Construction Companies Accounting & Audit Resources

Construction Companies Accounting & Audit Resources

Reading Time: 6 minutes

Whether it is dealing with labor shortages, collecting retainage or preparing for the ever-changing regulatory landscape, those in the construction industry never seem to have a lull in the action. This audit and accounting resource guide supplies insights and reference material for your construction business and reviews some of the recent changes in the industry.

Revenue recognition is finally here! 

After years of threats and changes to the standard, revenue recognition is now in effect. For construction companies issuing Generally Accepted Accounting Principles (GAAP) basis financial statements, this new accounting standard will change their financial statement presentation and possibly the timing of revenue recognition. This standard introduces a five-step approach to recognizing revenue and requires construction companies to make more estimates, examine contracts for variable consideration and revisit change orders to determine if they should be a new contract or modification of an existing contract. The new standard completely replaces the existing standards.

revenue recognition resources image

Accounting for leases is still on the way

Construction items and jars of change.

After revenue recognition, construction companies still have leases to contend with in 2021. Many off-balance sheet lease agreements will be added to balance sheets, which will result in an increase in both debt and asset balances. Construction companies need to be aware of the ramifications this will have on their total financial health and bank or bonding covenants.

Current liabilities will increase and if banks opt not to remove this new liability from covenant calculations or change the benchmark, a historically easy ratio to obtain may become an impossible hurdle. The lease standard will also require estimates of how many extensions of a lease will be exercised and, based on wording in the lease, expenses like operating costs and real estate taxes may be included in the newly recorded liability. Construction companies should review their lease agreements and current footnotes to determine the impact of this change, prior to implementation.

Business value paperwork on desk

Assess the need to continue using GAAP reporting

GAAP has been the gold standard for accounting basis, some would argue, forever. However, with the recent changes occurring or pending, including the above mentioned revenue recognition and lease standards, GAAP may no longer be the answer for many small or privately held construction companies. When a reporting framework becomes too difficult to maintain or not beneficial to the users of the financial statements, it may be time to change. Construction companies could shift to tax or cash basis of accounting or a similar version of either and instantly simplify this function. Another option, as developed by the American Institute of Certified Public Accountant, is the Financial Reporting Framework for Small and Medium Sized Entities (FRF for SME). This framework was very similar to GAAP 10-15 years ago and has removed many of the larger changes (revenue recognition, leases and fair value reporting) that has made current GAAP so complex. Any switch in accounting basis cannot be made lightly and needs to be discussed and understood by the users of the financial statements, including banks, owners, bonding companies and future users of the financial statements. Although these alternatives are valid and widely used, there are exceptions.

Example 1: If a construction company’s goal is to sell to a large, publicly traded company, switching away from GAAP is not the solution.

Example 2: If obtaining bank financing is an issue or switching banks is being planned, it may not be the best time to transition. Discuss options with your bank prior to making a transition away from GAAP. 

Wayfair is not just for online retailers

overhead shot of construction workers having a meeting

When the U.S. Supreme Court changed course on nexus determination and no longer required a physical presence for sales tax remittance, the online retail industry was not the only one affected. States quickly reacted to the ruling and have implemented a variety of different laws. Before taking a contract of shipping goods out of state, be sure to review the possible sales tax implications. 

construction company plans

Technology drives the construction industry

The 2019 Construction Technology Report by JBKnowledge offers insights into the market and allows you to compare your company to others in the industry in terms of technology usage, IT expenses and research and development costs. As in most industries, technology drives efficiency, improves productivity and is constantly changing. The report is driven by a survey of industry members. 

Labor shortages are continuing

Several construction hats hung up at a construction site.

Although not an industry specific problem, the construction industry has been hit hard by a shortage of qualified employees. Union benches are empty and accepting under-motivated or under-qualified applicants is the new normal as projects and proposals are still available. If this continues, construction companies will need to look at expanding benefits to keep or attract employees. Companies need to look at production and backlog and consider if higher production, at the expense of overtime and other additional costs, is worth the margin gained on the work. This is especially important if contracts require specific deliverables or have a specific date for completion. Most construction companies have a difficult time passing on a proposal, but increasing margin or extending dues dates when responding to the proposal could improve workflow and counteract the effects of overtime.

How does your Company Stack Up?

Note: Interested in learning benchmarks and key performance indicators for your specific industry? Reach out to a Smith Schafer professional. We work with over 800 Minnesota construction and real estate entities and have access to industry reports.

Tax law changes offer opportunities

Tax reform simplified some aspects of the tax code, but also made it much more complicated. Construction company owners need to ensure they have fully examined the opportunities allowed within tax reform, including, maximizing the tax benefits of their basis of accounting and increasing the 199A deduction. These decisions cannot be made without a full review of both the ownership group and the company in general. 

construction industry tax resources graphic

Additional Resources for You!


Industry knowledge and close collaboration are instrumental in providing our construction clients with the insight and awareness to make the best business decisions and seize growth opportunities. Smith Schafer is a recognized leader in providing accounting and consulting services to the construction industry since 1971. We have a team of experts, focused on working with the construction industry, and committed to helping our clients succeed. If you have questions about improving your business model, implementing an accounting practice or tax planning strategies to improve operations, Smith Schafer can help. For additional information, click here to contact us.

Have you Heard? Electric School Bus Programs Rising in US

Have you Heard? Electric School Bus Programs Rising in US

Reading Time: 2 minutes

The school bus industry has recently experienced a moderate level of technological change and development. Transportation companies continue to invest in technology, which improves transportation safety, providing more environmentally friendly service and improving quality of service. 

According to IBISWorld 2019 report, industry operators are expected to increasingly invest in low-emission school buses. Rising concerns about the harmful effects of older diesel school buses on children’s health has led to increased pressure on school districts and industry operators to invest in newer school buses with lower emissions. Hybrid school buses were first used in 2008. This technology was introduced to the Twin Cities area in the fall of 2017.

As technology continues to develop, electric school buses are expected to become more common over the next five years, due to environmental concerns and projected increases in fuel prices.

Pros of Electric School Buses

  • Electric buses produce zero emissions, which means cleaner air for school kids and the planet.
  • Fuel and maintenance costs for electric buses are much lower than for diesel buses. There is no need for engine oil changes and no transmission or engine to maintain.
  • There are grant incentives for electric school buses, which may help to make it more affordable.

Cons of Electric School Buses

  • An electric school bus can cost from $200,000 to $400,000, while conventional diesel school buses run $100,000 to $150,000.
  • It takes a long time to recoup its price premium due to low usage patterns. School buses average of 66 miles per day, about half as much as a transit bus, according to the National Rural Electric Cooperative Association. The large amount of time a school bus sits parked increases the time it takes to earn back the cost difference through fuel and maintenance savings.

Is your school bus company considering electric buses?

To bring you innovative solutions, our Transportation Group stays on top of industry benchmarking, trends, tools and technologies to ensure we give you the best possible advice. Smith Schafer professionals have serviced the transportation industry since 1971 and is committed to serving over 110 Minnesota transportation entities. We take great pride in consulting on various industry specific issues, as well as the broader needs of these companies and their owners. Click here to schedule a free 30-minute consultation.

Key Performance Indicators for the Hospitality Industry

Key Performance Indicators for the Hospitality Industry

Reading Time: < 1 minute

Utilizing benchmarks is the easiest way to determine how well your hospitality company stacks up against others in your industry. Understanding and knowing current benchmarks is a great way to measure the success of your company against industry standards. They give you a way to identify areas in which you are excelling, as well as where extra attention and resources may be needed.

To stay competitive amidst rising food costs, employee turnover rates, changing consumer habits and other market factors, it’s essential to understand how your metrics stack up against industry standards.
Click the button below to download the benchmarks regarding three major subgroups in the hospitality industry:

  1. Restaurants
  2. Hotels & Lodging
  3. Golf Courses
IRS Introduced New Tax Withholding Estimator

IRS Introduced New Tax Withholding Estimator

Reading Time: < 1 minute

Calculate Your Tax Withholding

The IRS has improved its online tax withholding calculator. It includes changes from the updated W4.

The new version of the calculator helps workers effectively adjust their withholding and features a customized refund slider allowing users to choose the refund amount they prefer from a range of different amounts.

We recommend checking your withholding every quarter to protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time.

Note: The tax withholding calculator does not ask you to provide sensitive personally-identifiable information (i.e. Social Security number, address, bank account numbers). The IRS does not save or record the information you enter on the Calculator

199A Deduction for Rental Real Estate Safe Harbor

199A Deduction for Rental Real Estate Safe Harbor

Reading Time: 2 minutes

The Internal Revenue Code Section 199A Qualified Business Income (QBI) Deduction allows a deduction equal to 20% of business income for owners of pass-through entities. When the law was passed, there was confusion about whether owners of rental real estate businesses would be eligible for the deduction. When the regulations were finalized, the IRS released Revenue Procedure 2019-38, which was intended to help these rental real estate businesses assess whether they are eligible for the QBI Deduction. This helps to clarify confusion by allowing a “safe harbor” for rental businesses who do not necessarily qualified as a trade or business, to qualify for the deduction.

What types of entities qualify for the safe harbor?

The safe harbor rules define a rental real estate enterprise as an interest in real property existing for generating rents. If the taxpayer owns several different real estate enterprises, they have the choice to either treat each one of the rental properties individually or as a group. Properties would be divided into groups for residential real estate and commercial real estate if a grouping election is made.

What are the requirements to qualify for the safe harbor?

  • The taxpayer, their employees, agents or independent contractors must perform at least 250 hours of rental services annually with respect to the enterprise.
    • Items qualifying as rental services:
      • Advertising for the rental of the properties
      • Performing repairs and maintenance
      • Supervision of employees or contractors
      • Processing tenant applications
      • Negotiation or execution of leases
    • Items not qualifying as rental services:
      • Making investment or financing decisions
      • Managing long-term capital improvements of the property
      • Hours spent traveling to or from the rental properties
  • Separate books and records must be maintained to track income and expenses of each rental real estate enterprise, either individually or by group if electing to form a multiple property enterprise.
  • Taxpayer must maintain records proving who performed the services, hours of all service performed, description of the services performed and the dates on which the services were performed.

What could disqualify a taxpayer from the safe harbor?

  • A taxpayer cannot use the safe harbor if they use the real estate property as a residence at any point during the year.
  • Real estate property leased using a triple net lease would not qualify for the safe harbor.

The safe harbor rule is not the only way to qualify for the Section 199A deduction. This deduction can be quite powerful so contact us today to discuss how to qualify. It is important to review your tax strategies to ensure you are in the best position possible.

Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction and real estate industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities.  Click below to schedule a free 30-minute consultation.