What every real estate investor should know about cost segregation

Cost segregation is a popular tactic utilized by real-estate investors to enable them to augment the cash flow by reducing the accelerated depreciation, additionally lessening the paid income taxes. A cost segregation study on as of late built offices is being performed to get recognized about the systems other real estate investors are utilizing. Each land speculator should know how cost segregation companies will profit them. Nowadays the investigation of cost segregation depreciation is imperative as it lets the speculators of land discover the benefits in a structure's development with an actual existence than can be devalued to 5, 7, or 15 years. There are a few ways to locate the right cost segregation experts. Once can carry out intensive research, check their engineering qualification, and check for their tax expertise.

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Construction Cost Management an Effective Way to Minimize Your Annual Cost

One of the important steps of project management includes Construction Cost Management which ideally creates a baseline for the project cost at the various phases of project development. It is done to ensure that project costing does not get exceed from the particular budget. In case the project happens to exceed the planned budget, it might not be able to yield profits. The various types of estimates involved in construction include design estimate, bid estimate, control estimates. Cost control management is required in every project so that the unnecessary expenses may be cut down as over a long haul; this would seem like a superb decision. It is important so that the expenses could be curbed at the beginning of the project. It is also important that the money is utilised well, and sound management makes the execution of the project easier.

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Material Handling

 

Material handling is just as important as anything during facility planning. The costs of improper planning can lead to loss of efficiency and productivity which in turn increases the costs and drives down profitability. From an efficient material handling system, a lot of value could be added to the routine and regular activities. Besides, the main aim of the material handling system designer must be to reduce the total cost of material handling without putting any impact on service level and productivity. If the order picking operations are improved, travelling time and time spent on filling orders reduced, space utilisation is done by improving storage methods a lot of material cost can come down. For any facility, material handling is of critical importance as it is nothing short of an opportunity to save more costs. Having said that, it is important that material handling should be done during the planning of the facility.

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The New Workplace

For decades, the workforce of America has had two standard options: full-time or part- time. However, today, in the new work place some employers are now offering flexible work schedules to accommodate a growing number of employees that do not want to work a traditional 9-5 schedule. According to the United States Department of Labor “A flexible work schedule allows employees to vary their arrival and/or departure times.” At Lindon Engineering Services, employees follow a more personalized work schedule, while the company still performs at peak efficiency.

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PATH

As the 2015 tax season comes to a close it is time to prepare for the new provisions associated with Protecting Americans from Tax Hikes (PATH) Act of 2015. The biggest revisions to the depreciation regulation that will ultimately benefit clients are:

• The extension of bonus depreciation through 2019
• The addition of Qualified Improvements (QIP)
• Modifications to Qualified Leasehold (QLHI), Restaurant (QRP), and Retail (QRIP) Improvements

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REMODELING PROJECTS (Asset Disposition)

Recently we have performed a number of cost segregation studies on remodeling/renovation projects. Among the questions that have arisen in reconciling the cost of the renovation are those related to the disposition of the cost of assets that have been removed and those remaining from the previous facility. For the most part, we have ignored the cost of the existing building and improvements resulting in their remaining on the client’s books even though some of the assets have been demolished. 

The recent release of the Temporary Regulations under 263(a) has changed the manner in which the residual basis of existing assets is handled following removal on a remodeling project.

In the past, demolished assets had to be carried on the client’s books until the full cost had been recovered and ultimately retired. Now, however, the value of the removed assets can be written off as abandoned components (Note: This only applies to 39-year real property). Not only does this regulation take effect immediately, but an owner can also write off removed components from remodeling projects performed during the past ten years by filing a Form 3115 (Change in Accounting Method).

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What is Research and Development? (R & D Series Part I)

What is Research and Development (R&D)? Seems like the answer should be simple… I mean just look at the name! The simple answer is, it’s the investigation of business activities to improve or create products and/or procedures. 

R&D events can be an internal operation or outsourced to specialists. Many small business owners take advantage of outsourcing R&D work because they lack knowledge of design and engineering for their new-found concepts. R&D activities  

vary from industry to industry, but they always contain these three steps:

1.      Basic Research – The exploration to obtain a more complete understanding of fundamental aspects of a concept. 

2.      Applied Research – The investigation of methods to obtain specific objectives regarding product or processes. 

3.      Development Research – The examination of the implementation of research knowledge and designs for production.

There is no guarantee to the outcome of R&D. Many companies spend a large amount of money on research and development activities and never realize a return on their investment. Some companies utilize R&D with the knowledge that they will not immediately profit, but instead focus on the long-term profitability.  How much is spent on R&D isn’t a measure of success, rather, it is the balance between technical risk and market risk, all of which need proper investment and management. Forbes uses this equation to model the success of research and development: innovation =  invention + customer value + business model

There are many factors that contribute to the decision of whether to pursue R&D. The following are the top four:

1.      Proprietariness – Is the nature of the research unique such that it can be protected through patents or non-disclosure agreements? Having that level of protection makes R&D much more valuable. 

2.      Timing – Starting R&D is best when the market for the product is slow or moderate in growth.

3.      Risk – R&D is a high-risk activity. Lowering the risk could mean acquiring the research to produce marketable products or processes. 

4.      Cost – Expenses for R&D activities can be very costly and produce a negative cash flow before returning a profit. In the next article, I will discuss how much and what is spent on Research and Development. 

Whether success or failure, all those expenses don’t have to be a burden of loss. The Research and Development Tax Credit, made permanent through the Protecting American against Tax Hikes (PATH) Act during 2015, allows businesses a credit for qualified research activities and expenses. This will be discussed in a later article. 

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Study Timing

For a Cost Segregation (CS) study, timing is important. The analysis cannot be completed until the construction work is complete and the total cost of the construction work has been finalized. And, ideally, the CS should be done before the tax filing for the year the building is placed in service. This results in a maximized cash flow for the facility owner, by realizing their tax savings as soon as possible. That is not to say that a CS should not be done after the first tax year of the building being operational. Carry-forward costs allow the property owner to realize unclaimed tax deductions that they may have missed in the years since the building was placed in service. However, these savings are slightly lower than they would have been if they had completed a CS at the time the building was placed in service.

A similar situation is true for our Business Solutions Services (BSS) studies. When planning the operations of a facility, the greatest opportunities for cost savings occur during the facility planning stages. This is because the difficulty and cost of altering the layout of a facility or relocating a facility is extremely high. Using detailed information about daily operating procedures to guide the facility design process can help minimize operating costs over the long-term. Even if a business is past the facility planning stage, there are still several other ways that BSS can help reduce costs. Besides the layout of the facility, significant opportunities for savings can lie in material handling, process improvements, inventory and production control policies, workstation design, and more.

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Inventory Control

The primary decisions of inventory control are as follows: What products or materials should be made or ordered? How Much of those products and materials should be made or ordered? When should we make or order those products and materials? Reasons that companies will hold inventory are to achieve economies of scale, to protect against variability in demand, lead time, etc., and more. Costs associated with an inventory control system include holding or carrying costs that represent the cost of keeping items in inventory over a period of time, replenishment costs that represent the cost of making or ordering to increase the inventory level, and penalty or shortage costs for not having sufficient inventory to meet demand.

A good tool to use for planning an inventory control system is an appropriate forecasting model of past demand data. Different forecasting models exist for different data patterns, such as level, seasonal, or intermittent demand data. Each model uses different parameters to analyze past demand patterns and forecast future demand points. As time goes on and more data becomes available, the forecasting model can be continuously updated and improved.

Quantitative inventory control methods can utilize forecasting analysis to optimize when, how much, and what products are made or ordered by minimizing the costs associated with these decisions. Just like different forecasting models exist for different data patterns, different inventory control techniques exist for different demand patterns and various levels of uncertainty.

One of the most commonly known inventory control models is the basic Economic Order Quantity (EOQ) model. This model is very simple and easy to use; however, it has several underlying assumptions that do not typically reflect realistic scenarios such as no replenishment lead time or allowing a non-integer order quantity. More complex models that incorporate lead times, both deterministic and time-varying, quantity discounts, inventory shortages, and variable demand patterns can be derived from this model.

When using forecasts and inventory control models, it is important to remember that they are usually wrong. If this is true, then why would you ever want to use them to make decisions? The answer is because they provide insight into making future decisions. “Good” forecasts are accurate and give you an idea of the range for your future demand. These methods shouldn’t be used independently of important market information either, such as the effects of a new popular movie release on the demand for related movie merchandising.

Better control over the inventory system provides benefits beyond the costs of inventory. Holding excess inventory results in greater storage space requirements, which limits space utilization. Read more about this in our Space Utilization post.

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Getting Paid for Change Orders

By: Donald K. Archer

It has been my experience that contractors do not manage changes in the scope of work particularly well. You probably know that you are contractually entitled to receive compensation for any changes made in a contract. But, are you aware of what constitutes a change?

Contract changes take many forms:

• – Acceleration of schedule
• – Delays
• – Changes in the scope of work
• – Deletions of any provision
• – Unforeseen conditions

Getting paid for some of these types of changes may not be easy. There is one type of change, however, for which you should certainly be paid without argument – the directed change.

Dealing with Directed Changes

In a directed change, the owner has directed the contractor to perform work not included in the contract. Both parties should be in agreement that an adjustment to the contract in terms of scope of work, cost and time has occurred.

While the contractor and the owner may not agree on the dollar amount for the work or the time to perform it, they both must understand that a change to the contract must be executed. Most construction contracts provide that the contractor must perform the change regardless of whether the two parties disagree on the cost or time requirements of the change order. This provision puts the contractor in the unenviable position of having to file a claim – a position you want to avoid if at all possible.

Plan for Changes

What should you do if you are directed to make changes in the work?

Use extreme caution to ensure you follow the terms and conditions of the contract exactly with respect to changes. Some typical contract provisions you need to follow include:

Notification of the change to the owner; Timely documentation of the scope change, extra costs and time required to execute the added work.

Develop a Field Change Request (FCR) form to document the change. Provide the scope of the change, cost to perform, the time required and the effect on the overall project schedule and a place for the owner to acknowledge/accept the provisions of the change.

If the owner does not accept the FCR, then don’t perform the extra work and notify the owner in writing that you are not performing the work related to the change.

The keys to getting paid for the work you perform are having your paperwork in order and following the terms of the contract exactly. Complete and accurate documentation doesn’t always guarantee you’ll get paid, but it does improve your chances.

Mr. Archer is a Civil Engineer with a Masters degree in Business Administration and a Masters Degree in Engineering Management. He is an Adjunct Professor of Engineering Management at the University of Louisville and is the President of his own engineering company, Lindon Engineering Services, Inc.

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