A tool used by a developer, contractor or homeowner to keep the primary party committed to getting the project completed is called ‘retainage’. In effect, retainage means to withhold a small percentage of all payments made until all the work is done. The idea is prevent the contractor, subcontractor or vendor from earning their respective profit until they have completed their agreed upon service.
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.
Charging a construction management fee is one of several different construction production styles. The most common is the traditional build and sell style. Here the contractor puts up the capital to build the house and sells the house while under construction. A common term used with this style is ‘Spec’ house. Another style involves shifting ownership of the project to the buyer upfront and the contractor merely runs the project, i.e. ensures it is built properly. This is referred to as a management fee style of construction. The typical contract is between an owner of a lot and a contractor. The owner is willing to fund the project through completion and pay a contractor a flat percentage of the cost of construction as a fee for managing the project. The contractor brings his license, experience and subcontractors to the job to build the home for the owner.
With the construction management fee style, the question for the contractor is: what is reasonable and fair rate to charge as a percentage of costs to build the home? This article explores how to determine a good rate and the various risk factors that affects this rate. Understanding how to determine the rate is essential to earn a fair and reasonable amount for your services. The reader must first grasp the risk factors involved and customary returns on each respective risk factor between the two most common styles – traditional and management. Once the contractor understands the underlying risk factors, the rate is easier to calculate. Finally, there are some nuances and adjustment factors requiring attention by the contractor in order to determine a good rate. The following sections explain the risk factors involved, proper rate determination and adjustments to determine a good contractor’s management fee.
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.