9/14/2015 BEST PRACTICE IN YOUR CAPITAL IMPROVEMENT PROGRAM BEST PRACTICES

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1 BEST PRACTICE IN YOUR CAPITAL IMPROVEMENT PROGRAM JOHN M. CROY NATIONAL SENIOR DIRECTOR CONSTRUCTION, MCGLADREY LLP OCOTBER 1, 2015 BEST PRACTICES Definition: Process or method that, when executed effectively, leads to enhanced project performance Industry Standards BEST PRACTICES: FEDERAL GOVERNMENT Truth in Negotiations Disclosure Statements False Claims Act Pre-Award Survey: Accounting System 1

2 Pre-Award Survey: Accounting System System should describe: Segregation of preconstruction and construction costs Segregation of allowable and unallowable costs Chart of accounts map to the payment application Reconciliation of job to amount invoiced CONSTRUCTION RISKS Schedule Costs Specifications CONSTRUCTION PHASES Preconstruction Construction Close Out 2

3 PRECONSTRUCTION PHASE: DELIVERY METHODS Stipulated Sum: Competitive Bid (Design Bid Build) Cost Reimbursable: (Negotiate) Design Build (Stipulated Sum or Cost Type) Unit Price (Competitive Bid or Cost Type) PRECONSTRUCTION PHASE: RISKS Poor contractor selection Poor contract language Over paying costs PRECONSTRUCTION RISKS: CONTRACTOR SELECTION Company prior experience Key employee experience Financial capability Accounting system Delivery Method 3

4 PRECONSTRUCTION PHASE: BEST PRACTICES Review and maintain contractor qualifications Award process Evaluation committee Standard evaluation criteria Contract negotiations Accounting system PRECONSTRUCTION: COST AND PRICING ANALYSIS Fringe Benefits Insurance Bonds Fee PRECONSTRUCTION PHASE: ABUSE Labor rates Insurance and bond rates Computers Vehicles Home office costs General conditions 4

5 PRECONSTRUCTION: PAPA BEAR PRECONSTRUCTION PHASE: AUDIT INVOLVEMENT Review process for contract selection Participate in cost and pricing analysis Review contract terms CONSTRUCTION PHASE: RISK Schedule Specifications Costs 5

6 CONSTRUCTION RISK: SCHEDULE Risks: Delays No Liquidated Damages Test: Jobsite Walkthrough critical path Monthly updates CONSTRUCTION RISKS: SPECIFICATIONS Risks: Quality Materials Errors and omissions Testing: Jobsite walkthrough Compare to specifications - experience CONSTRUCTION SPECIFICATIONS 6

7 CONSTRUCTION RISKS: COSTS Risks: Unallowable costs Change orders Contingencies Allowances CONSTRUCTION RISKS: COSTS Testing: Compare proposal to actual costs Cost invoiced reconcile to cost incurred (job cost) Labor (5%) Insurance (2-5%) Subcontracts (85-90%) Other: General conditions CONSTRUCTION COSTS: OVER BILLINGS 60% 50% 40% 30% CY CY % 10% 0% Labor Overbilled Cost Fee Other Insurance Subcontracts 7

8 CONSTRUCTION PHASE: ABUSE Self-performed work Terminated subcontracts (red flag) Close relationships Change orders (3%-10%) Related party transactions Newly formed entities Low fee Stored materials CONSTRUCTION PHASE: AUDIT INVOLVEMENT Interim audit: 30%-50% Quarterly semiannually Monthly pencil draws CLOSE-OUT PHASE: RISKS Same as construction phase Quantum merit Estoppel Sitting on money Deliverables Vendor payments 8

9 Close-Out Audits: Abuse Same as construction Failure to provide deliverables Under paying subcontractors CLOSE-OUT PHASE: AUDIT INVOLVEMENT See construction phase Final accounting and reconciliation Final lien waivers Final deliverables AUDIT APPROACH Fraud: Where did they abuse? Where did they make the money? 9

10 Behavioral Red Flags Close Association with Vendors ($410,000) Wheeler Dealer Attitude ($405,000) Excessive Pressure ($388,000) Control Issues ($250,000) * Per The ACFE s 2010 Report To The Nations On Occupational Fraud and Abuse QUESTIONS? CONTACT INFORMATION John M. Croy McGladrey LLP (RSM) 501 North 44 th Street Suite 300 Phoenix, Arizona john.croy@mcgladrey.com