Shields Bailey to leverage these best practices and help you utilize cost estimation to work in your business and on your business, is a valuable resource. Please reach out to Crow Shields Bailey for assistance in getting this process started for your business.

J. Kenny Crow III

J. Kenny Crow III

Shareholder
Specialization in audit services include real estate, construction, manufacturing and distribution, nonprofits, and employee benefit services industries.

Navigating Beneficial Ownership Information Reporting

Congress passed the Corporate Transparency Act (the “Act”) in 2021 to combat the facilitation of illicit activities – including money laundering, financing of terrorism, and various acts of financial fraud – by malicious actors concealing their ownership of corporations, limited liability companies, or other similar entities in the United States.

Effective January 1, 2024, and subject to certain exceptions, existing and newly formed corporations, limited liability companies, and similar entities (referred to in the Act as a “Reporting Company”) will be required to file a report with the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) identifying the beneficial ownership of the Reporting Company. Reporting Companies formed after the effective date will need to include similar identifying information for their company applicant(s). Below is an overview of the reporting requirements designed to help Reporting Companies comply effectively and navigate potential legal challenges successfully.

1. Who is Required to Report?

Beneficial Ownership Information Reporting is mandated for all Reporting Companies. Typically, this includes corporations, limited liability companies (LLCs), and other entities created by filing a public document with a secretary of state or similar office, but there are exceptions. Entities that are exempt from the reporting requirements include:

  • Issuers of securities registered under the Securities Exchange Act
  • Governmental authorities
  • Banks, bank holding companies, credit unions and money transmitting businesses
  • Broker-dealers
  • Investment companies and advisers
  • Insurance companies
  • Tax-exempt entities
  • Large operating companies that employ more than 20 employees in the United States, filed federal income tax returns evidencing more than $5,000,000 in gross receipts or sales in the previous year, and have a physical office within the United States
  • Subsidiaries of certain exempt entities

2. Am I a “beneficial owner” or an “applicant”?

A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a Reporting Company or owns or controls not less than 25% of such Reporting Company. A difficult question is who possesses “substantial control.”

The FinCEN regulations list three indications of “substantial control”: (1) serving as a senior officer, (2) authority over the appointment or removal of a senior officer or a majority of the board of directors or similar body, and (3) the direction, determination or substantial influence over important decisions.

Senior officers are persons holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any officer performing similar functions. Interestingly, corporate secretaries and treasurers are not expressly deemed “senior officers” by FinCEN.

Important decisions are defined broadly and include decisions regarding: (1) the nature, scope and attributes of the Reporting Company’s business, including the sale, lease, mortgage or other transfer of a principal asset, (2) reorganization, dissolution or merger, (3) major expenditures, issuance of debt or equity or approval of the operating budget, (4) the selection or termination of business lines or ventures or geographic focus, (5) compensation schemes and incentive programs for senior officers, (6) entry into, termination or fulfillment of significant contracts, (7) amendment of the company’s certificate of formation, bylaws, LLC agreement and significant policies or procedures.

Reporting Companies formed after January 1, 2024, are also required to report the information of each company applicant. A company applicant is the individual who files the document creating the company. If more than one individual is involved in filing, the individual primarily responsible for directing or controlling the filing will also be considered an applicant. For example, an attorney and the paralegal that pushes the button or files the formation document are both technically considered company applicants.

3. What Information Should be Included in the Report?

Existing and newly formed reporting companies are required to provide: (1) the full legal name, (2) any trade name or “doing business as” designation, (3) the business street address, (4) the state or American Indian tribal jurisdiction of formation, and (5) an IRS TIN or other identifying number of the reporting company.

For each beneficial owner and, if applicable, each company applicant, the reporting company must provide: (1) full legal name, (2) date of birth, (3) current residential street address, (4) unique identifying number, and (5) image of the document from which the unique identifying number was obtained (including a nonexpired passport, state-issued identification document, or driver’s license).

Each Reporting Company is ultimately responsible for its filing and must certify that it is true, correct, and complete.

To streamline the reporting process and provide for more confidentiality, beneficial owners and company applicants may obtain a FinCEN ID number, which may be provided in lieu of the required information. A FinCEN ID number will be most helpful to beneficial owners of multiple companies and those whose information changes often.

4. When Are You Required to Report?

Companies created prior to Jan. 1, 2024, have until Dec. 31, 2024, to file an initial report.

Companies created between Jan. 1, 2024, and Dec. 31, 2024, will have 90 days after their creation to file an initial report.

Companies created on or after Jan. 1, 2025, will have 30 days after their creation to file an initial report.

If the information in an initial report is inaccurate or there is a change in the information of the reporting company or its beneficial owners, updated and corrected reports must be filed within 30 days after the date of a change to any required information previously submitted or after the date the inaccuracy is discovered, respectively. Therefore, it is important that companies keep track of

and report any changes in the reported information for beneficial owners, including changes of addresses and new driver’s license numbers. We strongly suggest Reporting Companies take steps to ensure the required reporting information is easily accessible and up to date to make the reporting process more efficient.

5. Who will have access to this information?

Per the Act, FinCen is required to maintain the confidentiality of reported information but is authorized to make disclosures for specific purposes to certain government authorities and to financial institutions.

6. What are the Consequences of Failing to Report?

Understanding and complying with these reporting requirements is vital due to the penalties for non-compliance, including fines of up to $10,000 and imprisonment for up to two years.

7. How Do Reporting Companies Need to Process Reporting?

Reporting Companies should establish internal processes to collect, verify, and maintain up-to-date information about their beneficial owners. This information must be filed electronically through the designated system provided by FinCEN or the relevant state authority. It is advisable for businesses to maintain records of their filings and any correspondence with regulatory bodies to verify compliance.

8. Where Can You Find More Information?

For more comprehensive details and updates, businesses should refer to the official website of the Financial Crimes Enforcement Network (FinCEN). Legal advisors specializing in corporate law or compliance can also provide tailored guidance.

Conclusion Compliance with Beneficial Ownership Information Reporting is not just a legal obligation but also a critical component of corporate responsibility. Reporting Companies should be proactive to ensure they comply with the Act, either by determining they are exempt from the reporting requirements or ensuring the required reporting information is easily accessible and up to date. Regular consultation with legal experts and staying informed about regulatory changes are best practices that can help Reporting Companies navigate this complex landscape effectively.

Luke Nixon

Luke Nixon

Luke Nixon is an associate based in the Mobile office of Phelps Dunbar LLP. Luke helps individuals, trusts and businesses in all industries navigate complex legal matters. He is part of a full-service law firm of 400 attorneys. Phelps blends progressive ideas and valuable traditions to foster collaboration among lawyers in Alabama, Florida, Louisiana, Mississippi, North Carolina, Tennessee, Texas, and London.

The Role of Strategic Accounting in the Construction Industry

Success in the construction industry hinges not only on the quality of workmanship but also on effective financial management. Construction professionals must recognize the pivotal role that strategic accounting plays in driving profitability and sustaining growth.  

Accurate Cost Estimation

Accurate cost estimation lies at the center of financial viability in construction projects. By accurately forecasting expenses, including material costs, labor, equipment, and overhead, construction professionals can mitigate the risk of budget overruns and ensure projects remain financially sustainable. Integrating historical data and industry benchmarks into cost estimation processes enables construction firms to predict potential challenges and allocate resources judiciously, thereby enhancing project profitability.

One way to aid in accurate cost estimation is through preparation of a contract schedule. A Company’s contract schedule provides better understanding of Company operations and financial performance for each job allowing for more effective management. The contract schedule is a critical tool for risk management, planning, and communication, making it indispensable for the smooth execution of construction projects.

Cash Flow Management

Effective cash flow management is essential for construction companies to maintain liquidity and meet financial obligations promptly. By implementing cash flow forecasting models, management can estimate and predict future revenues and identify potential cash bottlenecks, allowing for proactive measures to mitigate risks. Moreover, establishing stringent invoicing and payment protocols can accelerate receivables turnover, enhancing cash flow and bolstering financial resilience.     

The included cash management resource, published by RSM US, is tailored for construction contractors providing relevant insights and best practices to better assist you.

Construction Cash Guide

Strategic Financial Planning

Strategic financial planning is imperative for construction firms to achieve long-term sustainability and capitalize on growth opportunities. By developing comprehensive financial forecasts and investment strategies, construction professionals can align financial objectives with broader business goals, enabling informed decision-making and resource allocation. Furthermore, fostering a culture of financial literacy and empowerment among project stakeholders cultivates a collective understanding of financial performance metrics and fosters a collaborative approach towards achieving organizational success.

Identifying and evaluating Key Performance Indicators (KPIs) is crucial, as it provides a clear measure of performance against strategic goals and objectives. Regular assessment of KPIs allows for real-time insights into operational efficiency, financial health, and project progress. It enables managers to make informed decisions, identify areas for improvement, and allocate resources effectively.

In an increasingly competitive construction landscape, the importance of strategic accounting is undeniable. By championing a proactive, holistic approach to accounting, firms can navigate challenges with confidence and position themselves for success in an ever-evolving marketplace.

Kirsten Sokom

Kirsten Sokom

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

Key Differences between Alabama Department of Transportation and Alabama General Contractors Licenses

In the construction industry, navigating the bureaucratic processes of prequalification applications and license renewals is crucial for contractors to legally undertake projects. In Alabama, two key processes that contractors must be familiar with are the Alabama Department of Transportation (ALDOT) Prequalification Application and the Alabama General Contractors License Renewal. Here’s an exploration of the differences between the two:

The ALDOT Prequalification Application

A process that contractors must complete to be eligible to bid on state transportation projects. This involves submitting a Confidential Financial Statement and Equipment and Experience Questionnaire. The application assesses the contractor’s financial stability, equipment availability, and relevant experience. It’s a prerequisite for contractors aiming to work on transportation-related construction projects and is specific to the Alabama Department of Transportation.

The Confidential Financial Statement and Equipment and Experience Questionnaire must be submitted no more than 16 months after the date of the financial statements previously submitted (April 30th for calendar year-end entities). This deadline is firm, with no available provision for extension. A contractor will not be issued a bid proposal if the Company’s prequalification application has not been submitted.

The Alabama General Contractors (AGC) License Renewal

A broader requirement that applies to all contractors working in commercial and industrial construction within the state. This annual renewal process ensures that contractors maintain their eligibility to operate legally. It involves updating the licensing board with current financial information, proof of liability insurance, and evidence of continuing education where applicable. The renewal process is not project-specific but is a general requirement for all contractors to continue their practice in Alabama.

License renewals with the AGC operate on a unique schedule. Renewal due dates are based on the first letter of the company’s name published on the AGC website. License renewals may be extended up to 90 days upon written request.

License Requirements Comparison

Both licenses require the financial statements must be prepared by a certified public accountant under generally accepted accounting principles in the United States (US GAAP). ALDOT requires financial statements be audited or reviewed by a certified public accountant. The AGC will accept compiled, reviewed, or audited financial statements or ALDOT Prequalification Application in lieu of its own. Thereby consideration should be given to the time needed to perform these engagements to avoid disruption to operations.      

Both also consider different criteria in determining an entity’s eligibility:

  • ALDOT regulations state applications with negative net worth will be rejected.
  • AGC regulations specify a minimum net worth and working capital requirement of $10,000. If either of the requirements are not met the AGC license renewal application will be rejected. 

Additionally, bid limits are determined using different criteria:

  • ALDOT bid limits are determined by considering working capital, total assets, and net worth. Determination of an entity’s bid limit may be subject to additional adjustments upon evaluation of the Prequalification Application.
  • Bid limits are calculated by the AGC using the lesser of the Company’s net worth and working capital based upon the table below. Additional considerations to increase net worth or working capital one step are also available.
Bid Limit
Minimum Net Worth or Working Capital
Contracts Up To
A
$10,000
$100,000
B
$17,500
$250,000
C
$37,500
$500,000
D
$75,000
$1,000,000
E
$200,000
$3,000,000
U
> $300,000
Unlimited

Other financials elements can impact these limits. Given the unique nature of these criteria we advise discussing these options with your certified public accountant.

Understanding these differences is essential for contractors to ensure compliance with state regulations and to secure and maintain the ability to bid on and execute construction projects in Alabama. Failure to comply with application regulations can result in the inability to secure new contracts or the suspension of ongoing operations. It’s imperative for businesses to stay informed and proactive in managing their license renewals.

Kirsten Sokom, CPA

Kirsten Sokom, CPA

Principal
Audit services for construction, manufacturing, and distribution companies; engagement quality control and best practices.

My CPA says, ‘extend.’ What does that mean to me?

Filing taxes can be daunting, but understanding the purpose and process of filing an extension can provide much-needed clarity and relief. Let’s delve into the world of tax extensions and what they mean for you.

What does filing an “extension” do?

  • An extension is a formal request to the IRS for additional time to file your federal tax return (1040).
  •  The extension period typically extends the due date by six months, shifting it from April 16 to October 15th.
  •  While filing an extension grants extra time to file, it’s crucial to estimate and pay any anticipated taxes by the original due date.

Why does my CPA suggest we extend my tax return?

  • Your CPA might recommend an extension due to the complexity of your return or limited time within the filing season.
  • CPAs often have cutoff deadlines to manage their workload efficiently and ensure accurate filings.
  • Pending guidance or legislative changes could also prompt a suggestion for an extension.

Am I more likely to be audited if I extend?

  • No, filing an extension does not increase your chances of being audited.
  • It’s preferable to file an extension than submit an incomplete return or rush through the process without careful review.

What are the primary benefits of extending my tax return?

  • Provides extra time to file without penalty, especially when waiting for missing information or tax documents.
  • Offers opportunities for additional retirement planning or funding certain retirement plans.
  • Generally, filing an extension is less expensive and reduces the likelihood of needing to amend your return later.

Should I do anything differently if I am filing an extension?

  • Provide your CPA with all available information as early as possible.
  • Anticipate and pay any taxes owed by the original due date.
  • Consider making quarterly estimated tax payments if required, with guidance from your CPA.
  • Discuss refund options and tax planning opportunities with your CPA to optimize your financial situation.

Is there anything I can do to avoid filing an extension if I know I am missing some information now?

  • Provide all available documents to your CPA promptly to facilitate early preparation and review.
  • Your CPA may be able to draft a return for review and add missing information before the original due date.

Have there been any changes to the due dates of returns for this year?

  • As of now, there have been no changes to the due dates for tax year 2023.

Filing a tax extension can provide valuable breathing room and ensure accurate filings. By understanding the process and working closely with your CPA, you can navigate tax season with confidence and peace of mind.

Download Extension FAQ PDF from AICPA & CIMA719 KB