Construction auditing:

Post-Construction

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,

an independently owned and managed member of Baker Tilly International. © 2010 Baker Tilly Virchow Krause, LLP
Introductions

Webinar Moderator
Mary Barnett
ACUA President

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Introductions

Monica Modi Dalwadi Tony Ollmann

CPA, CIA, CFE Senior Manager Director
703 923 8559 608 240 2618
[email protected] [email protected]

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Overview

Today’s topics
> Why are we here today
> Why are you auditing this area
> Financial reconciliation
> Shared savings calculations
> Allowances and credits
> Closeout reporting
> Final walkthrough/punch-list

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Why are we here today

1) Recognize when to conduct a post-construction audit

2) Identify gaps in the owner’s current construction activities
and responsibilities
3) Perform procedures to assess construction controls and
adherence to compliance requirements.
a) Financial reconciliation
b) Shared savings calculations
c) Contingency, allowances, credits
d) Closeout reporting
4) Evaluate how Internal Audit can participate most effectively in
post construction audits

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Construction lifecycle

Insert graphic from word doc

*Architect/Engineer (A/E)

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Construction project lifecycle

Construction progress to date

Design and construction team has been selected (Facilities)

Contracts have been executed (Legal)

Construction is complete (Facilities)

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Owner’s responsibilities

Previously discussed:
Preconstruction activities (prevention)
> Contractor due diligence
> Contracting and negotiation
> Contract risk matrix development

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Owner’s responsibilities (cont.)

Previously discussed:
During the construction phase
> Controlling capital expenditures
> Monitoring change orders
> Scheduling thousands of activities for hundreds of people
> Maintaining an ethical and safe work environment

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Owner’s responsibilities (cont.)

Common construction risk

management myths
> The architect did that…
> Workmanship and quality risk is mitigated with compliance inspections
> Everything is computerized, there are never any arithmetic errors
> That was the contractor’s responsibility
> On time and on budget is a success

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Pros and cons of post-construction audits

Pros
> Easier to quantify the value of the audit
> Requires fewer resources
> Easier to identify policy and procedure
variances

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Pros and cons of post-construction audits
(cont.)

Cons
> Greater risk of memory and document
loss
> Forfeit the opportunity to prevent
something from occuring
> Higher probability of contractor conflict
while negotiating issue resolution

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Selecting a construction project for
closeout or post construction auditing

P.R.E.T.T.Y. attributes should be considered

when evaluating projects for audit
P – Perceived project satisfaction
R – Record keeping
E – Enterprise risk
T – Timing
T – Total construction budget
Y – Your ability to act upon audit findings

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Closeout construction audit expectations

Rules of thumb to follow

Closeout audits typically yield findings in excess of 1% of the
construction budget

> For instance, a $50 million project should identify $500,000 or more in
findings
> Negotiating settlement will return thousands of dollars back to the institution
> This assumes a well-managed project with good project controls. The
findings can be even higher on a poorly managed project.

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Construction audit program development

Key risks
> Charges for non-allowable costs
> Failure to deliver contracted scope
> Lost incentives and credits
> Overcharging for labor and materials
> Over priced change orders

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Construction Audit Program Development

Risks that arise during project closeout

> Owner allowances disappear
> Excess supplies are not properly credited
> Shared savings calculations are erroneous
> Final lien waivers are missing
> Contractor billings exceed contractor’s costs

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Construction Audit Program Development

Risks that arise during project closeout

Final project management tasks are forgotten
> As-built drawings are not delivered
> Equipment warranty documentation and operating manuals are lost
> Project documentation is not completed

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Expectations Management

Lower Assurance Greater Assurance

Compliance Oriented Audit Project Controls Oriented Audit

> Variance from policies and > Everything in a compliance

procedures oriented audit plus
> Major budget deviations > Detailed financial analytics
> Major schedule deviations > KPI variance analysis
> Limited financial analytics > Variance investigation
> Unplanned construction cost > Anticipated construction cost
recovery recovery

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Construction audit program development
(cont.)

Closeout audit program

fundamentals
> Obtain consensus on the audit objectives:
– Compliance effort
– Cost recovery effort
> Reconcile pay applications received with contractor
costs incurred
> Obtain copies of completed final construction punch
lists.
> Confirm visually, with interviews and analytically that
the entire contract scope was delivered.

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Construction audit program

Collect and Log

Construction Compliance
Documents
> As-built drawings
> Final lien waivers
> Final subcontractor pay applications
> Permits and certificates of inspection

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Closeout Construction audit program

Quality Control
> Obtain copies of all inspection reports
> Confirm all violations or variances have been rectified
> Confirm all punch list items have been satisfied
> Tour the facility and visually confirm the project is complete
> Analyze project financial performance

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Closeout Construction Audit Program

Auditor’s Site Inspection

> Messy or unorganized job sites may hide quality or other issues
> Look into the dark corners and covered areas
> Listen for excuses
> Look at doors, windows and corners for straight lines
> Look at wall and flooring finishes for inconsistencies

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Closeout Construction Audit Program

Subcontractor’s interview
> Ask if they were paid on a timely basis
> Ask about any rework they may have done
> Ask if they proud of this project and would they showcase it in a project
portfolio

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Closeout Construction Audit Program

Reconcile Construction Allowances

> Each allowance should be reconciled independent of each other
> Do not comingle the allowances or let them be treated as part of the
contractor’s construction budget.
> Allowances are not “free” construction budget to be reallocated at the
contractor’s discretion.

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Construction audit program (cont.)

Reconciliation of project expenditures

> Obtain all project related financial or accounting transactions that document
owner expenditures
> Reconcile the sum of the total payments made to each vendor to the
various contract amounts as adjusted by change orders
> Review itemized payments made to each vendor for each project and vouch
a sample of vendor payments to canceled checks other support
> Review a sample of invoices paid direct by the owner for services, materials
or other costs which may have been the responsibility of the general
contractor

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Construction audit program (cont.)

Shared Savings Calculations

> Review the contract and identify all allowable and non-allowable costs for
the calculation
> Adjust the contract budget amount for change orders
> Adjust the contract budget for non-allowable shared savings
> Remove allowances from the contract budget
> Adjust the contract budget for scope reductions

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From the field…

Interim Audit
The construction of a $27M facility over 20 months is a significant event that
can stress project financial controls. The owner asked Baker Tilly to design
and implement an interim audit program that included a detailed examination
of direct labor costs and burden. Benchmarking the direct labor costs to
market standards uncovered labor burden rates 30% higher than the local
collective bargaining agreement. This information lead to a billing adjustment
of $150,000 and a reduction in labor burden rates for the remaining fourteen
month construction period.

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From the field…

Closeout audit yields $300,000 in findings

Baker Tilly was engaged by a private college to examine how their $5M
renovation project ballooned to $8M. The school regents upset by a 60%
budget overrun needed to understand how their budget had been spent.
Baker Tilly examined the project change orders and discovered duplicate
change orders, change orders for in scope work, and 40% embedded profit in
labor burden with compounded invoice mark ups. The change order audit
enabled the regents to negotiate a $300,000 subcontractor credit.

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Additional resources

> [email protected]
> www.bakertilly.com/construction-audit-webinar
> http://www.theiia.org/
> https://www.thenaca.org/
> http://www.caacci.org/
> http://rsmeans.reedconstructiondata.com/
> http://www.auditnet.org/

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Questions?

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Contact information

Thank you for participating today! Remember CPE certificates will be

mailed to you by ACUA Headquarters in about three weeks.

Monica Modi Dalwadi Tony Ollmann

CPA, CIA, CFE Senior Manager Director
703 923 8559 608 240 2618
[email protected] [email protected]

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Disclosure

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Prominent Disclosure
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address the specific circumstances of any individual or entity. In specific
circumstances, the services of a professional should be sought.
Pursuant to the rules of professional conduct set forth in Circular 230, as
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