Construction Risks Exposed The Questions You Should Be Asking

Transcription

1 Construction Risks Exposed The Questions You Should Be Asking Curtis Matthews, CPA, CCA Valerie Smith, CCA July

2 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountantclient relationship. Although this information may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. 2

3 Presenter Valerie Smith, CCA Senior Manager Valerie is a Senior Manager with Moss Adams Construction Audit and Advisory Services Practice with over 16 years of financial management experience focused on the construction industry. She has managed numerous operational and construction cost audits for education, health care and hospitality facilities. Her specific experience includes financial statement and cash flow analysis and reporting, construction program evaluation and reporting, job cost analysis and project performance, process controls and construction contract compliance. Valerie has also provided risk assessment services and control reviews for construction projects, including assisting organizations with drafting or updating construction policies and procedures. Prior to joining Moss Adams, Valerie worked for general contracting firms as a Senior Financial Analyst, Controller and Assistant Regional Controller. She has a Master of Business Administration degree with a Concentration in Accounting and is a Certified Construction Auditor. 3

4 Presenter Curtis Matthews, CPA, CCA, CPE, CISA Managing Partner Curtis is the Partner in charge of Moss Adams Construction Ausit and Advisory Services Practice and brings over 29 years of relevant experience. He formerly directed Construction Risk Management Services for PricewaterhouseCoopers LLP and was responsible for the worldwide construction audits covering Intel s multi-billion-dollar projects. Curtis has helped project owners negotiate favorable contract terms, implement strong project controls, monitor construction controls performance and ensure that construction project charges are compliant with contract requirements. Curtis holds a Bachelor of Arts degree in Business Administration with a Concentration in Accounting and a Master of Science degree in Management in Science and Technology. He is a Certified Public Accountant, a Certified Construction Auditor, a Certified Professional Estimator, and a Certified Information Systems Auditor. 4

5 About Moss Adams LLP National Audit and Consulting Firm Perform over 50 construction audits annually o Contract review o Cost and control audits o Change order review o California Proposition 39 performance audits o Federal contract compliance audits o Construction program policies and procedures Projects range from $10 million to over $3.5 billion Multiple industries 5

6 Today s Discussion Common Construction Project Exposures Project Risk Factors Questions You Should Ask Construction Contract Controls Project Controls Requiring Your Focus and Attention Anticipated Construction Control Results Moving Forward 6

7 Common Construction Project Exposures Unfavorable contract terms and controls Inaccurate project financial records and reports Excessive requirements and scope creep Overcharges and costly practices Excessive change order costs Project and schedule delays Construction quality issues Project staffing Project funding not aligned with project plans Stakeholder perception issues Unfulfilled owner or occupant requirements Property and casualty loss Claims and disputes MOSS ADAMS LLP 7 7

8 Construction Project Risk Factors Project complexity and size Type of contract Owner construction experience Project staffing Exercise of audit rights Contract compliance requirements Schedule impact Contracting competition 8

9 Questions You Should Ask What controls are in place to: Ensure contracts include most favorable pricing and controls? Approve project design, construction budgets and spending? Manage and monitor project cost schedule and scope performance? Audit and validate contractor charges? 9

10 Questions You Should Ask (cont.) What controls are in place to: Authorize contracts, purchase orders and payments? Control change orders? Close out projects? 10

11 Construction Contract Controls Fees General conditions costs Insurance and bonds Labor and related burden Subcontracts Rental equipment Change orders Self-performed work Right-to-audit language 11

12 Construction Contract Controls Fees Stipulated fee percentage to be applied to cost of work Fee range based on the total contract value Exclude certain cost items from the fee calculation: o Insurance o Performance bonds o Permits o Self-performed work 12

13 Construction Contract Controls Fees (cont.) Fee contract language should include: Specify fee percentage calculated on cost of work the contractor s fee shall be equal to percent ( %) of the cost of work Define exactly what comprises cost of work for fee: the following elements of the cost of work, although reimbursable as part of the cost of work, shall be excluded from the cost of work for the contractor s fee calculation. 13

14 Construction Contract Controls General Conditions Costs Contract should contain specific language for costs to be reimbursed (allowable and unallowable costs) Costs to look out for: o Communications (Internet and cell phone) o Computers and software o Meals and entertainment o Relocation o Safety incentives o Purchase card expenditures YOU, as the OWNER, should determine and communicate acceptable limits. Do not be swayed by the phrase industry standard. 14

15 Construction Contract Controls Insurance and Bonds Insurance calculations should be based on cost of work only General Liability Insurance (GLI) Subguard replaces performance bonds Builders risk and performance bonds 15

16 Construction Contract Controls Insurance and Bonds (cont.) If Owner Controlled Insurance program (OCIP) or Contractor Controlled Insurance Program (CCIP), ensure subcontractors DO NOT include insurance costs in pricing. GLI, Subguard and CCIP rates should be stipulated in the contract at market rates. 16

17 Construction Contract Controls Labor and Related Burden Two methods o Actual cost o Stipulated rates Two types o Salaried/project management o hourly/craft labor Actual cost is preferred; stipulated maximum rates are a good practical method. Stipulated rates provide a profit center to the contractor. 17

18 Construction Contract Controls Labor and Related Burden (cont.) If you allow stipulated rates, ensure that you specify what is included in the burdened rate (actual cost, payroll taxes, insurance, etc.). o We do not recommend including paid time off (PTO) in burden rates. If the contract allows these charges, costs should be incurred as PTO is actually taken. Exempt (salaried/project management) labor should not be charged to the project for more than 40 hours per week. Ensure labor burden rates reflect a decrease for overtime and double time. 18

19 Construction Contract Controls Subcontracts Typically comprise 70 to 80 percent of total contract value Your project manager should be involved with the general contractor s (GC) bidding process to ensure: o Subcontractor qualification process is in place o Bids are accepted, reviewed and appropriately awarded o Approach is unbiased 19

20 Construction Contract Controls Subcontracts (cont.) Subcontract types: o Most subcontracts are lump sum. o Larger subcontracts (i.e., mechanical and electrical) are Guaranteed Maximum Price (GMP). o For GMP subcontracts, the GC needs to implement controls to ensure that the subcontract terms include terms and conditions from the GC s prime contract. 20

21 Construction Contract Controls Rental Equipment Two issues monthly rate and total payments. o Monthly rental rates should be stipulated to not exceed a percentage of published rental rates or local prevailing rates. o Cap total rental payments at a stipulated percentage of fair market value (FMV). o Stipulate sources for rate averages and FMV and HOLD THE GC ACCOUNTABLE. Document FMV in the contract. Provides a profit center for the contractor. Equipment on site only with Owner approval (typically your project manager). 21

22 Construction Contract Controls Rental Equipment (cont.) Exclude maintenance. If maintenance is included, stipulate types and limit costs. Make sure you fully understand what computers and software are necessary for the project. Do not pay for overhead systems. Costs should be fully supportable and be caused by the project. 22

23 Construction Contract Controls Change Orders Typical process: o Request for Information (RFI) o Change Order Request (COR) o Change Order Supporting cost documentation required increases and decreases to GMP total. Understanding scope of change is critical. Must be approved by Owner, Architect/ Engineer (AE) and GC. Do not pay for subcontractor/gc/ae errors or damage. 23

24 Construction Contract Controls Self-Performed Work (SPW) Work that is typically subcontracted is performed by the GC. SPW should be excluded from the contract fee calculation and have a stipulated SPW markup. Proposed SPW costs should be validated through competitive bidding process or independent evaluation. Amount of awarded SPW should be limited to reduce exposure. 24

25 Construction Contract Controls Right-to Audit Clause Ensure good right-to-audit clause in contract. Audit rights should be sufficiently clear to enable efficient and complete auditing of charges. No audit scope limit. Require all supporting documents be available upon request. 25

26 Key Construction Control Focus Areas Planning Programming Design Construction Completion & Close-Out Facilitate project scope definition sessions Establish communications process and progress meetings Establish progress reporting protocols Assess insurance program structure Assess staffing model Introduce best procurement practices Define project control structure including program policies and procedures Build contractual controls Assess efficacy of project scheduling Facilitate sessions to finalize project objectives/plans and estimates Conduct value engineering and constructability reviews Review/improve project management processes, reporting and change order controls Assess design contract management controls Review proposed cost and pricing Monitor project progress and quality Review cost measurement and payment controls Audit contractor cost records, financial/ budgetary reporting and control processes Review safety program and insurance best practices Claims and disputes Property/income tax valuation and sales tax payment Evaluate performance against targets Audit final cost, monitor close-out and contract compliance Capture learning for improvement on future projects Independent and balanced assessment and reporting on project performance 26

27 Key Controls Validation Payment application controls o Approvals AE included o Accuracy check o Cover sheet agrees to schedule of values o Job cost detail agrees to schedule of values o Costs are adequately supported Owner approvals relative to personnel and equipment Contractor bidding controls over subcontracts Self-performed work approval controls 27

28 Key Controls Validation (cont.) Change order controls o Unapproved RFIs and CORs o Uncommitted funds on approved CORs Project reporting Three-step audit process during project o Initial control effectiveness o Midpoint/Interim reconcile costs and validate controls o Close-out reconcile costs, review close-out documents 28

29 Key Controls Validation (cont.) Risk: Labor overcharges Excessive change order cost Cost management issues and surprises Excessive rental equipment cost Excessive contract cost and overpayments Hidden contractor profit center Unallowable cost charges Overbilled subcontractor cost Excessive insurance costs Good Controls: Detailed timekeeping documentation of contractor hours worked; actual costs or stipulated max rates Owner and AE required approvals to prevent paying for GC errors or in-scope work Detailed documentation for cost estimates from contractor Cap on total rental payments, stipulated percentage of FMV Adequate definition of contract savings clause Detailed definition of acceptable costs listed in General Conditions Provision that home office personnel are contractor overhead and not job chargeable Detailed supporting documentation submitted with billings from subcontractors Stipulated insurance rates in contract 29

30 Anticipated Construction Control Results Project economy, efficiency and cost control Prevention of problems and early detection of risks and overcharges Compliance with contract requirements and existing policies and procedures Tighter program controls Reduction in errors and overcharges Reduction in change orders or cost of change Improved communication Protection of stakeholder funds 30

31 Moving Forward For new projects, utilize audit support to negotiate favorable pricing and contract controls. If you have construction projects in process, conduct a construction project risk assessment to determine which common construction risks are most relevant to your organization. Assess the staffing and controls you have in place to address those construction risks. Conduct a detailed audit of expenditures for contract compliance, reasonableness and accuracy. Assess and understand grant compliance requirements. 31

32 Presenters Contact Information Curtis Matthews, Managing Partner (503) Valerie Smith, Senior Manager (480) MOSS ADAMS LLP 32 32