Lake County School District s. Construction Audit for. Eustis Heights Elementary School. Executive Summary & Detailed Audit Report

Transcription

1 1 Lake County School District s Construction Audit for Eustis Heights Elementary School Executive Summary & Detailed Audit Report Fiscal Year Completed By: Thomas A. Mock, CIA Date: August 27, 2015

2 2 TABLE OF CONTENTS Cover Page...1 Table of Contents. 2 Executive Summary A. Summary of Findings B. Overview.3 C. Conclusion.. 3 Detailed Audit Report A. Background.4 B. Scope and Objectives 4 C. Procedures and Observations..4-5 D. Findings and Recommendations E. Overall Conclusion....7 Attachments A. Owner Direct Purchase Program 8

3 3 A. Summary of Findings Executive Summary The construction audit for Eustis Heights Elementary School s (EHES) Campus-Wide Addition found several opportunities for improvement that will provide avenues for the School District to strengthen controls and save on future projects. The key areas noted for improvement are as follows: 1. Construction Contract GMP contract language can be strengthened to improve the owner s control and auditability on future projects. The following were found to be either silent or require amending in the construction contract: Mark-up on Mark-up (Fee on top of a Fee) Fixed Costs General Condition Costs Overhead & Profit Fee Labor Burden Construction Field Logs Owner Direct Purchase Program B. Overview Internal Audit finished the review of the Construction Project for Eustis Heights Elementary School that was started in June 2013 and concluded in August The objective and scope of the review focused on the costs charged to the project, along with the controls used to monitor the construction progress. Internal Audit reviewed the construction contract for areas of improvement, and performed interviews with the architect, construction manager and School District s building code official to gain insight into the overall EHES Construction Project process and any recommendations for future projects. C. Conclusion Internal Audit s review found no significant issues in the costing for items selected and reviewed. The recommendations provided from EHES Construction Project audit are made to help the School District: control expenditures, reduce overall costs and improve processes & procedures on future construction projects. Internal Audit has already participated in the development of the next construction contract with Procurement, Facilities and the School Board Legal Counsel to implement the recommendations outlined in this report.

4 4 A. Background Detailed Audit Report Lake County Schools entered into an agreement for Professional Services with AllState Construction, Inc. on May 20, 2013 for $12,640,000 dollars for RFQ #3644BM Construction Manager for Eustis Heights Elementary School (EHES) Campus-Wide Additions, Remodeling and Renovations Project. The Owner's Construction Budget included all Construction Manager s fees, Costs of the Work, and Construction Manager s construction contingencies in the Guaranteed Maximum Price (GMP) contract. This initial agreement did not provide the final Owner's budgeted funds and a separate agreement (Amendment #1) was finalized on September 23, 2013: Amendment #1 - Approve the GMP and provide for the construction of the replacement school for Eustis Heights Elementary School and establish a GMP in the amount of $13,419,150 and provide $1,180,850 for Maintenance to renovate buildings 3, 8, 12 & 13 and demolish the non-renovated existing campus and restoration of the site. Note: Internal Audit did not review Maintenance s $1.18 million Cost of the Work in this audit. The pre-construction agreement with AllState was a Fixed Fee of $56, The Construction Phase General Conditions Fee was also a Fixed Fee of $722, The General Condition Fee was paid as follows: Initial payment of $53, thirty days following issuance of Notice to Proceed by Owner. The balance of $668, was paid proportionally to the ratio of the Cost of the Work on the monthly payment applications as the project proceeded until its conclusion. The architect firm for this project was C.T. Hsu + Associates, P.A. An agreement for Professional Services was signed on April 23, 2012 for $993, to provide Professional Architectural and Engineering Services for the Educational Facilities Project Planning, Programming and Design for Campus Wide Renovations, Remodeling and Additions at Eustis Heights Elementary School. This agreement included programming for Schematic Design, Design Development & Construction Documents, bidding/negotiations and contract administration. B. Scope and Objective The scope and objective of this construction audit was to provide management with assurance that construction costs (Cost of the Work) were in accordance with the GMP Construction Contract. This audit also looked at areas in the construction contract for improvement opportunities that could potentially result in: cost savings, strengthened controls, and efficiencies on future construction projects by the School District. C. Procedures and Observations Pre-construction work on the EHES Construction Project started in June 2013 and continued until the final payment application was received in August Internal Audit initiated the audit by reviewing the construction contract for this project to understand the terms and identify what aspects of the costs Internal Audit should focus on during the audit. The main work for this audit was completed at different times during the construction process: the first review was performed when construction was approximately 25% underway, the second review started when construction reached approximately 50% complete, the third review began when substantial completion was achieved and the audit was finalized when the last payment application was issued. The evaluation and audit work from the contract review and initial analyses helped identify questions that were asked of certain key personnel involved in the construction project when Internal Audit conducted interviews prior to substantial completion. The work covered by Internal Audit included, but was not limited to determining whether the: selection of subcontractors was competitive; subcontractor payments were appropriate; construction costs billed in the job cost ledger were in accordance with the contract terms; monthly payment applications and SOV were performed correctly; markups, fees, and overhead & profit costs are in accordance with the contract terms; contingency usage was appropriately accounted for; construction costs charged to the project were appropriate; and financial reporting and progress reports were adequate.

5 5 Internal Audit worked during the EHES Construction Project with the School District s project manager to: assist with questions concerning costing to the project, audited the Cost of the Work, and reviewed the project s final payment for the close-out of the construction project. Internal Audit completed sample testing for the construction project s Cost of the Work to insure the accuracy of dollars charged to the construction project. The sample testing was accomplished by randomly selecting items to review from the construction project s Schedule of Values (SOV) in the following areas: General Conditions, Subcontracts, and Contingencies. Internal Audit s review found no significant issues in the costing for items selected and reviewed. The close-out of the EHES Construction Project provided a 9.98% savings through the successful management of the project overall by the School District s project manager and construction manager. The construction project s savings were realized in five different areas as follows: 1. General Conditions $ 116, Subcontracts $ 491, Contingency $ 251, Alternates $ 421, Allowances $ 57, Total Savings $ 1,339, Internal Audit verified that the contract Fixed Costs for Pre-Construction and General Conditions agreed to the amount specified in the contract and the final Schedule of Values. Finally, to close the project Internal Audit verified that all lien releases were received and the final Schedule of Values agreed to the final Payment Application and it was properly calculated by the contraction manager. All Payment Applications (#1 thru #23) were approved and signed by the architect, President of AllState Construction Inc., and School District personnel. D. Findings and Recommendations Internal Audit observed areas for improvement in the construction contract language that may lead to future reductions in construction cost. Internal Audit also found through interviews and audit requests that certain documentation was not maintained by the construction manager that are imperative in determining the proper stewardship of the project. The recommendations addressed here are for future construction contracts, and when implemented will help to improve the procedures, enhance controls, management costs and expand the accountability and auditability of the construction project. 1. CONSTRUCTION CONTRACT Findings During the course of the construction audit, Internal Audit noted areas for improvement in the language of the construction contract to enhance its controls and expand its auditability for future construction projects. The following areas were found to be either silent within the contract or an opportunity to be improved: 1. Mark-up on Mark-up (Fee on top of a Fee) 2. Fixed Costs 3. General Condition Costs 4. Overhead & Profit Fee 5. Labor Burden 6. Construction Field Logs 7. Owner Direct Purchases Program Some of these areas constitute open-ended or closed-ended language within the contract that reduce their auditability and/or hindered the ability to reduce costs on the construction project for the School District. While others are meant to provide controls over the project that provide accountability and track activities on the construction site.

6 6 Mark-up on Mark-up The current GMP construction contract language does not address if the construction company can mark-up fees on top of fees. An example would be in the area of self-performed work in the project: Is it acceptable for the contractor to include the 4.25% overhead and profit fee on top of the overhead and profit fee on their self-performed work? This would not be acceptable in any other business transaction and should be properly spelled out as not allowed in the GMP Construction Contract. Fixed Costs The GMP construction contract language provides Fixed Fees for the Pre-Construction and Construction Phases of the project. Fixed Costs do not provide LCS the opportunity to save dollars on the project if cost savings could be achieved in these areas. Internal Audit recommends the contract language be changed to Not to Exceed there by providing an avenue to reduce costs (if possible) and still limit and protect the overall costs to the construction project. General Condition Costs The GMP construction contract should clearly outline what is allowable and unallowable under general condition costs. This can either be added in the contract language or provided as an exhibit to the contract. Overhead & Profit Fee The Overhead & Profit (OH&P) Fee was contracted at 4.25% of the EHES construction project s cost of the work. The GMP contract language connected the 4.25% OH&P Fee to the originally approved signed GMP amount: excluding pre-construction phase fee, construction phase general condition fees and OH&P Fees. The outcome of this resulted in the School District paying 4.80% or.55% over the contracted OH&P Fee of 4.25% on the final cost of the work expended. The appropriate contract language should link OH&P Fee of 4.25% (or less as negotiated) to the final cost of the work and it would be paid on a prorated basis to the cost of the work expended as the work is completed. EHES final cost of the work was $10,365, or $1,339, below the original GMP contract cost of the work amount of $11,705, Labor Burden Future construction contracts should require the construction company show support for their Labor Burden Rate by providing a breakdown of what is included in the overall percentage. This requirement would be an attachment provided by the contractor to support the statutory payroll costs and fringe benefits costs used in the contractor s Labor Burden Rate. Construction Field Logs One of the methods to control the different aspects of a construction project is through Field Logs. Construction projects can have many different types of Field Logs tracking various activities on the construction site such as: submittal log, material delivered log, daily weather log, RFI log, change order log, site visit log, daily construction activity log, labor sign-in/sign-out log, etc. These logs help manage and control the many moving parts on the project. Owner Direct Purchase Program Internal Audit noted from the review this project did not perform Owner Direct Purchases (ODP) to reduce overall costs by eliminating the State Sales Tax for material incorporated in the construction project. Since the last construction project, the State has enacted new procedures that government bodies must follow. Internal Audit flow mapped the new procedures (see Attachment A) for the School District and recommends updating standard operation procedures to ensure proper steps are followed for Florida State compliance under ODP programs. Recommendation Internal Audit recommends Lake County Schools construction contract administrations update future construction contract language in the areas noted above to assist in reducing costs, improvement in accountability and auditability to the School District in future building projects. Management Comment These recommendations have already been incorporated into the draft GMP Contract for future agreements. Facilities, Procurement, Internal Audit and the School Board Legal Counsel, worked together to incorporate the recommendations from the audit along with additional updates to the contract language provided by Procurement and Facilities to the GMP Construction Contract prior to the completion of the audit.

7 7 E. Overall Conclusion The recommendations provided from this construction audit are made to improve the overall accountability and auditability of the construction project with the objective to reduce overall construction costs to the District. Although recommendations in this report will not provide savings on this construction project, future projects will be able to realize savings in the areas noted in this report. Sincerely, Thomas A. Mock, CIA Director of Internal Audit

8 8 Attachment A OWNER DIRECT PURCHASES PROGRAM Start LCS must issue a Certificate of Entitlement to each vendor and the Contractor Construction Manager provides request to purchase material for project Request for Material State Require LCS to Issue Certificate of Entitlement State Require LCS to Issue P.O. Vendor P.O Lake County Schools (LCS) creates and issues P.O to vendor for material Vendor delivers material to the job site State requires LCS to take title of material from vendor Vendor Packing Slip Vendor Packing Slip Vendor Invoice State requires LCS to Assume Risk of Loss or Damage for material Construction Manager sends Packing Slip to Facilities Design & Construction Facilities Design & Construction receives Vendor Invoice and matches to Packing Slip State requires vendor to bill LCS directly Vendor Packing Slip Note: Material purchased using this process, must become a part of the project s structure. FF&E doesn t qualify and should not be purchased using this process for Sales Tax Exemption. Vendor Invoice LCS s Accounts Payable sets up vendor for payment and cuts check for material purchased by LCS LCS issues a check to vendor for payment of material purchased State requires LCS to make payment directly to vendor End