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Construction Audits Reduce Project Costs!

General contractors and owners alike have come to appreciate construction auditing. Construction Auditing has gained respect in recent years as a specialty field of auditing which typically produces savings which far outweigh the costs. Capital-intensive industries often have a construction auditing unit within their internal auditing departments, corporate engineering departments, or plant sites. When any owner undertakes a major project, it should assess its risk and consider construction auditing alternatives. Major projects are dynamic environments in which vast sums are expended over accelerated schedules and are therefore susceptible to sizable losses if appropriate controls are not in place. Also, the recent trend toward design-build contracting strategies creates a need for strengthened accounting participation in the process. Here are the reasons why construction auditing is productive, a listing of the types of reviews performed by Cost Recovery Works and other construction auditing firms, and a table providing examples of results achieved.

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Excavating Cost Savings

Construction Auditing unearths Cost Savings and

Cost Recoveries before they are irretrievably lost

Contracting methods

Fixed price contracting methods, when imposed on a dynamic scope, inevitably produce change orders. Verifying the costing and accuracy of change order requests is a natural auditing activity

Cost-plus or T&M contracts require verification of pricing, quantities, invoicing accuracy, and extensive controls testing if these methods are used job-wide. Such contracts were likely the origin of construction auditing.

Engineering contracts may be based on billing rates, salaried costs times a multiplier, or other terms which require adequate billing controls.

Counterproductive subcontracting strategies can compound costs.

Each project area has separate and distinct controls requirements.

Contractor controls

Deviation from fixed price contract invoicing and industry standards creates dangers of billing errors.

Lax scope definitions or undefined scope of work create opportunities for errors.

Project engineers lack the time to verify detailed billings and must rely on sometimes untested systems.

Subcontractors have various means of revenue enhancement.

Achieving comprehensive accounting for project commitments requires great discipline, which might be in short supply on a large, complex project. The result is frequently cost escalation after the project is "complete."

Project Manager Responsibilities

Most companies assign a project manager to the capital spending program to perform the following duties:

Scheduling

Coordination with operations

Contractor coordination

Subcontracts

Security

Coordination with agencies

Construction Contract Administration

Project Taxation

Start-up

Cost control
Procurement
Engineering
Engineering contract administration
Safety
Document Control
Permitting
Systems turnover
Constructability issues

Which task will be sacrificed?

At what cost to the company?

During a compressed schedule is it reasonable to expect one person to juggle these functions without incurring losses? Is it really being reasonable to expect this individual to perform these tasks and conduct thorough analysis of project costs? A construction auditor is the project manager's right hand on major projects! An experienced auditor gives the project manager support by verifying the details of project cost, providing analysis of alternatives, and evaluating billings.

Types of Construction Audits

Engineering

Time Charge Reviews

Reimbursables billings

Third party engineering

Design review and approval process

General Contractor

Construction management

Craft labor

Tools and Equipment

Procurement

Field Engineering

Accounting

Shipping and Receiving

Subcontractors

Mechanical

Electrical

Concrete

Structural Steel

HVAC

Masonry

Site work

Here are some illustrated examples of cost reduction opportunities encountered by Cost Recovery Works, Inc. and from CRW founder and president Al Gray's experience as a capital project auditor.

Photos and illustrations are by permission of Arttoday and are not depictions of the actual parties involved.

Review Subject and Scope		Results
Mechanical Subcontract What savings are in store for you? The scope of a tank installation contract and final drawings were compared to detect scope deletions. The project mechanical engineer had approved the final payment. The project auditor decided to review the contract before the payment occurred.		A drawing revision after the subcontract was executed deleted several tanks which were in the scope of the agreement. The subcontractor agreed to a reduction of the final payment of $95,000. Scope Deletions are a common source of overcharges.
Electrical Subcontract Proactive measures can avoid shocking overcharges! The subcontract was converted from fixed price to cost-plus. A review of the costs was required to verify billed prices and quantities for labor, material, and equipment.		The audit produced findings of overcharges totalling $450,000. Subsequent negotiations resulted in a cost recovery in excess of $250,000. Another review of the same contractor revealed that a superintendent was billing his time under two subcontracts. The cost recovery from this issue was approximately $20,000.
Excavation Subcontract Project controls unearth costs before they are covered up! The excavation subcontract called for construction equipment to be billed, inclusive of operator time, at rates of $65 to $125 per hour for each hour that the equipment was productively operated on the project site. A review was performed to ascertain compliance with the subcontract terms.		The review resulted in findings that the subcontractor was billing full daily utilization of each piece of equipment on the project site. Only one operator was paid to operate a water truck, roller, and motor grader. The subcontractor had overcharged more than $60,000 for unused equipment. Review of another excavation subcontractor on another client's project revealed an overcharge of $195,000 for crushed stone.
Structural Steel Contract There may be gold in steel details! The steel fabricator for a new chemical plant claimed that its post-completion audit of the steel fabrication and supply contract indicated more than $140,000 of structural steel was unbilled. The project civil engineer agreed to the payment. The project auditor conducted his own audit of the contract.		The conclusions from the project auditor's study of the detailed steel drawings, bills of lading, and invoicing were that there were $65,000 of steel represented by unmatched receiving documents and that the $75,000 balance was not owed to the fabricator. It is important that the administration of such blanket orders be current, accurate, and complete. It is very difficult to review steel details at the completion of a project. This type of contract justifies having a construction auditing function!
Concrete Supply Purchase Order Proactive measures avoid costs before they are set in concrete! The concrete supplier furnished ready mix concrete from an on-site batch plant. The project auditor tested actual volumes of poured concrete versus billed quantities and found unfavorable variances which ranged from 8% to 12% on a consistent basis. The project civil engineer had a number of concrete trucks weighed before and after deliveries, computed theoretical weights, and verified the project auditor's finding.		The metering system was corrected, with the result that subsequent variances ranged from -5% to +5%. Correction of the light-loading problem saved more than $325,000. Coupled with other procurement methodologies recommended by project auditing, more than $800,000 was saved on the cost of concrete
Engineering Services Plotting a course to minimize costs requires attention to the details! While the contractor engineers were excellent and ethical in every respect, the engineering billing systems used to charge their services were tested to determine whether time charges were accurate, rates were correct, and that reimbursable expenses were not in excess of market rates.		The reviews resulted in alternative sources of supply for certain supplies, materials, and systems which produced savings of more than $200,000. Corrections of multiplier factors to conform with the contract reduced fees by another $150,000. Total savings on project savings from multiple reviews exceeded $550,000.
Craft Labor Lets drive home the point that excessive construction costs are not inevitable! The contract called for craft labor to be billed at actual cost plus defined markup percentages. The project auditor conducted thorough reviews of base costs and certain markups, including worker compensation insurance.		The labor cost component was overstated by more than $625,000, which the contractor refunded. The review found that the labor classifications upon which worker compensation premiums were being charges were inaccurate. Reclassification reduced project costs to completion by more than $380,000. Another cost sometimes based upon craft labor are billings for small tools. There are opportunities for savings in this area also.