Get articles from experts who've helped the construction industry thrive in an uncertain construction climate. In this issue: Avoiding the 5 Most Common Types of Fraud in Your Construction Company - by Mary O'Connor Effectively Managing Cash Flow to Fuel Growth - by Casey Malek Employing Independent Contractors - by Joy Duce New Revenue Recognition Standard - by Bart Adams Research Tax Credit: One More Item for Your Tax "Punch List" - by Jim Brandenburg Is Your Business Prepared for the Unexpected? - By Joe Kulek

1. Copyright © 2015, Sikich. All Rights Reserved. www.sikich.com
Avoidingthe5MostCommonTypes
ofFraud in Your Construction Company
By Mary O’Connor, ASA, CFE; Partner, Sikich
Have you ever noticed how our culture seems to be fascinated with crime and policing? For
generations, we have watched actors portray white collar detectives and criminals in media like
Wall Street, Catch Me If You Can and White Collar. Perhaps part of what makes these shows
and movies so entertaining is the fact that many are based on true stories.
Although many of these stories associate fraud with large enterprises, research shows it is
extremely difficult to predict the organizations that can fall victim to fraudulent acts. As the
leader of a construction company, it’s important to know that, regardless of the size and scope
of your organization, there is always potential of facing fraud.
When looking at the numbers, the construction industry is far less susceptible to fraud schemes
compared to industries such as banking and government. In fact, the Association of Certified
Fraud Examiners’ (ACFE) 2014 Report to Nations noted that only 3.1 percent of all fraud cases
occur within the construction industry, a decrease of 0.3 percent from the ACFE’s prior report.
Also declining is the median loss construction companies take from these fraud incidents.
But while the numbers are in fact improving, the median loss of $245,000 per incident is still
overwhelmingly high.
Most often driven by financial and economic pressures, fraud within the construction industry
can be committed by employees, subcontractors, suppliers or anyone else involved in your
projects. Because of this, construction business owners and their management teams must
understand the most common types of fraud to which construction companies fall victim.
1. Corruption: Making up nearly half of all construction fraud incidents, corruption is particularly
prevalent in contract-heavy industries. When contracts are high in value or long in project
length, corruption is often easier to conceal, making this an appealing opportunity for
fraudsters.
2. Billing: The second-largest type of fraud in construction companies, billing fraud can mean a
number of different things. Subcontractors can bill for underperformed or unperformed work,
or invoice your company for inflated or non-allowable materials.
3. Check Tampering: This type of fraud accounts for more than a quarter of all construction
fraud. When an employee engages in check tampering, he or she is simply altering or forging
a check associated with the organization’s bank account. This type of fraud can often be
avoided by entrusting more than one individual with accounting responsibilities.
4. Expense Reimbursements: Since employees and subcontractors are often responsible for
purchasing materials and later expensing those materials, padded expense reports are
common. In fact, they make up 27.9 percent of all construction fraud incidents. Learn more
about creating accountable reimbursement plans at http://bit.ly/reimburse-plan.
In This Issue
Avoiding Fraud ........................ 1
Effectively Managing
Cash Flow ................................... 2
Employing Independent
Contractors ............................... 3
New Revenue Recognition
Standard ..................................... 4
Research Tax Credit .............. 5
SuccessionPlanning............... 6
Construction Update
Thought Leadership Experts
Spring/Summer 2015
continued...

2. 5. Non-Cash: The fifth most common type of construction fraud
lies in stealing non-cash assets for personal use, including
materials, equipment and tools. Keep an eye out for employees
or subcontractors who purchase any of these, but have them
shipped to an unfamiliar address.
This list is not necessarily an all-encompassing list of fraud that
can occur within construction companies, which is why it’s crucial
to have your key leaders understand identifying, handling and
protecting against fraud. Learn more about our fraud services at
sikich.com/dispute-advisory.
Mary can be reached at moconnor@sikich.com or 312.648.6652.
Avoiding Fraud, continued...
Construction Update – Spring/Summer 2015
Copyright © 2015, Sikich. All Rights Reserved. www.sikich.comCopyright © 2015, Sikich. All Rights Reserved. www.sikich.com
With the increased backlogs of many contractors, it’s as
important now as it’s ever been before to plan for and manage
your cash flow. More contractors go out of business due to a
lack of cash as opposed to backlog or profit. Cash can fuel your
growth—lack of it will hinder your ability to grow and take on work.
Largest Effects on Cash Flow
The largest impact on your cash flow is a result of contract
negotiations and understanding the owner or general contractor
you’re working with prior to bidding. Is the owner or general
creditworthy, do they pay on time and do they often have
chargebacks? Jobs usually require significant upfront costs.
Negotiating the contract to reflect such and negotiating payment
terms can help your cash flow. Develop a relationship with the
owner and the person responsible for payables to have an open
line of communication regarding payments.
� Negotiate Retainage: A 5 to 10 percent retainage may be
higher than the overall gross profit on a job, and collecting that
on the back-end of a job can be a drain on your cash flow. Try
negotiating your retainage percentage downward to reduce
the impact on your cash flow or negotiate a phase-out of the
retainage over the life of the project.
� Change Orders: Change order language should be part of any
of your contracts and is an important factor to ensuring you
get paid. Be sure to identify change orders early on in the
process and discuss them promptly. Obtain a signed change
order as soon possible to help ensure payment for work you’re
performing.
� Overbillings: The ability to frontload your schedule of values
and be responsibly aggressive in overbilling can significantly
improve your cash flow. Any overbilling on a project greater
than the anticipated gross profit (referred to as job borrow)
should be in the bank. Issue your billings timely including for
stored materials, when applicable. There is no good excuse for
an underbilling.
� Punch List and Contract Close-Out: Don’t let retention kill your
cash flow. Create your own punch list every few hundred man
hours to speed up the contract close-out and hope to avoid
the old adage of the last 10 percent of the contract taking 20
percent of the time. Strive for a quick close-out of a project
that should also keep the customer happy and lead to quicker
collection of your money.
� Budgeting: A good starting point for a budget should be
anticipated revenue, which can be estimated using the volume
of work you’re bidding on multiplied by your average win
percentage, factoring in your current backlog and factoring out
any work that may not be completed until future periods. You
should also factor in the market and aligning your budget with
your business’ strategic goals. For cost considerations, factor
in your average gross margin, direct cost trends, labor burden,
administrative overhead and sales and marketing expenses.
Consider any changes you plan on making in your business
including adding staff, purchasing new equipment, pay raises,
health insurance costs, etc.
Cash flow should be forecasted and monitored at the
project level. For specific projects, anticipate the timing of
job expenditures and cash inflows from billings in order to
determine whether your company can take on additional
work or will need additional financing to be able to take on
additional work. You should know how much work you will do
each month, how much you are allowed to bill for, when you
will collect your retention, whether it will be necessary to use
your line of credit and when you can pay it down. If you don’t
understand your cash flow timing, you won’t know if you can
take on additional work responsibly. Individual project cash
flow forecasts can be compiled for building a cash flow budget.
Also, consider capital budgets and general and administrative
budgets.
� Other Strains on Cash Flow: An additional strain on cash flow
can include ignoring or not paying close attention to the aging
of receivables. Furthermore, high fixed costs for equipment can
hinder your company. Consider leasing or renting equipment if
you don’t plan on fully utilizing the equipment during the year.
Effectively managing cash flow can make or break the success of
your construction company. By taking the steps outlined above,
you will more likely have the ability to leverage opportunities for
growth. To learn more about our expertise in helping construction
companies manage cash flow, visit sikich.com/accounting-audit-tax.
Casey can be reached at cmalek@sikich.com or 262.754.9400.
EffectivelyManagingCashFlow to Fuel Growth
By Casey Malek, CPA, CCIFP; Senior Manager, Sikich

3. Copyright © 2015, Sikich. All Rights Reserved. www.sikich.com
In addition to hiring traditional employees, organizations
can meet their staffing needs through a variety of alternative
arrangements. One more popular option, particularly in the
construction industry, is hiring individuals as independent
contractors.
Perhaps the most basic question about the employment
relationship is whether a worker is, in fact, an employee or
independent contractor. As with so many employment law
issues, the answer is, “It depends.” In this case, it depends
who is asking: the U.S. Internal Revenue Service (IRS), the
U.S. Department of Labor (DOL), a workers’ compensation
hearing officer and so on. Even courts have admitted that
the distinction is not always clear.
Employee status triggers employer obligations under various
federal and state laws that do not apply to independent
contractors, and the responsibility for classifying a worker
correctly falls squarely on the employer. Accordingly,
organizations must understand the practical and legal differences
between employees and independent contractors.
The Staffing Decision: Employees or Independent Contractors?
Construction companies cannot use independent contractors
indiscriminately to avoid the tax, equal employment opportunity
and other legal requirements applicable to employees.
Organizations face significant risks when they improperly classify
a worker as an independent contractor when, under all the
circumstances, that worker should be treated as an employee.
Accordingly, an employer should consider a variety of factors—
none of them in isolation—in deciding whether to meet a staffing
need by means of independent contractors versus employees.
Weighing the requirements of the job in combination with other
factors will enable the employer to judge whether an independent
contractor will both meet the employer’s staffing needs and
withstand legal scrutiny.
Factors to consider include:
� Duration
� Exclusivity
� Control
� Independent judgment
� Specialized knowledge,
training or experience
� Importance of marketing
� Exigent circumstances
� Business essentials
� Employees doing
the same job
� Industry standard
� Controlling administrative
overhead
� Legal ramifications
of misclassification
� Tax consequences
� Workers’ compensation
� Unemployment
compensation
� Wage and hour liability
� Vicarious liability
How to Classify Properly
Classifying a worker as an independent contractor should
always be an informed and bona fide business decision, not an
opportunity to avoid the employer’s obligations to employees.
Independent contractor arrangements have drawn increasing
scrutiny and significance with the proliferation of workplace laws
covering employees and the growth of the contingent workforce.
Misclassification of an individual as an independent contractor
can give rise to a variety of liabilities.
Tests for Independent Contractor Status
No legal test applies in every situation when deciding to classify
a worker as an independent contractor. For example, the IRS
and DOL use different, although similar, analytical frameworks.
In fact, the multiplicity of tests defining independent contractor
status applied across federal and state laws makes it possible
for a worker to be classified as an independent contractor
“under one law, but as an employee under another.” The
specifics related to these test can be located by visiting the
specific agency’s website.
Effective Practices
Construction companies can take a number of proactive steps
to ensure they effectively use independent contractors within the
bounds of the law:
� Involve HR upfront in making a decision whether to meet a
staffing need through independent contractors or employees
and in making sure the arrangement qualifies as a bona fide
independent contractor relationship.
� Use written independent contractor agreements containing
language that helps establish the bona fides of the
classification as an independent contractor.
� Adopt a formal policy concerning the use of independent
contractors.
Employing Independent Contractors
By Joy J. Duce, SPHR; Senior Managing Director, Sikich
continued...

4. Copyright © 2015, Sikich. All Rights Reserved. www.sikich.com
� Use a checklist to make sure all details regarding management
of independent contractors are being handled.
� Do not treat independent contractors like regular employees,
but do ensure they understand and adhere to the
organization’s policies and procedures.
No bright-line test exists to determine when a worker should
be classified as an employee rather than as an independent
contractor. However, a wealth of information is readily available
to help organizations make the necessary case-by-case
determinations. Once the decision has been made to meet a
staffing need through independent contractors, organizations
can take a number of practical steps to manage independent
contractors effectively.
Learn more about how Sikich can help with the intricacies of
employing independent contractors by visiting us at sikich.com/hr.
Joy can be reached at jduce@sikich.com or 262.754.9400.
It has been approximately one year since the Financial
Accounting Standards Board (FASB) issued its sweeping
change to the recording of revenue for U.S. Generally Accepted
Accounting Standards (USGAAP) from the rule-based model
broken down by industry to the one comprehensive principal
based model covering substantially all industries.
Effective Date of New Standard Postponed
Many implementation issues still need to be addressed, and for
that reason, both the FASB and its international counterpart, the
IASB, have proposals to postpone the effective date of the new
standard for one year for both public and nonpublic entities. We
believe the proposals will be adopted as early as June 2015. The
new effective dates, which we believe will be enacted, moves the
effective date for public companies to periods beginning after
December 15, 2017 and for nonpublic companies to periods
beginning after December 15, 2018.
Financial Reporting Standards for Contractors:
Changes are Coming
While this deferral will benefit everyone from an implementation
standpoint, we are encouraging all of our clients and friends to
use this time wisely to prepare their businesses for a smooth
transition. For our construction clients, there was an initial fear
that the long-time honored percentage of completion method
of accounting was going to be scrapped; it was not, but new
complexities are added to the revenue recognition process.
Some of these complexities include:
� Is revenue recognized when the performance obligation is
completed or as the performance is being completed?
� Is there more than one performance obligation in a contract
which needs to be accounted for separately?
� What additional footnote disclosures will need to be included?
(Yes, expect as least some enhancements to current
disclosures.)
� When and at what value do you recognize revenue or costs for:
• Unpriced change orders?
• Contract awards and bonuses?
• Contract penalties and claims?
• Uninstalled materials and fulfillment costs?
• Capitalization of incremental costs to obtain a contract?
Some areas may require little if any changes such as the method
for recognition of losses on construction contracts.
Impact on Income Tax Reporting
There will also be tax implications, as these changes will certainly
increase the number and amount of differences between
financial statement and tax income. Already there are a number
of differences between financial statement and income tax
reporting, and the addition of the aforementioned complexities
along with others will certainly add to the reportable differences.
Other Operating and Financial Impacts to Consider
Contractor financial statements are often confusing to infrequent
users, and the new standards will potentially add additional
challenges to the users of contractor’s financial statements.
Many financial institutions have substantial challenges in the
understanding of the accounting principles used in the industry.
This will lead to a need to review traditional banking financial
covenants, debt repayment requirements based on various
formulas that may be impacted by the changes, and employee
performance incentives based on net income, contract gross
profit and revenue.
Transition Period Reporting
Because of the complexities of revenue recognition, contractors
should consider all of the options available in the preparation
of their financial statements. As part of the transition to the
New Revenue Recognition Standard Update
By Bart Adams, CPA, CGMA; Partner, Sikich
Employing Independent Contractors, continued...
continued...

5. Construction Update – Spring/Summer 2015
Copyright © 2015, Sikich. All Rights Reserved. www.sikich.com
new standard, every year presented will need to be reviewed
for required changes to the reported revenue and expense
items and balance sheet items. This change will also impact the
beginning balance sheet for the one-, two- or three-year periods
presented. For many of our clients, a possible alternative includes
a single-year presentation, as that would eliminate looking back
and making reporting adjustments to more than the beginning
balance sheet items for the current year to be reported.
While you may feel some relief with the potential to postpone
the adoption of these new GAAP standards, we encourage
you to review the changes that will impact you and, with your
team, develop your business’s plan of action to meet these new
effective dates.
Read more about the new revenue recognition standard in our
white paper, Strategizing for Global Financial Changes: 8 Steps
You Can Take Now to Prepare for the New Revenue Recognition
Standard, at sikich.com/strategizing-for-global-financial-changes.
Bart can be reached at badams@sikich.com or 262.754.9400.
In today’s competitive construction industry, businesses are
constantly striving to improve and develop new ways to succeed.
Firms look for ways to gain market share and create a niche;
if not, they could soon be on the outside looking in. Congress
decided to reward these efforts in the form of the research and
development tax credit (“RD credit”). Awareness of this credit
may reduce a taxpayer’s overall income tax liability, and thus trim
the cost of overall research expenditures.
Historically, taxpayers have found the RD credit difficult to use
and calculate. In recent years, however, new tax laws and IRS
regulations have broadened the availability of RD credits by
expanding the expenses allowed in computing the credit and
simplifying the calculation of the credit (Please note: The R D
credit temporarily expired as of December 31, 2014, which has
happened numerous times over the past 30+ years of the credit.
It is likely, however, that the credit will be extended retroactively
back to January 1, 2015 at some point this year.)
The RD credit is not just for those in the computer and
technology industries; it can also apply to construction
businesses. For tax purposes, the IRS’ rules define research to
include development of new customer products, improvements
on existing customer products, the improvement or development
of a process, software development and many others. The new
process or product that is developed must only be new to
the construction company as a taxpayer, and not to the
construction industry as a whole. Research expenditures from
both successful and failed projects can be used to calculate
the RD credit. Some possible applications in the construction
industry could include: development of electrical or plumbing
systems; LEED project design and certification; HVAC system
design; development of energy-efficient systems; structural
design for highway infrastructure; development of alternative
building materials; and other activities involving the development
of a new product of process.
To calculate the RD credit, taxpayers must identify its
“qualified research expenses” (“QREs”). QREs must contain the
following three elements to secure any RD credit: process of
experimentation, technological in nature and new or improved
business component.
Once the research project meets the above subjective tests,
the project costs are further evaluated as only certain costs
qualify as QREs. QREs include wages of personnel involved
(often engineers, architects and designers, but can include some
clerical support staff and even some supervision), supplies used
in the project and 65 percent of “contract research” if certain
conditions are met. It is critical for taxpayers to document their
QREs; an RD credit is allowed only if the business has adequate
documentation. Once the research projects are identified and
QREs are determined, the next step is to calculate the RD
credit, and this calculation recently changed. The RD credit
using the new “alternative simplified credit” (“ASC”) method is
calculated as follows: 14 percent of the excess of current year
QREs over 50 percent of the average QREs for the previous three
years. While the original method is still available, many taxpayers
find the ASC calculation to be less complex. Additionally, the
ASC method does not require an increase in QREs to receive the
credit.
With the variety of activities qualifying for the RD credit and
with the simplification of the credit calculation, the RD credit is
more attractive to taxpayers than in the past. In addition, many
states also offer their own RD tax credits (some Midwestern
states with RD tax incentives are Wisconsin, Illinois, Indiana,
Iowa, Missouri and Minnesota). Construction businesses should
analyze their operations to identify RD projects and the costs
associated with these projects to determine any available tax
incentives.
Jim can be reached at jbrandenburg@sikich.com or 262.754.9400.
ResearchTaxCredit:One More Item for Your Tax “Punch List”
By Jim Brandenburg, CPA, MST; Partner, Sikich
New Revenue Recognition Standards, continued...

6. 1415W.DiehlRoad,Suite400
Naperville,Illinois60563
Is Your Business Prepared for the Unexpected?
By Joe Kulek, CPA, CCIFP, MBA; Partner, Sikich
Business owners often spend so much time pouring sweat
and tears into managing their company they forget to plan for
the future. Exiting a business can be almost as complex and
challenging as starting one. In many cases, business survival
may depend on succession plans implemented long before the
owner actually leaves the company.
Succession planning begins with four fundamental questions
that help define your planning objectives:
1. Who do you want to own and manage the business?
2. How much longer do you want to work?
3. What income will achieve your desired lifestyle?
4. How can you transfer ownership in a tax-efficient manner?
A construction owner might choose to do one of several things
as they exit the company. They could outright sell it to someone
else, transition it to key employees, transfer it to family members
or shut it down. There is no “one right way” to exit a business.
It’s a personal decision for the business owner that should take
into account financial, legal, tax and personal issues, as well as
guidance from trusted, experienced professionals.
We work with construction clients to help them answer these
questions, protect the value of their business and structure a
tax-efficient exit. In our planning process, we consider what
steps need to be taken to protect the business value, including
taking care of key employees or addressing other risks that could
significantly impact its value. Business succession planning can
be complex; thus, it is critical to identify the appropriate team to
assist in achieving your objectives.
It is never too early to start the planning process. Plan for the
unexpected. This includes a buyer or strategic partner unexpectedly
approaching you with an opportunity that you may want to pursue.
However, if you haven’t addressed all business risks and other
planning issues that would arise in due diligence by this buyer or
strategic partner, you may miss the opportunity of a lifetime. Plan
for the unexpected now in order to relax and let go later.
Joe can be reached at jkulek@sikich.com or 217.862.1858.
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