If you’ve been paying attention lately, you’re aware that national construction spending is at record levels1. To encourage construction companies to continue building, creating jobs, and innovating, there are extremely powerful tax incentives available for research and development, energy efficiency, and property development that may increase cash flow and reduce effective tax rates. These tax incentives are especially important in a highly competitive business environment with thin profit margins. For example, the R&D tax credit allows up to 6% to 10% for every dollar spent on construction related R&D activities and 179D allows up to $1.80 per square foot as a deduction for energy efficient construction.
To understand how contractors are eligible for these federal and state incentives, it’s important to understand how construction is changing
Design and construction delivery methods have evolved. Even under Design-Bid-Build contracts, owners have realized the benefits of early contractor involvement on projects. Construction Manager at Risk and Design-Build type contracts require contractors to shoulder some of the owner’s risk burden, but also allow for valuable influence in preconstruction decisions that shorten delivery and give owners price certainty.
The American Institute of Architects (AIA) understands that contractors contribute to a more timely and informed understanding of the design, resolution of design-related issues, visualization of construction sequencing, and improvement to cost control and budget management, “all of which increase the likelihood that project goals, including schedule, life cycle costs, quality and sustainability, will be achieved”2.
Fast Track Construction
For the reasons mentioned above, contractors are often selected before any design work is complete. They assist with design development and submit a price proposal, usually a guaranteed maximum price (GMP), including the contractor’s fee, contingencies and allowances. Construction starts before design is complete and typically follows the following sequence:
- Site Work & Foundation – the infrastructure and site work that serve the building as well as the structural foundation are constructed while the balance of the building is still being designed
- Superstructure – while the site work and foundation is being constructed, the building structure is designed and then built
- Core & Shell – the interior and exterior of the building is a separate package and has to incorporate ongoing construction and future build out
- Interior Build Out, Landscape – even though the final interior finishes and exterior landscape designs are constructed last, the design of these systems are integrated into all the previous packages
I’ve worked on fast track building projects, like the award-winning Texas A&M ILSB, that followed this general process and relied on the general contractor and the subcontractors to support the design. Transportation and infrastructure projects can similarly be phased.
The Empire State Building was built in the same amount of time as the tallest building in Houston, TX (the JP Morgan Chase Building) even though it was completed 50 years earlier and is 400 feet taller. Construction delivery methods have increased the speed at which buildings are built in general, but the complexity in permitting, design integration, and building systems has challenged the design and construction industry to continue transforming.
With increased complexity and competition in the marketplace, even subcontractors have started innovating the way construction projects are delivered. Even on design-bid-build projects, mechanical, electrical, and plumbing contractors are providing incidental design and engineering. Fire & security contractors are calculating occupancy hazards and laying out sprinkler heads and piping. Specialty contractors are designing and fabricating building systems, and almost all subcontractors are providing some level of preconstruction planning, offering alternatives to improve function or reduce cost (value engineering), and delivering solutions for multi-discipline coordination.
You can’t visit a construction site these days without seeing iPads, fully electronic drawings, and construction management software. Building Information Modeling (BIM) has become increasingly more prevalent, real-time electronic drawings and specifications have increased efficiency, wearable technologies are improving safety, and drones are surveying and documenting progress. Sustainable design and construction has exploded in the last 15 years and challenged contractors to develop products and processes that adhere to LEED, Envision, and other owner requirements.
Project delivery methods, increased complexity, regulations, and technology have all influenced the cost of risk in construction. More and more owners, architects, and engineers are relying on contractors to provide incidental design and engineering services, as reflected in some standard AIA and EJCDC contracts. There is an increased appetite for litigation and exposures are higher. Today’s contractors are required to have a much greater sophistication in analyzing insurances and losses related to risk.
Construction Tax Incentives
Many of the business activities performed by contractors mentioned above qualify for federal and state R&D Tax Credits, and with the rapid advancement in energy efficiency, contractors working on commercial building projects for the government may qualify for 179D, a federal tax deduction. These incentives, and others, save construction companies money so that they can continue building, creating jobs, and innovating.
BRAYN Consulting knows the construction industry. Allow us to help you or your client take advantage of these powerful tax incentives.