VIEWpoint CONSTRUCTION

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1 VIEWpoint CONSTRUCTION Insight, Oversight and Foresight for Your Business Construction Bidding Best Practices Your success as a general contractor or subcontractor relies largely on your ability to master the bidding process. Doing so will allow you to secure more work, maintain backlog and enhance profits. Read below for four best practices to incorporate into your process. 1. Secure a place on negotiated bid lists. Although not always possible, where you can, focus your efforts on obtaining private bid opportunities versus public bids. This will allow you to better compete in areas other than price, including your construction specializations, reputation, work quality and safety record. Achieving favorable status starts with your work product and extends to your ongoing relationships with customers. That means consistently producing high-quality work, meeting project deadlines and minimizing risk. Other tips include: Follow up post-job with customer satisfaction surveys to help measure your progress toward such goals and pinpoint areas for improvement. Focus on building strong relationships with key customers. Join area construction organizations and attend their networking events. Make referrals and introductions to those in your network, and ask them to return the favor by introducing you. A Doeren Mayhew Quarterly Construction Newsletter Inside This Issue Construction Bidding Best Practices Alternative Dispute Resolution: A Remedy to Costly Contract Litigation How Personal Goodwill Can Boost Your Business Sale Proceeds New Lease Proposal Includes Dual-Recognition Approach On Our Blog Tax Reform Proposal: What Lies Ahead Could You Be Overpaying Your Vendors? New Medicare Tax: Watch Out for Withholding Issues And More (Continued on page 2) Michigan Texas Florida rd Quarter 2013

2 VIEWpoint CONSTRUCTION 3rd Quarter 2013 (Construction Bidding Best Practices Continued from page 1) Busy contractors lacking sales manpower may even consider implementing a CRM system with tools to help automate communication with customers and monitor sales opportunities. 2. Put your best bid forward. Bid accuracy and quality is fundamental, but in some cases, you may need to go beyond the basics to differentiate your bid and stand out in the price war. This is especially true for those who must compete primarily in the public bid space. Review past jobs similar in scope to ensure you aren t overlooking special considerations. Have your best people review the job blueprints and maintain a high level of oversight on the bid process where price competition is a concern. 3. Consider contract terms. A little foresight in the bidding process can go a long way in controlling job costs and maintaining profitability on your projects. Consider where your risks are in terms of costs and cash flow, and incorporate terms to protect your business. Best practices related to contract terms include: Adding provisions to cover financial risks such as bonds, warranties, insurance, damages, safety issues, etc. Including methods of payment, payment schedules, etc. Ensure payment dates align with project deliverables. Covering performance standards and a process for dispute resolution if standards aren t met. Subcontractors might consider adding a clause that they must be paid a certain number of days after the general contractor is paid. Another best practice is a stop-work clause freeing you to leave the project if you aren t paid within a designated timeframe. For longerterm jobs, consider clauses to offset potential increases in material prices. 4. Ensure proper job cost accounting. Since control of job costs drives gross profit, it is Your success as a general contractor or subcontractor relies largely on your ability to master the bidding process. Text goes here. critical that you understand them. Effective job cost accounting helps you determine and allocate your overhead and your burden within bids. Burden includes costs such as workers compensation insurance, payroll taxes, fringes and equipment costs. You can calculate burden based on a percentage of labor hours, dollars, revenues or other methods. By failing to accurately reflect these costs in your bid, you can actually lose money on a job that appears to be profitable. Your accounting system should allow for effective breakdown of this data. If not, be sure to check with your accountant on how you can improve job costing. For more information on improving your bidding process, contact Doeren Mayhew s dedicated Construction Group. Doeren Mayhew 2

3 VIEWpoint CONSTRUCTION 3rd Quarter 2013 Alternative Dispute Resolution: A Remedy to Costly Contract Litigation Alternative dispute resolution (ADR) has been touted as the remedy to settling contractor conflicts in the courts. For starters, it s significantly less costly and timely. But the greatest benefit is that there are truly no winners or losers in these disputes, as the goal is to find a common ground between the parties involved. It s no wonder that ADR is commonly used in the construction industry. Read below for more about what ADR involves and how it can be applied in disputes. ADR: Is it Truly Effective? ADR is a technique used to assist disagreeing parties in coming to some sort of agreement, short of the traditional legal system. For decades, studies have proven ADR is not simply a fad, but a reliable, less costly process, leaving room to maintain respectable business relationships. Mediation Vs. Traditional Litigation 83 Percentage of respondents who report overall lower costs Percentage of respondents who believe mediation involved shorter disposition time Percentage of respondents who see no difference in fairness of the process Source: The Institute for Advancement of the American Legal System Report on Mediation Versus Traditional Litigation In spite of the statistics, many construction associations have steered clear of mandating ADR procedures in contracts. However, contractors and subcontractors have taken the initiative to individually implement ADR clauses. There are three ADR techniques commonly used by contractors: 1. Non-binding neutral 2. Mediation 3. Arbitration Non-Binding Neutral A non-binding neutral is a person or person(s) impartial to the dispute at hand. They hear each respective party s position, access all of the evidence and legal concerns, and conduct interviews to gather further information when needed. This process enables neutrals to advise both parties on the way to resolve the dispute. Mediation Whereas a non-binding neutral provides an opinion on how the dispute should be settled, mediators go a step beyond to help the parties come to an agreement. This process typically involves one or a group of mediators and can be held in an informal, public setting. This can cut court costs and fees, as mediation does not require mandating circumstances or time consumption. It can take a few weeks to come to an agreement in a mediation process, versus the months and even years to settle a court case. Arbitration If the above non-binding and mediation processes are ineffective in your particular circumstance, arbitration is another common process that is considered to be more efficient, private and direct. Different from a non-binding approach, arbitration leads to a final, binding decision that results in an award. Of the three most common forms of ADR, arbitration is most similar to traditional litigation. Judges can be hired to help facilitate resolution. The parties are given the power to determine the issues to discuss in litigation and even how the award is to be given, which is transferred in writing. Arbitrators overseeing construction legal proceedings are usually a panel of three experts with extensive industry-related experience. (Continued on page 5) Doeren Mayhew 3

4 If you re a business owner, you undoubtedly have created some personal goodwill in the business intangible assets that originated from your personal efforts. You may not realize that these same efforts that have helped build your business into what it is today can help you minimize taxes and increase your proceeds upon sale, without much negative impact on your buyer. VIEWpoint CONSTRUCTION 3rd Quarter 2013 How Personal Goodwill Can Boost Your Business Sale Proceeds Goodwill Definitions The International Glossary of Business Valuation Terms defines goodwill as that intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified. Sometimes goodwill is defined as the difference between a company s fair market value and its net tangible (asset) value. This broad definition may lump identifiable intangible assets together with goodwill. In fact, Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets, lists the identifiable intangible assets that appraisers can value separately from goodwill. Goodwill can be further broken down into two types: 1. Business (or entity) goodwill is intangible value attributable to the business itself, including its established processes and location(s). Businesses retain this portion of goodwill even if owners retire, sell or otherwise part ways. 2. Personal (or professional) goodwill is tied to the efforts and reputation of owners. It generally cannot be transferred to a third party without significant time and effort. Some distinguishing features considered when analyzing goodwill include: Personal attributes of the owner(s). Companies that rely heavily on the reputation, skills and knowledge of owners possess personal goodwill. For example, state laws require partners in an accounting or law firm to possess the requisite education, training and professional designations. When used effectively under an asset transactional structure, allocating purchase price to personal goodwill can help you mitigate tax exposure and get a bigger piece of the pie. Marketing techniques. When categorizing goodwill, appraisers consider how the business attracts and retains customers. Businesses that typically generate leads via walk-ins and Yellow Page ads more likely possess business goodwill. When customer (and employee) loyalty is based on the efforts, contacts and referrals of individual owners, it suggests personal goodwill. Management structure. Business owners who are unwilling (or unable) to relinquish control may unwittingly create personal goodwill especially if they also possess specialized knowledge, experience and training. Centralized management structures make it harder for businesses to transition to new ownership without sellers ongoing involvement. Using Goodwill in Your Favor Tax implications are a major seller concern in any transaction, but especially in the case of a C corporation, which is taxed at both the corporate and personal levels. For such business sales, a (Continued on page 6) Doeren Mayhew 4

5 VIEWpoint CONSTRUCTION 3rd Quarter 2013 (ADR Continued from page 3) Do the Research and Check Your Facts Having a solid case is critical to any dispute, and facts are the key. Financial advisors and accountants can be very influential in this process, known as fact-finding. Usually performed in tandem with ADR, a fact-finder will either work as a neutral or partial contact, disseminating information and relaying it through reports. Their goal is to assist the parties in reaching a settlement or solution through the bare facts. Finding the Best Neutral It takes effort and thorough research to find a neutral (otherwise referred to as mediator or arbitrator) to navigate the issues and find resolutions to complex faults in a project. However, this step is critical in finding the right person to advise your case and reap results. The American Arbitration Association (AAA), along with several industry advisory committees, has established criteria to help you make the best selection. Your neutral should have acquired most or all of the following: At least 10 years of construction industry experience Mandatory AAA training for dispute avoidance and resolution Strong sense of neutrality and commitment to impartiality and objectivity Effective judicial skills Reputation for neutrality work Availability and accessibility to guide this process quickly and with ease The AAA s website, offers a list of mediators and arbitrators who are trusted in the industry. While no project will ever be perfect, many disputes can be avoided by simply creating open communication of the responsibilities and resolution options within your contracts with clients and subcontractors. To learn more about alternative dispute resolution and how it can lower your contract litigation costs, contact Doeren Mayhew s dedicated litigation support advisors. New Lease Proposal Includes Dual-Recognition Companies dealing with leases will finally receive guidance on how the accounting for these leases will be implemented in the future, with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announcing a revised proposal of financial reporting standards for leases. FASB and IASB have called for nearly identical treatment in regard to the approach, measurement and presentation of expenses and cash flow as a result of lease activity. Lessees would recognize assets and liabilities for leases exceeding 12 months. The main difference in the proposal was the switch from a single approach to dual-approach accounting. Other changes include: Recognition of assets and liabilities for leases exceeding 12 months. Use of a straight-line lease expense method in income statements for leases that are only paid for the use of the asset. Most real estate properties fall into this category of recognition. Reporting of amortization of assets separately from interest on the lease liability during the time period when consumption is a significant portion of the asset. Additionally, this type of lease would be recognized as a non-financial asset measured at cost, less amortization. Typically, equipment and vehicle leases will need to follow this method. Lessors will need to account for equipment and vehicle leases that are categorized as off-balancesheet for the lessees to provide more transparency related to the lessor s credit and asset risk. Most commonly, this is related to operating leases. Due to the varied nature of leases, it was difficult to develop one approach to financial reporting that applies to all of them, hence the dual approach. This approach will help provide transparency for businesses with investors since leases will be recognized as liabilities on the balance sheet with disclosures related to them. An effective date has not yet been set by the boards, but it is anticipated to go into effect in Comments are due by Sept. 13. For more information on the changes and how to prepare, contact Doeren Mayhew. Doeren Mayhew 5

6 305 West Big Beaver Road Troy, Michigan doeren.com PRESORT FIRST-CLASS MAIL U.S. POSTAGE PAID ROYAL OAK, MI PERMIT NO. 903 Serving hundreds of contractors and suppliers doing business domestically and abroad, Doeren Mayhew s Construction Group members are adept in all elements unique to construction from job costing to surety bonding, equipment funding to tax deferral strategies, internal process improvements to leadership succession planning. Stay up to date on the issues and trends affecting the construction industry on our VIEWpoint blog. doeren.com/blog This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted. Offices in Michigan, Texas, Florida Doeren Mayhew. All rights reserved. VIEWpoint CONSTRUCTION 3rd Quarter 2013 (How Personal Goodwill Can Boost Your Business Sale Proceeds Continued from page 4) good deal of trade-off exists when weighing the transaction type what s favorable for the buyer is often not as optimal for the seller, and vice versa. Where personal goodwill comes into play is the asset sale. While this transaction type can position the buyer more favorably, it also allows the seller to allocate purchase price to personal goodwill to reduce tax rates and increase after-tax proceeds. Consider the example on the right. In closing, when used effectively under an asset transactional structure, allocating purchase price to personal goodwill can help to mitigate tax exposure on the sale and increase after-tax proceeds. The *Assumes material participation; 3.8% Medicare tax added otherwise buyer benefits from the step-up basis under an asset deal, while the seller increases his dollars a win-win for all parties. For assistance maximizing your business sale proceeds, contact our certified mergers and acquisitions advisors and licensed investment bankers. Securities offered through Decosimo Corporate Finance, member FINRA and SIPC. Doeren Mayhew 6