When it comes to innovation, the construction industry is often overlooked. Many assume that research and development (R&D) tax credits are only available to tech companies or large corporations. This misconception leads many construction firms to miss a significant opportunity to cut costs and invest in improvements.

R&D tax credits are made to reward businesses that address certain challenges through innovation. For construction companies, this can include activities like developing new materials, improving project workflows, or designing unique structures to meet client demands. Even smaller firms can qualify if they engage in these kinds of improvements.

Today we will cover how R&D tax credits apply specifically to the construction industry, which activities and expenses qualify, and how your company can benefit from this tax incentive.  Here is a detailed plan of what we will explain in this article:

• How R&D tax credits apply to the construction companies
• What expenses can be claimed under R&D tax credits for construction?
• Myths and misconceptions about R&D tax credits in construction
• Common challenges construction firms face when claiming R&D tax credits
• Steps construction firms can take to claim R&D tax credits

How R&D Tax Credits Apply to the Construction Companies

R&D tax credits directly benefit construction companies that engage in innovative projects or solve technical challenges. These credits are not just for high-tech industries — construction firms can qualify if they perform activities that meet specific requirements.

In the construction industry, R&D often occurs during the development of unique designs, the testing of new materials, or the use of advanced techniques to overcome project limitations. For instance, if your team works on improving a building’s energy efficiency by testing different insulation methods or creating a custom solution to meet strict environmental standards, those activities could qualify.

What makes construction projects eligible is their focus on addressing uncertainty. This could mean experimenting with various methods to determine the most effective way to meet building codes or creating structures that perform better under specific conditions, such as extreme weather.

These credits can be applied to reduce your tax liability, offering financial support for your company’s innovation efforts. Even if you’ve already completed a project, you may still be able to claim for past qualifying activities.

What Expenses Can Be Claimed Under R&D Tax Credits for Construction?

When claiming R&D tax credits for construction projects, you can include specific costs known as Qualified Research Expenditures (QREs). These are expenses directly related to the activities that meet the eligibility criteria for the tax credit. Below is a breakdown of the main categories of expenses that can typically be claimed:

1. Wages. You can claim the salaries of employees who are directly involved in R&D activities. This includes:

• Workers conducting hands-on experimentation or problem-solving.
• Supervisors overseeing the qualifying R&D tasks.
• Staff providing direct support to the research, such as drafting technical drawings or collecting data.

For example, if your team experimented with new materials to improve a building’s structural performance, the wages for the workers involved in the design, testing, and analysis of those materials could be included.

2. Supplies. This category includes the cost of materials used in R&D projects. Supplies are defined as tangible items consumed or transformed during the research process. For construction companies, this could mean:

• Raw materials used to create prototypes or test new designs.
• Components used during the trial-and-error phase of developing a new process.
• Specialized construction materials used in pilot projects.

Keep in mind that any supplies not directly consumed during R&D activities — such as tools or equipment — are generally not eligible.

3. Contract Research. If you hire external consultants or subcontractors to perform qualifying R&D activities on your behalf, the payments made to these contractors may be included. Common examples include:

• Engineering firms assisting with feasibility studies or advanced calculations.
• Consultants working on the development of innovative building techniques or materials.

It’s important to ensure that these contractors’ activities meet the same eligibility criteria as in-house work and that your company retains some level of control or rights over the results of their research.

4. Testing and Experimentation Costs. Expenses related to testing prototypes or validating new designs can also qualify. For construction projects, this might include:

• Testing the performance of new materials under simulated stress conditions.
• Performing on-site trials to evaluate a new construction technique.
• Laboratory fees for analyzing materials or structural elements.

These costs are particularly relevant for construction companies that engage in experimental builds or require physical validation of new methods. For example, if your team develops a new structural component, the expenses involved in testing its durability or compliance with safety standards could be claimed.

5. Software Development. If your company develops or customizes software for specific project needs, those costs may qualify. For instance:

• Developing software to optimize project workflows.
• Creating tools to automate compliance checks or streamline design iterations.

This is especially valuable in modern construction, where technology often plays a key role in problem-solving. If you design proprietary software to improve efficiency or integrate innovative techniques into your projects, the development costs for that software could be eligible.

Why Accurate Documentation Matters

To claim R&D tax credits successfully in any niche, your company needs robust and detailed documentation of eligible expenses and activities. This is not just about keeping receipts — it’s about building a clear narrative that demonstrates how your work meets the eligibility criteria.

Here’s what to focus on:

1. Employee records: keep detailed payroll reports for individuals working on R&D tasks, including time tracking for specific activities.
2. Material purchases: save invoices and receipts for all materials consumed during the experimentation or prototyping phase.
3. Contractor involvement: maintain contracts and itemized invoices for subcontractors performing qualifying activities.
4. Project logs: document the goals, methods, and results of each project to show how you addressed technical challenges and eliminated uncertainties.

Good R&D documentation ensures your claim is defensible if audited and helps maximize your credits by accurately reflecting all qualifying expenditures.

Myths and Misconceptions About R&D Tax Credits in Construction

There’s a lot of confusion about how R&D tax credits apply to construction, and it’s not surprising. These misconceptions often make companies assume they don’t qualify or think the process isn’t worth the effort. But a closer look shows that many of these beliefs just aren’t true.

One common misunderstanding is the idea that R&D credits are only for tech companies or industries like pharmaceuticals. This isn’t the case. The construction industry has plenty of innovation that qualifies, from designing more efficient systems to developing unique solutions for challenging projects. If your work involves solving technical problems, there’s a good chance it fits the criteria.

Another myth is that only large firms can take advantage of these credits. This leaves smaller construction companies hesitant to even explore the possibility. In reality, the size of your business doesn’t matter. The focus is on what you do, not how big your operations are. Small teams working on innovative projects are just as eligible as large corporations.

Then there’s the fear of claiming credits for projects that didn’t go as planned. Many companies think that if something doesn’t succeed, it can’t qualify. That’s not true. Experimentation and even failed attempts are part of the process, as long as there’s a clear effort to eliminate uncertainty and improve methods or outcomes.

A lot of firms also shy away because they think the process is overly complicated. It’s true that documentation is important, but it doesn’t have to be overwhelming. The key is keeping track of relevant activities and costs. With proper guidance, it’s entirely manageable.

Lastly, some believe only groundbreaking discoveries count. But R&D tax credits aren’t just about major breakthroughs. They also cover smaller steps forward, like improving a building’s energy efficiency or finding a better way to meet unique site conditions. These incremental changes are often the backbone of qualifying activities.

By clearing up these misconceptions, you can see that R&D tax credits are far more accessible than they might seem. For many construction firms, the opportunities are just waiting to be claimed.

Common Challenges Construction Firms Face When Claiming R&D Tax Credits

Claiming R&D tax credits can bring significant benefits, but the process isn’t without its hurdles. For construction firms, these challenges often come down to misunderstanding eligibility, incomplete documentation, or underestimating the complexity of the claim process. Let’s break down some of the most common issues and how to address them.

1. Identifying qualifying activities
Many construction firms struggle to pinpoint which of their activities qualify as R&D. This is partly because the work often blends routine tasks with innovation, making it hard to separate the two. For example, creating a custom design to solve a unique structural challenge may qualify, but firms often dismiss it as “just part of the job.”

You need to recognize when your work involves experimenting with new methods, materials, or designs to eliminate technical uncertainty. Don’t forget to keep a clear record of these activities during projects.

2. Inconsistent or inadequate documentation
Without proper records, even the most innovative projects can fail to qualify. One of the biggest challenges construction firms face is tracking R&D-specific costs and activities. For example, employee time spent on R&D tasks may not be recorded separately from other project work, making it difficult to support a claim.

To avoid this, it’s essential to implement systems for tracking R&D-related work from the start. This can include time logs for employees, detailed notes on experiments, and records of materials used for testing. The more specific and organized your documentation, the smoother the claims process will be.

3. Misunderstanding state and federal rules
While this guide focuses on federal R&D tax credits, many states offer additional incentives. The challenge is that the eligibility criteria, rates, and documentation requirements can vary between state and federal programs. This creates confusion for firms that operate in multiple locations or try to maximize benefits by combining credits.

Working with a tax professional who understands both state and federal regulations can help ensure you don’t miss opportunities or make mistakes.

4. Fear of Audits
The possibility of an IRS audit can deter some construction firms from claiming R&D tax credits. While audits are rare, they do happen, and the fear of being unprepared stops many companies from pursuing a claim altogether.

The best way to address this concern is to build your claim on solid documentation. If you want to learn more about this, then check out our article about “How to handle an R&D tax credit audit”

Steps Construction Firms Can Take to Claim R&D Tax Credits

Claiming R&D tax credits can seem daunting, but with the right approach, it’s a manageable process. Since we’ve already covered identifying and documenting eligible activities in detail, let’s focus here on how to turn those efforts into a successful claim.

1. Start with an eligibility assessment

Before you invest time in preparing a claim, conduct a thorough review of your projects. Focus on identifying the activities that align with R&D criteria, such as solving technical challenges or experimenting with new methods. If you’ve already reviewed how to identify qualifying work in the earlier section, this is where you put that knowledge into action.

2. Organise your documentation

We’ve discussed the importance of proper documentation. At this stage, make sure everything is consolidated and ready for review. Group your records by project, ensuring that employee timesheets, material receipts, and project logs are easy to access. This will streamline the next steps and make the claim process more efficient.

3. Partner with an R&D tax specialist

While some firms manage their claims internally, working with an R&D specialist who understands construction can save you time and ensure nothing is overlooked. A tax advisor familiar with both federal and state R&D programs can help verify eligibility, maximize your claim, and navigate any complexities unique to your industry. This is especially helpful if your projects span multiple states or involve subcontractor collaborations.