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Auditing Unit Priced Construction Contracts
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. © 2012 Baker Tilly Virchow Krause, LLP
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About Baker Tilly
> Established in 1931> One of the top 20 largest accounting and
advisory firms in the United States according to Accounting Today’s 2012 list of “Top 100 Firms”
> More than 1,480 professionals
> Baker Tilly Virchow Krause, LLP is the largestUS Baker Tilly International independentmember firm
> Baker Tilly International is the eighth largest
in more than 120 countries
> Convenient, seamless resource for worldwide
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About Baker Tilly
From concept and funding to controls and compliance, Baker
industry professionals to assist with your facility developmentproject through all stages of the development lifecycle.
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Introductions
Tony Ollmann, CPA, CCADirector 608 240 [email protected]
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Overview
Today’s topics: Auditing unit priced construction
EXAMPLE TEXRisk Analysis
Audit Plan Development
Change orders
Case Studies
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Polling question #1
A. YesWere you able to attend.
C. Not yet, but I plan to viewthe recordings.
or wa c e recor ng oany of the previous
construction cost controland audit webinars?
.
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Learning objectives
> Recognize when to use unit price contracts> Learn how to identify unit price contract risk
>
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Key terms
> Unit price> Unit cost
>
> Material credits> Recycling credits
>
> Plans and specifications
> Material substitution
> Prevailing wage
> Certified payroll
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Unit priced contracts
Working definition: All inclusive price or rate tobuild/install a single unit of work. All inclusive price or rate should include:
> Labor
> Materials> Equipment
> Taxes
> Permits and inspections
> Overhead and profit
Engineering and design costs are typically excluded from unitprices.
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Unit priced contracts
Examples:> $100 per foot of pipe installed
per cu c yar remove
> $450 per ton of steel installed
> $10 per square yard installed> 250 per electrical outlet installed
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Polling question #2
A. Master services agreementWhich of these.
C. Hazardous materialabatement
D. All of the above
cons ruc on serv ceswould use unit price
contracts?
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Unit priced contracts
When are unit priced contracts used:> Total quantities may be difficult or undeterminable on bid day
o a con rac va ue may e cu or un e erm na e onday
> Unit scope is fully definable, repeatable and provides basis for
> Progress is measured in units completed rather than percentcomplete
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Unit priced contracts
What type of work are unit priced contractsfrequently used for?> Underground construction: utility work, tunnels and infrastructure
> Master services agreements
> Highway and roadway construction> Rail bed and track construction
> Pipeline above and underground
> Utility construction: transmission lines, communication towers,
campus interconnects> Repeatable units of work
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Unit priced contracts
Repeatable units of work:> Electrical outlets
g x ures
> Sprinkler heads
> Windows> Doors
May be found as supplemental rate schedules
within the subcontract to facilitate changes tothe building programming.
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Unit priced contracts
Master service contracts> Flat monthly rate
re e ne scope o wor
> Often includes labor and consumable materials
> Major repairs fall outside of the standard service scope
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Unit priced contract risk analysis: contracttemplates
American Institute of Architects (AIA)> Contractor centric
rc ec cen r c
American Council of Engineering Companies
ACEC> Consulting/design engineer centric
> Owner centric
> Owner centric
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Unit priced contract term categories
> Contract templates> Cost of work
>
> Funding programrequirements
> Billing terms
> Third party resources
> Miscellaneous
> Insurance
> Progress reporting
> Site control
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Unit priced contract risk analysis: fundingprogram requirements
Public funding programs: TIF, grants, incentiveprograms, public bond> Davis-Bacon
> WBE/DBE/MBE participation
> Affirmative action compliance> Mandatory set aside
> Compliance audit
> Use restrictions
> Supplier restrictions> Contractor bonding
> Mandatory competitive bid
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Public funding
Risk Element Risk Mitigation Supporting Documents
Davis-Bacon compliance Verify contractors arepaying laborers’ salary and
Certified payroll report Collective bargaining
ene ts t at meet orexceed local CBA
agreement
WBE/DBE/MBEartici ation Verify the requiredartici ation % has been
Contractors certifiedstatusmet Subcontracts
Bid tabulations
Supplier restrictions Verify amount of work Subcontracts
Documents of businessownership
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Unit priced contract risk analysis: fundingprogram requirements
Private funding programs: Bond issues, bankloans, operating revenue, philanthropy
> Compensating balances
> Escrowed funds
> Performance bonds
> General few restrictions placed on the owner
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Polling question #3
A. Completed quantitiesWhich of these risks is
B. Unit of measure conversionerror
C. Labor burden inflated
not usua y assoc a ewith unit pricedcontracts?
D. Construction materialsubstitution
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Billing terms – risk elements
> Price escalation
> Undefined working units(How long is a day?)
> Target budget price
> Rate increases are inflated
> -> Volume prices (Is it gallons
installed or opened?)
> Overhead and profit are
expenses
> Different types of unit prices
> Sales tax mana ementapplied on top of unit price > Surcharges
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Billing terms
Risk Element Risk Mitigation Supporting Documents
Annual price increases Verify new price calculations Unit price bid
to trigger price increases
Undefined working units Update contracts or statement
of work with revised definitionso ume pr ces ga ons use or
gallons opened)p a e con rac or s a emen o
work with revised definitions
Fuel surcharge inflation Calculate surcharge based onthird party metrics or standards
US Energy Information Administration
Fuel usage logs
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Case study: annual price adjustment
Facts:> Contract provides for a price increase based on the CPI
pp ca e reg on: es
> Price increase applied uniformly across each line of the bid
schedule
2011 Consumer Price Index
National Northeast Midwest South West
3.2% 3% 3.2% 3.4% 2.8%
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Case study: annual price adjustment
Contractor submits revised rate schedule basedon the CPI adjustment along with January 2012nvo ce.
Description 2011 UnitPrice
ProposedIncrease
2012Price
Semi-Annual Elevator SafetyInspection $375 $13 $388
Quarterly Preventive
MaintenanceRepairs and Maintenance ofConsumables $165 $6 $171
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Case study: annual price adjustment
Auditor’s price adjustment calculation
Price
of 2.8% Price
Semi-Annual Elevator Safety
Inspection $375 $10.50 $385.50
Quarterly PreventiveMaintenance $800 $22.40 $822.40
Repairs and Maintenance of. .
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Case study: annual price adjustment
January Invoice for Maintenance Services
Description2012Price
Since Last
Invoice2012Price
Semi-Annual Elevator Safetynspec on
Quarterly PreventiveMaintenance $828 2 $1,656
Consumables $171 5 $855
Total $2,899
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Case study: auditor’s notes
1. Contractor used the highest CPI rate insteadof the correct rate for their region
2. Contractor rounded rates up to the nearestwhole dollar
.unbilled services under the new 2012 rates.Overcharging by $99.
4. Net impact would result in $143 inovercharges or 2.3% of the contract value
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Polling question #4
A. 9One cubic yard is equal.
C. 54
o ow many cu c ee
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Methodology
> Reverse engineer the invoice to determine the billing method
> Review the engineer’s estimates
>
> Reconcile estimates with inspection reports and documentvariances
> Verif variances are authorized
> Compute billings based on authorized completion and contractbilling method
> Reconcile invoice and computed totals
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Cost of work – risk elements
> Units conversion
> Overstated quantities
>
> Accelerated schedule premiums
> Cost of rework (usually T&M)
> Inferior materials are substituted (Certified Materials)
> Manufactures certificates
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Cost of work
Risk Element Risk Mitigation Supporting Documents
Overstated quantities Reconcile billed quantitieswith inspection reports.
Inspection reports Estimated quantities
er y ng computat ons. tatement o wor
Certified materials Verify materials purchasedwith material certificates.
Receiving tickets Purchase orders Manufacturers
certificate
Cost of rework Verify the cause of reworkthrough inspection reports.
Inspection/rejectionreport
the root cause.
Working conditionspremium
Reconcile premium dayswith site conditions to verify
Weather report Superintendent’s diary
authenticity of charge.
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Overstated quantities case study
Facts:> Scope: Dig a trench 500 x 6 x 6 feet
nspec on repor ver e x x oo renc
> Trenching price: $50 per cubic yard removed
> Trucking price: $250 per truckload> Each truck holds 15 yards of dirt. 60 truckloads were required.
> Owner was invoiced $60,000
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Overstated quantities case study
Invoice analysis Auditor’s invoice compilation
CostType
Quantity Rate Amount
Trucking 60 $250 $15,000
CostType
Quantity Rate Amount
Trucking 60 $250 $15,000
Removal 900 $50 $45,000
Total $60,000
=
Removal 666 $50 $33,300
Total $48,300
=
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Case study: auditor’s observations
1. Owner was overcharged by $11,7002. 50% more truckloads were required than the
original estimate
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Polling question #5
A. Superintendent’s fieldWhich source document
B. Owner’s site inspectionreport
C. Engineer’s acceptance
s e mos re a eprogress report?
report
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Cost of work
Risk Element Risk Mitigation Supporting Documents
Units of work conversion Verify unit conversion accuracy Inspection reports Estimated quantities
Cost of accelerated schedule Verify that accelerating theschedule resulted from an
event outside the contractor’s
Work authorization Construction schedule
Weather reports.
Recycling and disposal Verify recycling receptacleswere leased for the job
Reconcile projected volumeof rec cled material with
Disposal service invoices Salvage credit vouchers
actualSite reclamation Verify site reclamation with site
visits and cost of reclamationanalysis
Site inspection reports Site photographs Time sheets Supplier invoices
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Case study: unit conversion
Facts: Underground utility replacement> Remove 500 square yard existing sidewalk $40 per square yard
emove , near ee o ex s ng cur per near ee
> Grade and seed 5,000 square yards $4 per square yard
> Surface 1,000 cubic yards of sidewalk $550 per cubic yard
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Case study: unit conversion
Engineer’s inspection reports:> Sidewalk removal – 4,800 square feet
ur remova – , near ee
> Grading and seeding – 1 acre
> Sidewalk paving – 1,000 cubic yards
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Case study: unit conversion
Contractor’s Invoice Auditor’s Computation
Type Quantity Rate Amount
Sidewalk
Removal
1,600 $40 $64,000
Type Quantity Rate Amount
Sidewalk
Removal
534 $40 $21,360
CurbRemoval
1,000 $15 $15,000
Grading &Seed
5,000 $4 $20,000
CurbRemoval
1,000 $15 $15,000
Grading &Seed
4,840 $4 $19,360
SidewalkPaving 1,000 $550 $550,000
Total $649,000
SidewalkPaving 1,000 $550 $550,000
Total $605,720
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Case study: auditor’s observations
1. Inspection reports did not use the same units ofmeasure as the estimates
. .Was this approved?
3. Actual grading and seeding was less than the estimate.
.$42,640 overcharge. 1 square yard = 9 square feet
5. Contractor billed for estimated grading and seeding and.
1 acre = 4,840 square yards
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Site control – risk elements
> Environmental regulations
are violated
> Site and adjoining property is
> Traffic control
> Obligations to repair existingfacilities
damaged
> Availability of land
> Land restoration
> Conflicting utilities
> Third party right of way
> Work disru tion> Hazardous conditions
> Discovery of new or unknownhazardous materials
> Rite of ways are violated
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Site control
Risk Element Risk Mitigation Supporting Documents
Environmental regulations areviolated
Interview PM andenvironmental manager
Environmental siteassessment
compliance
,safety plan
Safety compliance report
Land restoration Site visit Right of way agreement
with restoration plan
Site management plan
Work disruption Interview PM Traffic management plan Utility services outage plan
hazardous materials
invoices with hazmat plan Meet with counsel to
discuss options
management plan Disposal certificates or
acceptable substitute Supt daily diary
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Case study: site control
Facts:> Major building remodel project
e s on an es a s e , ur an, an oc e campus
> Original building was constructed in 1973
> Architect, contractor and engineer suspect asbestos exists in the
> Amount of hazardous material exposure is unknown
> Total cost of remediation is unknown
s es os su con rac or s re a ne un er a un pr ce con rac
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Case study: site control
Risk Element Audit Plan
Unlicensed contractor Verify asbestos contractor is properly licensed
Asbestos remediation was not performedor incomplete
Obtain inspection reports certifying the site asasbestos free or contained after work is
completedIllegal hazardous waste disposal Obtain quantity of hazardous material disposed
of from disposal site documentation
Illegal hazardous waste disposal Reconcile disposal quantity with subcontractor’sfield log
Overcharging for services and disposalReconcile disposal quantity with subcontractor’sinvoice
Subsequent claims for hazardous waste Verify findings with project health and safetymanager
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Case study: auditor’s observations
> Subcontractor is properly licensed and experienced
> Every bag of hazardous materials was logged and accounted for
>
> Site inspection reports confirm construction site is safe
> No billing variances
waived this requirement due to the nature of the work
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Third party information – risk elements
> Reliance upon third party information
> Reliance upon third party construction resources
>> Government agencies
> Underground facilities
> Reviewing and checking underground data is included in the unit price
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Questions?
Questions?
Please feel free to ask questions in the screen to your right.
We will answer as many questions as time permits.
Visit bakertilly.com/construction-audit-webinar for recordings oftoday’s presentation and other topics in this series.
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Contact information
To receive CPE credit for today’s presentation, you MUST complete thesurvey e-mailed to you following the webinar.
.
Thank you for participating today!
Tony Ollmann, CPA, CCADirector
608 240 [email protected]
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Disclosure
Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated
by the United States Department of the Treasury, nothing contained in thiscommunication was intended or written to be used by any taxpayer for the purpose ofavoiding penalties that may be imposed on the taxpayer by the Internal RevenueService, and it cannot be used by any taxpayer for such purpose. No one, without ourexpress prior written permission, may use or refer to any tax advice in thiscommunication in promoting, marketing, or recommending a partnership or otherentity, investment plan, or arrangement to any other party.
Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned andmanaged member of Baker Tilly International. The information provided here is of ageneral nature and is not intended to address specific circumstances of any individual
. , .
2012 Baker Tilly Virchow Krause, LLP
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