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How will the new revenue recognition standard impact your business?

Published on September 25, 2014 by in Uncategorized

By Kent Goetjen and Mike Sobolewski

A significant increase in required disclosures is among the key changes resulting from the long-anticipated new converged standard on revenue recognition released earlier this year by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).

Engineering and construction (E&C) firms subject to US GAAP or IFRS financial accounting standards have long followed industry guidance for construction contracts to account for revenue. The new standard is principles based—a big shift from today’s industry-specific guidance.  Changes resulting from the new standard will vary by industry and certain areas will likely create significant challenges for E&C companies.

The new standard will require a five-step approach:

Identify the contract: When it comes to whether contracts should be combined, major changes aren’t expected. Construction companies that segment contracts might not be significantly affected because of the requirement to account for separate performance obligations. There is an expected increase in significant judgments on  how organizations determine when to include unpriced change orders and other contract modifications in contract revenue.

Identify performance obligations: Contractors often account for each contract at the contract level. Under the new standard, contract promises must be for distinct goods or services to be a performance obligation that requires separate accounting. Some construction contracts may have only one performance obligation.

Determine transaction price: Under the new standard, revenue related to variables including awards and incentive payments might be recognized earlier. A significant change in practice as it relates to claims, liquidated damages, and the time value of money isn’t expected.

Allocate transaction price: Transaction price is allocated to the performance obligations in a contract that requires separate accounting. Of interest will be the allocation of variable consideration (awards, incentive payments) associated with only one performance obligation, rather than the contract as a whole. An entity can allocate transaction price entirely to one (or more) performance obligation when certain conditions are met.

Recognize revenue when/as performance obligation(s) satisfied: Under existing guidance, revenue recognition is based on contractor activities; provided reasonable estimates are available, revenue can be recognized as the contractor performs. Under the new standard, revenue is recognized when a performance obligation is satisfied, which occurs when control of a good or service transfers to the customer.

The standard is also expected to impact:

  • Warranties – Warranties are currently accounted for within contract accounting or outside contract accounting in accordance with existing loss contingency guidance. Change may occur for some businesses that use a cost-to-cost input method for measuring progress and don’t include warranty as a contract cost.
  • Contract costs – Direct costs of fulfilling a contract are capitalized under the new standard if not within the scope of other standards and if they relate directly to a contract/future performance, and are expected to be recovered under the contract.  Incremental direct costs of obtaining a contract are recognized as an asset if expected to be recovered. There could be a significant change for contractors currently using the gross profit method for calculating revenue/cost of revenue.
  • Contract assets and liabilities – Cost in excess of billings and billings in excess of cost initially recognized on the balance sheet under current GAAP should be similar to the contract asset and contract liability recognized under the new standard. However, the transfer from a contract asset to an account’s receivable balance (when the contractor has a right to payment) may not coincide with timing of the invoice as is required under existing guidance.

E&C companies should continue to evaluate the new standard’s impact on business activities, including contract negotiations, key metrics, taxes, budgeting, controls and processes, information technology requirements and accounting.

About the Authors: Kent Goetjen (h.kent.goetjen@us.pwc.com) is PwC’s U.S. Engineering & Construction industry sector leader. He has more than 30 years of experience providing service to clients in the engineering and construction industry. Michael Sobolewski, (michael.sobolewski@us.pwc.com) is a partner at PwC US and an engineering & construction industry specialist. He has extensive industry experience, including work with private companies that have operations locally, nationally and globally.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.

 
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Is Your Construction Company in Good Standing?

Published on September 22, 2014 by in Uncategorized

By Jennifer Friedman 

In a heavily regulated industry like construction, there are a wide range of compliance issues business owners need to follow. In many instances, companies overlook the importance of remaining in “good standing” after initially incorporating or forming an LLC. Ensuring that the company is staying compliant within state guidelines is essential to continue operating the business effectively and being able to bid on contracts. The benefits of being in good standing coupled with the consequences of failing to comply are compelling reasons why you should know where your company stands.

Most Common Ways to Fall Out of Good Standing

There are many ways that a company can jeopardize its compliance. The easiest way a business can lose its good standing is by failing to file an annual report or make franchise tax payments. It is also important to update an entity’s status whenever the business completes actions such as mergers, acquisitions or expansions because these changes may require filling out a new annual report and tax forms.

States also change compliance requirements periodically so business owners have to be aware of new deadlines, forms and fees. While they may seem inconvenient, routine checks to ensure all materials are submitted ahead of time save time and money in the long run.

Consequences of Failing to Remain in Good Standing

The most concerning effect of falling out of good standing is that a business can be suspended and lose permission to continue work. A business in poor standing also appears as an increased risk so lenders are less likely to provide funding. A non-compliant company may have to surrender the company name so competitors can scoop up valuable, established branding. Business owners can be personally liable for failure to comply and can be penalized by the state.

Good Standing Sets The Business Up for Growth

Remaining in good standing brings a wealth of benefits that makes other processes smoother. When a business properly completes the report and tax forms that must be filed in order to maintain compliance, it will receive a Certificate of Good Standing that entitles the company to do business legally. This lends credibility to the organization and secures the benefits of incorporation. When the time comes for the company to expand, the Certificate of Good Standing is a prerequisite to gaining permission to operate in additional states, also known as “foreign qualification.”

How to Prioritize Good Standing

Businesses need to take compliance seriously from the start and invest in relationships with compliance lawyers, accountants and registered agents. To stay up to date on regulation requirements, business owners should take advantage of online tools that make legal issues easier to understand. Getting into the habit of routinely reviewing compliance issues with professionals will help the business avoid unnecessary trouble while keeping it on track for future achievement.

In summation, making good standing a priority from the outset and thoroughly understanding the ways in which to keep your business in good standing, is imperative for establishing credibility and maintaining sustainable long-term success.

Jennifer Friedman oversees marketing activities for the small business segment of CT, a Wolters Kluwer Company, providing legal compliance solutions to the small-business community. As the CMO of CT small business, Jennifer directs all activities related to digital marketing and advertising to help build the brand through innovation, partnerships and enhancing the customer experience. Visit https://ct.wolterskluwer.com/ for more information.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com. 

 

 
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Why Technology is Your Gateway to New Business

Published on September 17, 2014 by in Uncategorized

By Riggs Kubiak

Ten years ago, contractors or construction executives relied solely on referrals to expand their business. However in today’s world of Angie’s List, LinkedIn and Yelp, word-of-mouth isn’t the only way to secure new business leads. With technology on the rise in commercial real estate, new business prospects are just a click away.

As with everything else in today’s world, if you’re not using the latest technology to move your business forward, then you run the risk of falling behind on the opportunities that your competitors are capitalizing on.

Here are three reasons why technology is here to stay:

Easy Sharing

It is crucial that new mobile apps help building professionals easily store and share their projects on their tablets, as opposed to having to always carry piles of glossy and outdated brochures.

Seamless Updates

One of the best things about today’s connected world is that everything that you have is constantly being updated to provide up-to-the-second information. This is true for the real estate industry as well, as for too long professionals have spent a great deal of money on printing out glossy brochures that become outdated within a month of printing. This constant wasting of money is prevented by apps that allow real estate professionals to store their portfolio and constantly update it.

Analytics

Technology allows people to access a great deal of information that they were never able to access. For a long time, architects, engineers, contractors and construction executives wouldn’t know who was looking at their portfolios and what projects got more traction when displayed. That is all changing now, as technology allows for an incredible analytical analysis of who is looking at your portfolio, what projects look the best, how long people are looking through your portfolio, etc.

The bottom line is this: mobile and web-based platform are turnkey solutions for construction executives who are looking to expand their networks and win new business. If you’re not latching on to this trend, then you are truly missing out on incredible opportunities.

Riggs Kubiak is the CEO and founder of Honest Buildings (HB), the world’s leading connection engine for real estate projects. From architects to engineers, contractors to technology experts, HB helps professionals find and meet the perfect people for their real estate projects, fast. With an innovative suite of products and more than $300 million in deal flow to date, HB is changing the way real estate connections are forged.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.

 
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Make Telecommunications a Priority for your Projects

Published on September 5, 2014 by in Uncategorized

By Kunal Hinduja

Construction managers have a lot to consider when they embark on a massive new project, and the pressure to come in on time and under budget can be enormous. Plus, the venue – whether it be an office building, sports stadium or a shopping mall – has to look great. A stunning lobby will surely enhance the value of a building, attracting many visitors and tenants, but what’s invisible often produces the most value.

When it comes to revenue generation and tenant retention, indoor telecommunications need to be a top priority for today’s construction industry. These issues might seem trivial when planning a $100 million construction project, but these are the amenities that can make or break a visitor’s opinion of the venue.

Today’s buildings require a distributed antenna system (DAS), an indoor cellular network allowing all cellular mobile devices including smartphones, tablets and any other mobile device to connect to wireless carriers such as AT&T, Verizon, T-Mobile and Sprint. As mobile devices become more and more advanced, our indoor DAS networks need to perform at a higher and higher capacity. Plus, more data sessions are generated from indoor venues today than outdoor locations, adding greater the strain on the network.

In recent years, high-capacity mobile telecommunications networks have been an after-thought when building commercial real estate. For construction managers and building operators, a solid DAS increases tenant retention and serves as a valuable source of revenue.

Public safety is also an important issue to consider when planning for mobile telecommunications in new buildings. More than 70 percent of all emergency calls are made within structures from mobile phones, and a reliable connection of calls is absolutely crucial. From the beginning of the planning stages, construction managers should be thinking of safeguards to guarantee calls placed to 911, or first–responders such as police and fire departments or emergency medical services.

Distributed antenna systems provide this critical function and they could possibly make the difference between life and death. Just as construction managers ensure that sprinkler systems are set up properly and that the structure won’t topple over in the event of a hurricane or earthquake, the same emphasis should be given to a proper DAS to ensure public safety.

It’s not just for the outgoing 911 call. Maintaining an open radio frequency communication between first-responders regardless of discipline or jurisdiction is mission critical to ensure the safety of the public as well as emergency personnel involved.

Kunal Hinduja is President of ARQ, a mobile telecommunications services company, which has installed DAS for a variety of projects ranging from professional sports stadiums to Las Vegas resorts. For more information, contact him at khinduja@arqwireless.com or visit www.arqwireless.com.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.


 

 
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Want to be a successful contractor? Check out these conferences.

Published on August 28, 2014 by in Uncategorized

By Boryana Gramatikova

Being successful as a general contractor requires a very eclectic set of skills. It is a labor-intensive job, which demands not only physical resilience, but also constantly developing your social and leadership skills.

As a professional contractor, you need to keep track of the changes in industry policies on licensing and bonding, learn to communicate effectively with your subcontractors, and search for better ways to navigate the workflow. Rather than trying to unriddle everything on your own, an easier way to accomplish these tasks is to attend general contractor conferences.

The benefits of attending a contractor conference are many. First, every conference has networking value. You will also have the opportunity to catch the latest trends in tools usage, technologies, and processes, and hear innovative ideas.

Here are some general contractor conferences that might be worth your while:

The A/E/C Collaboration 2014

Dates: Sept. 10 through 12

Location: Austin, Texas

Description: The A/E/C Collaboration 2014 is an AGC Building Contractors Conference at Austin’s Omni Hotels & Resort.

The conference will feature top performers from the construction business sector, who will teach attendees how to streamline their operations, and introduce the latest collaboration techniques and show how to use them to improve your company’s position in the marketplace.

Some of the lectures include:

  • “2015 Forecast: Outlook for Construction Segments, Materials, Labor and Local Markets”
  • “Managing Legal, Bonding and Insurance Risks on Joint Venture Projects”
  • “Improving Onsite Productivity with Collaborative Lean Implementation”

You can register for the A/E/C Collaboration 2014 online, or send an email to duntonr@agc.org for help and more information.

2014 Fall Conference & Expo by AGC California

Dates: 22-24 October, 2014

Location: Rancho Mirage, California

Description: the 2014 Fall Conference and Expo is organized by AGC California, and will be at the Rancho Las Palmas Resort.

The conference is designed to be a more educational event for general contractors. The keynote address is titled “Public-Private Partnerships: Achieving success by leveraging best practices in PARTNERSHIP,” and it will be given by John McArthur from the Kiewit Development Company.

Attendees can work on their networking skills by visiting the Expo, where various booths of proven industry professionals can be found.

You can sign up for the 2014 Conference and Expo by creating an account and then registering online.

18th Annual AGC/CFMA Construction Financial Management Conference

Dates: November 5 through 7

Location: Las Vegas, Nevada

Description: The 18th Annual AGC/CFMA Construction Financial Management Conference is organized by the Associated General Contractors of America (AGC) and the Construction Financial Management Association (CFMA). This year it will be at Caesar’s Palace in Las Vegas.

The three-day conference will feature 36 interactive sessions, covering the latest industry issues and their financial implications. Some of the lectures will be:

  • “Profitable Growth Strategy and Implementation Risk in Today’s Volatile Market”
  • “Business Survival Strategies: Practical Business Continuity to “Bullet-Proof”
  • “Managing Organizational Transitions from the CFO/Controller’s Seat”

Registrations completed before the 5th of September will come at the discounted price of $780. All single registrations after that will cost attendants $860.

Know of any other great upcoming contractor conferences? Write us a comment.

Boryana Gramatikova is a recent University of Westminster graduate with an MA in Broadcast Journalism. Her interest span across film, sports and Asian culture. She has vast experience in blogging on everything surety bond-related. Currently she contributes to the JW Surety Bonds blog.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.


 

 

 
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Next Life: Bringing Historic Properties into the 21st Century

Published on August 26, 2014 by in Uncategorized

By Riggs Kubiak

New York City has no shortage of celebrated landmark properties, protected for their historic value. Today, however, these buildings are often in need of structural updates (including electrical, audio-visual, and HVAC) to preserve their character and ensure their continued future use.

Such projects are multi-faceted – and often have a unique set of challenges. Take, for example, the Grace Episcopal church, built in 1847, which was in the planning stages of restoration late last year.

ICS Builders was tapped to complete the art conservation and reconstruction of the roof in keeping with its original historic design while completing updates to the church’s infrastructure. ICS ensured that the new upgrades elevated the church to modern capabilities while keeping with the feel of the Brooklyn Heights Historic District.

While restoring the church, ICS Builders discovered a hidden mural on the ceiling, dating back to 1866. Staff preservationist Lisa Renz was called in to ensure the delicate unveiling process was a success.

The ICS team overcame many of its roadblocks by implementing proper safety measures and gaining the trust of residents in their capability to perform their duties with the community’s best interests in mind. The project was successful because the church hired a firm equipped to handle such a specialized job.

While this project is still in progress (the roof is in the process of being replaced), we can learn a great deal from this including:

  • The importance of ensuring that the updates fit with the aesthetic of the neighborhood,
  • Implementing safety measures to allow community members access to the building even during the construction, and
  • Finding the right projects for your expertise that will allow you to put your best foot forward.

The construction industry holds great opportunity, but it is imperative that firms find the right projects and professionals for their team.

Riggs Kubiak is the CEO and founder of Honest Buildings, the world’s leading connection engine for real estate projects. 

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.


 
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New Options for Energy Management and Control in Smaller Commercial Facilities

Published on August 15, 2014 by in Uncategorized

By Martin Flusberg 

Although energy management systems (EMS) are the norm in industrial buildings and large commercial facilities, they’re far from it for most commercial facilities. That’s because according to the Department of Energy, 90 percent of commercial facilities are smaller than 25,000 square feet, and most of these facilities don’t have an EMS.

The reasons for the difference in EMS penetration are fairly straightforward. The potential savings of an EMS in smaller venues does not justify the cost of a system intended for the complexities of larger facilities. Moreover, those systems were typically designed for use by on-site facility managers and, as a result, tend to be overly complex for smaller facilities without dedicated facility professionals on-site. In fact, our experience suggests that typical 100 store retail chains often have only one facility manager supporting the entire portfolio.

Fortunately, a variety of recent technological developments have changed the EMS equation. Ubiquitous internet connectivity and cloud computing, low cost sensors and wireless communications, and the application of analytics to “big data” have changed the very nature of an EMS, resulting in cost-effective, user-friendly systems more accessible to smaller facilities.

EMS for Smaller Commercial Facilities

An EMS often starts with control of heating and cooling, the largest energy expense in a majority of commercial facilities. Heating and cooling systems in smaller facilities generally have more in common with systems in homes than with systems in larger facilities. As a result, relatively low-cost internet-controlled thermostats can take the place of more costly HVAC control systems. This has brought the savings and convenience of HVAC control to smaller facilities without the complexities associated with traditional EMS. And fortunately, many small commercial EMSs offer intuitive interfaces that include features particularly important to small buildings

Lighting cost is also particularly important as it is typically among the highest energy expenditures in smaller buildings. The good news is that fewer lighting circuits in small facilities means lower costs for lighting controls, and a new generation of products leverages centralized installation and wireless communications to make them even more affordable.

There are also relatively inexpensive new technologies that monitor facility operations at a granular level. Such systems may monitor energy use of individual pieces of equipment and present that information centrally, along with temperature and other variables. This granularity can deliver several major benefits, including:

  • Identifying opportunities for significant savings;
  • Informing management about the prevalence and costs of equipment powered on when it shouldn’t be, helping enforce corporate operating procedures; and
  • Proactively identifying equipment problems, potentially lowering maintenance costs and avoiding major disruptions.

For companies with multiple facilities, benchmarking capabilities deliver additional value by highlighting efficient and inefficient facilities. With granular monitoring, it is possible to pinpoint the reasons for performance differences across locations. And, users are able to identify equipment models that perform best, informing purchasing decisions with hard data.

Finally, such an EMS represents a cost-effective way to perform “continuous” or “monitoring-based” commissioning. Since equipment conditions can, and do, change constantly – often resulting in “drift” or performance degradation – ongoing monitoring ensures that operations can be fine-tuned at any time.

Smaller facilities are now well-positioned to take advantage of new, cost-effective and user-friendly EMSs that deliver significant business value.

Martin Flusberg is CEO of Powerhouse Dynamics. He has spent most of his career developing innovative technologies that address climate change; the first half in transportation and the second half in energy. Most recently, he was co-founder and President of Nexus Energy Software, a pioneer in delivering on-line energy and carbon analysis to consumers and businesses. 

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.

 

 
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Strategies to Promote Employee Health and Safety

Published on August 12, 2014 by in Uncategorized

By Stephen Ellis

According to the Occupational Safety and Health Administration (OSHA), on any given day, nearly 6.5 million people work at approximately 252,000 construction sites across the nation. Because of the nature of the job, injuries do happen, sometimes fatal ones. The fatal injury rate for the construction industry is higher than the national average for all industries. As such, it’s crucial for construction sites to create and maintain health and safety standards for the organization for both the well being of the employees and the well being of the company.

To further encourage and sustain employee health and safety in the workplace, consider implementing these three practices.

Implement Strict Safety Policies

Ideally, a workplace is hazard-free. However, some trades, such as ground construction and mechanical engineering inherently involve precarious work and unstable environments. Having a set of safety policies in place can minimize danger. Spread awareness by labeling unsafe environments, posting general warning signs and referencing the qualifications needed to enter various regions of a worksite. Also, employees not designated to work in certain high-risk positions should be discouraged from entering hazardous zones or attempting jobs they are not certified to complete.

Follow Safe Work Practices

A system of safe work practices can lessen the number of at-work injuries. Invest in products designed to prevent slip and fall accidents, such as anti-slip safety mats, restroom handrails, and entryway umbrella bag dispensers. Keep a clean and clear site to prevent workers from tripping on or getting struck or cut by hazardous materials. Additionally, using personal protective equipment such as hard hats and safety goggles, as well as utilizing proper work zone safety awareness will also limit injuries.

Provide Health and Safety Training

Ensuring a safe culture requires strong commitment from the top down, and safety must become everyone’s responsibility. Therefore, it’s important for every construction company to implement required safety-training programs for all employees to partake in. These programs should include first aid and emergency action plan training. Each work zone should also be supplied with first aid kits so small injuries can be quickly remedied. As required by jurisdiction, fire and emergency drills should be held on a regular basis. Also, ensure these procedures are taken seriously and require active engagement. Last, encourage employees to be responsible and take sick time when necessary without reprimand.

Health and safety standards should be a part of every business plan. In addition to saving life and limb, a commitment to improving workplace health and safety standards can help a business avoid potential lawsuits and other monetary loss. Further, an employee-focused culture that emphasizes health and safety creates a positive environment for optimal job satisfaction, morale, and productivity.

Stephen Ellis is manager of risk control for TriNet,

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.

 
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Why Old Technology is Stifling Project Profits

Published on August 7, 2014 by in Uncategorized

By Craig “Tooey” Courtemanche

While I write this, file cabinets in a job site trailer are being filled to capacity, a superintendent is misplacing a thumb drive with the latest drawing set and a subcontractor is days behind schedule because he’s still trying to get sign-off on a key submittal. And that’s just on a single project. All of these problems have a common base cause: using outdated technology to run a construction project.

Whether the approach is using email with Excel files as attachments for communications, or attempting to run in-house file servers in the name of “securing our data,” the result is the same: outdated technology used for project communications and collaboration wreaks havoc on the bottom line of too many construction businesses.

Here are the three aspects of construction project management that are getting hit the hardest by the use of older technologies:

Team collaboration is harder than it should be: Client-server applications designed in the 1990’s and run on in-house servers provide limited accessibility to project data. User licenses and VPN access requirements drastically inhibit communications and collaboration as team members wait to retrieve newly updated information before continuing their work. Project staff are required to suffer through slow VPN connections and remote desktop applications, and are routinely forced to hunt through emails with outdated attachments.

Communications are overwhelming: With thousands of emails and multiple revisions going back and forth, the volume of communication can be endless – this makes keeping updates to contracts, insurance documents, project plans, RFIs and change orders impossible. With no streamlined system in place, there will undoubtedly be details (and dollars) lost.

Projects are slipping their schedules because of a lack of information and communication: Keeping projects on schedule is imperative to profitability, and avoiding delays requires every party to deliver their work on time. Without the ability to monitor deadlines and anticipate delays in permitting, inspection, or obtaining equipment, valuable time and resources are lost.

The solution to overcoming these challenges is cloud-based construction software. Cloud-based solutions can be implemented quickly, without requiring complicated or expensive maintenance or updates. Software automates communications processes and workflows automatically, creating a central hub for real-time project information. The files that the project team needs to get their jobs done are no longer on a single in-house server or on a lost thumb drive. Instead, this data is stored securely in the cloud—ready to be used and shared by all team members.

Perhaps the biggest advantage of cloud-based construction software is the ability to access project data on smartphones or tablets from the field. When project team members have the capacity to archive and track emails, contracts, drawings, daily logs, RFIs, submittals and punch list items from their smartphones, they also have the ability to answer any project related question instantaneously. The ability to diagnose problems in real-time and resolve them quickly increases project team collaboration, escalating efficiency and drastically increasing project margins.

Accurate, up-to-date project information, securely delivered to all project team members on any Internet-connected device – that’s the promise, and the reality, of today’s cloud-based construction software. Soon enough, the days of working with paper logs and outdated in-house servers will be only remembered as an unloved remnant of the past.

Craig “Tooey” Courtemanche is the Founder & CEO of Procore Technologies Inc., a cloud-based construction management software provider. More than a decade ago, Tooey founded Procore in order to leverage the power of the internet to improve construction project management. Today, hundreds of thousands of construction professionals worldwide manage their projects with Procore’s cloud-based construction project management software.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.


 
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Captives for Construction Cost-Control

Published on August 5, 2014 by in Uncategorized

By Matt Lanza

The construction industry seems to be in an optimistically uncertain state, economically speaking. Opportunities appear on the upswing, as plans for new development and construction projects take shape. That potential growth is tempered given that the construction industry still faces financial challenges. Many appear determined to be as “lean and mean” as possible until the market rebounds to its pre-recession levels.

Accordingly, owners of construction firms are scrutinizing their bottom lines, looking for ways to be as financially strong as possible to compete effectively in the marketplace. One often-overlooked strategy for accomplishing that goal is addressing the cost of certain forms of insurance – workers’ compensation among them.

It’s no secret to anyone in the construction industry that they are required to pay high premiums for workers’ compensation insurance based on their industry’s claims as a whole. The construction company or trade service owner who has a low number of claims and is “the exception” to the industry norm often feels frustrated paying higher premiums based on the experience of others in the industry – rather than on their own individual company’s performance.

That is where investigating the “captive” option can significantly benefit such a company. Captives are not new, but in recent years, the popularity of this option has increased as businesses evaluate new ways to save on their bottom line.

Initially, the captive was the domain of larger companies such as Sears or IBM, which in effect formed their own insurance companies. The same principle now works on a group level, enabling companies that are not the size of Fortune 1000 corporations to leverage similar advantages.

Since insurance companies make money on profits after evaluating claims paid out, it stands to reason that lower claims result in lower premiums. For companies paying annual premiums of $200,000 or more in combined coverage (WC, GL and Auto), the group captive allows them to be “part-owners” of an insurance company and receive lower rates. The group captive is comprised of a number of different companies coming together in one group. This concept allows everyone to “put money into the pot,” to become their own insurance companies, and buy excess and reinsurance. Unspent revenues and investment dollars come back into the group and reduce everyone’s cost.

The captive idea is advantageous for those with good records in a difficult industry. With a captive market, the issue of proper claims management is better, and rates are better – often, much, much better!

Anyone with good loss ratios, better than their peers, is a potential candidate for a captive. The same goes for any business owner who is diligent about loss control, claims management and wants to have a good environment for their employees. This approach will have a positive effect on a company’s bottom line, allowing the company to allocate resources where they are really needed. Construction businesses seeking to control costs would do well to ask their carrier about captives.

Matt Lanza (pictured to the left) is executive vice president of Knight International, providing commercial insurance and risk management solutions. Knight International is based in Braintree, Mass., and serves a national client base.

Have an idea for a guest blog for Construction Today? Contact alan.dorich@phoenixmediacorp.com or jim.harris@phoenixmediacorp.com.

 

 
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