Association of Cost Engineers NEC: Option C Cost Audits
Association of Cost EngineersNEC: Option C Cost Audits
NEC Option C Cost Audits• NEC Audit Provisions• NEC Payment Provisions• Audit Objectives• Audit Plan• Audit Considerations• Implementation of Audit Plan• Rolling Programme of Cost Audits• Potential Audit Problems
Solomons Europe Limited
• Solomons Europe is a Chartered Quantity Surveying Practice Established in 1998
• Provide support to UK’s Major EPC and Industrial Services Contractors
Solomons Europe Limited• Specialise in
NEC AUDIT PROVISIONSNEC ECC Option C
Target contract with an Activity Schedule
NEC AUDIT PROVISIONS• Contract Clause
– No express reference to cost audits in the NEC
– 52.3 Contractor allows the PM to inspect accounts and records required to be kept at any time within the working hours
NEC Payment Provisions• (50.1) Project Manager assesses the amount
due– Price for Work Done to Date
• Defined Cost + Fee
NEC Payment Provisions• Defined Cost =
– Option C:• Payments due to Subcontractors…
and• The cost of components in the Schedule of Cost
Components
NEC Payment Provisions• Payment timescales
– 51.1 PM certifies a payment within one week of the assessment date
– Hence, high level review of any application with more thorough audit in the following weeks
– Any audit findings are then incorporated into next PM assessment of amount due
Audit Objectives• Audits ensure costs paid are
• Accurate
• Allowable and
• Appropriate
Audit Plan• Managing Reality Book Two: Procuring an
Engineering and Construction Contract:– Appendix 3: Audit Plan
Audit Plan• The audit process should be detailed in the
Works Information
Audit Plan• Audit Task Sections – Monthly Report
• People• Equipment• Plant & Materials• Charges• Manufacture & Fabrication• Design
Audit Considerations• Generally
– Specific contract provisions– Have payments actually been made? - access to
bank statements– Allocation to correct cost codes / WBS
Audit Considerations• Subcontractors
– Pre-appointment• Order placed in accordance with any Works
Information requirements
Audit Considerations• Subcontractors
– Post-appointment• Properly administered
– Change control– Assessment of PWDD– Payments made within timescales– Final accounts reflect contract
Audit Considerations• People
– Place of work: Working Areas: “used only for this contract”
– Time capture procedure– Payslips (weekly & monthly) – Payroll burden: per Schedule of Cost
Components
Audit Considerations• Equipment
– Rates: reflective of current market rates (whether internal or not)
– Idle plant– Purchased Equipment– Maintenance / repair
Audit Considerations• Plant and Materials
– Orders– Goods received notes– Invoices– Payments– Check quants required v quants delivered
Audit Considerations• Charges
– Costs necessary to carry out the works– Costs included in Working Area overheads /
people overheads are not also included elsewhere
Audit Considerations• Manufacture and Fabrication
– Outside the Working Areas– Should be agreed and form part of the Contract
Data• “wholly or partly designed for the works”
Audit Considerations• Design
– Outside the Working Areas– Should be agreed and form part of the Contract
Data– Rates x hours + travel to Working Areas
Rolling Programme of Cost Audits• Plan to cover 10% of cumulative costs• Plan to audit each major cost element• Element audit schedule to reflect programme• Frequency of element audits reflect relative
values– Some elements may warrant a monthly audit:
e.g. prelims, staff costs
Potential Audit Problems• Vagueness of the Schedule of Cost
Components • Non-availability of substantiating information
may result in reduced payments
Potential Audit Problems• Ability to audit down the supply chain where
no direct contractual relationship exists• Reluctance to provide “commercially
sensitive” substantiating information / Data protection (!)
• Where the supporting information is held
Summary• Vital for Contractors (and subcontractors) to
keep full and organised records relating to costs to demonstrate validity and appropriateness
• Audits are a pragmatic way of ensuring accurate allowable and appropriate costs are reimbursed
Summary• Successful audits create commercial
confidence for both parties throughout the project
• Successful audit outcomes assist early settlement of final accounts
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www.solomonseurope.co.uk