1. Construction Auditing Tuesday, September 15, 2009 4:00-5:15 pm Presented By: John Humphries Kelly Business Consultants 8084 Watson Road, Suite 200 St Louis, MO 63119 (314) 729-1150 www.kellybusconsultants.com

2. INTRODUCTION Effective Audit Detects Analyzes Reports Cost Issues B4 Final Cost Savings Estimate 1 – 3% Project Cost Effectiveness of Money Spent on Audit Efforts

3. AUDIT TYPES Month to Month Audit Advantages More Acceptable to Contractor Preventative Measures »Contract Grey Area »Contract Interpretations Audit Issues Resolved B4 End of Project Higher Recovery Disadvantages Longer Time Frame for Audit

4. AUDIT TYPES End of Project (Catch Up) Audit Advantages Audit Recaps Issues High Level Identifies High Risk Areas of Contract Disadvantages Contractor Dislikes Lower Recovery (Negotiation Loss)

5. AUDIT TYPES Compliance & Management Controls Contract Compliance Bidding Procedures Solid Internal Controls

6. Audit Plan Client Contact Project Background Contractor Experience »Types »Size Contractor Staff Turnover »Field Staff »Corporate Staff Contractor Accounting Software Changes Subcontactors »Out of Business »Replaced

7. Audit Plan Level of Audit 10,000 ft Level Detailed Audit Cost Recovery Contract Compliance

8. Audit Plan Review Construction Contract Identify Contract Type »Lump Sum »Cost Plus A Fee »GMP (Guaranteed Maximum Price) Written to Favor General Contractor (AIA Format) Limits Contractor Scope of Work Vague Contract Language Amendments to Contract Added Identify High Risk Areas/Contract Issues Right To Audit Clause (3 years) Helps Plan Audit Time

9. Audit Plan Review Payment Application Sample Supports Contract Type Contractor Documentation General Conditions Self-Perform Work Contingencies / Allowances Change Orders

10. Audit Plan Audit Risk Analysis Identify High Risk Areas to Owner # Audit Hours Estimated Construction Cost Recovery Construction Audit Proposal

11. Audit Plan Kick Off Meeting Introduction Key Team Members »Owner »General Contractor »Subcontractor »Audit Team

12. Audit Plan Kick Off Meeting Discuss Owner Objectives (Goals) Team Members »Owner Audit/Contractor Matrix »Contract Compliance »Construction Cost Recovery »Verify Actual Construction Cost

13. Audit Plan Kick Off Meeting Project Audit Scope »Project Time Frame »Close Out »Monthly Audit Updates »Audit Report Distribution Owner General Contractor Subcontractor(s) »Contractor/Subcontractor Written Responses Credits Applied on Future Payment Applications Meetings to Discuss Open Audit Issues »Contractor / Subcontractor Documentation Requests Material & 3 rd Party Rental invoices Labor Timesheets Subcontractor Payment Applications Change Orders / Logs Contractor Equipment Rental Schedules

14. Audit Plan Kick Off Meeting Discussion of Key Areas in the Contract »Exhibits, Attachments, Rental Schedules & Bill Rates »Pre-Construction Services »Definition of Costs

15. Contract Types Lump Sum (Stipultated Sum) General Conditions »Lump Sum »Cost »NTE »Change Orders (%)

16. Contract Types Lump Sum (Stipulated Sum) Direct Labor (Less Experienced/Lower Paid Employees) »Low Labor Turnover Materials / Subcontractors »Subcontractors Sub Out Work to Less Expensive Subs »Subcontractor Does Not Complete All Scope Work »Subcontractor Over Bills Percentage of Completion on their Contracts

17. Contract Types Lump Sum (Stipulated Sum) Change Orders »OT / Premium »Out of Scope Work »Additional GC Request »Additional Markup & Additional CM Fees

18. Contract Types Cost (Time & Material) Plus A Fee General Conditions »Cost »NTE »Percentage (Change Orders)

19. Contract Types Cost (Time & Material) Plus A Fee Project Management (Supervision) »Excessive Over Staffing »Overlapping Between Pre-Construction/Construction »Vehicles & Associated Costs »Subsistence »Travel

20. Contract Types Cost (Time & Material) Plus A Fee Direct Labor (More Experienced/Higher Paid Employees) »High Labor Turnover »Possible More OT (Labor Forces From Other Projects) »Lower Skilled Employees (Apprentices) Billed @ Higher Skill Level Labor Rate

21. Contract Types Cost (Time & Material) Plus A Fee Materials »Excessive Ordering/Restocking Fees »Discounts/Quantity Discounts »Contractor Inventory

22. Contract Types Cost (Time & Material) Plus A Fee Subcontractors »Cost/GMP »Lump Sum »Change Orders

23. Contract Types Cost (Time & Material) Plus A Fee Contractors Fee »Fixed »Percentage of Cost of Work

24. Contract Types GMP (Guaranteed Maximum Price) Same as Cost (Time & Material) But has Maximum Amount

25. Cost ( T&M) Plus A Fee /GMP Contract (Example) General Condition Costs Project Costs Shared By All (Temporary) »Project Management (Supervision) »Direct Labor (Clean Up) »Temporary Toilets »Dumpsters/Dump Charges »Hoisting / Other Equipment »Company Vehicles (Trucks) »Fuel »Subsistence/Travel Expenses »Drug Testing »Small Tools/Consumables »Safety »Weather Proofing »Site Trailers »Electricity/Heat/Water Ice/Telephones »Roads »Fences »Security »Signs/Photos »Copies,Postage,Deliveries, Office Supplies/Blueprints

26. Cost ( T&M) Plus A Fee or a GMP Contract Project Management (Supervision ) Staff Examples »Project Director /VP Construction »Project Superintendent »Project Manager »Project Engineer »Project Safety Director »Project Safety Engineer »Project Accountant/Clerk »Project Office Manager »Field Superintendent (GF Carpenter/Laborer) Labor Cost Based on Actual Project Hours @ Bill Rate »Salary (RT,OT,DT) »Benefits »Payroll Taxes/Insurance »Markup

27. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Union Craft Wages (Inclusive) »Vacation »Holidays »Sick Days »Dues

28. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Craft Fringes Benefits »Health/Welfare »Pension/Retirement/401K »Apprentice Training »Vacation/Holiday »PRIDE »Substance Abuse/Market Research »OSHA Van (Electrical) »Miscellaneous Funds & Dues

29. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Payroll Taxes/Insurance »FICA (SS)6.20% $106,800 2009 cap »FICA (MED) 1.45% - No limit »FUTA – 0.80% $7,000 ($56) cap »SUTA - % of $12,600 (MO) Cap »Workers Compensation (State/Co/Craft) »Workers Compensation (Self-Ins) »Workers Compensation (OCIP)

30. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Other »Safety Bonus »Small Tools/Consumables »Service Trucks

31. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Insurance »GL »Umbrella »Other Corporate Insurance

32. Cost ( T&M) Plus A Fee or a GMP Contract Direct Labor Mark Up »Overhead »Profit

33. Cost ( T&M) Plus A Fee or a GMP Contract Materials 3 rd Party Vendor Invoices Contractor Inventory Small Tools < $500 Sales Tax Discounts Mark Up

34. Cost ( T&M) Plus A Fee or a GMP Contract Equipment 3 rd Party Rentals Contractor/Subcontractor Owned Equipment > $500 »Hourly »Daily »Weekly »Monthly Equipment Purchases Mark Up

35. Cost ( T&M) Plus A Fee or a GMP Contract Subcontract Work Lump Sum Cost or GMP Change Orders »Lump Sum/Cost/NTE »Subcontractor Payment Application »Individual Invoice »General Conditions »Work for Another Subcontractor

36. Cost ( T&M) Plus A Fee or a GMP Contract Miscellaneous Permits Builders Risk General Liability / Umbrella Performance Bonds

37. EXAMPLES OF AUDIT ISSUES Duplicate Costs in “Approved” Labor Rates Vacation/Holiday/Sick Days Wrong Fringe Rate for Craft Small Tools/Consumables Safety Bonus (Per Hour) GL/Umbrella Insurance Trucks Home Office Overhead Mark Up

38. EXAMPLES OF AUDIT ISSUES Other Duplicate Billing and Overlapping Costs Labor W/E Dates Vendor Invoices (Old Dates, Fax Copies, Etc.) Subcontractor Payment Applications Change Orders

39. EXAMPLES OF AUDIT ISSUES Typical Audit Findings Excess Payroll Taxes/Insurance »FUTA »SUTA »Workers Compensation Sales Tax on Tax-Exempt Projects Math/Calculation/Formula Errors Equipment Storage (Parking Lot) Small Tools/Equipment/Consumables Non-Documented Billings Excessive Contractor Markups Other Project Costs Non Project Billable Costs Overhead and Corporate Costs Off Site Training/Entertainment Costs

40. EXAMPLES OF AUDIT ISSUE RESPONSES Project Superintendent – “The Labor breakdowns provided in our billing are exported directly from our payroll system so there is no risk for error”. “The timesheets actually have less information than the billing breakdown. The breakdown is our invoice and is the most accurate and comprehensive data”. A previous audit had identified incorrect fringe rates used for billing Carpenter hours resulting in a $390,000 over billing. Also, numerous labor hours identified as billed but not identified on the employee’s timesheet along with overlapping week-ending dates billed. This particular General Contractor rarely bills apprentice hours but other Contractor’s labor force consists of 10-15% apprentices by Craft.

41. EXAMPLES OF AUDIT ISSUE RESPONSES General Contractor – “The Contract doesn’t state I can’t bill it”. Non Project billable items General Contractor – “We did a lot of extra work and were not paid for it”. Almost every GMP Contract, the General Contractor uses this one. General Contractor – “That is not included in the “Bill Rate”. The General Contractor trying to explain vacation and holiday hours were not included in the bill rates for their Administrative Staff. Architect – “We agree it was a duplicate billing, but the Owner Approved it”. The Architect had two different Contract types in their Proposal, (1) Lump Sum and (2) Cost. The duplicate was about $10,000 in reimbursables found in two different areas of Architect work.

42. CLOSE OUT Set Up Cost Out Meeting Audit Issues Discussion/Follow Up to Close Out Open Audit Issues Punch List Items Pending Change Orders »Approved »Not Approved Contractor Backcharges Final GMP / Cost Amount Final Lien Waivers Disputed Change Orders/Work Final Audit Report / Management Letter Recap of All Audit Issues By Category Final Audit Summary Closed Out Recommendations for Changes in Contract Language Results (Recovery) to Cost Ratio

43. SUMMARY Audit Met Owner Objectives/Goals Contractor Expectations Facilities Group Education Revisions to Facilities Contracts Board of Directors Matrix Objectives Met Results (Recovery) to Cost Ratio Questions