The Practitioner s Blueprint to Construction Auditing Ron Risner, MBA, CIA, CCA, CCP 2012, The IIA Research Foundation.

Transcription

1 The Practitioner s Blueprint to Construction Auditing Ron Risner, MBA, CIA, CCA, CCP 2012, The IIA Research Foundation Table of Contents List of Figures Executive and Preface Acknowledgments About the Author UNDERSTANDING THE BASICS OF THE CONSTRUCTION INDUSTRY Chapter 1: Laying the Foundation for Learning Construction Auditing: Major Risks and Key Construction Terms Audit Perspective to Common Construction Risks Key Definitions Chapter 2: Construction Agreements: Understanding Their Attributes and Risks and How the Agreement Affects the Audit Types of Construction Agreements Lump Sum Agreement Reasons to Audit a Lump Sum Agreement Cost Plus with a Guaranteed Maximum Price Time and Material Cost Plus a Fee Unit Price Design-Build Alternative Project Delivery Additional Perspective Regarding Contract Types Chapter 3: How Construction Projects Are Organized and How the Approach Impacts the Audit The Traditional Organizational Approach (a.k.a. Design-Bid-Build) The Impact of the Traditional Approach on a Control or Cost Audit Construction Manager at Risk Approach Design-Build Approach Multiple Prime Contractor Approach Program Manager Approach Construction Personnel Disciplines

2 PLANNING AND PERFORMING CONSTRUCTION AUDITS Chapter 4: Types of Construction Audits Determining the Type of Audit Control Review Cost Review Combined Control and Cost Review Reviewing an Organization s Construction Department Change Management Review Review of Financial and Budgetary Reporting Project Closeout Review Review of the Terms and Conditions of the Construction/Architect Agreements Claim Review What a Construction Audit Is Not Chapter 5: Audit Timing: Pros and Cons of When to Commence an Audit The Timing of a Control Review The Timing of a Cost Review for a Lump Sum Agreement The Timing of a Cost Review for Other Types of Construction Agreements The Timing of a Review of Your Organization s Construction Department The Timing of a Change Order Review The Timing of a Review of Financial and Budgetary Reports The Timing for Assisting with a Claim Availability of Audit Resources Chapter 6: Choosing the Right Project to Audit, Building a Risk Matrix Model Risk Matrix Attributes Using the Matrix: A Case Final Analysis of the Case Final Assessment of the Matrix Chapter 7: Planning and Conducting the Audit Using the Contractor s Payment Application as a Starting Point Scoping Out Project General Information from the Contractor s Payment Application Scoping Out Project Financial Information from the Payment Application What the Payment Application Does Not Tell You Construction Audit Timeline Chapter 8: Reviewing the Financial and Budgetary Health of a Project to Help Tailor the Audit Scope Timely Comprehensive Variances Estimate to Complete (ETC) Expected Final Cost (EFC) Unacceptable Financial Reporting

3 Responsibility for Preparing the Financial Report Chapter 9: Performing an Efficient Audit: Effective Use of Information Technology How to Start an Efficient Review Documents to Request in Electronic Form Rework Punch-list Items Duplicate Change Orders Duplicate Payments Disposition of Allowances and Alternates Disposition of Value Engineering Sampling Vendor Payments Verifying Payment to Owner Vendors Review of Subcontractor Costs Review of Subcontractor Change Orders Review of Labor and Labor Burden Costs THE ARCHITECT AND THE DESIGN INDUSTRY Chapter 10: Planning and Design: The Role of the Architect and How to Audit Architectural Costs The Planning Phase The Architect s Major Role: Providing Four Basic Design Services Design Risk Impact of Design Risk on the Audit Fast-track Projects Basic Services to be Provided as Part of the Architect Agreement Optional Services The Architect s Fee Design Change Orders Conducting a Process Audit of Design Services Conducting a Cost Audit of Design Fees AUDITING CONSTRUCTION COSTS Chapter 11: Preconstruction Costs Defining Preconstruction Costs The Materiality of Preconstruction Costs The Preconstruction Agreement Classifying Preconstruction Activities Controlling Preconstruction Costs Auditing Preconstruction Costs Chapter 12: General Condition and General Requirement Costs Vernacular Used for General Condition Expenses The Materiality of General Condition Costs Auditing General Condition Costs Based on Type of Construction Agreement

4 Timing of the General Conditions Audit Documenting Reimbursable Costs Controlling/Auditing General Condition and General Requirement Costs Nonreimbursable Costs Controlling General Condition or General Requirement Costs Ex Post Facto Chapter 13: Subcontractor Costs (Part 1) Understanding Privity The Impact of Privity on the Audit Cost Plus Subcontract Agreements Bid and Award Process Obtaining Copies of Subcontracts Validating the Schedule of Values Other Audit Steps Revolving around the Schedule of Values Chapter 14: Subcontractor Costs (Part 2) Obtaining Subcontractor Monthly Payment Applications Obtaining Subcontractor Lien Waivers Auditing Subcontractor Payment Applications Looking for Allowances and Alternates Subcontractor Value Engineering Mobilization and Demobilization Costs Chapter 15: Subcontractor Costs (Part 3) Subcontractor Change Order Nomenclature Retention Subcontractors Hired Directly by the Owner Chapter 16: The Most Significant Risk on a Project: Change Orders Defining a Change Order The Genesis of Change Orders Why Change Orders Are Risky When Change Orders Become Excessive Owner Change Order Log as a Financial Control Controlling Change Order Costs Lump Sum Subcontractor Change Orders Audit Scope Compilation of Overbillings Chapter 17: Contractor Self-performed Work Self-performed Work: Contractors Acting as a Subcontractor How Contractors Use Information to Obtain Self-performed Work Controlling the Cost of Self-performed Work Auditing Self-performed Work

5 Chapter 18: Labor and Labor Burden Costs Relevancy of the Audit Depends on the Type of Construction Agreement Disclosure of Labor Costs Auditing Labor Costs Disclosure of Labor Burden Costs Auditing Labor Burden Costs Auditing Labor and Labor Burden Costs in Change Orders Temporary Labor Costs Chapter 19: Equipment Rental Costs Types of Equipment Logistical Sources Controlling Equipment Rental Costs Auditing Equipment Rental Costs Subcontractor Equipment Rental Costs Chapter 20: Insurance and Bonding Costs Liability Insurance Workers Compensation Insurance Builder s Risk Insurance Alternative Insurance Programs Auditing Traditional Insurance Programs Auditing Owner-controlled or Contractor-controlled Insurance Programs Surety Risks Subguard Controlling Surety Costs Auditing Surety Costs Chapter 21: Owner Construction in Progress (CIP) Accounts Preponderance of CIP Costs Auditing CIP Costs Keyword Searches Reviewing CIP Invoices Construction Management or Owner s Representative Costs AUDITING CONSTRUCTION PROCESSES, POLICIES, PROCEDURES, AND CONTROLS Chapter 22: Monitoring the Progress of a Project: The Monthly Progress or Status Report Narratives Project Cost Schedule Change Order Log Contractor Accounting and Financial Logs and Reports Contractor Field Logs and Reports Aerial or Site Pictures

6 Chapter 23: The Contractor and Subcontractor Bidding and Award Process Bid and Award of Subcontracts by the Contractor Capital Expansion Approval Process Capital Funding The Delivery System Contractor/Subcontractor Qualification Process Request for Proposal Process Question and Answer Period Clarifications and Assumptions Exclusions Competitive Bidding Sealed Bid/Bid Opening Evaluation Process and Criteria Other Audit Considerations Chapter 24: Controlling the Five Types of Contingency Funds Contingency Defined Determining the Contingency Budget Contingency as a Risk Controlling and Auditing Contingency Usage Chapter 25: Contractor Accounting and Financial Logs and Reports Value Engineering Defined Value Engineering Log Auditing Value Engineering Allowances Defined Allowance Log Auditing Allowances Alternates Defined Alternate Log Auditing Alternates Permit Log Sales Tax Savings Records for Not-for-Profits Business Equipment, IT Equipment, and Tools Purchased Log Chapter 26: Field Logs and Reports Request for Information Log Submittal Log Drawing Revision Log Equipment Log Materials Received Log Back-charge Log Weather Report Log Daily Activity or Field Log Nonconforming Work Log Labor Sign-in/Sign-out Sheets

7 Long Lead-time Report Quality Assurance and Quality Control Reports Audit Activities Chapter 27: Quality Assurance and Quality Control Parallel with Sarbanes-Oxley Quality Assurance and Quality Control Defined Responsibility for Quality Testing and Inspection An Auditor s Perspective of Quality Assurance and Quality Control Chapter 28: Your Organization s Construction Policies and Procedures (or Absence Thereof) Should There Be Policies and Procedures? The Case for Adopting Policies and Procedures Possible Chapters of a Policies and Procedures Manual Implementing the Policies and Procedures Manual A Case for a Minimum Number of Policies and Procedures Chapter 29: The Project Closeout Process Main Components of the Closeout Process Controlling the Closeout Process Audit of the Closeout Process OTHER CONSTRUCTION AND AUDIT CONSIDERATIONS Chapter 30: Controlling Costs by Controlling the Construction Agreement s Terms and Conditions: A Form of Financial Value Engineering Understanding the Consequences Getting Started Effectiveness Depends on the Type of Contract Being Used Business Terms and Conditions That Can Be Controlled A Final Word about the Legal Implications Chapter 31: Construction Claims and the Auditor s Role The Nature of a Claim Conditions That Lead to Contractor Claims Common Types of Contractor Claims Conditions That Lead to Owner Claims Common Types of Owner Claims Invoking Audit Rights as an Alternative to Settling Claims

8 Chapter 32: Other Important Construction Risks Safety Market/Economic Risks Governmental Risks Lack of Team Chemistry and Partnering Contract Administration Risk Chapter 33: Mega, Giga, and International Projects Different-sized Projects with Different Delivery Systems Project Management versus Program Management International Federation of Consulting Engineers (FIDIC) Construction Customs APPENDICES Appendix A-1: Interview Questionnaire for the Architect Appendix A-2: Interview Questionnaire for the Contractor, Owner, Owner s Representative, or Program Manager Appendix B-1: List of Documents Needed/Client Assistance List: Architect Appendix B-2: List of Documents Needed/Client Assistance List: Contractor Appendix B-3: List of Documents Needed/Client Assistance List: Owner Appendix C: General Contractor s Final Payment Checklist Glossary of Construction Terms