In part I of our series, How to Spot Construction Change Order Fraud, we highlighted examples of change order abuse. In this post, we will dig deeper into ways to identify threatening behavior ahead of time and ways to prevent change fraud.Read More
The following overview of construction industry trends is part of a larger series of industry reports that will be published between August and October 2017 for the benefit of our subscribers. Data and information provided is cited from IBIS World, a global business intelligence leader specializing in Industry Market Research.
In 2016, Meaden & Moore clients in the construction industry experienced a 4.8% decrease in revenue. This decrease was offset by a 6.3% decrease in cost of sales, allowing for a 17% increase in net income. The construction industry as a whole experienced unexpected revenue growth at 7% in 2016. Most of the industry growth in 2016 occurred during the fourth quarter as commercial, multifamily housing, and public work construction unexpectedly skyrocketed. In comparison, by October of 2016 the year’s growth was expected to be 1%. Revenue for the industry is expected to increase 5% in 2017 as conditions stabilize.Read More
During the last recession, state tax departments saw a decrease in revenue and struggled to create new cash flows to replace what was lost due to taxpayer income reductions. States responded by increasing their audit activity to replace the lost revenue. Most states pursued sales and use tax audits as there was a greater likelihood of audit findings with related penalties and interest.Read More
Back in 2001, we witnessed the Enron accounting scandal, which led to one of America’s largest corporate bankruptcies and the demise of the prestigious accounting firm Arthur Andersen. A key ingredient in Enron’s accounting plot involved the use of special purpose entities (SPEs). These entities held billions of dollars of debt and incurred substantial losses, yet through loopholes in the accounting standards, they were never reported (i.e. consolidated) into Enron’s accounting records.Read More
Change orders are amendments to existing arrangements that serve to modify contractual terms and conditions. In the construction industry, change orders are common occurrences, particularly on large complex projects.
When we think of change orders, we often associate them with project owner directives to alter the scope or specification of a project. For example, in order to ‘make budget’, a project owner may decide to save on construction costs by reducing the original size or amenities of let's say a new mixed-use development. Alternatively, new technologies or innovations might spur a project owner, of let's say - a health care facility, to modify the project to accommodate new medical equipment or devices.Read More
A core competency of a Construction Manager ('CM') and/or General Contractor ('GC') has always been the ability to effectively manage 'subcontractor risk'…that being the risk that the CM or GC incurs additional uncompensated time and cost to fulfill the contractual obligations of the subcontractor.
Under the traditional fixed-price arrangement, the Project Owner knows the price of the project, while any construction cost savings goes directly to the GC's bottom line. Under this model, the GC is incentivized to hire the lowest priced subcontractor, but not necessarily the 'best contractor for the job'. Furthermore, the GC can reduce its 'subcontractor risk' by purchasing surety bonds, the cost of which is incurred by the GC, rather than the Project Owner.Read More
Often confused within the construction industry are pay-when-paid vs. pay-if-paid provisions in contracts between general contractors and subcontractors.
Under a pay-when-paid provision, a general contractor must remit payment for work performed by subcontractors within a reasonable time even if the general contractor has not received payment from the project owner.
Conversely, pay-if-paid provisions require that a general contractor remit payment for work performed by subcontractors only after the general contractor receives payment from the project owner.Read More
In May, the Financial Accounting Standards Board (FASB) issued new rules for how to recognize revenue from contracts with customers. The rules impact many entities across multiple industries, including the construction industry. Before we get into the “what,” let’s first look at the “why.”
Why Did the FASB Issue a New Standard on Revenue Recognition?
Revenue recognition guidance differed between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). According to the FASB, “The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers.” Basically, the new framework helps to patch fragmented and inconsistent standards that allowed companies across industries to record their revenue differently.Read More