Key Takeaways
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Your current operations may qualify you for an R&D tax credit
Construction companies often overlook R&D tax credits because they assume the incentive applies only to laboratories or product development. In reality, many qualifying activities occur on active construction projects where teams are developing solutions to complex technical challenges.
A contractor may qualify when they face technical uncertainty and evaluate alternatives to achieve a desired outcome. Examples include improving construction methods, testing materials, redesigning systems to meet performance requirements, solving site-specific challenges, refining prefabrication and installation processes, or developing more efficient ways to complete work while maintaining quality and safety standards.
The opportunity is often part of day-to-day operations rather than separate innovation initiatives. Design-build projects, complex installations, value engineering efforts, and process improvements can all create potential eligibility when supported by a systematic approach to resolving technical challenges. Activities such as modeling alternatives, evaluating different materials, conducting field testing, or revising designs based on project constraints may all contribute to a qualifying credit opportunity.
The right costs need to be captured
Common qualified research expense categories include employee wages, supplies, and contract research expenses. Employee wages may include compensation paid to employees who directly perform, supervise, or support qualified research activities. Supplies may include tangible property consumed during qualified research, excluding items such as land, buildings, or depreciable property.
Contract research expenses may include amounts paid to third parties to perform qualified research on the company’s behalf, though generally only 65% of eligible contract research expenses can be included.
For construction companies, coordination between project teams, accounting, payroll, and tax is especially important. The strongest claims are built when technical activity, supporting records, employee involvement, and related costs can be connected clearly.
Contract structure can affect eligibility
Construction contract terms can also affect who is entitled to claim the credit. The analysis generally depends on which party bears the financial risk if the research is unsuccessful and whether the contractor retains substantial rights to the results.
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Contract Type |
Who is eligible? |
Why? |
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Firm Fixed-Price (FFP) / Lump Sum |
Contractor |
Payment is tied to delivering a functioning product or meeting strict milestone specifications. If the R&D fails or runs over budget, the contractor covers the loss. |
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Standard Cost-Plus / Cost-Reimbursable |
Customer |
The contractor is paid for effort rather than results. The customer carries the financial burden of a failed or over-budget project. |
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Time & Materials (T&M) |
Customer |
Like cost-plus, the contractor bills for hourly labor and materials as incurred. There is no risk of non-payment if the technical solution fails. |
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Contingent / Success-Based Fee |
Contractor |
Payment is explicitly structured to only occur upon successful completion or performance optimization of the business component. |
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Guaranteed Maximum Price |
Mix |
Expenditures for contractors under the max price cap are disqualified due to similarity with "funded" research; expenditures above the cap are eligible because the risk lies with the contractor. |
The contract label alone is not enough. Contractors should review the actual agreement, payment terms, change order provisions, risk allocation, and rights to use the resulting work before determining whether a project supports an R&D credit claim.
Documentation drives the value
Eligibility depends on more than claiming a project was innovative. Companies should be able to demonstrate the uncertainty involved, the alternatives considered, the work performed, and the resources dedicated to the effort.
Useful documentation may include project records, design revisions, testing results, field reports, drawings, meeting notes, time records, contracts, change orders, and related correspondence. The stronger the connection between the technical work performed and the supporting records, the easier it is to substantiate a claim and quantify eligible costs.
Identify Potential R&D Credit Opportunities In Current Projects
What construction leaders should do next
Review projects where teams solved technical problems, tested alternatives, improved methods, or overcame design and construction challenges. Then determine whether those activities can be supported with appropriate documentation and cost data.
Consider focusing first on projects that involve significant design changes, unique site conditions, complex coordination requirements, or extensive evaluation of alternative approaches. These projects often include technical activities that warrant further review.
For many contractors, the opportunity already exists; now it comes down to identifying qualifying work and documenting it effectively.
Take a strategic, long-term approach
The most successful R&D credit programs are built into existing project workflows. Regular project reviews, consistent documentation, and coordination between operations, accounting, and tax teams can improve both compliance and credit value.
Rather than treating the credit as a one-time exercise when taxes are filed, contractors can benefit from identifying qualifying activities throughout the year and capturing key project information, cost, and contract information.
With the complexity of R&D credit qualification requirements, many contractors benefit from working with advisors who understand both construction operations and R&D tax rules. UHY’s R&D Tax Credit Practice helps companies identify qualifying activities, evaluate documentation, and establish sustainable processes for capturing credits year after year.
Talk with UHY about Claiming an R&D Credit on a Construction Project
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Author
TODD SUTHERLAND
Partner, UHY LLP Managing Director, UHY Advisors
Todd Sutherland has over 20 years of accounting experience across a wide industry spectrum. He is the Director of Research and Development Tax Credits and specializes in helping clients claim R&D tax credits, and defending the R&D credit claims under IRS examination.