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Construction auditing: Continuous monitoring of active construction projects Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. © 2010 Baker Tilly Virchow Krause, LLP
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Construction auditing: Continuous monitoring of active ... · PDF fileConstruction auditing: Continuous monitoring of active construction projects Baker Tilly refers to Baker Tilly

Jan 30, 2018

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Page 1: Construction auditing: Continuous monitoring of active ... · PDF fileConstruction auditing: Continuous monitoring of active construction projects Baker Tilly refers to Baker Tilly

Construction auditing:Continuous monitoring of active construction projects

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. © 2010 Baker Tilly Virchow Krause, LLP

Page 2: Construction auditing: Continuous monitoring of active ... · PDF fileConstruction auditing: Continuous monitoring of active construction projects Baker Tilly refers to Baker Tilly

Introductions

Webinar ModeratorMary BarnettACUA President

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WebEx guide

> Everyone is muted to avoid background noise. Please use the chat box if you need to Chat Windowcommunicate with the host.

> Asking questions: In the chat screen, ask questions by choosing “All Panelists” in lower right chat window. Type your message in

Chat Window

the chat box and hit “send.”

> If disconnected: Refer to your e-mail and reconnect. If audio is disconnected ,click the Communicate tab in the upper left ppto find the dial in numbers and access code or refer back to your e-mail for the dial-in #.

> Support #: If you have any technical problems, call WebEx Chat Boxp ,Support at 866 229 3239.

> We will be recording today.

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Choose “All Panelists”Refresh button

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Introductions

Monica Modi Dalwadi Tony OllmannCPA, CIA, CFE Senior Manager Director703 923 8559 608 240 [email protected] [email protected]

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Overview

Today’s topics EXAMPLE TEXConstruction lifecycle

Owner’s responsibilities

Pros and cons of continuous monitoring

Selecting projects for audit

continuous monitoring

Construction audit program development

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Learning objectives

1) Recognize when to continuously monitor a construction projectp j

2) Identify gaps in the owner’s current construction activities and responsibilities

3) Perform procedures to assess construction work in progress3) Perform procedures to assess construction work in progress and adherence to compliance requirements.a) Change ordersb) Progress reportingb) Progress reportingc) Project controlsd) Contract accounting

4) Evaluate how Internal Audit can participate most effectively in4) Evaluate how Internal Audit can participate most effectively in continuous monitoring activities while maintaining a collaborative work environment

5) Develop a continuous monitoring audit program5) Develop a continuous monitoring audit program

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Construction lifecycle

Insert graphic from word doc

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*Architect/Engineer (A/E)

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Construction project lifecycle

Construction progress to date

Design and construction team has been selected (Facilities)

Contracts have been executed (Legal)

Gro ndbreaking ceremon is completeGroundbreaking ceremony is complete

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Owner’s responsibilities

Previously discussed: Preconstruction activities (prevention)

> Contractor due diligenceContractor due diligence> Contracting and negotiation> Contract risk matrix development

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Owner’s responsibilities (cont.)

During the construction phase

> Controlling capital expenditures> Monitoring change orders> Scheduling thousands of activities for hundreds of people> Maintaining an ethical and safe work environment

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Owner’s responsibilities (cont.)

Common construction risk t thmanagement myths

> Our architect is reviewing and approving pay applicationsg g y> If the architect approved the change order it must be okay> We have a shared savings provision, our contractor has incentive to

minimize project costs p j

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Pros and cons of continuous monitoring

Pros

> Early detection of non-compliance items> Prevention of abusive behaviors> Minimize the “I forgot” and lost document syndrome> Higher return on investment

– Typically three percent or more of the construction costs

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Pros and cons of continuous monitoring (cont )(cont.)

Cons

> Can require more time of internal audit professionals> Difficult to document and calculate the value of prevention> Requires greater subject matter knowledge

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Selecting a construction project for continuous monitoringcontinuous monitoring

T.H.E.S.E. attributes should be considered h l ti j t f ditwhen evaluating projects for audit

T –H –E –SS –E –

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How to budget and pay for the construction auditconstruction audit

Rules of thumb to followA dit h l 001% ti th t ti tAudit hours equal .001% times the construction cost. > For instance, a $50 million project should have 500 audit hours> This assumes an experienced team, moderate construction schedule and

an average building

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How to budget and pay for the construction audit (cont )construction audit (cont.)

Rules of thumb to follow (cont.)Th t f th t ti dit i l t ti t likThe cost of the construction audit is a real construction cost like project management, engineering services and construction materials.

Options to pay for the construction audit:> Capitalize the cost with other construction costsp> Charge back to facilities management> Special budget resource request to fund the> construction audit as a special project> construction audit as a special project> Part of annual internal audit budget

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Construction audit program development

Key risks

> Overcharging for labor and materials> Over priced change orders> Charges for re-work> Lost incentives and credits> Failure to deliver contracted scopep> Charges for non-allowable costs

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Construction audit program development (cont )(cont.)

Construction audit program fundamentals

> Document and analyze construction process controls> Test financial controls for weakness and/or compliance > Reconcile contractor’s cost calculations> Verify contractor’s cost calculations with contract terms> Recommend financial control improvementsp> Validate continued testing with cost/benefit analysis> Tailor test programs to focus efforts on highest

and most exposed construction financial risksand most exposed construction financial risks

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Construction audit program

Audit program

> Preparation of control schedules> Reconcile project expenditures> Direct labor analysis> Labor burden analysis> Change order analysis and pricing analysisg y p g y> Subcontract analysis> Material purchases> Verification of contracted scope> Verification of contracted scope> Equipment rental analysis> Bonds and insurance analysis> Quality assurance and quality control> Quality assurance and quality control

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Construction audit program (cont.)

Preparation of control schedules

> Contractor’s applications for payment> Owner’s project payments> Pay application back up documentation> Contractor’s costs by major construction phase> RFIs and scope changesp g

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Construction audit program (cont.)

Reconciliation of project expenditures

> Obtain all project related financial or accounting transactions that document owner expenditures

> R il th f th t t l t d t h d t th> Reconcile the sum of the total payments made to each vendor to the various contract amounts as adjusted by change orders

> Review itemized payments made to each vendor for each project and vouch a sample of vendor payments to canceled checks other supporta sample of vendor payments to canceled checks other support

> Review a sample of invoices paid direct by the owner for services, materials or other costs which may have been the responsibility of the general contractorcontractor

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Construction audit program (cont.)

Direct labor analysis

> Obtain payroll registers and certified payroll information> Audit for activity which may not be legitimate reimbursable costs> Compare independent records of activity at the job site to the payroll

charges> Determine whether or not personnel charged to the job may have been

ki f b t t ffili t ith t i t b k hworking for subcontractors or affiliates without appropriate back charges> Trace payroll charges to the contractor’s payroll register> Reconcile payroll registers> Verify allocation of payroll costs

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Construction audit program (cont.)

Labor burden analysis

> Decompose the labor burden and determine the basis for the contractor's charges for payroll taxes, insurance, and fringe Audit for activity which may not be legitimate reimbursable costsnot be legitimate reimbursable costs

> Determine that the contractor's charges for FICA, FUTA, WC, and SUTA are appropriate

> Review other components of contractor's labor burden charges for> Review other components of contractor s labor burden charges for appropriate methodology in application Trace payroll charges to the contractor’s payroll register

> Decompose the union benefits charges and separate from labor burdenDecompose the union benefits charges and separate from labor burden charges

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Construction audit program (cont.)

Change order analysis

> Prepare a control schedule of owner change orders > Review the detailed change order backup documentation > Perform recalculation of change orders > Verify labor and labor burden pricing for change orders> Verify appropriateness of change order material pricing, material quantity y pp p g p g q y

take-offs, labor productivity factors, and related extensions > Review change order for errors

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Construction audit program (cont.)

Change order pricing analysis

> Ensure the change order represents a legitimate change in scope > Review for possible deletions or partial deletions or changes in scope > Determine whether or not any owner provided items might have been used > Review for proper application of sales taxes > Verify that contractor does not participate in subcontractor buy-outs of y p p y

inflated change order price proposals

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Construction audit program (cont.)

Subcontracts

> Prepare a control schedule of all base subcontract and subcontract change orders

> Review all change orders issued to subcontractors > Balance paid invoices to the schedule of base subcontract and change

orders > Verify credit invoices or un-invoiced amounts which may indicate a

substitution, credit alternate, backcharge, etc. > Reconcile back charges with subcontractor credits> Confirm receipt of unconditional lien waivers

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Construction audit program (cont.)

Material purchases

> Examine contractor's job cost detail > Review competitive quotes obtained from material suppliers > Review invoices and related material delivery tickets for job description,

delivery address, authorized invoice approvals, appropriate acknowledgement of receipt for use at the site, etc.

> A dit f i di ti f t i l b i t d f dit> Audit for indications of material being returned for credit > Audit for purchases of excessive amounts of material > Compare the as-built quantity take-off to the actual

titi h d d bill d t th j tquantities purchased and billed to the project> Examine test and inspection reports

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Construction audit program (cont.)

Bonds and insurance analysis

> Obtain copy of contractor's Performance and Payment Bonds and corresponding power of attorney from surety

> C fi b d di tl> Confirm bond coverage directly> Verify underwriter rating meets contractual minimum standards for financial

stability in the event of a claim against the bonds> R i th t t t d t i th t d t f l li bilit> Review the contract to determine the type and amount of general liability

and other special insurance coverage required to be carried by the contractor

> Obtain copies of Insurance Certificates from contractor> Obtain copies of Insurance Certificates from contractor

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Construction audit program (cont.)

Verifications of a contractor’s scope of work

> Develop a list of unusual scope of work items to be independently verified> Recalculate contractor incentive bonus computations> Reconcile use of contingency budget with status reports and documentation> Reconcile accepted alternatives with change orders and project budget

adjustments> Verify unaccepted alternatives are not substituted> Reconcile allowances with contractor delivered work

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Construction audit program (cont.)

Equipment rental analysis

> Obtain a breakdown of the contractor’s equipment rental rates charged to the project

> T t t d t i h th th i t t bill d l> Test to determine whether the equipment rates were billed properly> Obtain daily reports and/or time sheets which document the equipment

usage > R i i ll h h d t th j b> Review miscellaneous purchases charged to the job > Ensure that the rates charged are consistent with those prevailing in the

local area

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Construction audit program (cont.)

Quality assurance and quality control

> Review minutes from various meetings, contractor's daily logs, engineering field test reports and any other correspondence files

> Obt i d i th t t ith t i l t ti d lit> Obtain and review the contract with materials testing and quality control/quality assurance firms

> Obtain and review contractor and/or subcontractor submittals, shop drawings and cut sheetsdrawings and cut sheets

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ACUA professional education events

Midyear ConferenceMarch 13 16March 13-16

Orlando, FloridaInformation & Registration at www.acua.org

WebinarsWebinarsFebruary 9 – Topic pending

April 13 – Part 3 of Construction Auditing

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Additional resources

> [email protected]> www.bakertilly.com/construction-audit-webinary> http://www.theiia.org/> https://www.thenaca.org/> http://www caacci org/> http://www.caacci.org/> http://rsmeans.reedconstructiondata.com/> http://www.auditnet.org/

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Questions?

Please feel free to ask questions in the screen t i htto your right.

W ill ti tiWe will answer as many questions as time permits.

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Contact information

Thank you for participating today! Remember CPE certificates will be mailed to you by ACUA Headquarters in about three weeks.y y q

Monica Modi Dalwadi Tony OllmannyCPA, CIA, CFE Senior Manager Director703 923 8559 608 240 2618

i d l di@b k ill ll @b k [email protected] [email protected]

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Disclosure

Required firm disclosure and Circular 230 P i t Di lProminent Disclosure The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific i t th i f f i l h ld b htcircumstances, the services of a professional should be sought.

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 this communication was intended or written to be used by anycontained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.

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