Home Page image

Construction Compliance Studies

Construction Compliance Studies

 

From the desk of Edward Botti

July, 2017

Construction projects are extremely visible, complex endeavors requiring substantial financial commitments. Regardless of public or private funding for the construction project, a comprehensive analysis will go a long way to ensure that the project isn’t costing more than it should.

Recognizing that risk and controlling the construction project enables organizations to secure control over capital spend, minimize overpayments, manage change and increase work productivity to complete the project in a successful manner.

Construction studies must be carefully thought out and arranged according the contract(s) and the key provisions of the contractual terms. However, there are components that are more susceptible for overpayment compared to other components of expense in the project. We call these “red flags”.  A Comprehensive construction study will identify and isolate these issues.

One of the main red flags is labor costs. Sub categories of the labor cost category such as overtime, labor burden, acceleration, self-performed work, are all areas where significant overcharges may occur by the General Contractor (GC) and Sub-Contractors (SC).

Another red flag area is the cost of materials and equipment. These expenses should be verifiable if the contractor maintained proper accounting records of everything that was billed to the project. An analysis will determine if these expenses were accurately charged and in accordance with the contract(s) and lease(s).

Contingencies, allowances, equipment rental charges and unit pricing can also be red flags that should be examined to safeguard that the payments are in compliance with the contractual terms.

The key is to know what to focus on, where the issues are, how the error(s) occurred, and how to fix them.

Many times we see and read organizations marketing pieces that discuss construction costs and studies. They put up fancy web sites, only to focus on the obvious issues in very abstract terms, such as Contract Compliance, Design Drawings, Change Orders etc…   Those are very obvious issues that any second year staff accountant can speak to, but what exactly is the problem, and most importantly, how is it corrected?

Just stating the obvious and putting it out there for all to see, doesn’t really tell us much about it. It’s just uttering the recognizable industry terms and packaging them up for consumption.

There is more to it than that.

Each project is different. Each contractor has their own systems and procedures. Understanding these underlying issues is just as important as understanding why change orders, for example, can be a major contributor to overcharge. I imagine any one of us that takes the time to read this, would agree that recognizing the obvious is not a talent or skill, it’s really just smoke and mirrors, designed to make someone look like they really know what they are doing.

They key is to understand the multiple layers of these categories, not just the name of them, but the multiple components of each one.

To do so, you must start at the beginning of the project, and do a comprehensive examination of the construction process from solicitation of bids to final payment.

Several of our projects have involved issues regarding change orders. So, why are change orders an issue? We have found:

1) Incorrect estimates, obstacles or possible efficiencies that require the customer to deviate from the original plan,

2) Inefficient personnel that is incapable of completing their required deliverables within budget, causing additional money, time, or resources to be added to the project cost,

3) Additional features or options are requested,

4) The contractor has to add work items to the original scope of work at a later time in order to achieve the customer’s demands, and

5) Extreme weather conditions can cause delays or require additional work to complete construction.

It is very important to note that these studies are not limited to just new construction projects but are also applicable to renovations, remodels, demolitions, retrofits, build outs, tenant Improvements, etc.

Many providers of this service will not discuss these other types of construction projects simply because they might not generate the fees they need to make budget.

Relying on a specialist is always the best route.

Selecting the right team of specialist is also a critical decision.

Firms with multiple service offerings across a broad spectrum involving many different departments, partners and managers may very well have a business relationship with the contractors/landlords they are supposed to be examining. Some may not even know about it.

It’s very important to keep in mind that with these jack of all trade firms, there could be a potential for conflicts of interest, which jeopardizes the entire point of conducting a study.

They can’t be everything, to everyone. At some point, you do have to pick a side, you can’t work both sides of the table and really believe in what you do.

The study is relevant across all industries worldwide from health care, entertainment, higher education, government, retail, manufacturing, etc.

Types of projects include schools, casinos, buildings, stadiums, highways/bridges/tunnels, malls, lifestyle centers, hospitals, etc.

The purpose is not just a cost recovery effort, but a cost prevention program as well.

Capital projects should involve qualified analysts prior to contract execution to act as an intermediary between the owner and the GC, and to assist with disputes.

Why do a construction study?

Risk – billions of dollars are spent each year by organizations on capital expenditures,

  • Expertise – deliver independent and objective assurance that company funds are managed correctly,
  • Bandwidth – shortage of resources and sound processes/procedures by project management team to adequately protect assets, and
  • Benefit - improved internal controls throughout the project management functions.

Our approach is broken down in the following phases:

 Identify       Evaluate    Examine    Communicate     Recover

Each phase of the project is just as important as the other phases. All phases have to be diligently applied as a whole process. Short cuts cannot be taken.

Identify- do the work and isolate the potential issue,

  • Evaluate- determine the impact of the issue,
  • Examine- determine the cause and who was responsible,
  • Communicate- divulge every single piece of information with the owner, vet all issues before presentation, and
  • Recover- correct the problem, validate the new controls, secure asset for the owner.

One last somewhat overlooked area is construction projects as part of a Lease transaction. BCC, as experts in Commercial Leasing transactions, supports our clients by reviewing the lease and ascertaining exactly what expenses are/were to be covered by the Landlord and what expense are/were the obligation of the Tenant.

A model is then developed that illustrates the costs actually paid vs. the costs that were agreed to be paid. In many circumstances expenses that should have been included in the costs of the project, had been passed along to the Tenant, resulting in overspend.

Other matters and issues that can lead to overspend include:

Mismanaged stipulated sum and cost plus contracts,

  • Change orders for work that was never performed,
  • Incorrect sales tax in the bids,
  • Cost plus contracts with or without guaranteed maximum price,
  • Duplicate charges,
  • Shared savings splits that were incorrectly calculated,
  • Unreconciled allowances, and
  • Labor billed ups (FUTA, SUTA, workers compensation, insurance, etc.) at full regulatory rates instead of contract specific rates.

Conclusion

Procurement of capital construction assets incorporates high risk undertakings and intricate execution procedures.

  • Construction studies are not an expenditure – they are essential for comprehensive, effective cost management that reduces total project expense.
  • Construction studies are a crucial internal control process to augment capital program effectiveness.
  • BCC involvement provides quality oversight and frequently results in limited cost overruns or overcharges.
  • Avoid conflicts of interests.

Edward Botti

BC Compliance Group, LLC

July, 2017