With the management fee style of construction, the question for the contractor is: what is reasonable and fair rate to charge as a percentage of costs to build the home?
The construction contract is a formal agreement identifying the terms and understanding between the contractor and the purchaser. The document has many clauses that greatly impact the contractor. Learn about these respective clauses in the construction contract and how to word them to financially benefit your company.
In 2009, the Internal Revenue Service issued the Construction Industry Audit Technique Guide (ATG) for use by IRS agents and for contractors. The contractor’s audit guide explains the processes and methods the IRS uses to examine a contractor. The end goal is to verify actual taxable income over an assigned tax year for a contractor. The IRS recognizes that this industry is complex and utilizes multiple methods to establish revenue and net profits. It is so complex, the guide is 257 pages long.
This article introduces the guide and its major sections and how to understand what areas are applicable to your construction company.
Every construction project has costs beyond the direct costs and the contractor wants to earn a profit. To cover these costs he must have an appropriate markup. The contractor must give consideration to many variables and circumstances to calculate the best markup for a construction project. To determine the best markup percentage on costs, the contractor should consider his indirect costs, overhead, taxes, and final profit desired.
The completed contract method of accounting recognizes revenue and the associated costs once the project is complete. This is one of the two popular accounting methods used in the construction industry. For residential contractors, the completed contract method may have a slight tax advantage by deferring revenue recognition but is generally not considered the best method of accounting in the construction industry.
There are two primary methods of reducing costs of construction. The first is cost negotiation and the second is cost shifting. These two methods have several tools in each to achieve overall price reduction. The following describes each method and the respective tools within each method that you can use to achieve overall cost reduction.
When a builder constructs a house without a contract, it is known as a spec house or a speculation home. There are several advantages to the builder to build a spec house including timing, financial gains and workforce retention. There are advantages to the buyer to purchase a spec house as well. These include no delay in moving in, an overall lower price, and a simpler contract.