Design-Build Firm Discovers Valuable Tax Credit Hidden in Everyday Projects

Company DB is a regional design-build construction firm that specializes in commercial construction projects. Their experience runs the gamut, with expertise in everything from healthcare and education facilities to multi-family properties and office buildings.

Like many design-build firms, Company DB is involved long before construction begins. Their team evaluates design alternatives, coordinates building systems, solves constructability challenges, and develops practical solutions to satisfy a project’s technical requirements and a client’s discerning tastes.

For years, Company DB assumed the Research & Development (R&D) Tax Credit was only for traditional laboratory activities – things like medical research or pharmaceutical testing.
Nothing could be further from the truth.

Many of the technical challenges design-build firms solve every day qualify for the R&D Tax Credit.

ELIGIBILITY
In order to qualify for the R&D Tax Credit, a research activity must pass all four parts of the IRS’ Four-Part Test. The consulting team worked with Company DB to evaluate its projects against all four criteria:

1. Developing or Improving a Product or Process
Company DB was continually creating new building designs and reworking them based on client feedback. In this case, the product being developed/improved is the design itself. Every design-build project required customized solutions rather than simply following an existing set of plans.
Additionally, Company DB strove to streamline construction methods, making processes smoother, less wasteful, and more economical. The process improvements can also be qualify as research activity under the R&D Tax Credit.
Result: Passed

2. Eliminating Technical Uncertainty
At the beginning of many projects, Company DB did not know exactly how certain design or construction challenges would be resolved.
Examples include:
• Integrating new construction into existing occupied facilities
• Coordinating mechanical, electrical, and plumbing (MEP) systems within limited building space
• Reconciling differences between design drawings and actual field conditions
• Designing around existing structural elements while maintaining code compliance
• Evaluating multiple building layout, materials, and system configurations to meet owner requirements
Because the appropriate solution was unknown at the outset, these activities involved technical uncertainty.
Result: Passed

3. Process of Experimentation
Rather than applying a standard solution, Company DB evaluate alternatives throughout the design and construction process.
Its teams routinely:
• Compared multiple design options
• Revised BIM and Virtual Design & Construction (VDC) models
• Modified layouts after field verification
• Evaluated constructability and sequencing alternatives
• Coordinated with subcontractors to refine building systems
• Tested different approaches before selecting the final design
This iterative process represents the type of experimentation mandated by the R&D Tax Credit.
Result: Passed

4. Technological in Nature
Company DB’s work relies on principles of engineering, architecture, construction management, and building science.
Result: Passed
Because Company DB satisfied all four requirements, its qualified activities were eligible for the R&D Tax Credit.

COSTS
There are 4 possible types of costs – employee wages, supplies, cloud hosting, and payments to third-party contractors. The R&D Tax Credit offers up to $0.10 back for every qualifying dollar identified in a study, so it’s important to ensure that all relevant costs are considered.

The primary expenses for design-build firms like DB are employee wages. This can include wages paid to those actually performing the research activities and those who supervise or support them.

Common qualifying job titles include:
Performing Research Supervising Research Supporting Research
Architect/Designer C-Suite Executive CAD Designer
Engineer Project Manager BIM Modeler
Energy Consultant Design Director Surveyor
Soil Scientist Construction Manager Drafter

DOCUMENTATION & STUDY PROCESS
Documentation is crucial to substantiating the R&D Credit claim. Fortunately Company DB – like most design firms — already generated excellent records as part of their day-to-day operations:
• BIM and Virtual Design models
• Design revisions
• Constructability analyses
• Change orders
• RFIs
• Contracts
• Scope narratives
• Job descriptions
• Time-tracking software output

This documentation testifies to both the technical activities performed and the associated qualified wages.

The consulting team reviewed employee responsibilities, interviewed key personnel, and analyzed payroll documentation to determine the portion of each employee’s time devoted to qualified research activities. If an employee spends more than 80% of their time on qualified research, 100% of their wages may be counted towards the Credit, so it’s crucial to understand the nature of activities performed by role.

After a meticulous analysis, the consulting team determined that in Tax Year 2023 Company DB had the following Qualified Expenses:

Federal Level
$3,079,616

State Level
$2,884,894

(The numbers aren’t identical because sometimes states don’t align with federal definitions of exactly what constitutes a qualified activity.)

This translated to a gross federal and state Credit equaling $248,438.

OUTCOME
By documenting the technical problem-solving already occurring throughout its design-build projects, Company DB successfully identified a significant federal and state R&D Tax Credit.
The R&D Tax Credit can be claimed annually, as long as qualified activities continue to be performed. Company DB were delighted to discover this renewable source of capital and will be incorporating the R&D Tax Credit into its overall financial plan moving forward.