WiszCo, LLC John L. Wisz CONTRACTING SMARTER: Strategies Designed to Minimize Regular Occurring Audit Issues National Association of Construction Auditors 7th Annual Conference South Lake Tahoe, California September 17-19, 2018 WiszCo, LLC John L. Wisz

John L. Wisz Principal WiszCo, LLC 9446 Hilldale Drive Dallas, TX 75231 (214) 221-3371 john.wisz@wiszco.com www.wiszco.com ContractING SMARTER: Strategies designed to minimize regular occurring audit issues NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

What are we doing wrong? What do we need to do? CONTRACTING SMARTER What are we doing wrong? What do we need to do? NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Making the same mistakes over and over CONTRACTING SMARTER What are we doing wrong? Making the same mistakes over and over What do we need to do? Get smarter NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Why do the same mistakes repeatedly occur? Knowledgeable personnel do not have diverse enough experience Employee turnover: Knowledge and experience leave the organization Employee apathy, laziness and lack of care/attention to detail (unengaged) Inexperienced personnel do have the necessary knowledge or experience Personnel lack awareness or otherwise believe nothing will go wrong (overconfident) Contractor experience, savvy and negotiation skill outweigh Owner skills NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Procedurally Contractually Decision Making (Strategic) How do we get smarter Procedurally Decision Making (Strategic) Action Taking (Doing something) Engaging (Involved, paying attention to detail) Contractually Refinement and enhancement of contract language to minimize loopholes/risk, reduce ambiguity and to strengthen those areas that are problematic in nature NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Procedurally – getting smarter Procurement Procedures Delivery Method (Fast Track; Competitive Bid/Proposal; Negotiate, At-Risk; Design-Build) Bidding at the subcontract level; Buyout Tracking Negotiating (resist the temptation to believe everything that is said) Use pre-contract audit procedures to verify data prior to agreeing to same in contract SOV considerations (Prime and Subcontract). Ensure narrative matches values. Include a contract value summary in each subcontract that reconciles to award amount Accounting and Project Control Requirements (See AIA Audit Provision) – Evaluation? Determination of compensation parameters Contract type (basis of Compensation): Lump Sum; Cost Plus; GMP Compensation methods for Labor; Insurance; Bonds and other Costs Fee Determination (Fixed and/or percentage and related amounts) Contingency and Savings considerations Implementation of effective Contract Administration procedures Payment Application Reviews Change Order Reviews NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Accounting and control systems AIA A102 and A133 Contract Excerpt: § Article 11 and 6.11 Accounting Records (Audit Provision) The Contractor/Construction Manager shall keep full and detailed records and accounts related to the Cost of the Work and exercise such controls as may be necessary for proper financial management under this Contract and to substantiate all costs incurred. The accounting and control systems shall be satisfactory to the Owner. What things are conspicuously absent from the above paragraph? Deficiencies in Systems and Record Keeping: Systems and Reports and non-existent Weak (not sufficiently robust) – Data capability and reporting is functionally limited Cannot readily or easily run custom reports or queries Cannot readily or easily download data into desirable formats (such MS Excel) PDF Images vs. Raw Data (Relational database characteristics) Payment Applications and Changes Orders NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Compensation Methods - Labor Raw Labor and Labor Burden: Lump Sum (or included within LS General Conditions) Agreed-Upon / T&M Rates (fully loaded) Actual Cost Basis Hybrid: Actual Raw Labor + Agreed-Upon Burden %’s Direct Personnel Expense (DPE) or Salary Cost x Multiplier What is subject to audit? What should be eliminated? Confusion and/or ambiguity Complexity Hidden Profit What should be Considered?  PRE-CONTRACT AUDIT PROCEDURES NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Contingency - Considerations What is it for (intended purpose)? How does it get created? Is it included in all contracts? Owner vs Contractor Contingency – What’s the difference? What requirements should be included in the contract? Use and sources of funds (allowable vs. unallowable) Approval requirements (Change Order, LIA, Payment Application, other) Disposition What should be done with Unspent Contingency (at conclusion of project)? NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Savings - Considerations What are Savings and are they desirable? Should Owners split Savings with their Contractors? Yes/No? How? Why? Are all types of Savings splittable? When should they be split? How are Savings achieved? Means and methods, efficiency and effectiveness Savings achieved through excessively high, unrealistic or inaccurate budgets Buyout Savings Unspent Contingency Unspent Allowances Cost saving ideas, value engineering, scope changes What can be done to mitigate risk in this area? NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Insurance & Bonds - Considerations OCIP; CCIP; Contractor/subcontractor provided – What is best approach? Payment & Performance Bonds (Prime & Subcontract). Necessary? Desired? Subcontract Default Insurance (SDI) or “Subguard” – Better than P&P Bonding? Compensation methods Fixed Cost Fixed Rates Actual Cost (subject to audit) Experience modifiers, discounts, retrospective-rated plans, losses, risk transfer fees, administrative costs DO NOT agree to unaudited fixed rates without some form of due diligence. Having specialized experience of knowledge in these areas is a must. NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

contractually – getting smarter Areas generally needing attention: Right of Audit provision Change Order Pricing and Administration Defined Costs vs Actual Costs General Conditons/General Requirements Labor and related Labor Burden Trades (including Self-performed work and Cost + Fee arrangements) Insurance and Bonds Contingency and Savings Fee considerations (Fixed or Percentage) Used for determining Change Order Values (Prime and Subcontracts) Applied to Cost of Work Circular calculations NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Philosophy 101 NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018

Conclusion and wrap up WiszCo, LLC QUESTIONS? John L. Wisz THOUGHTS? COMMENTS? John L. Wisz Principal WiszCo, LLC 9446 Hilldale Drive Dallas, TX 75231 (214) 221-3371 john.wisz@wiszco.com www.wiszco.com NACA 7th Annual Conference South Lake Tahoe September 17 -19 , 2018