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5/2/2018Health CareAuditingConstructionCapital Projects 101May 2, 20181
5/2/2018TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinarAnswer polls when they are providedComplete group attendance formGroup leader sign bottom of formSubmit group attendance form to training@bkd.com within 24 hours of webinar If all eligibility requirements are met, each participant will be emailed theirCPE certificate within 15 business days of webinarAdam RouseManaging Consultantacrouse@bkd.com2
5/2/2018Agenda What is construction audit? Who benefits from construction audit? Contract types & risks Common areas of cost recoveryWHAT IS CONSTRUCTION AUDIT?3
5/2/2018CONSTRUCTION AUDIT IS Designed to be costprevention tool Assists with contractor &owner disputes Designed to level playingfieldTrue objective of hiringan independent thirdparty construction auditfirm is to protect theowner’s best interestsCONSTRUCTION AUDIT IS NOT Basic accounts payablereview Legal review Cost recovery review Safety review Checklist audit/reviewObjective is not todamage the relationshipbetween the owner &contractor4
5/2/2018 Make sure all essential terms & conditions are in contract to protect owner Contracts are typically written in the contractor’s favor, not the owner Identify any contradictory language AIA contract templates are written by architectsPhase 1:Contract Review IDEALLY GET INVOLVED BEFORE CONTRACT IS SIGNEDPhase 2: PayApplicationReviewPhase 3:CloseoutReview 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 project’s progress & budget 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 listWHAT WE DO Sit at table as an advocate for the owner Review bids from subs & verify no duplicative scopes of work Independently track project progress & budget Review insurance (subguard, OCIP, CCIP, bonds) Review contractor & subcontractor qualifications5
5/2/2018HIGH-RISK AREAS Change orders Duplicate markup, often contractor does not include deductive change order if scope ofwork changes, change order support not adequate, contractor has less incentive to keepcost low, verify change order [scope] is appropriate compared to original scope of work Material costs Material charged to/from another job, storage charges, excessive wait times or deliverycharges Labor burdens Rates not updated annually, labor rates not in contracts, unemployment tax charged aftermax reached, components of labor burdens being directly charged in invoices, movinglabor from one job to another that has available budget or more favorable terms, chargingfor holidays, PTO, etc.6
5/2/2018HIGH-RISK AREAS General conditions Allowable vs. unallowable: verify costs hitting general conditions are OK per contract Usually included in GC: job site trailer & utilities winter conditions small tools charge project manager & principal labor charges administrative & overhead costs layoutyard & construction material storage accounting & project reporting Usually NOT included: insurance general foremen & supervisory costs pickup trucks& transportation construction material purchasing & transportation computer & officeequipment Equipment rental Compare rental rates to a published guide, verify with contractor what is included in rentalrates (some rates include warehouse staff, operator, fuel, oil, maintenance, etc.), verifyequipment charged is appropriate based on project scheduleHIGH-RISK AREAS Self-performed work under a GMP contract Established labor & overhead burden rates Shared-savings calculation Self-performed work should be competitively priced Bidding Pricing Reporting7
5/2/2018CONSTRUCTION PROJECT tionManagerOwnerArchitectConstructionAuditor Role Properly plan project Select a construction manager or generalcontractor (or both) Manage finances Monitor & approve change orders8
5/2/2018ConstructionAuditor Role Represent owner’s best interest Review pay application detail Involved with the change order process Meet with contractors & owner monthly toclear up issuesCONTRACT TYPES & RISKS9
5/2/2018CONTRACTS American Institute of Architects (AIA) wrote a commonlyused contract template Pitfall: these contracts were written by architects The owner is not well represented in these contracts AIA contracts can be used; however, they should onlybe used as a starting point Right to audit clause (commonly omitted in lump sum &fixed-price contracts)CONTRACT TYPES Time & material Guaranteed max price (GMP) Unit price Lump sum (fixed price)Not all contractsare createdequal. There areadvantages &disadvantages toeach method Cost plus fixed fee10
5/2/2018TIME & MATERIAL - AUDITING Contractor can make more money bysubstituting materials Contractor could overbill Costs could be inflatedGUARANTEED MAXIMUM PRICE (GMP)AdvantageDisadvantage Owner can benefit from costsavings Contractor often thinks theGMP amount is their budget Protects owner from large increases Contractors sometimes inflateprices on a GMP contract Burdens owner with moreproject management11
5/2/2018UNIT PRICEAdvantageDisadvantage Works well on clearly definedtasks (no unknowns) Doesn’t work well for largerprojects. Works better forsmaller task items, e.g., layingsod, installing light fixtures,etc. Quicker execution if pricesagreed in advanceLUMP SUM (FIXED-PRICE)AdvantageDisadvantage Aware of project cost for cashflow & budgeting purposes If costs increase, contractorscan cut corners to savemoney, thus sacrificing quality Less administrative burden Budget typically doesn’tincreaseKeep in mind that contractors build in extra profitswhen developing a lump sum to account for anycontingencies. If none arise, the owner could havepaid more for the work under this contract method12
5/2/2018COST PLUSAdvantageDisadvantage Helps execute projectsquicker while the design isstill being finalized Requires a bit more workfrom the owner to analyzeinvoices for accuracy Can add a cost-savingsclause to split savings Despite having a sharedsavings clause, the owner isgiving the contractor extramoneyCONTRACTING DELIVERY METHODS Competitive bid Construction manager at risk (CMAR) Direct contracting Design build Design-bid-build13
5/2/2018CONSTRUCTION AUDITOR’S ROLE Pre-construction Review pricing structure Review contract terms & conditions Add strong audit clause During construction Review monthly pay applications for contract compliance Review change orders (including scope) Post-construction Review lien waivers Review punch list Review allowances Independently calculate any shared savingsCOMMON AREAS OF COSTRECOVERY14
5/2/2018CONSTRACTOR PROFIT RATES According to ConstructionFinancial ManagementAssociation, the average pretaxnet profit is 1.4% to 2.4% forgeneral contractors & 2.2% to3.5% for subcontractorsCHANGE ORDERS Change orders often increase the project budget Contractors do not frequently account for deductions, onlyadditions Supporting documentation is often not provided or is very vagueLook for: lump sum change orders, higher costs(premium charges), scope overlap, excessive profit,using contingency money15
5/2/2018ALLOWANCESAllowances are customary;however, they need to bereconciled at the end ofprojectPurpose: put in contract foritems that cannot bespecifically identified, e.g.,kitchen appliances in an officebuildingINSURANCEBonds CCIP OCIP Builder’s risk Subguard Others Policies can include rebates to contractor Sometimes insurance costs are included in overheadrates & are directly charged16
5/2/2018CASE STUDY – SUBGUARD INSURANCE Facts General contractor (GC) had bond with owner GC took out a subguard policy on all subcontractors(charged owner for policy) A sub defaulted, GC filed a claim against subguard policy,charged owner the deductible GC then charged owner to redo the work with a new sub17
5/2/2018MATERIALS Contractor often receives rebates or discounts forprompt payment Compare as-built quantity take-off with actual number ofitems purchased Review invoices & material tickets Know how you are being charged (know the specificunit type)LABOR & LABOR BURDENS Often holiday & vacations are included in profit rate or in laborburdens & get double billed Burdens should not include: union dues, tool allowances Sometimes labor burden charges are included in generalconditionsExampleIf an employee works overtime (1.5x), labor burdens would increase1.5x. The contractor is not paying more health insurance or payrolltaxes for that employee, yet would charge you extra18
5/2/2018EQUIPMENT RENTAL Contractor owned Determine what is included in rental rates (operator,maintenance, gas, fuel, oil, warehouse picker) Cap rental rates Rented from third party Obtain rental agreements Verify rate being charged (daily vs. weekly vs. monthly) isappropriateNUTS & BOLTS OF CONSTRUCTION AUDITThink of constructionaudit services as part ofthe construction job itselfsuch as projectmanagement, architect,engineering, etc.EngineerConstructionAuditThe ProjectArchitectProjectManager19
5/2/2018MISTAKES TO AVOID Allowing the architect or contractor to write the terms ofthe contract Do not rely on the same construction firm for eachproject without consideration for competitive feesQuestions?20
5/2/2018CONTINUING PROFESSIONAL EDUCATION (CPE)CREDITBKD, LLP is registered with the National Association of State Boards ofAccountancy (NASBA) as a sponsor of continuing professionaleducation on the National Registry of CPE Sponsors. State boards ofaccountancy have final authority on the acceptance of individualcourses for CPE credit. Complaints regarding registered sponsors maybe submitted to the National Registry of CPE Sponsors through itswebsite: www.nasbaregistry.org.The information contained in these slides is presented by professionals for your information only & isnot to be considered as legal advice. Applying specific information to your situation requires carefulconsideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting onany matters covered.CPE CREDIT CPE credit may be awarded upon verification of participantattendance For questions, concerns or comments regarding CPE credit,please email the BKD Learning & Development Department attraining@bkd.com21
5/2/2018Thank You!Adam Rouse Managing Consultant acrouse@bkd.comBKD Thoughtware 22
CASE STUDY - SUBGUARD INSURANCE Facts General contractor (GC) had bond with owner GC took out a subguard policy on all subcontractors (charged owner for policy) A sub defaulted, GC filed a claim against subguard policy, charged owner the deductible GC then charged owner to redo the work with a new sub
