Construction auditing: Post-Construction

Transcription

1 Construction auditing: Post-Construction Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP

2 Introductions Webinar Moderator Mary Barnett ACUA President 2

3 WebEx guide > Everyone is muted to avoid background noise. Please use the chat box if you need to communicate with the host. Chat Window > Asking questions: In the chat screen, ask questions by choosing All Panelists in lower right chat window. Type your message in the chat box and hit send. > If disconnected: Refer to your and reconnect. If audio is disconnected,click the Communicate tab in the upper left to find the dial in numbers and access code or refer back to your for the dial-in #. > Support #: If you have any technical problems, call WebEx Support at Chat Box > We will be recording today. Refresh button Choose All Panelists 3

4 Introductions Monica Modi Dalwadi Tony Ollmann CPA, CIA, CFE Senior Manager Director

5 Overview Today s topics > Why are we here today > Why are you auditing this area > Financial reconciliation > Shared savings calculations > Allowances and credits > Closeout reporting > Final walkthrough/punch-list 5

6 Why are we here today 1) Recognize when to conduct a post-construction audit 2) Identify gaps in the owner s current construction activities and responsibilities 3) Perform procedures to assess construction controls and adherence to compliance requirements. a) Financial reconciliation b) Shared savings calculations c) Contingency, allowances, credits d) Closeout reporting 4) Evaluate how Internal Audit can participate most effectively in post construction audits 6

7 Construction lifecycle Insert graphic from word doc *Architect/Engineer (A/E) 7

8 Construction project lifecycle Construction progress to date Design and construction team has been selected (Facilities) Contracts have been executed (Legal) Construction is complete (Facilities) 8

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10 Owner s responsibilities Previously discussed: Preconstruction activities (prevention) > Contractor due diligence > Contracting and negotiation > Contract risk matrix development 10

11 Owner s responsibilities (cont.) Previously discussed: During the construction phase > Controlling capital expenditures > Monitoring change orders > Scheduling thousands of activities for hundreds of people > Maintaining an ethical and safe work environment 11

12 Owner s responsibilities (cont.) Common construction risk management myths > The architect did that > Workmanship and quality risk is mitigated with compliance inspections > Everything is computerized, there are never any arithmetic errors > That was the contractor s responsibility > On time and on budget is a success 12

13 Pros and cons of post-construction audits Pros > Easier to quantify the value of the audit > Requires fewer resources > Easier to identify policy and procedure variances 13

14 Pros and cons of post-construction audits (cont.) Cons > Greater risk of memory and document loss > Forfeit the opportunity to prevent something from occuring > Higher probability of contractor conflict while negotiating issue resolution 14

15 Selecting a construction project for closeout or post construction auditing P.R.E.T.T.Y. attributes should be considered when evaluating projects for audit P Perceived project satisfaction R Record keeping E Enterprise risk T Timing T Total construction budget Y Your ability to act upon audit findings 15

16 Closeout construction audit expectations Rules of thumb to follow Closeout audits typically yield findings in excess of 1% of the construction budget > For instance, a $50 million project should identify $500,000 or more in findings > Negotiating settlement will return thousands of dollars back to the institution > This assumes a well-managed project with good project controls. The findings can be even higher on a poorly managed project. 16

17 Construction audit program development Key risks > Charges for non-allowable costs > Failure to deliver contracted scope > Lost incentives and credits > Overcharging for labor and materials > Over priced change orders 17

18 Construction Audit Program Development Risks that arise during project closeout > Owner allowances disappear > Excess supplies are not properly credited > Shared savings calculations are erroneous > Final lien waivers are missing > Contractor billings exceed contractor s costs 18

19 Construction Audit Program Development Risks that arise during project closeout Final project management tasks are forgotten > As-built drawings are not delivered > Equipment warranty documentation and operating manuals are lost > Project documentation is not completed 19

20 Expectations Management Lower Assurance Greater Assurance Compliance Oriented Audit Project Controls Oriented Audit > Variance from policies and procedures > Major budget deviations > Major schedule deviations > Limited financial analytics > Unplanned construction cost recovery > Everything in a compliance oriented audit plus > Detailed financial analytics > KPI variance analysis > Variance investigation > Anticipated construction cost recovery 20

21 Construction audit program development (cont.) Closeout audit program fundamentals > Obtain consensus on the audit objectives: Compliance effort Cost recovery effort > Reconcile pay applications received with contractor costs incurred > Obtain copies of completed final construction punch lists. > Confirm visually, with interviews and analytically that the entire contract scope was delivered. 21

22 Construction audit program Collect and Log Construction Compliance Documents > As-built drawings > Final lien waivers > Final subcontractor pay applications > Permits and certificates of inspection 22

23 Closeout Construction audit program Quality Control > Obtain copies of all inspection reports > Confirm all violations or variances have been rectified > Confirm all punch list items have been satisfied > Tour the facility and visually confirm the project is complete > Analyze project financial performance 23

24 Closeout Construction Audit Program Auditor s Site Inspection > Messy or unorganized job sites may hide quality or other issues > Look into the dark corners and covered areas > Listen for excuses > Look at doors, windows and corners for straight lines > Look at wall and flooring finishes for inconsistencies 24

25 Closeout Construction Audit Program Subcontractor s interview > Ask if they were paid on a timely basis > Ask about any rework they may have done > Ask if they proud of this project and would they showcase it in a project portfolio 25

26 Closeout Construction Audit Program Reconcile Construction Allowances > Each allowance should be reconciled independent of each other > Do not comingle the allowances or let them be treated as part of the contractor s construction budget. > Allowances are not free construction budget to be reallocated at the contractor s discretion. 26

27 Construction audit program (cont.) Reconciliation of project expenditures > Obtain all project related financial or accounting transactions that document owner expenditures > Reconcile the sum of the total payments made to each vendor to the various contract amounts as adjusted by change orders > Review itemized payments made to each vendor for each project and vouch a sample of vendor payments to canceled checks other support > Review a sample of invoices paid direct by the owner for services, materials or other costs which may have been the responsibility of the general contractor 27

28 Construction audit program (cont.) Shared Savings Calculations > Review the contract and identify all allowable and non-allowable costs for the calculation > Adjust the contract budget amount for change orders > Adjust the contract budget for non-allowable shared savings > Remove allowances from the contract budget > Adjust the contract budget for scope reductions 28 28

29 From the field Interim Audit The construction of a $27M facility over 20 months is a significant event that can stress project financial controls. The owner asked Baker Tilly to design and implement an interim audit program that included a detailed examination of direct labor costs and burden. Benchmarking the direct labor costs to market standards uncovered labor burden rates 30% higher than the local collective bargaining agreement. This information lead to a billing adjustment of $150,000 and a reduction in labor burden rates for the remaining fourteen month construction period

30 From the field Closeout audit yields $300,000 in findings Baker Tilly was engaged by a private college to examine how their $5M renovation project ballooned to $8M. The school regents upset by a 60% budget overrun needed to understand how their budget had been spent. Baker Tilly examined the project change orders and discovered duplicate change orders, change orders for in scope work, and 40% embedded profit in labor burden with compounded invoice mark ups. The change order audit enabled the regents to negotiate a $300,000 subcontractor credit. 30

31 Additional resources > > > > > > > 31

32 Questions? Please feel free to ask questions in the screen to your right. We will answer as many questions as time permits. 32

33 Contact information Thank you for participating today! Remember CPE certificates will be mailed to you by ACUA Headquarters in about three weeks. Monica Modi Dalwadi Tony Ollmann CPA, CIA, CFE Senior Manager Director

34 Disclosure Required firm disclosure and Circular 230 Prominent Disclosure The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. 34