Construction Auditing

Introduction to Introduction to

CONSTRUCTION AUDITINGCONSTRUCTION AUDITING

Presented by Presented by

Bob McDonald Bob McDonald

Jefferson Wells InternationalJefferson Wells International

JeffersonWells International

Our Purpose - an OverviewOur Purpose - an Overview

TermsTerms Types of contractsTypes of contracts Reasons for auditing construction projectsReasons for auditing construction projects Understand the construction project life cycleUnderstand the construction project life cycle Management of construction projectsManagement of construction projects Selecting projects for auditSelecting projects for audit Audit steps and timingAudit steps and timing Contractor Billing OverviewContractor Billing Overview


Ground RulesGround Rules

NoneNone When you have a question – ASK!When you have a question – ASK!


TermsTerms

Consumables, Consumables, Expendables & Small Expendables & Small ToolsTools

Cost Cost Crafts & TradesCrafts & Trades Design BuilderDesign Builder Fast TrackFast Track General ConditionsGeneral Conditions LaborLabor

Architect & A&EArchitect & A&E AIAAIA Asset Allocation Asset Allocation

StudyStudy BackchargesBackcharges Change order, extra Change order, extra

work & Claimwork & Claim Contractor, CM, GCContractor, CM, GC Construction Construction

engineeringengineering


TermsTerms

MaterialsMaterials OwnerOwner OSHAOSHA Retainage Retainage Sales & Use TaxesSales & Use Taxes SiteSite Shared savingsShared savings SubcontractorSubcontractor

SubsistenceSubsistence Tax abatementTax abatement Turn KeyTurn Key Value EngineeringValue Engineering More Terms – See RS More Terms – See RS

Means Company 800 Means Company 800 334 3509 Dictionary334 3509 Dictionary


Types of ContractsTypes of Contracts

Lump Sum, Fixed Cost, Stipulated Sum Lump Sum, Fixed Cost, Stipulated Sum Cost PlusCost Plus

– Cost Plus with Fixed or Percentage FeeCost Plus with Fixed or Percentage Fee– Cost Plus with Guaranteed MaxCost Plus with Guaranteed Max– Cost Plus with GMAX & Shared SavingsCost Plus with GMAX & Shared Savings

Unit PriceUnit Price Time & MaterialTime & Material


Why audit construction projects?Why audit construction projects?

Top management is concerned and exposedTop management is concerned and exposed Construction projects are costlyConstruction projects are costly Delays can result in lost market opportunityDelays can result in lost market opportunity Provides monitoring not available Provides monitoring not available

elsewhereelsewhere Provides a means of keeping projects on Provides a means of keeping projects on

track, or gets them back on track quicklytrack, or gets them back on track quickly


Goals of a Construction AuditGoals of a Construction Audit

Identify Cost Avoidance OpportunitiesIdentify Cost Avoidance Opportunities Ensure Controls Are Developed & Ensure Controls Are Developed &

MaintainedMaintained– OwnerOwner– ContractorContractor

Identify Overcharges/UnderchargesIdentify Overcharges/Undercharges Avoid LitigationAvoid Litigation


Construction Life CycleConstruction Life Cycle

PlanningPlanning– ConceptionConception– DesignDesign

ContractingContracting ConstructionConstruction Close-outClose-out


How are construction projects How are construction projects managed?managed?

Inside or Outside Project ManagerInside or Outside Project Manager Company OfficerCompany Officer Executive CommitteeExecutive Committee ArchitectArchitect


Owners Project Management Owners Project Management TeamTeam

Project Manager and/or Owners RepresentativeProject Manager and/or Owners Representative PurchasingPurchasing LegalLegal Contract AdministrationContract Administration Finance & AccountingFinance & Accounting AuditingAuditing Tax (consult)Tax (consult) Risk Management (consult) - OCIPRisk Management (consult) - OCIP


External OrganizationsExternal Organizations

ArchitectArchitect Engineering Engineering Construction ManagerConstruction Manager General ContractorGeneral Contractor Owners RepresentativeOwners Representative SubcontractorsSubcontractors TestingTesting SurveySurvey


Typical Project OrganizationTypical Project Organization

S U B C O N TR A C TO R S U B C O N TR A C TO R

S U B -S U B C O N TR A C TO R

S U B C O N TR A C TO R

G E N E R A L C O N TR A C TO R

A R C H ITE C T

O W N E R


Alternate Project OrganizationAlternate Project Organization

A R C H ITE C T

S U B C O N TR A C TO R S U B C O N TR A C TO R

S U B -S U B C O N TR A C TO R

S U B C O N TR A C TO R

G E N E R A L C O N TR A C TO R

O W N E R



E n g in eer

A rch itec t

S u b con trac tro S u b con trac to r S u b con trac to r

G en era l C o ln trac to r T & E F irm

O w n er



O w n er as G en era l C on trac to r

D es ig n E n g in eer

A rch itec t Trad e C on trac to r Trad e C on trac to r

S u b con trac to r

Trad e C on trac to r Tes tin g M ate ria lm an

O w n er


Alternate Project OrganizationAlternate Project OrganizationO w n er w ith fu ll su p p ort

O u ts id e C ou n se l O w n ers R ep

O u ts id e A u d it

D es ig n E n g in eer

A rch itec t

Tes tin g

C on s tru c tion M an ag er

S u b -su b con trac to r

S u b con trac to r M ate ria lm an

G en era l C on trac to r

O w n er's P ro jec t Team

E xecu tive


What is the best organization?What is the best organization?

All types workAll types work Use the one that suits your organizationUse the one that suits your organization


How should projects be selected How should projects be selected for audit?for audit?

Size ($ value & physical size)Size ($ value & physical size) Type of contractType of contract

– Cost Plus & T&M versus Lump SumCost Plus & T&M versus Lump Sum– Shared Savings FeaturesShared Savings Features

High profile or high risk projectsHigh profile or high risk projects Experience of Owners RepresentativeExperience of Owners Representative Experience with the General ContractorExperience with the General Contractor


Contract RiskContract RiskCost PlusCost Plus

LaborLabor– Rates & FringesRates & Fringes– SubsistenceSubsistence– Uncompensated overtimeUncompensated overtime– Not to exceed limits ignoredNot to exceed limits ignored– Travel & reimbursableTravel & reimbursable– Union ratesUnion rates– GhostsGhosts



MaterialsMaterials– Trade & other discountsTrade & other discounts– Excessive materialExcessive material– Scrap & returnsScrap & returns– SourcesSources– ReworkRework



EquipmentEquipment– Rent to ownRent to own– Rental exceeds purchase priceRental exceeds purchase price– Excess damage costsExcess damage costs– Sweetheart dealsSweetheart deals– Taxes on fuelTaxes on fuel– Equipment not on jobEquipment not on job– Rental rebates not creditedRental rebates not credited



InsuranceInsurance Performance bondPerformance bond Home office chargesHome office charges Permits & licensesPermits & licenses FinesFines Mathematical errorsMathematical errors


Contract Risk T & MContract Risk T & M

Use of incorrect labor costsUse of incorrect labor costs Use of incorrect material mark upsUse of incorrect material mark ups See Cost PlusSee Cost Plus


Contract RisksContract RisksStipulated Sum, Lump Sum or Fixed FeeStipulated Sum, Lump Sum or Fixed Fee

Materials outside specificationMaterials outside specification Quantities not installedQuantities not installed Improper construction methodsImproper construction methods Change orders in original bidChange orders in original bid Owner supplied material not creditedOwner supplied material not credited Insurance not purchasedInsurance not purchased Change orders not costed correctlyChange orders not costed correctly


Contract RisksContract RisksLump Sum or Fixed FeeLump Sum or Fixed Fee

““Front End” or “Top Loading”Front End” or “Top Loading” Bonds not obtainedBonds not obtained Unauthorized subcontractors usedUnauthorized subcontractors used Tax errorsTax errors Contract work performed by owner’s Contract work performed by owner’s

employeesemployees Services not providedServices not provided


Unit PriceUnit Price

Erroneous estimatesErroneous estimates– Mobilization/demobilizationMobilization/demobilization– Improper measuring/quantity verificationImproper measuring/quantity verification


Recommended Contract TypeRecommended Contract Type

Cost PlusCost Plus Guaranteed MaxGuaranteed Max Shared Savings FeatureShared Savings Feature


Elements of a typical Elements of a typical construction audit programconstruction audit program

Bid Review (Optional)Bid Review (Optional) Contract ReviewContract Review Control AssessmentControl Assessment Contractor Billing Tests - Progress BillingsContractor Billing Tests - Progress Billings

– LaborLabor– MaterialsMaterials– Equipment (Contractor owned & rented)Equipment (Contractor owned & rented)– Subcontractor chargesSubcontractor charges



Contractor Billing Tests (continued)Contractor Billing Tests (continued)– Permits and licensesPermits and licenses– Miscellaneous charges (small tools & Miscellaneous charges (small tools &

consumables)consumables)– Overhead chargesOverhead charges– Contractor feeContractor fee– Retainage calculationRetainage calculation– Performance bond & insurancePerformance bond & insurance– Home office chargesHome office charges



Contractor Billing Tests (continued)Contractor Billing Tests (continued)– Physical inspection and review of engineering Physical inspection and review of engineering

inspection reportsinspection reports– Relocation & travelRelocation & travel

Control VerificationControl Verification Financial ReviewFinancial Review

– Lead schedulesLead schedules– ReceivablesReceivables– PayablesPayables



Financial Review (continued)Financial Review (continued)– Construction in Process (CIP)Construction in Process (CIP)– Fixed AssetsFixed Assets


Audit reportsAudit reports

Bid ReviewBid Review Contract ReviewContract Review Trip ReportsTrip Reports Final ReportFinal Report


What should be contained in trip What should be contained in trip reports?reports?

Tailor to the organizationTailor to the organization Typical trip reportTypical trip report

– SummarySummary– Comments Comments – Issues Requiring Follow-up & Party Issues Requiring Follow-up & Party

ResponsibleResponsible– Visit ScheduleVisit Schedule


Auditor SelectionAuditor Selection

InternalInternal– Train Your OwnTrain Your Own– Hire an Experienced AuditorHire an Experienced Auditor

ExternalExternal– Public Accounting FirmsPublic Accounting Firms– Construction Auditing FirmsConstruction Auditing Firms


Change OrdersChange Orders

Change OrdersChange Orders Extra WorkExtra Work ClaimsClaims


Change Order Template Change Order Template

Change Order #Line Item #

DrawingSheet # Description Quantity Unit Price U/M Cost Hrs/Unit Unit Hours

- - - - - - - - - - - - - - - - - - - -

Total material NIC Sales & Use Tax - Total Labor Hours -

Bulletin #Contract:

Material LaborScope of Change:


Change Order TemplateChange Order Template

Labor Cost per Hour - AveLabor Hours Estimated - Estimated Field Labor Cost - Supervision Percentage of Field Labor - Subtotal for Field Labor - Add for Payroll Taxes - Add for Insurance - Add for benefits - Project Manager @ (No. Hours) x Hourly Rate - Engineering @ (No. Hours) x Hourly Rate - Total Direct Labor Costs - Add (%) for Fee - Total Labor Costs -

LABOR & BURDEN COSTS


Change Order TemplateChange Order TemplateMaterial Costs from Detail - Sundry Material @ % Material Cost 0%Subtotal Material Costs - Small Tools @ % of Materials 0%Freight on Material @ % of Materials 0%Sales & Use Tax on Materials @ % 0%Fuel for Rental EquipmentRental EquipmentTotal Other Direct CostsAdd % for FeeTotal Material & Equipment -

MATERIAL COSTS FROM DETAIL

SubcontractorNet Subcontractor Costs - Fee @ % of Subcontractor Costs - Total Subcontractor Costs -

SUBCONTRACT COSTS


Change Order TemplateChange Order Template

Labor & Burden Costs - Material & Equipment Costs - Subcontract Costs - Total Change Order Proposal -

RECAP OF TOTAL COSTS

Total Subcontractor Costs -

Total Material & Equipment -

Total Labor Costs -


Typical FindingsTypical Findings

Defective Pricing in CO’sDefective Pricing in CO’s Unauthorized Items BilledUnauthorized Items Billed

– Home office chargesHome office charges– OtherOther

Labor OverchargesLabor Overcharges– Workers Comp RatesWorkers Comp Rates– FUI/SUIFUI/SUI

Materials Not Used on JobMaterials Not Used on Job General ConditionsGeneral Conditions G/L Insurance – Experience ModifiersG/L Insurance – Experience Modifiers


Typical FindingsTypical Findings

Duplicate Charges Duplicate Charges Equipment Billed Not in UseEquipment Billed Not in Use Bonds not purchased Bonds not purchased Backcharges not accomplishedBackcharges not accomplished Scrap not CreditedScrap not Credited Unauthorized Substitution of MaterialsUnauthorized Substitution of Materials Unapproved Methods Unapproved Methods


Which Types of Contracts and Projects Which Types of Contracts and Projects Should be Audited?Should be Audited?

All TypesAll Types


When Should Construction When Should Construction Projects be Audited?Projects be Audited?

Begin at PlanningBegin at Planning Concurrently Throughout the ProjectConcurrently Throughout the Project CloseoutCloseout


Jefferson Wells ApproachJefferson Wells Approach

1.1. Contract AnalysisContract Analysis2.2. Blueprint the project organizationBlueprint the project organization3.3. Determine the risksDetermine the risks4.4. Develop the Work PlanDevelop the Work Plan5.5. Initial Report Initial Report

contract analysis, recommend improvementscontract analysis, recommend improvements project management, recommend controlsproject management, recommend controls

6.6. Conduct the engagementConduct the engagement Verify chargesVerify charges Monitor controlsMonitor controls

7.7. Update meetings Update meetings 8.8. Complete the planned work and add other tests deemed necessaryComplete the planned work and add other tests deemed necessary9.9. Final ReportFinal Report


Contract AnalysisContract Analysis

What to look forWhat to look for– Type of contractType of contract– Complete?Complete?

» Executed?Executed?» All exhibits & attachments?All exhibits & attachments?

– Financial Terms and ConditionsFinancial Terms and Conditions– Right-to-auditRight-to-audit– Change order/extra work/claimsChange order/extra work/claims– General ConditionsGeneral Conditions


Work PlanWork Plan

Select tests from Master Audit ProgramSelect tests from Master Audit Program Add other tests based on analysis of this Add other tests based on analysis of this

projectproject


What does a contractor billing What does a contractor billing look like?look like?

See Sample G702 and G703 See Sample G702 and G703 Certification by Contractor & by ArchitectCertification by Contractor & by Architect


Construction AuditingConstruction Auditing

Questions and AnswersQuestions and Answers Call Bob McDonald @ Jefferson Wells Call Bob McDonald @ Jefferson Wells

International 216 664 5600 Fax 216 664 International 216 664 5600 Fax 216 664 5606 or email 5606 or email [email protected][email protected]

Construction Auditing

Business

contract risk cost

audit construction projects

auditing construction

exposed construction

alternate project organization

fixed cost

typical project organization

contract risk t