2. C2 Follow the Capital Risks
Adam Rouse
Managing Consultant

3. Agenda
Understand why capital projects are often left out of annual audit plans
How to determine which capital projects to audit
How to audit capital projects
Lessons learned

4. Why Capital Projects are Often Left Out of Annual Audit Plans

5. How organizations develop annual audit plans…
Risk-based approach (risk assessment)
Changes within organization
Key initiatives
Financial exposure/risks
IT / Cyber security focus

6. IA risk assessment methodology is risk based
Capital spending budgets are increasing
Infrastructure spending is increasing

7. Biggest reason why…… The unknowns / status quo
“We have a GMP or not-to-exceed contract, therefore we have no risk of cost overruns.”
“We hire a construction management firm to monitor and manage the project.”
“We have worked with the same GC and no issues or cost overruns have occurred in the past.”

8. Common reasons why capital projects not audited
Ignorance
Fear/ uncertainty
Territories
Budgets were smaller
False sense of protections
Legal
Contract language
Contract type (lump sum)
How to overcome
Training
Awareness
Utilize 3rd party expert

9. Which Projects to Audit?

10. Risk assessment How to evaluate risks: Size of project in $
Dollar volume of owner change orders
Number of sub contractor change orders
Type of construction agreement (lump sum-low vs cost plus-high)
Over or under budget
Fast track vs non-fast track

11. Higher Risk for Contractor
Contract Type
Firm Fixed Price
Fixed Price w/ Price Adjustment
Cost plus Incentive Fee
Cost Plus Fixed Fee
Time & Materials
Cost Reimbursement
Cost Plus a Percentage of Cost
Higher Risk for Contractor
Higher Risk for Owner

12. Don’t forget to consider
Political risk
Economic risks
Designers risk
Stakeholder risks
Document and information risk
Other risks:
Weather risks
Resource risks
Construction site risks
Supplier risks
Contractor risk
Past experience with contractor
Public relations risk (public project?)
Organizational initiatives

13. How to Audit Capital Projects

14. Why audit? Transparency Recover overcharges Lower capital cost
Reduce project risk
Control capital expenditures
Hold parties accountable

15. Identify any contradictory language
Phase 1: Contract Review
Make sure all essential terms & conditions are in contract to protect owner
Contracts are typically written in the contractors’ favor, not the owner
Identify any contradictory language
AIA contract templates are written by architects
IDEALLY GET INVOLVED BEFORE CONTRACT IS SIGNED
Phase 2: Pay Application Review
Reviewing the project in close to real time
Review monthly pay applications (labor, equipment, rental, overheads, etc.)
Review any & all change orders
Independently track the projects progress & budget
Phase 3: Closeout Review
Performed at the end of a project
The idea is to recheck all figures before retention is paid out
Review the project checklists, obtain all lien waivers, post-project checklist/punch list

16. Auditing steps Obtain & understand contract(s)
Learn roles/responsibilities of each contractor on the job
Obtain all payment applications & change orders
Obtain support for all charges (equipment rental agreement, time sheets, etc.)
Compare data within invoices and support to contract & other support as necessary

17. Other Items Often change orders increase project budget
Contractors do not frequently account for deductions, only additions
Supporting documentation is often not provided or is very vague
Look for: lump sum change orders, higher costs (premium charges), scope overlap, excessive profit, using contingency money

18. Documents to request electronically
Job cost ledger from contractor
Owner and sub contractor change orders
Allowance log from contractor
Architect’s design change order log

19. Allowances
Allowances are customary; however, they need to be reconciled at the end of project
Purpose: put in contract for items that cannot be specifically identified, e.g., kitchen appliances in an office building

20. Labor & labor burdens
Often holidays & vacations are included in profit rate or in labor burdens & get double billed
Burdens should not include: union dues, tool allowances
Sometimes labor burden charges are included in general conditions
Example
If an employee works overtime (1.5x), labor burdens would increase 1.5x. The contractor is not paying more health insurance or payroll taxes for salaried employee, yet would charge you extra

21. Lessons Learned

22. #1
Insurance sub guard
Sub defaulted & claim was submitted
Has to hire another sub to re-work the task (framing)
Ended up costing owner additional $775,000

23. #2
Medical office building: $350m
Questionable costs, fee corrections, sub contractor change orders overages, final pay app overbilling
- Amounted to $7.9m

24. #3
Lump sum contract
Contractor running out of funds
$1m lump sum contract
CO submitted for $1m

25. #4
Fast tracked project
Over 1 million labor hours
$3/hr tool allowance

26. #5
Lump sum contractor paid too early
18 month contract duration
Owner engaged several construction firms to perform same scope of work
Contractor was bonded
Progress payments

27. Adam Rouse // acrouse@bkd.com

29. BKD Thoughtware®