How the National Association of Minority Contractors (NAMC) paved the way
By Vince Fudzie
As we close out this abbreviated month designated to the accomplishments of African Americans, I cannot help but ponder the contributions made to the construction industry, not only by African Americans but by other minorities as well. However, I can assure you that there has been no greater contribution than that of the founding members of the National Association of Minority Contractors (NAMC).
Here is my story and my experience with the NAMC, a fantastic organization and resource to minorities in our industry: Several months ago a friend asked me to get involved in the start-up of a local chapter of the organization. My first inclination was to waste no time with another ineffective, self-serving advocacy organization. To this point, I had been cynical toward the seeming lack of progress of minority contractors and the organizations that advocate for them, as construction dollars for minorities have been so low that it is a wonder minority contractors exist at all. My friend’s persistence ultimately peeked my curiosity, and I took it upon myself to research the group. And, wow, was I blown away by its almost 50 years of accomplishments on behalf of minority contractors (i.e. African, Asian and Mexican-American). In reality, social-political organizations such as NAMC have, since the sixties, fought courageous battles to achieve equity and fairness in all areas of life in America. Unfortunately, many of these victories have been diluted over the past thirty years or so.
As a child growing up in Oakland, California, in the sixties, I was immersed in the coverage of groups such as the Black Panthers and the Mexican farm workers led by Caesar Chavez. Little did I realize that along with the fight being waged for social justice, there were luminaries such as Congressmen Parren Mitchell and Ronald Dellums, Congresswoman Eleanor Holmes Norton, Assemblyman Willie Brown, Jr. and Mayor Maynard Jackson who were also waging a war on an economic front. It is from this social-political backdrop that Ray Dones and Joe Debro co-founded NAMC. The following is a brief history of the evolution of minorities in construction that you should know and be encouraged by:
1964 – The Civil Rights Act of 1964 was a landmark piece of legislation outlawing discrimination based on race, color, religion, sex or national origin. It ended unequal application of voter registration requirements and racial segregation at the workplace and by facilities that served the general public. It is considered one of the crowning legislative achievements of the Civil Rights Movement.
Pre-1966 – Minority contractors were receiving less than .001% of the total publicly funded construction dollars in the country. In addition, many states were unionized, and it was virtually impossible for most minorities to get in. Add to this the lack of bonding, financing and insurance options, and it was downright tough being a minority contractor.
1966 – Ray Dones and Joe Debro, recognizing that they both had mutual interest in the success and development of minority contractors, began discussions with other contractors in the Oakland Bay Area to formulate a strategy to improve their mutual plight. Through these discussions, they decided to create an educational association, the General & Specialty Contractors Association, which would educate and train its members to excel in light of the changing social and political atmosphere. This would ultimately be the genesis of NAMC.
1968 – Realizing that minority contractors around the country were experiencing similar issues, such as lack of access to financing, bonding and projects, Ray Dones believed that the formulation of a national organization to advocate at the federal level would provide the greatest impetus for change. In 1969, the first conference of the National Association of Minority Contractors was held in San Francisco, in which Ray Dones was elected President and Joe Debro, Executive Director.
1970 – As a result of the pressures brought on by NAMC and other advocacy groups to level the playing field for minority contractors during the 70’s, tremendous gains in opportunities were achieved. What was once a paltry one-tenth of 1% of publicly funded construction projects grew to more than 1.5% of construction dollars going to minorities during this period. These gains were bolstered by such programs as loan guarantees, federal and state set-asides, training programs, bonding assistance and the perpetually besieged 8(A) business development program.
1980 – Unfortunately during this decade, 1.5% of publicly funded work going to minority contractors was too much for some to handle. As a result, numerous opposing entities began to challenge the constitutionality of various minority programs. The landmark 1989 Supreme Court decision, City of Richmond v. J.A. Croson Company, would forever change the effectiveness of affirmative action as a whole. In this decision, the Court ruled that city ordinances requiring 30% participation by minority contractors on all city contracts were unconstitutional. Subsequently, numerous other challenges to affirmative action related programs were initiated, and, still today, mandatory set-asides are virtually non-existent in all fifty states.
2016 – Although NAMC and others continue to fight, it looks like minority contractors have almost come full circle in the quest for equity, once again being relegated to receiving less than 1% of all publicly financed construction dollars and even less of private spending. However, we will not be deterred, as we are now better trained, have greater resources and information, and have the same spirit of those who came before us. We CAN, we Must turn things around.
So as we close another Black History Month, let us not forget those who paved the way for us and our responsibility to carry the same determination and inspiration, so that those who come behind will have every opportunity afforded them. In my years, I have personally witnessed the ebbs and flows of minority inequality in all areas, and I take it upon myself to do everything in my power to see workplace equality in its fullness. Partnering with the NAMC has given me a foundation to make a difference.
Vince Fudzie, MBA, CPA, CIRA, is the Managing Member of Triune. Founded in 1997 with headquarters in Dallas, Triune is a leading, integrated, design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
6 Reasons for Profit Fade
By Wesley Middleton
Profit fade. This is a situation that your bonding agent doesn’t want to see. Company owners and controllers seldom use this tool, despite the fact that it can be very effective in identifying situations and issues inside your company. Preparing a fade analysis on a regular basis can help identify trends that may warrant further investigation.
What is a fade analysis? In a very general sense, it is simply a comparison of your original estimated gross margin on a job to your actual progression throughout the construction period to completion. Generally, a fade of 10% or more will result in a call from your bonding agent with questions about why it is happening. The more variability in your contract over time, the more of a risk you appear to be to your bonding agent, and the less confidence they have in your ability to estimate and manage jobs.
A Note on Fade/Gain Calculations: Avoiding a Common Error
If you have an estimated profit of 2% and your profit drops to 0%, then technically you have a 100% profit fade. The calculation should be a percentage change of a percentage, rather than the difference between 2 percentages. Let’s look at another example: If your 2% gross margin represented $1 million and the job broke even, then you’d want an explanation of the 100% profit fade. The current schedule would only show a 2% fade.
Sources of Contract Fade
When preparing a fade analysis, it is important to break it down by project manager, estimator, category of construction work, or other categories that may exist in your company. This can further isolate the cause of the contract fade. Here are six important reasons that you may be experiencing contract fade:
- An estimator who is not competent at estimating jobs and is too optimistic in his estimates, or aggressive bidding by an estimator who is struggling to win contracts.
- Change orders that are unprofitable or simply have not been approved and recorded in the accounting system.
- An under-performing project manager who is not effective in managing the costs and people on the job.
- Jobs that are outside the company’s expertise, resulting in a learning curve that causes additional costs or job delays.
- The accounting department is not coding job costs to the correct job. Having the project manager and estimator review and approve the final job costs will help in this area.
- Cost shifting, otherwise known as fraud. It can be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud, or the accounting clerk could be doing the same thing. Either way, the same review process in #5 above would help prevent this from happening.
Seeing the Better Picture
Comparing the total actual costs to the estimated costs simply isn’t enough. Seeing the change in gross margin from year to year adds an additional level of analysis. A well-planned deception of systematically “shifting” job costs from one contract to another between periods may not be detected by only comparing estimated costs to actual. Preparation of the fade analysis is better supported by a well-prepared WIP or contract schedule.
For a basic contract fade analysis template, click here. (link to: http://www.middletonraines.com/contract-profit-fade-analysis-download)
“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.” wmiddleton@middletonraines.com
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
5 Minutes to Wellness: Are Your Feet Happy? Check Your Shoes!
By Dr. Micheala E. Edwards
Today, it’s not unusual to spend more than $100 on a pair of tennis shoes. But are you sure that your shoes are the right ones for you? The way that your feet respond to external forces directly affects your walking and running gaits. Wearing improper shoes can cause increased joint shock, which is interpreted in the body as joint pain that grows from the bottom up (ankles to the knees, then to the hip, and then in the neck). Achy joints may be caused by broken down or worn out shoes. They can also be caused by wearing improper shoes for the activities that you are doing. Therefore, it is imperative that you have the correct shoes on your feet.
Different shoes should be worn for different purposes. For example, you wouldn’t benefit much from wearing a sprinting shoe (track spikes) when walking a mile. A wrestling boot will not give you much support while on the basketball court. First, know what your goals are when selecting a shoe to wear:
• Do you want motion control?
• Do you need a shoe for more stability when walking/running?
• Do you need more support for your ankles?
• What about the cushioning inside of the shoe?
• Are you looking for a high-performance shoe?
You should ask yourself each of these questions before purchasing a pair of tennis shoes. A good shoe salesman should be able to make suggestions on the best shoe for you when you describe your needs for the purchase. Once you’ve made your decision and begin to wear your new tennis shoes, it’s important to maintain proper care of them so that you can obtain optimal results:
• Keep your shoes dry at all costs (wet midsoles decrease shock absorption by 40-50%)
• Always untie your shoes when removing them to avoid breaking down the heel counter/Achilles box
• Add insoles for additional cushioning when necessary (running shoes lose 30-50% of their cushioning in the first 250 miles of wearing the shoe)
• Inspect your soles for discoloration or material deterioration (avoid shoes that may be on sale and have a long shelf life with yellow soles)
• Replace all shoes after 400-600 miles to avoid leg and ankle fatigue
It’s also important to know when to replace your tennis shoes depending on their purpose. Even the best shoes will have some breakdown of their materials and may cause achy joints and injuries in the long run. Know when to replace your tennis shoes according to how often you wear them:
• 10 miles per week or fewer: Replace every 12 months
• 15 miles per week: Replace in 8 months
• 25-30 miles per week: Replace in 4-6 months
A lot of thought should go into your tennis shoe purchase. Be sure to ask plenty of questions and inspect your shoes before you purchase them. Buying the correct type of shoes will help prevent unnecessary aches, pains and injuries, and will guarantee a more comfortable experience when walking or running.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
Additional Insured and Indemnity Requirements in Your Contracts: Will Your Insurance Respond?
By Brad Burnham
Agreements between general and subcontractors have been changing in recent years. Many, if not all, contracts have always had an insurance provision requiring the subcontractor to carry specific types of policies and limits of insurance. More recently, requirements for Excess Liability (Umbrella) and Workers’ Compensation have been included and many general contractors now require very specific wording on the Certificate of Insurance.
Contracts may call for the subcontractor to specifically name the general contractor (GC) and/or owner as an “Additional Insured” and require very specific wording about the completed operations coverage and far-reaching indemnification.
The requirements may include the subcontractor assuming so much of the GC’s liability that the insurance company becomes unable or unwilling to provide the coverage needed, leaving the subcontractor out of compliance. Some insurance agents will issue the Certificate of Insurance without understanding the scope of the coverage and without reading the client’s contracts and insurance requirements. However, only the policy itself defines the coverage and will always supersede a Certificate of Insurance.
Are you out of compliance with your subcontract agreements?
- Look at your current contracts for the Insurance and Indemnity Provisions.
- Ask a qualified construction insurance agent to explain how your current insurance program will respond to the contract requirements.
- Send contracts to your attorney and insurance agent prior to signing them.
Why have the contracts changed?
- More litigation in our society – a “find fault first” approach to occurrences
- Rising defense and investigative costs
- Risk managers (rightfully) assuring that any claims are paid by the party causing the injury or property damage
Overreaching Indemnification
By indemnifying, the subcontractor promises that it will stand by its work and protect the general contractor from all claims, including those for defective work, injuries and property damage. General contractors generally will not hire subcontractors without the inclusion of such a provision, and they are not unreasonable. What the subcontractor must avoid is a provision that obligates it beyond acts and omissions that it or its employees performed. Indemnification clauses that require the subcontractor to indemnify the GC for work beyond the subcontractor’s control are not reasonable and, in many states, not enforceable. A reasonable general contractor will agree that the indemnification clause should be limited to only those damages caused by the subcontractor or those under its control.
Brad Burnham is a Vice President and Partner with Hotchkiss Insurance Agency, LLC, headquartered in Dallas, Texas. Brad leads a construction team of licensed agents and Risk Managers. Contact Brad @ 972-512-7727 or bburnham@hiallc.com Hotchkiss Insurance Agency, LLC www.hiallc.com
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
How To Price a Federal Government Construction Claim
General and Administrative Costs, Bond Costs, Profit and Miscellaneous Costs (Part 4)
By Kay Kendall
The [SPELL OUT FIRST] (FAR) defines direct costs as any costs that can be identified specifically with a final cost objective. An example of a direct cost would be labor and concrete material costs incurred to construct a concrete slab. The concrete slab is the final cost objective.
Indirect Costs
The FAR defines an indirect cost as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost object. An indirect cost is not subject to treatment as a direct cost. An example of an indirect cost is a contractor’s general and administrative (G&A) expenses. These are also known as home office overhead. The G&A cost cannot be identified with the concrete slab above because the home office personnel did not work directly on constructing the slab.
G&A costs are calculated by multiplying the contractor’s G&A rate by all other allowable direct costs in the REA or Claim.
When preparing a REA or Claim, the actual G&A rate should be used and the costs included in the G&A calculation should be in accordance with FAR Part 31 – Contract Cost Principles and Procedures. Costs that are not allowable should not be included in the G&A rate calculation. Examples of costs that are generally unallowable are interest expense, advertising for the promotion of sales, bad debt and contributions. There are others, but these are some common examples.
Some contractors arbitrarily use a rate of 5% or 10%, or some other markup for G&A. However, without making the actual calculation, the contractor will not know its actual G&A rate. Maybe the contractor’s actual G&A rate is 18%, but it has just arbitrarily been using 10% or less in its price proposals. The contractor is entitled to recover its actual costs.
When submitting REAs or Claims to the government, the actual G&A rate should be used. The government can request an audit of the contractor’s REA or Claim, and in some cases – if the total REA or Claim is over the acquisition threshold, then it is required by the FAR to be audited.
Bond Costs
Bond costs are calculated on the total contract amount. When contractors bid a project that requires a bond, they include the cost of a performance and payment bond. The actual bond premium is based on the entire contract amount. The bond premium is probably calculated on a scale.
Suppose a contractor is awarded a $5,000,000 project that requires a performance and payment bond. The premium may be calculated on a scale similar to this one: the first $500,000 may cost $15.00 per $1,000, the next $2,000,000 $13.50 per $1,000, and the remaining $2,500,000 may cost $11.00 per $1,000. The scale may continue for anything over $5,000,000, and the premium cost will be $9.00 per $1,000. In this example, if the original project was $5,000,000 and work was added, then the correct bond rate to use in a REA or Claim that will increase the contract amount above the $5,000,000 is the $9.00 per $1,000.
Profit Calculation
Profit is a negotiable item. Some government entities use the Weighted Guidelines to determine the rate of profit for the contractor on a particular change. When all of the Weighted Guidelines criteria are maximized, the highest rate of profit that can be achieved using the Weighted Guidelines is 12%. Although the Weighted Guidelines are not mandatory in determining profit, they are widely used by government agencies. There are other methods for determining a reasonable profit. The key is that the method must be fair and reasonable.
Miscellaneous Costs
Other miscellaneous costs should not be overlooked – for example, builder’s risk, general liability and workman’s compensation insurance. If these costs are not included in the G&A and are charged directly to the project, they should be included in the REA or Claim. If they are part of the G&A rate calculation, to avoid duplication of costs, they should not be included as a direct cost in the REA or Claim.
Contractors in some states or U.S. territories incur costs that are not incurred in other states. For example, in Puerto Rico, there is a tax calculated on the total contract amount. The tax is an allowable cost to include in the REA or Claim. It should be calculated at the current rate on the total amount of the change, including bond and profit. Technically, the tax should also be calculated on the tax, but on smaller REA and Claim amounts it is insignificant.
Conclusion
With the information in these articles, contractors have a guideline for preparing REAs and Claims. Sometimes, the REAs or Claims can become complex. In those situations contractors should seek a qualified professional to assist with the REA or Claim preparation.
Remember, until the issue becomes a dispute or a Certified Claim is submitted, the cost to prepare and support the REA is generally allowable to include in the REA. A consultant experienced in government contracting can facilitate a successful REA or Claim.
In the event the issue elevates to an appeal or lawsuit, a construction lawyer with federal government experience should be consulted. Federal government law and procedures are different than in the non-government arena.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: Again, you should never undervalue the worth of a qualified claims consultant and/or a lawyer well versed in federal construction law and procedures.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2015 TMV, LLC (Triune). Any and all rights reserved.
David vs. Goliath Businesses:
How to Level the Commercial Construction Playing Field
By Vince Fudzie
At the beginning of every year numerous pontificators are charged with predicting the future, only to have those predictions rescinded and recast throughout the year. Yet it’s probably still best to run your business based on educated predictions and forecasts than none at all.
According to data from several prominent sources such as FMI, AIA and Dodge, everyone seems to believe that any growth in 2015 will be bolstered by a broader range of sectors. And it’s probably safe to say that U.S. construction starts will be somewhere between the estimated $654 billion in 2014 and the 2015 estimated $612 billion – give or take a billion or two.
Based on our own increased volume of new bid opportunities, I can safely say that there appears to be an uptick in the amount of construction starts going into 2015. Unfortunately, even though we have been extremely competitive on our bids, there have been a couple of recent occasions where we were the low bidder from an invited list, and we still were not awarded the project.
Case in Point: On one recent bid we were invited to participate with two other general contractors. The first contractor was a hundred-year-old behemoth, which I will call Company T, and the other was a captive entity of a large healthcare system, which I will call Company M. As such, both competitors had very deep pockets and extensive resumes doing large-scale projects of which this was not one.
Other than that, we were all pretty equally yoked. We had comparable bonding, insurance, people and more importantly, lots of successful relevant experience. The bid tab indicated that we were lower – by 7 percent or $275,000 from Company T.
So what would make a customer spend an extra $275,000 on a project that we have numerous times proven ourselves more than capable of doing?
Whatever the reasons it simply burns my britches, but instead of complaining about the unfairness of it all, I want to spend time talking about how we all can mitigate such occurrences in the future. In essence, what can we, as small to midsized contractors, do to level the playing field when competing against our older cousins? Spending some time in the new year developing the right strategy will soon have you chopping your larger competitors down to size.
1. Recruit the Best and Brightest
One of the advantages of being smaller is that you typically can’t afford to spend thousands to hire and train the best and brightest young minds, but you can afford to hire them later in their careers. Many such employees may have become disenfranchised by the bureaucracy, politics and inefficiencies found in larger firms. Therefore, create a culture that is appealing to the best people your company can afford and maintain an environment to keep them.
2. Engage Industry Leading Service Providers
If you are going to effectively compete, you need to employ the same caliber of service providers as your larger competitors. This way no potential customer can call this aspect of your business inferior. Whether it’s insurance, banking, bonding or any other needed service, make sure they are leaders in the industries they represent.
3. Develop a Solid Subcontractor Network
Having a competitive and knowledgeable subcontractor network is essential to not only quality bids, but also to maintaining the highest level of knowledge in the various trades of our industry. This level of knowledge will become invaluable as you work to be an industry leader on par with bigger players.
4. Try Something Exceptional
This is where you need to think outside the box and do something that will put you on the radar in your market area. This could be sponsoring a major event or actively supporting a charitable organization in the community. Remember you don’t have to be a behemoth to do exceptional things that will endear you to potential customers and the community.
5. Determine Your Value Proposition
Have you spent time establishing a value proposition that truly adds value to customers? If not you need to get on it. As a smaller competitor there are numerous attributes that you possess that adds value to each project. You just need to spend time seriously determining exactly what they are. Once you have determined the value you bring, you must actively convey it to potential customers and decision makers prior to your next bid opportunity.
6. Exceed Expectations
Once you have leveled the playing field and successfully won a project, it is imperative that you not only meet but exceed the expectations of your new customer.
Exceeding expectations will not only create loyalty with the customer but will also create a new advocate for you and help establish your company’s reputation.
In a nut shell, you level the playing field by being on par with the larger competitors in all possible areas – personnel, knowledge, service, and subcontractors – and then beat them in the areas where you are unique and/or add value.
Vince Fudzie MBA, CPA, CIRA, is the Managing Member of Triune. Founded in 1997 with headquarters in Dallas, Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2015 TMV, LLC (Triune). Any and all rights reserved.
How To Price a Federal Government Construction Claim – Part 3
Pricing Material, Subcontractor and Jobsite Costs for REA or Claim (Part 3)
By Kay Kendall
Continuing our discussion of pricing the REA or Claim, we will pick up with material costs, subcontractor costs and jobsite overhead costs.
Material Costs
Material and subcontractor costs should be easier to track than labor and equipment costs. If a change has taken place that requires more material than originally required, the additional quantity at the price it was purchased should be included in the REA/Claim.
Documentation to support the additional costs such as purchase orders, change orders to existing orders and invoices should be provided that show the additional quantity and cost. If the quantity has only increased, it could be useful to show how the additional quantity was calculated and the calculation of the additional cost for the increased quantity.
Subcontractor Costs
Subcontractors have the same burden that the prime contractor has in providing sufficient detail and supporting documentation to justify their REA/Claim. Sometimes, in the interest of keeping the project moving forward and keeping cost tracking simple, it might be a good idea to have the existing subcontractor dedicate a separate crew to perform changed work. This isn’t always the case but should be considered if the features of work are separable.
This author’s experience is that the government (and other contract owners) denies portions of subcontractors’ REAs/Claims because of commingling costs. Basically, the government puts the burden of proof on the subcontractor or contractor to prove how many hours were spent on the changed work. When the features of work are so intertwined that it is not possible to track the labor or subcontractor costs separately, a loss of productivity theory of recovery should be considered.
When a subcontractor is performing changed work, the contractor should get a firm price from the sub for the defined scope of work. Also make sure the contractor’s subcontracts include flow-down clauses from the government contract for the subcontractor to follow the same FAR clauses, other contract clauses and cost principles that the prime contractor has to follow.
The contractor must exercise due diligence to review and verify the accuracy of the subcontractors’ REA/Claim costs. In some situations, it might be prudent for the contractor to submit subcontractor Claims separate from the contractor’s Claim, because the contractor will be certifying the Claim – including a proposal or claim for costs not incurred or under the direct control of the contractor.
Either way, the subcontractor should also certify their claim.
Claim certifications should be taken very seriously. Contractors that certify claims with known inaccurate or false information may be subject to civil and/or criminal prosecution.
Jobsite Overhead Costs
Jobsite overhead is another cost that should be considered in a REA or Claim. In some cases, the government and the contractor enter into forward pricing agreements on costs like jobsite overhead and general and administrative (G&A) expenses.
If a change is directed to the work and it does not extend the contract completion date, some government entities will argue that no additional jobsite overhead is due. There are some instances where additional non-working foremen, superintendents or project managers are required to execute the work in a change. In those cases, the costs for the additional personnel should be included as direct costs in the REA or Claim.
The government will sometimes subtotal the direct costs (labor, material, equipment, subcontractors) in a REA or Claim and add a percentage to that cost for jobsite overhead. This author has seen this method agreed to by the government on changes that did not result in a time extension.
In the event that the change does result in a time extension, the percentage method of calculating the jobsite overhead may not be enough to cover the jobsite overhead costs. For example, maybe the direct cost of the change is only $10,000 and the government position is at 15% markup for jobsite overhead – $1,500 in this case.
But suppose the change, when added to the construction schedule, increases the contract completion date by 25 calendar days due to the submittal and approval of something in the change, and the procurement of the material takes more time because it can’t be ordered until approved by the government.
In this case, if the contractor’s jobsite overhead cost is $1,500 per day, the cost impact is $37,500 due to this change ($1,500 per day x 25 calendar days). Therefore, the $1,500 calculated from the 15% markup doesn’t produce equitable results for the contractor.
For changes or delays that impact the contract completion date significantly, and the application of a percentage to the direct costs does not produce equitable results, the jobsite overhead costs should be calculated from the contractor’s Job Cost Report.
Costs that are normally considered jobsite overhead are on-site management, their vehicles, office facilities and utilities, secretarial and clerical workers, timekeepers, telephone costs and other similar costs charged directly to the project but not associated with any other direct cost objective.
A common way to calculate these costs is to total the types of jobsite overhead costs listed above and divide the total by the number of calendar days in the period the costs were computed. If the project is complete at the time the REA or Claim is being prepared, the total costs for jobsite overhead costs – less mobilization, demobilization and other non-recurring costs – should be divided by the duration of the costs to get a calendar day rate. The calendar day rate can then be multiplied by the number of calendar days the contract completion date was extended as a result of this change or delay.
In the next article, we will discuss general and administrative costs, bond costs, profit and miscellaneous costs.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: As the general contractor, since you will be in most cases responsible for certifying all claims, it is wise to spend time educating your subcontractors on how to submit claims properly.
I have been amazed at the astronomically high claims some subcontractors will submit because they simply don’t understand the process or feel that it’s an opportunity for a financial windfall.
You will save yourself considerable time and effort if you assist them from the beginning. In just about all cases where there is substantial money involved, I suggest that you hire a good claims consultant – they are worth their weight in gold.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
How To Price a Federal Government Construction Claim
Pricing Labor and Equipment Cost for Government Construction REA or Claim (Part 2)
By Kay Kendall
After establishing the legal basis and causation of a REA or Claim, the damage costs must be quantified. The costs in the REA or Claim should be in sufficient detail to permit an analysis of all material, labor, equipment, subcontract and overhead costs, as well as profit, and should cover all work involved in the proposal, whether such work was deleted, added or changed.
In a previous article titled “That’s Not in the Contract, Do I Still Have To Do It?” we discussed one of the differences between a REA and a Claim: costs incurred in preparing and supporting the cost in a REA are generally allowable costs to include in the REA. Therefore, it is best to put as much supporting documentation and explanation into the REA as is available.
That way, when/if a Claim or even an appeal is pursued, the detail has already been done and it was done in the REA where the preparation costs are generally allowable. If the contractor prepares and submits the REA without adequate documentation to support the costs and then decides to go the Claim route, a more detailed document will need to be prepared for the Claim, or the same result may occur.
When possible, the contractor should set up a separate cost code to track the changed or delayed work. If there are multiple changes or delays, then multiple cost codes should be set up to track the costs.
If it is not possible to set up cost codes, the costs should be documented in other ways. Contractors Quality Control Reports are a good place to discuss costs and personnel working on changed or delayed items.
In this article, we will discuss labor and equipment costs.
Labor Costs
When direct labor costs can be identified by the names of the personnel who performed the work, the actual labor rate of those personnel should be used to calculate the actual cost. Be sure to add costs related to labor, such as payroll taxes and fringes. Those employees who are not a part of direct labor or whose hours are not tracked to a specific project should compile contemporaneous notes of the time spent on the projects, were claims will be submitted.
Equipment Costs
Equipment usage and idle time related to the change or delay should be tracked. If the equipment is company owned, hourly rates can be obtained from the Corps of Engineers Construction Equipment Ownership and Operating Expenses Schedule.
It is also known as EP-1110-1-8 and has a volume for 12 different regions in the US and US territories.
It can be downloaded from the following website: http://140.194.76.129/publications/eng-pamphlets/EP_1110-1-8/toc.html.
The contractor will have to determine which region the project is in to apply the rates, and the appropriate year of the publication should be used for the time the work was performed. The Corps Equipment Schedule is referenced in many government contracts as the source to use for pricing equipment costs for changes.
Construction equipment rented from third parties should include an hourly rental rate based on the monthly, weekly or daily rate – whichever was invoiced. If the equipment was active (or operating), the fuel costs should be added. The Corps Equipment Schedule is a good source for obtaining hourly fuel costs, as it has some cost elements broken out of the rate.
If the fuel costs used in the Corps Equipment Schedule are significantly lower than the actual current fuel costs, the fuel costs can be adjusted by dividing the fuel cost in the schedule by the cost per gallon used in the Corps Equipment Schedule, then multiplying by the current fuel cost. On smaller REA’s and Claims, the difference is not significant, but on larger REA’s/Claims that include many pieces of equipment performing work for a large change, the increased fuel cost could make a sizable difference.
If the construction equipment used in the change or sitting idle during a delay is not specifically listed in the Corps Equipment Schedule, then a similar piece of equipment can be used. In determining a similar piece of equipment, such as a bulldozer, comparing HP, weight, purchase price and similar functions and attachments can be used to determine a comparable piece of equipment to use in the REA/Claim price.
Standby rates are applicable to periods when the equipment is dedicated to the change or delay and the equipment is idle. Standby costs for equipment are not applicable if the equipment would have been idle anyway.
In the next article we will discuss material costs, subcontractor costs and job site overhead costs.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: We as a company went nearly 10 years without having to file a Certified Claim on a federal project. Fortunately, we were prepared with good documentation and we were eventually made whole. I think the biggest issue we have encountered with claims is making sure that we recover those costs of non-direct job cost personnel.
As a company you need to make sure non-direct personnel involved keep daily detailed notes including hours spent working on your claims. Don’t allow your profits to take a hit because you underestimate the non-direct expenses incurred as a result of REA’s and claims.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
6 Reasons for Construction Profit Fade
By Wesley Middleton
Profit fade. This is a situation your bonding agent doesn’t want to see. Profit fade is a tool very seldom used by the company owner or controller, despite the fact that it can be very effective in identifying issues inside a company.
Preparing a fade analysis on a regular basis can help identify trends that may warrant further investigation.
What is a fade analysis? In a very general sense, it is simply a comparison of your original estimated gross margin on a job to your actual progression throughout the construction period. Generally, a fade of 10% or more will result in a call from your bonding agent. The more variability in your contract over time, the more of a risk you appear to be to your bonding agent, and the less confidence he/she will have in your ability to estimate and manage jobs.
A Note on Fade/Gain Calculations: Avoiding a Common Error
If you have an estimated profit of 2% and your profit drops to 0%, then technically you have a 100% profit fade. The calculation should be a percentage change, rather than the difference between two percentages. Let’s look at another example: if your 2% gross margin represented $1 million and the job broke even, then you’d want an explanation of the 100% profit fade. The current schedule would only show a 2% fade.
Sources of Contract Fade
When preparing a fade analysis, it is important to break it down by project manager, estimator, category of construction work, or other categories that may exist in your company. This can further isolate the cause of the contract fade. Here are six important reasons that you may be experiencing contract fade:
1. An estimator who is not competent at estimating jobs and is too optimistic in his/her estimates; or aggressive bidding by an estimator who is struggling to win contracts.
2. Change orders that are unprofitable or simply have not been approved and recorded in the accounting system.
3. An under-performing project manager who is not effective in managing the costs and people on the job.
4. Jobs that are outside the company’s expertise, resulting in a learning curve that causes additional costs or job delays.
5. The accounting department is not coding job costs to the correct job. Having the project manager and estimator review and approve the final job costs will help in this area.
6. Cost shifting, otherwise known as fraud. It could be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud, or the accounting clerk could be doing the same thing. Either way, the same review process in #5 above would help prevent this from happening.
Seeing the Better Picture
Comparing the total actual costs to the estimated costs simply isn’t enough. Seeing the change in gross margin from year to year adds an additional level of analysis.
A well-planned deception of systematically “shifting” job costs from one contract to another between periods may not be detectable by only comparing estimated costs to actual. Preparation of the fade analysis is better supported by a well-prepared WIP or contract schedule.
For a basic contract fade analysis template, click here.
“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.” wmiddleton@middletonraines.com
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
The Necessity of Daily Cash Reports and Reconciliation
By Mike Crabtree
I occasionally do outside consulting work in order to help small companies ensure that their accounting processes are in good working order. Small construction companies often have limited resources, and accounting is not always high on an owner’s list of priorities, especially if operating at a “Mom and Pop” level. However, this can lead to problems.
Bank Account Reconciliations
Perhaps not surprisingly, one of the areas I am frequently asked to address is that of bank account reconciliations. People get involved in the day-to-day activities of operating a business and put off the monthly reconciliation of their bank account for a few days…or weeks…or months.
I was recently asked to come in and catch a company up on their bank reconciliations. The operating account hadn’t been reconciled in 15 months. They had a strong positive cash flow and were not audited, so reconciliations hadn’t been a high priority. After all, what could really be wrong?
The owner wasn’t directly involved in the accounting process, relying on a very young “bookkeeper” he had hired on the recommendation of a friend. She was very good at the day-to-day tasks, such as filing paperwork, processing lien waivers, writing checks, making deposits, etc. However, she didn’t really understand the mechanics of properly recording cash transactions, even at the basic level of understanding that a deposit should be a debit to the ledger cash account and a check should be a credit. Sometimes, she would forget to record a deposit.
Additionally, as is common with many small companies, the owner would frequently write manual checks when he was out of the office. Sometimes he would tell her, sometimes he wouldn’t. Sometimes she would record the ones she knew about, and sometimes she wouldn’t.
It didn’t take long before she realized she was in trouble, but she was afraid to tell her employer. She did make an attempt to reconcile the cash account at first, but because of the number of transactions that had occurred during the month and her lack of understanding, she gave up…and continued on as before.
Again, cash flow was strong, so no disaster occurred.
Eventually, the company wanted to get a bank loan for expansion (they had never before had one due to the strength of their cash flow), and part of the lender’s requirements was current bank reconciliations. At this point, I was called in.
Ultimately, I discovered that there were more than 500 improperly recorded or missing transactions directly related to the cash account, which also caused the books to be significantly off as a whole. After a significant amount of time and fees for my services, we were able to get his cash reconciled and the books in order. The company got the loan, but it was discovered that there was $150,000 less cash than thought. It was an expensive lesson.
Now, the bookkeeper in this situation was a good person, no fraud was committed; she just didn’t understand her job as well as she should have, got behind and was afraid to ask for help. I was able to teach her some basic “debits and credits” so that she could successfully go forward in the future.
The owner in this case was very understanding and kept her at the company (along with my phone number). However, this entire situation could have been avoided if he had required and reviewed the bank account reconciliation. Still, even a monthly reconciliation might have been inadequate given the number of transactions that occurred over a 30-day period.
This is why I recommended a daily cash report with short-term anticipated cash inflows and outflows as well as a reconciliation of cash. With internet access to banking activity available today, it is unnecessary, in fact unwise, to wait until your monthly bank statement to reconcile.
A daily comparison of your banking and book activity allows missed cash transactions or backwards postings to be discovered and corrected in just a few minutes. Situations like this one will never happen again, and management/ownership will always know its true cash position.
Mike Crabtree has over 20 years’ experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
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