Construction Auditing, Cost Types and Auditability

Construction Auditing,

Cost Types and

Auditability

JakeOrtego,PE,CCA,CCP,CCE

Pollingquestion1

PresentationOutline

Important

Definitions

Contracts

AuditClauses

Understandingthe

TotalAgreement

Proactivevs

Reactive

Auditing

Auditing

Timeline

Reasonability

Limitations

 Audit

 DeliveryMethod

 Contractors

 ContractType

 ProjectTypes

ImportantDefinitions

DefiningConstructionAudit

Maybeacombinationofauditfunctionsandconsultingfunctions

AUDITFUNCTIONS

• Financial

• Compliance

• Operational

• Quality

• Forensic

CONSULTINGFUNCTIONS

• RiskAssessmentsandAvoidance

• Trending

• BestPractices

• Benchmarking

ImportantDefinitions

TypesofConstructionAudits

 Project

 Program

 Process

ImportantDefinitions

Auditingwhencan’trecovercanbeusefulforthefuture

Deliv eryMethod

OnePrice

LumpSum

FixedPrice

StipulatedSum

UnitBased

UnitPrice

TimeandMaterial

EarnedValue

ActualCost

CostPlus

CostPluswith

GMP– GuaranteedMaximumPrice

NTE–NottoExceed

Transparency

GreaterLess

ImportantDefinitions

PollingQuestion2

From2010Report“IntegratedProjectDeliveryforPublicandPrivateOwners”– PublishedbytheNASF,COAA,APPA,AGCandAIA

Deliv eryMethod

ImportantDefinitions

Deliv eryMethod

Description True CostPlus Typical GMP

GM/GC style

GMP

LumpSumwith

Allowances Other PossibleHybrids

SubCcontractors Actual

Each asa

separateLump

Sum

Each asa

separateLump

Sum

PartofLumpSum

Mix ofLumpsum,separate

GMPorunitprice

SelfPerformedWork Actual LumpSum LumpSum PartofLumpSum LumpSum

OtherMisc. DirectCosts Actual Actual Actual PartofLumpSum Actual,T&MorUnit Price

General Conditions Actual Actual LumpSum PartofLumpSum ActualorLumpSum

Ins

urancesandSureties Actual Actual LumpSum PartofLumpSum Actual,MultiplierorLumpSum

OverheadandProfit Multiplier Multiplier LumpSum PartofLumpSum MultiplierorLumpSum

Allowances Actual Actual Actual

Actual orUnit

Price

MixofActualorUnitPrice

Therearemanycombinationsthatcanbeused.This

tableshowssomepossiblecombinations.

ImportantDefinitions

 GeneralContractor

 Subcontractor

 Owner’sAgent

 Owner’sRepresentative

 CMA‐ ConstructionManagerasAgent

 ProgramManager

 DeveloperasAgent

 CMARConstructionManagerat

Risk

 EPC/EPCM– Engineering

ProcurementConstruction

(Manager)

 DesignBuild

 IPD–IntegratedProjectDelivery

Con tr act ors

ImportantDefinitions

Horizontal

 Roads,sidewalks,pipelines,utility

runs

 UsuallyUnitPrice

Vertical

 BuildingsandStructures

 TypicallyLumpSumorCostPlus

Other

 AreaBased‐ Excavations,

landscaping,parkinglots

 MorelikelytobeLumpSum,Cost

Plus,orT&M

ProjectTypes

ImportantDefinitions

• Explicit

• Implicit

• Undefined

Manyare:

• Ambiguous

• Misunderstood

• Missing

AuditClauses

Contracts

UsingTemplatesdonotguaranteetheclausesareinplaceorareadequite

MeasurementvsPayment

(FromGerorgia DOT)

MeasurementandPaymentTheOfficeofDesignPolicyandSupportshallsupplya

volumereporttotheAreaManageratthePreconstructionmeetingorshortly

thereafter.TheConstructionManagershouldusethevolumereport toestimate

quantitiesbetweenstationsforpaymenttotheContractorduringconstruction.

Undercutsand/orothergeneralsmalllocationsnotshownonoriginalcross

sectionsshallbecalculatedbyconstructionprojectpersonnelbaseduponfield

measurements.Recordthesequantitiesseparatelyfromthevolumereport

quantities.Contractorrequestedchangesordisputestotheoverallestimated

volumequantitiesshouldbeauditedbyContractLiaisonpriortofinaldecision.

FinalcrosssectionsandvolumereportshallbeauditedbytheContractLiaison

priortofinalpaymentismadeoragreedupon.

AuditClauses

Contracts

FromHawaiiDOT

7.18RighttoAuditRecords,RecordsMaintenance,Retention,andAccess.PursuanttoChapter103D‐317,H.R.S.,theState,

atreasonabletimesandplaces,mayauditthebooksandrecordsofaContractor,prospectivecontractor,subcontractor,

andprospectivesubcontractorrelatingtotheContractor’sorsubcontractor’scostorpricingdata.Anysuchauditsma

ybe

conductedbyFederalandStateemployeesorbyconsultantsworkingonbehalfoftheState.TheContractorand

subcontractor(s)shallmaintainthebooksandrecordsforaperiodofthreeyearsfromthedateoffinalpaymentunderthe

contract.

TheContractoranditssubcontractorsshall,inaccordancewithg

enerallyacceptableaccountingpractices,maintainfiscal

recordsandsupportingdocumentsandrelatedfiles,papers,andreportsthatadequatelyreflectalldirectandindirect

expendituresandmanagementandfiscalpracticesrelatedtotheContractorandsubcontractor’sperformanceofwork

underthiscontract.

TherepresentativesoftheState(andFederalgovernmentrepresentativeswhenfe

deralfundsareutilized)havetherightto

inspectandcopyanybook,document,paper,file,orotherrecordthatisrelatedtotheperformanceoftheworkofthe

Contractorandanysubcontractor.TheContractorshallprovidefullcooperationduringanyauditorinspectionandshall

insurethatitssubcon

tractorscomplywiththisrequirement.TheContractorshallbearallcosts(includingattorney’sfees)of

enforcementintheeventofitsoritssubcontractor’sfailureorrefusaltofullycooperate.

AuditClauses

Contracts

TypicalAIAAuditclause‐ § 6.11Accounting Records

TheConstructionManagershallkeepfullanddetailedrecordsand

accountsrelatedtothecostoftheWorkandexercisesuchcontrolsas

maybenecessaryforproperfinancialmanagementunderthisContract

andtosubstantiateallcostsincurred.Theaccountingandcontrol

systemsshallbesa

tisfactorytotheOwner.TheOwnerandtheOwner’s

auditorsshall,duringregularbusinesshoursanduponreasonablenotice,

beaffor dedaccessto,andshallbepermittedtoauditandcopy,the

ConstructionManager’srecordsandaccounts,includingcomplete

documentationsupportingaccountingentries,books,correspondence,

instructions,drawings,receipts,subcontracts,Subcontractor’s

proposals,purchaseorders,vouchers,memorandaandotherdat a

relatingtothisContract.TheConstructionManagershallpreservethese

recordsforaperiodofthreeyearsafterfinalpayment,orforsuchlonger

periodasmayberequiredbylaw.

AuditClauses

Contracts

AuditClauses

“NotAudit able”vs“Fixed”

 NotAuditableorUn‐Auditablearetheonlytermsthattrulylimitanauit

 Fixeditemsmaybeauditedbutnotnecessarilybechanged

NoAuditClause

 Hardertoconvincecontractorstoallowforanaudit

 ….butnotimpossible!

Contracts

GoverningLa w

FederalLevel

• TruthinNegotiationsAct

StateLevel

• Canvarybystate

• Possiblestatutesof

“KnowinglyMisrepresenting”

information

Contracts

TheTotalAgr eemen t

Contracts

• Themaininterfaces

• Contract

• CentralConditions

• DesignDocuments

• Division01

• ExceptionsandClarifications

• ValueEngineering

• QUESTION:

• Inthecaseofconflict,whatshouldgovern?

• Division01

• ConflictwithcontractandGCs

• WhoReadsit?

• ExceptionsandClarifications

• Howdothesefitinwiththedesign

• Recommendation:A/Eshouldacceptorrejecteachonelinebyline

• Sometimes,theE/Ccanbeinconflictwiththedesignintent

• Or,ifaccepted,couldchangethedesign

• ValueEngineering

• ShoulditbetheContractor’sresponsibility

ProactiveandReactiveAuditing

CostRecoveryCost/RiskAvoidance

Proactive

BidReviews

ContractTerms

RateReviews

MutualUnderstanding

Hybrid

InterimAudits

ContinuousAudits

ChangeOrderReview

PayApplicationReview

Reactive

CloseoutAudit

ForensicAudit

ComplianceAudit

HistoricAudit

POLLINGQUESTION3

Reasonability andIndus tryStandards

Manycostsareacceptedwiththe

conceptofthevaluebeing“Reasonable”

basedonexperienceorwithin“Industry

Standards”foritemslike:

 InsuranceRates

 BondRates

 LaborBurden

 FullBurdenedRates

 ContingencyPercentage

 OverheadandProfit

 …andmuchmore…

Manypublicsectorprojectsareawardedonlowestresponsivebid

Maylimitabilitytoexaminemaincosts

Doesnotlimitabilitytoexaminecostthatmaymakeupchangeorders

On to Auditing!

AfterorNear

FinalCompletion

Purpose:Verifytotalfinal costsareincompliance

withthecontractto:

‐ VerifyContractorbilledincompliance

withthecontract

‐ Recoveranyoverbilledfunds

‐ Identifyanymajorroot causesofcost

overrunsorscheduledelays

Pros

Thereshouldnotbeanytrailingcostsorpayments

Allwaiversoflienshouldbeavailable

Allsettlementsareknown

Allrebatesandcreditsareknown

Therearenopendingchanges

Thereisnodisruptiontoprojectbeingaudited

Cons/Risks

Diminishingknowledgeovertime

“Wecan’tfindthepaperwork,butev erythingwasagreedto!”

Increaseddifficultyiftherearefundstoberecovered

“Allofthemoneyhasbeenpaidout,thereisnothingtogiveback!”

Increasedlikelihoodofadversarialsituations

“Theprojectwascompletedlongago,whyisitbeingaudited?”

“Theowneragreedwiththepayments,whyisitbeingaudited?”

HorizontalConstruction

 UnitPrice

 Whatistypicallyaudited

 InvoicesandPayapplications

 correctlycalculated

 Supported

 Quantity

 FieldInspection

 AuditofQuantityVerification

 Other“Non‐Unit”partsofcontract

 Whatwaspaidfordelays,acceleration,

unforeseenconditionsandotheritemsbeyond

theunitprice

 UseofContingenciesandallowances

 ChangeOrders

VerticalandOther

GMP/CostPlus/T&M

• ChangeOrders

• ContingencyUse

• AllowanceUse

• Subcontractors

• Changes

• Invoices/PayApplications

• FinalWaiversofLien

• FinalSettlement

• AccountsPayable

• InternalChangesandTransfers

• Back‐charges

• ReimbursableMaterials

• ReimbursableLaborCosts

• WithactualsforHealth&

Retirement

• ReimbursableRentals

• ReimbursableGeneralConditions

• FinalCostswithrebatesfor:

• Bond

• Insurances

• RiskP

oolUsage(Maybe)

• FinalCalculationsfor:

• OHP

• SharedSavings(ifapplicable)

• LiquidatedDamages

TheIssueofChangeOrderTiming

Itisrecommendedtohaveallchangesapprovedor

rejectedbeforethefinalaudit.

• Somecontractorswillholdafinal“postaudit”changeto

trytooffsetpossiblesignificantfindingsagainstthem.

• Someownerswill waitfortheauditbeforeapproving

changeswiththeideathattheywillbasetheapproval

onanyavailablefundingthathasbeenmadebythe

audit.

Bothcasesareunadvisableaschangesshouldbe

basedonmodificationstothescopeandcontract

DuringConstruction

Purpose:Todeterminehowtheexecutionoftheprojectaligns

withtheexpectationsaswellas:

• Lookforrisksthatmaybeavoided

• ReviewPayApplications

• ReviewChangestoDate

• InterimAudit–Costtodate

• Trendingandforecasting

Payapplications

• Conformanceto

Contract

• Progress

• Terms

• Timing

• SupportingDocuments

• VerificationofMath

NOTES:

• Signaturesdonotensure

accuracy

• PAsarenotprogress

reports

Theremaybetimeconstraintsfromthedaythepayappisissuedtothedaytheauditneedstobe

completed

10Daysistypical

Timeconstraintswilloftenremovetheabilitytoauditthechangeorderseachmonth

AuditingoftheCOscanbegroupedintointerimauditsorfinalaudit

NOTE–SwornstatementsvsPAs

WhatcanbeAuditedandtheLimitations

• Det ailedcostestimates

• Quantitytakeoffs

• Drawings

• Designdirection(RFI,ASI,bulletins,

sketches,etc.)

• Communication

• Thelimitationistypicallywithcontractors

andsubcontractorsthatarenotusedto

providingdetailedchanges

Asignedchangedoesnotmeanthatyoucan

neverre‐examineit

Chang es

TrendingandForecasting

Expend ituresatthe50%completionpoint

TrendingExample–CashflowandSchedule

100

‐

80

160

240

320

400

480

560

640

720

800

‐ 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120

%ofTotalPojectValue

UnitsperMonth

%ofPlannedProjectDuration

PlannedMonthly

ActualMonthly

PlannedCurve

AcutalCurve

FollowOriginalCurve

TrytoMeetOriginalFinishCurve

SPICurve

Notes:

Unitpermonthare$

Projectdurationisa%ofthetotalduration

Durationmonthscanbeusedinsteadofduration%

Change satthe50%completionpoint

TrendingExample–CashflowandSchedule

100

%ofTotalPojectValue

PlannedCurve

AcutalCurve

FollowOriginalCurve

TrytoMeetOriginalFinishCurve

SPICurve

TomeettheoriginalSchedule,

thenextseveralperiodspend

ratemustbecloseto150%more

thanthemaxspendforanygiven

periodtodate.

TomeettheoriginalSchedule,the

nextseveralperiodspendratemust

becloseto120%morethanthemax

spendforanygivenperiodtodate.

Projectdurationwillincreaseby10%

A“SchedulePerformanceIndicator”

equationmaintainsahistoricspendrate.

Projectdurationwillincreaseby20%

Notes:

Unitpermonthare$

Projectdurationisa%ofthetotalduration

Durationmonthscanbeusedinsteadofduration%

TrendingExample–ChangeOr ders

Expend ituresatthe50%completionpoint

200

400

600

800

1000

1200

1400

100

120

‐ 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

CumulativeUnits

MOnthlyUnits

%DurationoftheProject

ValueofChangesperMonth

ValueofChangesperPeriod ForecastChangesperPeriod CumulativeMovingAverage

ForecastCumulativeMovingAverage Cumulative ForecastCumulative

CumulativeStraightLine

Cumulativemovingaverageshowstherateofchangebetweeneachmonth

WhenthecurveslopesUP,theaveragevalueofchangesisGREATERthanthepreviousperiod

WhenthecurveslopesDOWN,theaveragevalueofchangesisLESSthanthepreviousperiod

Byforecastingtheperiodvalues,youcanmodeltheCMAcurvefortherestofthe project

ThemonthlyvaluesareonlyusedtomodeltheCMAandcumulativecurvesandshouldnotbeused

topredicttheactualvaluesexpectedpermonth

Forcomparison,astraightlinewasinsertedusingtheaveragechangesatthe50%mark

Be foreConstructionBegins

Mostsavingspotentialforleastamountof

work

Hardtoquantifyasitisspeculative

Purpose: Verifythatallpartiesareinagreementinregardsto

thebudget,designstatus,schedule,andproject

executionplan.

Additionally,identifypotentialrisksthatmaynot

havebeenpreviouslyaddressed.

Ideallyshouldhappenbeforecontractsaresigned

POLLINGQUESTION4

• Contracts

• Subcontracts

• CM/GCBidDocuments

• SubcontractorBids

• Estimates

• BasisofContractValue

• Schedule

• InsurancePolicies

• LaborRateBuildups

• ClarificationsandExceptions

• Value EngineeringEfforts

• ProjectControlSystems

• Changes

• PayApplications

• ProjectReporting

• Allowances

• Contingencies

• ProjectExecutionPlans

• RolesandResponsibilities

• Subcontracting

• Schedule

• QualityControl

• Closeout

WhatCanbeAudited?

WhatCan’tbeAudit ed?

• Intheory,everythingisauditablepriortosigningof

aconstructor'scontract.

• Thatdoesnotguaranteethatthecontractorwillcomply

• Auditorsshouldbemindfulthatacontractormaystill

walkawayfromanegotiationpriortosigningthe

contract

• Auditingafterthecontracthasbeensignedmaybe

limitedtowhatwasagreedtointhecontr act.

Projectinception

Purpose: Verifythatthestepsforscoping,

budgeting,andschedulehavea

reasonableandrealisticbasis.

TimeFrame: Thismaybeperformedatmultiple

stagesincluding:

• Inception

• SelectionoftheArchitect

• ProgramDesign

• SchematicDesign

• DrawingsIssueforBid

• ReviewoftheGMP

Projectinception

WhatcanbeAudited

• Scopehasbeendefinedandisclear

• Viabilityandneedoftheprojectwithintheorganization,

location,industry,andmarketisunderstood

• Budgetgoalsarerealisticandachievable

• ConsidersA/E,Construction, Land,Legal,FFE,Contingencies,etc.

• Schedulegoalsarerealisticandachievable

• GiveadequatetimeforA/E,weather,commissioning,etc.

• Fundingsourcesareviableandavailable

• Riskhasbeenconsideredinthebudget,schedule,andfunding

• Uncertaintyinthebudgetandscheduleaccuracyhasbeen

considered

Thehardpartisgettingtothetable

 Trackingconstructioncostsarenotthesameasa

business’sfinancialsystem

 TherearenoGenerallyAcceptedAccountingPrinciples

(GAAP)specifictoconstructionaccounting

 ConstructionAccountingisNOTthatsameasaccountingfora

constructioncompany

 Therearenoaccountingstandardsbywhichall

constructioncompaniesmustfollowing

 Constructionhasmorethanjustexpenditures

 Commitments

 Retainages

 Absorbingcosts

 Somethingsmustbefullyreconciledratherthan

sampled

 Changes

 Allowances

 Commitments*

 Insurances*

 ContingencyUse*

*Ifthecontracttypehasthisleveloftransparency

NuancesofConstructionAuditing

QUESTIONS?

JakeOrtego,PE,CCA,CCP,CCE

Construction Auditing, Cost Types

and Auditability