When construction business owners hear “research and development,” they may picture scientists working in laboratories or technology companies developing new products.
But research also happens in the field and on the construction site.
Construction companies routinely solve technical problems, test alternative building methods, adapt designs to difficult site conditions and develop processes to improve safety, efficiency or performance. In certain circumstances, those activities may qualify for the federal Research Tax Credit.
The key question is not whether the work feels innovative. It is whether the company’s activities meet specific tax requirements—and whether the company has the documentation to support them.
What Activities Could Construction Companies Qualify For?
Construction companies frequently encounter conditions that require more than routine problem-solving. A project team may need to evaluate multiple technical approaches before determining how the work can be completed safely, efficiently, and according to the required specifications.
Potentially qualifying activities could include:
- Developing or improving construction techniques
- Evaluating alternative structural or mechanical systems
- Creating solutions for complex site conditions
- Testing different materials or material combinations
- Improving prefabrication or modular construction processes
- Developing methods to increase durability, performance or safety
- Designing temporary structures, shoring or support systems
- Improving sequencing, scheduling or installation methods
- Developing specialized tools, equipment or software
- Performing engineering calculations or computer modeling
- Testing alternative approaches to reduce waste or improve efficiency
- Resolving technical uncertainty related to constructability
Not every difficult project qualifies. Routine troubleshooting, adapting an established method or complying with a customer’s specifications may not be enough. The company must evaluate the underlying activities against the tax requirements.
The Four-Part Test
To qualify for the federal credit, an activity generally must satisfy four criteria.
1. Permitted Purpose
The activity must be intended to develop or improve the functionality, performance, reliability or quality of a product or process.
For a contractor, this could involve improving a construction method, building component, installation process or project-delivery technique.
2. Technological in Nature
The work must rely on principles of engineering, physical science, computer science or another qualifying scientific discipline.
Aesthetic decisions, market research and management techniques generally do not qualify on their own.
3. Elimination of Uncertainty
At the beginning of the activity, the company must face uncertainty about how—or whether—it can achieve the desired result.
For example, the project team may be uncertain about which method will meet structural requirements, how a system can be installed within limited space or which material will perform under specific conditions. The research must be done with the intention of eliminating some uncertainty in the process.
4. Process of Experimentation
The company must evaluate one or more alternatives through modeling, simulation, testing, trial and error or another systematic process.
The process does not need to occur in a laboratory, and the company does not necessarily need to succeed. However, it must do more than select a readily available solution based on existing knowledge.
What Expenses May Be Included?
Once qualifying activities have been identified, the company must determine which related costs are eligible. Qualified research expenses may include certain:
- Wages paid to employees who directly perform, supervise or support qualified research
- Supplies consumed during the research process
- Payments to third parties performing qualified research on the company’s behalf
- Costs associated with renting or leasing certain computers used in qualified research
Not every cost connected to an innovative project qualifies. Expenses for land, depreciable equipment, routine production, general overhead and certain activities performed outside the United States are generally excluded.
The analysis should connect eligible costs to specific qualifying activities rather than applying a broad percentage to an entire project or department.
Contract Terms Can Affect Eligibility
Construction companies often perform work under contracts that assign responsibilities, costs, and risks among multiple parties. Those terms can significantly affect eligibility for the credit.
Research may be excluded if it is considered “funded” by another party. Determining whether research is funded generally involves examining:
- Whether payment is contingent on the successful completion of the work
- Which party bears the financial risk
- Whether the contractor retains substantial rights to the research results
- How the contract addresses ownership and intellectual property
- Whether the agreement is fixed-price, cost-plus or structured another way
A fixed-price contract does not automatically qualify, and a cost-plus contract is not automatically disqualified. The complete agreement and the actual working relationship must be evaluated.
Companies pursuing the credit should involve their tax advisor in reviewing relevant contracts—not rely solely on project descriptions.
Documentation Is Critical
A construction company may perform qualifying work without formally calling it research. That makes contemporaneous documentation especially important.
Useful records may include:
- Project proposals and contracts
- Design drawings and revisions
- Engineering calculations
- Building information modeling records
- Requests for information
- Change orders
- Test results and inspection reports
- Meeting minutes
- Project schedules
- Emails discussing technical alternatives
- Photographs and field reports
- Timekeeping and payroll records
- Records of failed approaches and design changes
- Documentation identifying the employees involved
The records should help establish what uncertainty existed, which alternatives were considered, how those alternatives were evaluated and who performed the work.
Trying to reconstruct these details several years later can be difficult. Companies are generally better positioned when project managers, engineers, estimators and accounting personnel incorporate research documentation into their normal processes.
Questions Construction Companies Should Consider
A construction company may want to explore the credit if it can answer yes to questions such as:
- Do our teams regularly encounter technical uncertainty?
- Do we develop or improve construction techniques or processes?
- Do we model, test or compare multiple technical alternatives?
- Do we perform engineering or design work beyond routine construction?
- Do we assume financial risk when developing project solutions?
- Do we retain rights to use what we learn on future projects?
- Can we identify the employees and expenses connected to these activities?
- Do our project files document the alternatives we evaluated?
Answering yes does not guarantee eligibility, but it may indicate that a more detailed review is worthwhile.
Final Thoughts
Construction companies innovate every day, even if they do not operate a traditional research department. Developing a new installation method, solving a difficult engineering problem or testing alternatives to improve performance may represent more than good project management—it may also create a tax opportunity.
However, eligibility depends on the nature of the work, the contract terms, the financial risk assumed and the company’s documentation. A careful project-by-project analysis is essential.
If your construction company regularly develops or tests technical solutions, LSL’s construction tax professionals can help you evaluate whether those activities may qualify for the Research Tax Credit. We will also get you in touch with a company that can help you identify the records needed and generate the necessary reports required to support a potential claim.
