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Capital Projects Auditing

Objective

The purpose of capital project auditing is the control, conservation, and management of the owner’s hard-earned capital in a dynamic environment which poses great risk to those capital resources.

Capital Projects Auditing defined

Capital Projects Auditing is a comprehensive effort to assure that a company's assets are preserved during major capital spending endeavors through a coordinated, planned effort from the inception of the spending program, through completion, and concluding with the commencement of operations of the constructed assets.

Capital Projects Auditing is different from Construction Auditing

Construction Auditing, which focuses on engineering and construction contracts, is a large component of Capital Projects Auditing and is indisputably a valuable activity. However there are internal control, tax, and operational aspects of a major spending program which construction auditing does not address. Combining construction auditing with proactive controls in all other areas of the capital spending program yields cost reductions, and even recoveries, which dwarf those available from construction auditing.

Capital Projects Auditing is focused both internally and externally on all elements of project cost and those of subsequent operations of the facility.

Scope Controls

A factory at twilight

Appropriations
Capital Expenditure Requests
Capital Authorization Requests
Letters of Authority
Authorizations for Expenditure
Capital Spending Authorities
Your Company Nomenclature

 

*Capital Appropriations Controls are the basic foundation for project cost control

Additions

Deletions

Other Scope Changes

*Project Scope Control - without it internal and external forces can expand the project

Design Review and Approval

Contractor/subcontractor scope control - bid package plans and specifications

Field Change Notices

Work orders or other controls over extra work performed by project team for operations

Tax Controls

The U.S. Supreme Court Bldg.

Sales and Use Tax
Property Tax
State Income Tax
Federal Income Tax
Excise Taxes
Gross Receipts Tax
Value Added Tax

*Tax Impacts Many taxes and regulations affect the project and ongoing operations after completion. A comprehensive management effort can reduce project and operational costs by several percent.

Sales and Use - Preplanning is best, but a cost recovery audit after the project's completion will otherwise produce benefits.

Property - There may be exemptions for pollution control, R&D, or other incentives

Income - Segregation of personal property assets from real property produces substantial savings

VAT, GST and other taxes applicable to off-shore projects can add 15 to 20% to project costs

Construction Auditing

Elevated slab

Construction Auditing is a key component of the Capital Project Auditing Process which focuses on the role of architects. engineers, project managers, construction managers, general contractors, and major subcontractors

Corporate Finance and Accounting

Coins.

Corporate Project Participants
Cost Accounting
Risk Management
Fixed Assets
Treasury
Law
Tax
Finance

 

*Project Financing Methods

Industrial Revenue Bonds

Bank Loans

Operating Cash Flow

Sale/Leaseback transactions

 

*Project Accounts Receivable

Scrap sales

Surplus equipment and tool sales

Returnable containers - gas cylinders, cable reels, formwork

Items returned for credit

*Fixed Assets Accounting

Transfers from other locations

Additions - Construction in Progress

Deletions

Appropriation documents should provide basis for close out to Fixed Assets

 

*Project Cost Accounting Systems

Timeliness and Accuracy critical

Commitments

Expenditures

Projected costs to complete

Comprehensive to include corporate expenditures

*Risk and Insurance

Builders Risk

General Liability

Business Interruption

Construction Equipment

Bonding

Lien requirements

 

 

Operations

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Warranties

Spare Parts

Freight

Vendor reps

Performance

Environmental

Safety

*Backcharges - Costs of correcting nonconforming work or equipment

*Manufacturing equipment procurement and operation - for manufacturing plants this is usually 45 to 70% of total project costs

Compatibility with existing systems

Installation Contracts - Control over start-up services

Performance criteria for final equipment payments

Spare parts - a big source of savings

The Capital Auditing Function

Coordination and control of all of the above is beyond the capabilities of any project manager. Supporting the project manager with a project auditor or project controller will prevent losses from issues which would otherwise be unrecognized and unremedied. Having an on-site auditor also allows other corporate cost savings and cost recovery opportunities to be evaluated, seized, and realized.

 

Basic Elements of a Capital Project Auditing function

*A dedicated on-site presence

* Support of corporate and project management

*Flexible project audit reporting systems with shortened response times - imposition of typical internal auditing reporting cycles do not work in a major project environment

*Auditing capabilities are written into contracts, major subcontracts, and project procedure

*Project management and engineering make constructability decisions. Project auditing test controls and verifies contractor costs. The auditor supports the project manager with analytical capabilities.

*Project auditor/ project controller coordinates project activities with appropriate corporate managers with the objective of identifying and correcting opportunities which might otherwise fall victim to interdiscipline gaps, i.e. accounting-construction, law-engineering

*Project auditing is reinforced by internal auditing or temporary accounting personnel as needs arise

*Sufficient independence in reporting

*Adequate training

The Savings Potential

*A proactive project auditing function can reduce total project costs by 1 to 2%

*The savings attainable are typically 3 to 5 multiples of the costs of  performing the reviews

*The concept can be applied to other areas of corporate operations

 

 

Examples of savings from major capital projects

These illustrations depict some of the areas covered by capital projects auditing which exceed the limits of construction auditing. The examples represent some of the opportunities to lower costs encountered by Cost Recovery Works, Inc. and previous work by CRW founder and president Al Gray.

 

Review Subject & Scope

 

Results

Project Financing

 

 

Portions of a new manufacturing facility were eligible for financing using exempt Industrial Revenue Bonds (IRB's), which featured interest rates 1.5% lower than the owner's cost of capital. Corporate treasury and law departments had submitted an IRB project description and had secured approval of the funding. The project auditor investigated whether additional portions of the facility would be eligible.

 

 

The project auditor reviewed the existing IRB project scope and the governing IRB regulations, compared the overall manufacturing project to those documents, and identified additional systems ( including coaf fired boiler components similar to those in the picture) that were eligible for the financing. The corporate law department secured approval of the broadened scope, resulting in more than $2,000,000 savings at present value.

Manufacturing Equipment

 

 

Modern process control valves, like those in this tank farm photo, are frequently purchased under blanket purchase orders with supply houses. Pricing is comprised of multiple components which depend on valve specifications, with discounts applied to each component. Accurate pricing may be difficult to achieve. Recognizing that purchasing personnel lacked the time to audit the pricing of the valves, the project auditor conducted a review.

 

 

The project auditor selected a sample of valve purchases from the 5 designated project suppliers. The pricing was tested for accuracy. The findings were that 2 of the suppliers had overcharged due to the omission of one or more discount factors. The suppliers refunded more than $33,000. Savings to the project and to manufacturing operations from correction of the suppliers' billing systems exceeded $200,000.

Equipment Spare Parts

 

 

Various manufacturing process equipment purchase orders contained provisions for spare parts to be supplied. Since payments to the supplier were based upon milestones, final payment was conditioned upon equipment start-up, and engineers approved invoices based upon progress rather than delivery of components, the project auditor recognized the potential for payment of undelivered spare parts which were not required for start-up.

 

The project auditor reviewed all process equipment purchase orders to identify all purchases which included specified spares within the contract price. Receiving documents and storeroom records were reviewed to ascertain that all of the required parts had been delivered. Three suppliers had failed to deliver all or part of the purchased spares. Recoveries of more than $110,000 in missing spares were obtained.

 

 

 

 

 

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