Engineering & construction service offerings

Below are just a few of the many services that we can offer:

Using leveraged ESOPs in a corporate financing strategy

An outstanding opportunity may exist for private construction companies who are looking to sell all or part of their company, while keeping it within the extended family of existing owners, management and/or employees. It involves using a leveraged Employee Stock Option Plan (ESOP) and applies specifically to private C corporations, or S corporations that can be converted to C corporations.

A leveraged ESOP is a specialized form of tax qualified retirement plan that may invest up to 100% of its assets in securities of a company and acquire the shares with funds borrowed from, or on the credit of, the company. In a typical leveraged ESOP transaction, the ESOP borrows funds from a bank or other third party lender and uses the proceeds to purchase shares of company stock from existing shareholders or the company. If the ESOP acquires at least 30% of the outstanding shares (by vote or value), and the selling shareholder(s) reinvests the proceeds within one year in "qualifying replacement property" (e.g., securities of a domestic operating company) there is no current recognition of capital gain on the sale.

Subsequent to the share acquisition, the company makes annual contributions to the ESOP in an amount sufficient to service the ESOP loan. Because such contributions are fully deductible (within certain limits), the transaction has the effect of allowing the company to deduct the entire principal and interest on the loan repayment. Dividends paid on the ESOP shares may also be tax deductible. As the loan is paid down, shares are allocated to participants accounts within the ESOP. Eventually, as employees retire or leave the company, the shares are repurchased at fair market value, thereby funding the employees' retirement benefit. Employees may be able to treat a substantial portion of their distributions as long-term capital gain rather than ordinary income.

The leveraged ESOP may yield a number of benefits for private construction companies:
  • Gain liquidity and diversification
  • Buy out minority shareholders
  • Sell a portion of the company to a friendly buyer
  • Secure tax efficient financing
  • Establish a valuable stock-based incentive and retirement benefit for employees
  • Defer or eliminate recognition of capital gain on the sale of shares to the ESOPReceive significant tax benefits unavailable with other forms of corporate financing

To find out more on how a leveraged ESOP may play a role in your corporate financing strategy, contact Lou Joseph, Alan Lee or Joe Gattone.

Controlling change orders, extras, claims & back charges

Change is a way of life in the construction industry. Customers or contractors may initiate change orders to modify the original contract. In addition, customer representatives at a job site sometimes authorize the contractor to do additional work beyond contract specifications commonly called "extras." At the same time, due to the nature of the industry and the complexity of some projects, disputes over unapproved work or the scope of change orders may arise that can result in claims or back charges .

Management control of these items is critical to construction activity. In fact, the ultimate profitability of a contract often hinges on the documentation and data collection practices surrounding them. PwC can help you determine if your current practices follow industry standards and institute tighter accounting and operational controls should you need to improve.

Managing financing For operations

The cost and availability of financing are affected by the risks to which contractors are susceptible and the greatest risk factor in the industry stems from the method of pricing. A contractor must set his prices in the bidding or negotiating process before product costs are absolutely determined and the process, particularly for fixed-price contracts, is not necessarily subject to modifications just because the costs change. Therefore, a contractor's greatest financing need is working capital.

PwC can help you weigh your financing options. We can review your current methods of financing to determine how well they support your working capital needs. For example, term loans are usually not necessary because banks and other creditors typically require more tangible types of collateral or personal guarantees for term loans than most contractors are prepared to furnish. Typically, your needs can be met by working capital loans on a contract-by-contract basis. Many contractors use chattel loans, which can be tailored to match payments with cash receipts and waive payments during off-season periods.

Reducing employee benefit costs

Employee benefit costs have escalated to become one of the highest expenses for engineering & construction businesses, after payroll. What does this mean for your organization? For many, it means introducing more efficiency into the buying power of benefits. For non-union employers, one of the first steps towards controlling benefit costs is to compare them to industry averages. Another tactic is to reduce inefficiencies associated with your benefit dollars. By reviewing your vendor contracts, renegotiating the benefits and conducting vendor performance reviews, you may reduce costs associated with your employee benefit program. Costs may also be reduced by reviewing and addressing the specific cost drivers (e.g., health risks) impacting your specific business. You may be able to trim costs through coaching and lifestyle change programs. Efforts in these areas may yield higher quality benefits for your employees and greater cost savings for all.

The above is just a short description of some of the actions you can consider and does not encompass all options. Furthermore, for purposes of retaining employees, you should understand their benefit needs before trying to reduce the associated costs.

Enhancing billing practices to improve cash flow

The billing practices in the engineering & construction industry vary widely and may often not be correlated with the performance of the work. Billing arrangements are usually specified in the contract and vary with the different types of contracts used in the industry. The amount and timing of billings under contract may be based, for example, on such measures as the:
  • Completion of certain stages of work
  • Costs incurred on cost-plus contracts
  • Architects' or engineers' estimates of completion
  • Specified time schedules
  • Quantity measures of unit price contracts, such as cubic yards excavated
PwC can help you put effective billing practices in place. For example, progress billing or customer advances on contracts can provide a significant source of cash flow for most construction contractors. However, most contracts will have the owner retain a specified amount of each progress billing (often 10%) until the job reaches an agreed-upon stage of completion, with a provision for a reduction thereafter.

Another idea is to assign a higher relative bid price to job components that are expected to be completed early in the job. This practice, called unbalanced bidding or front-end loading, accelerates the contractor's cash receipts on a contract and represents a significant financing strategy for many contractors.

Negotiation of advantageous cash payment terms at the bidding stage and other procedures to accelerate cash collection are significant financing considerations in the industry. However, as a result of unbalanced bidding, cash inflows at the end of the contract may be less than cash requirements. Therefore, appropriate controls and cash budgeting are an essential part of managing your finances.

Exploring joint ventures to share risks and resources

Contractors frequently participate in joint ventures with other parties on construction projects to share risks; combine the skills, talents and resources of the participants; or to obtain financing or bonding. Therefore, it is advisable to review a joint venture between engineering & construction businesses to determine the effect of the new structure from both a financial and tax perspective.

PwC can conduct this review. Based on our experience in serving your industry, we are well aware of the specific accounting and tax rulings that impact joint ventures and can help you create a structure that is fair and beneficial to both parties. At the same time, our professionals can also assess the risk/consequences that such a venture will have on your current tax and financial reporting practices.

Auditing beyond the financial statements

Because of the large number of small enterprises in the engineering & construction industry, a contractor's financial statements are used mostly for credit and bonding purposes. However, business realities dictate that gross profits are not certain, nor irrevocably earned, until contracts are actually completed and accepted. In addition, final collection, particularly of retentions by owners, usually takes place some time after the earning process that is recognized in the financial statements.

For these reasons, PwC provides audit services that look beyond the financial statements. We often report on supplemental information, such as a job-by-job analysis of the recognized gross profits allocated between reporting periods, to provide assurance to creditors and other stakeholders that the reported numbers are consistent with the financial statements.

Providing personal wealth services to owners

As a construction business owner, there are many demands on your time. You may not always have time to devote to planning and administration of your personal financial and business affairs. What would be the effect to your personal wealth should anything happen to your business?

Our Personal financial services team helps business owners enhance and preserve their wealth by helping to manage risk and improve performance. We utilize a customized approach that reflects who you are and where you want to go.

Planning effective succession strategies

Many small and medium-sized engineering & construction businesses fail to make it through the second generation. In order to manage succession effectively, a strategy must be developed early on that combines the issues of management, ownership and other stakeholders in the business.

PwC can help you plan your business progression and transfer of ownership interests. We work one-on-one with you in creating an integrated plan for transferring wealth to your heirs, in providing advice to improve the tax efficiency of the plan, in identifying your retirement needs and in developing strategies to meet your retirement goals. By using a comprehensive approach, we can help you more effectively meet your personal objectives, while successfully transferring ownership interests over to the next generation.

Benchmarking to improve performance

Benchmarking can be performed across three main levels: (1) within a firm against other units, (2) within a certain industry or (3) across industries. Comparing one firm or one industry against other industries helps one to identify issues and performance gaps that may not be apparent from a narrower perspective. At PwC, we help clients get the comparisons needed for success. For many years, we have provided engineering & construction companies with access to benchmarking data to make more informed management decisions.

Identifying tax opportunities to improve cash flow

Effective cash flow management is crucial to competitiveness. A key value differentiator of PwC is our approach to this goal. Not only do we provide audit and tax services designed to meet your needs, but we will recommend, as appropriate, tax savings opportunities as they are identified.

For example, construction companies should consider adopting income tax reporting practices that are sensitive to the uncertainties of the estimating process and that more closely relate to the timing of cash receipts and disbursements. This generally means the adoption of methods that defer income recognition until contracts are completed or the use of the modified accrual basis, which reports retentions only when received, or the use of the cash basis.

The key to quality tax service is to understand how tax-related matters impact an industry. PwC has both the industry knowledge and experience to provide tax solutions to engineering & construction companies. ]]>