Tax Incentives and Material Costs
In construction, profit margins require constant attention. Leveraging the latest tax incentives can make a difference. So can a rigorous approach to utilizing price escalation clauses in the face of volatile material costs. Step up your strategies for protecting the profit margins at your construction business with this expert advice.
Making Every Dollar Count
According to accounting giant Bennett Thrasher, construction businesses can look forward to meaningful tax benefits stemming from One Big Beautiful Bill (OBBB). Specifically, certified public accountants, Aaron Epp and Aaron Scale provide these pointers on leveraging tax incentives:
- 100% Bonus Depreciation – The OBBB restores 100% bonus depreciation on property acquired after January 19, 2025. This allows businesses to immediately deduct the full cost of qualifying property, including machinery, equipment, vehicles and other assets.
- Section 179 Expansion – Small- to mid-size contractors can also deduct equipment purchases in the first year, with an increased Section 179 expense limit of $2.5 million (phased out after $4 million in purchases).
- Expansion of Exception from Using the Percentage of Completion Method (PCM) – Generally, contractors are required to use PCM for long-term contracts unless they meet the small contract exception or home construction exception, which applies to buildings with four or fewer dwelling units. The new law expands this to any residential construction project, including apartments, condos, student housing, long-term care facilities, etc. This provides greater flexibility and potential tax deferral opportunities for residential construction contractors.
In addition to leveraging tax incentives, it’s wise to protect profit margins by carefully managing material costs. To that end, accountants emphasize that escalation clauses are a must, and “one of the most important tools contractors have to protect their margins.” Accordingly, make it a point to review all contracts carefully, and be sure the language specifically includes:
- Clear triggers for material price adjustments tied to indices such as Engineering News Record (ENR) or Producer Price Index (PPI).
- Requirements for subcontractors to adopt similar clauses to prevent margin erosion downstream
- Provisions allowing renegotiation or termination if tariffs spike beyond predefined thresholds.
- Periodic cost review checkpoints with owners to proactively adjust budgets.
Cash Position: Think Ahead
As leading national surety bond writers for the construction industry, underwriters at Colonial Surety Company remind business owners to think strategically before taking large distributions from the company on the heels of strong earnings. Consider, for example, that weakening the company’s cash position can limit the capacity to secure bid bonds for larger builds. Marty McCarthy, CPA, CCIFP, and managing partner of McCarthy & Company, further underscores the importance of being financially strategic year round in preparation for successfully partnering with lending and bonding programs:
Strategic tax planning takes into consideration many other factors, including how reducing income for tax purposes will affect financial statements, cash position, capitalizing on current elections, and much more. For example, when deciding on a lending and bonding program, lenders and sureties rely on the strength of a contractor’s financial statements and the company’s character, capacity, and capital. Customers also review these metrics to ensure that the contractor is financially strong and can meet their performance obligations.
Need More Help?
Colonial Surety Company assists construction businesses of every size on their path to success. Our Hometown Bond Program helps local builders get credit based underwriting bonds for up to $250k—no financial statements required.
Growing from there, construction business owners can get in on more action by qualifying for The Partnership Account® for Contractors. Once qualified, you’ll use our power of attorney to issue your own bid bonds, in minutes. Order performance bonds with speed and ease too. Plus, you’ll bid and win more than ever as you leverage your:
- surety line of credit—in writing;
- private digital dashboard;
- daily snapshot of single and aggregate limits
- ability to update work on hand
Surety Bond programs for construction businesses of every size are right here: Bonding Programs at Colonial Surety Company
Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial Surety Company is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.
