Participants in the Construction Project

constructionThere are many different players in the construction process that play distinct roles. The key participants are discussed below.


Contractors perform the construction work in accordance with the plans and specifications provided by the owner and are required to be licensed by state law.

General or Prime Contractors

A general contractor's principal business is the performance of the construction work in accordance with the plans and specifications of the owner. A general contractor takes full responsibility for the completion of the project. The general contractor will normally subcontract out a substantial part of the work, while maintaining overall control through project managers and onsite supervision. The general contractor may utilize specialty subcontractors, but can perform any portion of the work. Generally contractors are licensed. If the contractor is a corporation or partnership, an officer or partner, the contractor must be licensed.

Construction Managers (Project Managers)

Generally, the construction manager does not perform construction work on projects, but is an agent for the owner. The construction manager may be engaged in lieu of or in addition to a general contractor. As an agent, the construction manager coordinates the construction project, but has no contractual relationship with the subcontractors. Generally, construction managers only provide services. Construction managers do not perform any construction work. Construction managers are not liable for defects in the construction. However, the construction manager may be liable for design defects.

Commercial Contractors

Commercial contractors specialize in commercial construction projects. These projects may include the construction of a single building or any number of buildings. Commercial projects include:

  • Retail project like shopping centers, restaurants, and grocery stores;
  • Rental facilities like office buildings, industrial parks, and apartments;
  • Business locations like company headquarters, manufacturing plants, and insurance companies;
  • Municipal buildings like city halls, prisons, schools, and hospitals; or
  • Special projects like amusement parks, racetracks, coliseums, and churches.

A commercial contractor constructs nonresidential buildings, such as office buildings, warehouses, and shopping centers.

Commercial Project Owners

The owner of a construction project may be an individual, corporation, partnership, or government body. The owner evaluates whether a project is feasible and will provide the future benefits desired. The owner then engages an architect or engineer to design the plans and specifications of the project. Normally, the owner secures the necessary financing for the project for both the construction period and permanent financing upon completion. The owner will retain title to the project throughout the construction phase, subject to liens from construction loans and mechanics liens. The general contractor may or may not have an ownership interest in the project. The contractor may own a percentage interest in one of the following ways:

  • Owning stock in the corporation that owns the project;
  • Being a partner in a development partnership; or
  • Owning the property or an interest in a joint venture as an individual.

Residential Construction Developer

The examination of residential developers is different than the examination of a contractor who builds in accordance with a contract for an owner. The developer is generally the owner and the builder of the residential development. The developer acquires land, obtains approval, secures construction financing, and begins construction of the residential development in stages or phases of construction.

The initial phase is sold, and the construction process begins on the next phase. This process requires the builder allocate a per-unit cost to each unit sold. The cost of each unit (on-site costs, such as direct materials and labor, and an allocated portion of off-site costs such as streets and amenities) must be matched with the sales price of each unit sold. The sales price is often based on what the market will bear under the current economic environment.

The largest number of taxpayers in the construction industry is a specialty subcontractor. They can range from one-man operations to nationwide, publicly traded corporations, or divisions of larger corporations. Subcontractors are distinguished from the general contractor by the limited scope of their work, which usually involves a special skill, knowledge, or ability.

Subcontractors include specialists, such as plumbers, electricians, framers, and concrete workers. They generally enter into contracts with the general contractors, and may provide the raw materials used in their specialty areas.

The general contractor, not the owner of the property, will usually pay the subcontractors. Materials purchased by the subcontractors are generally delivered directly to the job site. The subcontractors' work may be completed in stages, or it may be continuous.

Highway Contractors

Highway and street contractors require specialized equipment and techniques. The equipment includes bulldozers, graders, dump trucks, and rollers. Examples of highway construction include city streets, freeways, country roads, highway bridges, and tunnels.

Heavy Construction Contractors

Heavy construction contractors require large and complex mechanized equipment, such as cranes, bulldozers, pile drivers, dredges, and pipe-laying devices. Some examples of projects in this category include dams, large bridges, refineries, petrochemical plants, nuclear and fossil fuel power plants, pipelines, and offshore platforms. Most industrial plants are classified in this category because of the complexity of the work. The largest engineering and construction firms are included in the heavy construction classification.

Architects and Engineers

The architect or engineer designs the plans to be used by the construction contractors. The plans provide the necessary detail (dimensions, materials to be used, location of fixtures, etc.) to the contractors. When the project is started, the architect or engineer may monitor the contractor's progress and often approves progress payments to the contractors. The architect or engineer will make modifications (change orders) in the plans as needed. Change orders are written revisions to the contract, which increase or decrease the total contract price paid to the construction contractors. The change order document contains the change order number, change order date, a description of the change, and the amount of the change order. The contractors under the terms of the contract can also issue change orders.

Material Suppliers

Material suppliers provide the raw materials used in the construction project. Material supplies are purchased by the subcontractors and installed by them in accordance with their contract. General contractors often write joint checks to subcontractors and material suppliers to ensure that all parties have been properly paid. Materials are generally delivered directly to the job site and are direct job costs, which are not normally inventoried by the contractor. In some situations the contractor will maintain inventories of frequently used miscellaneous yard stock.

Construction Lenders

The construction lender provides the necessary funds to pay contractors on a progress basis. In return for making the loan, the lender receives interest on the outstanding loan balance. Construction period interest costs ("soft costs") paid by the owner to lenders must be capitalized during the construction period. Interest and other loan costs are often taken directly from the loan principal as a result of the institutions interest provisions.

As construction work progresses, the construction lender (bank, savings and loan, insurance company, etc.) will advance the funds based on the work performed or based on a payment schedule. The construction loan is generally secured by the land and construction in progress. When construction is completed, the owner will secure permanent long-term financing.

Surety Companies

Sureties are generally insurance companies who provide bonding to contractors. Bonds provide a form of insurance to the owner. Performance bonds protect the owner if the contractor fails to complete the construction work. Performance bonds are typically a percentage of the contract amount.

Bid bonds guarantee that the contractor will sign the contract after it is awarded and furnish the necessary performance and payment bonds within a specified time. Contractors must submit detailed financial data to the surety company to secure a bond.

Financial statements prepared in accordance with generally accepted accounting principles (GAAP) are often furnished to the surety on a quarterly basis or more often. Supporting schedules included in these financial statements provide extensive job information, required by the surety in order that they may analyze and limit their risk. Personal financial statements are usually required to be supplied from officer shareholders.

Multiple Roles

Each of the above participants can and often has multiple roles in the construction process. For example, the owner could also be the general contractor (builder or developer). The general contractor in addition to providing supervision may also do specialty work that would typically be subcontracted (for example, concrete work). Design-build companies are growing.

Construction lenders frequently hold an equity position in a development partnership in order to participate in the management decisions and to share in the profits. Anchor tenants, such as major department store chains participate in the development partnership in exchange for signing long-term leases. Contractors and material suppliers can obtain rights in the project by filing mechanics liens against the property.

IRS Construction Industry Audit Technique Guide (ATG) - Chapter 1, Publication Date - May 2009
The information on this page is taken from the IRS Website and it claims that this is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. It is current through the publication date noted above. In general, it is a good reference guide through the subjects discussed.