|
1. Spending Level |
|
|
Project is $5 million or
less per site. |
1 |
Comment: Spending levels
alone cannot determine the efficacy of assigning on-site
project auditors. If the budgeted costs of the project are
more than $50 million or there are complexities, the Owner
should strongly consider engaging a project auditor for the
duration of the project. |
|
Project is between $5 and
$10 million per site. |
2 |
|
Project is between $10 and
$25 million per site. |
3 |
|
Project is more than $25
million per site. |
4 |
|
2. Schedule Development
|
|
|
Completion is based upon a
detailed schedule using CPM (critical path method) or other
method which allows for completion of design, competitive
bidding, and construction. |
1 |
Comment: Forcing a project
completion date increases the owner’s risks, irrespective of
the contracting methods utilized. Coupled with a dynamic
design, accelerating the completion date can significantly
increase costs. |
|
Completion is based upon
schedules for similar facilities that the owner has
constructed. |
2 |
|
Completion date is
accelerated by the use of flexible contracting methods and
constant schedule reevaluation. |
3 |
|
Completion date is
established by management, market forces, or other outside
forces. |
4 |
|
3. Contracting Methods |
|
|
Completed-design, Fixed
price |
1 |
Comment: Imposing fixed
price contracting methods on a dynamic scope may be far more
costly than adopting cost-plus contracting methods. Cost-plus
contracts afford flexibility required to meet an imposed
completion date and, if properly managed and controlled, can
reduce costs. |
|
Substantially completed
design, guaranteed maximum price. |
2 |
|
Significantly completed
design, cost-plus with a guaranteed maximum price, with or
without shared savings. |
3 |
|
Design-build, fast track
based upon cost-plus contracting methods. |
4 |
|
4. Scope Definition |
|
|
Every type of project
change, additive, deductive or transfer, requires some level
of management approval. |
1 |
Comment: In the absence of
a tight scope definition and controls, the project manager has
wide latitude to reduce the scope in order to meet the budget.
If this occurs after the contracts have been issued, there is
a likelihood that the owner will experience significant
losses. |
|
Any changes to the total
project scope are approved by management, but the project
manager has discretionary authority to transfer costs between
line items. |
2 |
|
Management approves only
substantial changes, either deductive or additive. |
3 |
|
Only major scope additions
or overruns require management approval. |
4 |
|
5. Design Stability |
|
|
Owner has existing basic
facility design and systems selection. |
1 |
Comment: The security
against cost escalation afforded by fixed-price contracts lies
in the completion of design prior to the contracting phase. |
|
Owner has selected systems
but facility design is undefined. |
2 |
|
Owner must modify facility
design to accommodate new systems. |
3 |
|
Owner faces new systems
selection and new facility design. |
4 |
|
6. Oversight Capability |
|
|
Owner has experienced
project managers to oversee all major capital projects. |
1 |
Comment: Project managers
are expected to manage budget, schedule, scope, engineering,
construction, and coordination with operations. Is it
realistic to expect them to be able to analyze contractors’
billed costs as well? Supporting the project manager with such
analytical skills is a primary contribution of a project
auditor. |
|
Owner appoints project
manager from operations as new projects arise. |
2 |
|
Owner hires a temporary
project manager under contract or a construction management
firm. |
3 |
|
Owner uses one outside firm
for engineering, procurement, construction, and project
management. |
4 |
|
7. Project Complexity
|
|
|
Project covers
nonindustrial end uses and requires primarily civil
contractors |
1 |
Comment: Risks to an owner
increase with project complexity. More specialty contractors
are needed, multiple engineering and construction firms are
used, and coordination becomes paramount. This not only
stretches the owner’s project manager thin, it creates more
costly conflicts and change orders. Project auditing
capabilities are even more important. |
|
Project encompasses an
assembly plant and requires some electrical and mechanical
installation. |
2 |
|
Project encompasses limited
stages of production and requires electrical, mechanical,
building, HVAC and other major contractors or subcontractors. |
3 |
|
Project encompasses
multiple stages of production, there are complex equipment or
process systems which affect building design, and multiple
specialty engineering, equipment installation and construction
firms must be coordinated. |
4 |
|
8. Owner’s Experience |
|
|
Owner has ongoing
construction of similar units. |
1 |
Comment: Recent experience
provides a basis for comparison. The cyclical nature of
capital spending in manufacturing often precludes maintaining
in-house experience from one capital spending cycle to the
next. |
|
Owner has built a similar
facility in the last three years. |
2 |
|
Owner has a similar
facility built more than three years ago. |
3 |
|
Owner is building a
facility which is the first of its kind or owner is new to the
line of business. |
4 |
|
9. Appropriation Process |
|
|
Capital Budget is based
upon a detailed estimate. |
1 |
Comment: The validity of a
capital budget is directly proportional to the amount of
detail provided in the underlying estimate. |
|
Capital Budget is based
upon similar project costs, adjusted for changes. |
2 |
|
Capital Budget is based
upon costs per square foot or on a conceptual estimate. |
3 |
|
Capital Budget is an
allocation of available funds. |
4 |
|
10. Design Discipline |
|
|
End-users of the facilities
are encouraged to provide input into the design of the
facility, are given deadlines to provide the input, and are
prohibited from requesting design changes during construction. |
1 |
Comment: The success of an
owner in controlling costs is largely dependent upon providing
input into the design phase and limiting it thereafter.
|
|
End-users are provided with
separate capital funds to make minor changes at the completion
of the project. |
2 |
|
End-users have control over
the owner’s acceptance and have the capability to insist upon
changes prior to final payment. |
3 |
|
End-users in various
departments are empowered to make design changes throughout
the project. |
4 |
|
11. Site Development |
|
|
Facility is sited in an
existing commercial development or industrial park. |
1 |
Comment: Elimination of the
necessity to perform excavation, site preparation, and
underground utilities considerably reduces project complexity.
However, projects requiring renovation of existing facilities
often feature the added complexity of modifying an unknown
scope, particularly with older manufacturing facilities. |
|
Facility is an expansion of
an existing facility. |
2 |
|
Facility requires
modifying, remodeling, or retrofitting an existing structure
or equipment system. |
3 |
|
Facility is being
constructed at a “green field” site. |
4 |
|
12. Contract Cost Controls |
|
|
All contracts and major
subcontracts require cost-based change orders with full rights
of audit. |
1 |
Comment: The owner should
insist on these provisions, as they provide an option to audit
change orders, should change orders proliferate during the
project. It is difficult to know at the project’s inception
how many change orders will be required and at what increased
cost. . |
|
All contracts and major
subcontracts include unit prices for additions or deletions of
significant components. |
2 |
|
Contracts and major
subcontracts require fixed price change orders accompanied by
details of quantities and prices. |
3 |
|
Contracts/subcontracts do
not address change order pricing and contractors request lump
sum change orders. |
4 |
|
13. Cost Reporting Systems |
|
|
Current reporting of
committed, expended, and projected costs, with detailed
variances. |
1 |
Comment: Many owner’s
capital accounting systems do not provide timely cost
reporting which is sufficiently current to control project
costs. |
|
Monthly cost reports are
issued in a standard format. |
2 |
|
Cost reporting methods are
left to the discretion of the project manager. |
3 |
|
Cost reporting methods are
established by the general contractor or construction
management firm. |
4 |
|
14. Tax Considerations
|
|
|
The project is commercial
and no tax incentives apply. |
1 |
Comment: With project
controllers or project auditors on site, the effects of design
changes on tax incentives can be identified. Project auditors
can effect tax planning methods throughout the project |
|
The project is industrial,
but there are no tax incentives. |
2 |
|
The project is industrial
and there are broad-based training, sales/use, property, and
income tax incentives. |
3 |
|
The project is industrial
with tax and other incentives subject to judicial, contract
administrative, and other limitations. |
4 |
|
15. Auditing Capabilities |
|
|
The owner has an
experienced capital auditing staff |
1 |
Comment: Many owners impose
the project auditing responsibilities upon the plant
controller or location accounting manager. While this seems to
be a logical approach, it does not recognize that project
activities are at a peak during a time that the controller is
expected to plan, direct and implement accounting
responsibilities for the new operations. |
|
The owner has an internal
auditing staff with some construction auditing training and
uses temporary on-site auditors. |
2 |
|
The owner’s internal
auditing function reviews the project, focusing primarily on
post completion audits. |
3 |
|
The owner has no auditing
capabilities and relies on its project manager to manage
schedule, budget, engineering, constructability issues,
start-up, and analyze contractor “costs.” |
4 |
|
|
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....................................................................RISK
ASSESSMENT SUMMARY |
|
CUMULATIVE SCORE |
RISK |
RECOMMENDED LEVEL OF OVERSIGHT |
|
15 to 25 |
Low |
Project auditing
capabilities would produce marginal results. Owner should
build the option of cost-based change orders into its
contracts in the event that significant price escalation
occurs, whereupon contract auditors could be used. |
|
26 to 35 |
Mild |
Owner should consider
having an initial assessment performed to determine whether a
project auditing function can add value. |
|
36 to 45 |
High |
Owner should strengthen
existing project auditing capabilities. An on-site project
auditing presence will likely reduce costs. |
|
46 to 55 |
Very High |
Owner should employ a
project auditor or project controller. Project auditing should
yield cost reductions of several multiples of the cost. Post
completion audits would be valuable. |
|
56 to 60 |
Great |
A project auditor, even a
team of project auditors, will be needed to perform limited
damage control. Unless there is an overriding need for the
facility, the owner may wish to reconsider its project
planning. Post-completion audits may yield limited recoveries
but the owner will experience irretrievable losses of a
substantial magnitude. |
