A penny saved is a penny earned. And a process for finding and preventing wasted dollars on major construction contracts is worth its weight in gold. It’s called construction auditing.
These days, nearly all major private construction contracts and many large public works contracts are Guaranteed Maximum Price (or “G-Max”) contracts. This legal agreement means that the contractor is paid for the actual construction cost as allowed by contract up to a guaranteed maximum cost. It is common for these large construction projects to span many years, involve multiple entities, and cost tens or hundreds of millions of dollars. With such complex projects, accounting errors, miscategorization of costs, misapplication of agreed-upon rates, and less than diligent adherence to contract-allowable charges can add up to large sums of money being wasted or misappropriated.
Fortunately, virtually all G-Max and Cost-Plus contracts include a construction auditing provision, which requires the contractor to maintain backup records for all costs charged to the Owner and allows the Owner to audit the contractor’s records.
Additionally, on Fixed Price contracts, certain line items must be stated as “allowance” items, and the Contractor is required to keep these costs separate from other contract work and provide an accounting for the actual expenditures. Allowance line items are generally subject to Owner audit just as G-Max or Cost-Plus agreements, even though they are embedded in fixed-price agreements, and are commonly misadministered by the contractor.
Given the large amount of money at stake, it is surprising that not all Owners actually follow through with performing audits and may be inadvertently over-paying—in some cases substantially—on their construction contracts.
The following are a few tips from Patti Campbell, a construction auditor, based on her 35 years of performing audits on thousands of contracts:
- On large projects, the savings identified by a professional audit of construction costs will almost always exceed the cost to perform the audit.
- It is extremely rare to identify situations in which an Owner has been under-charged by a contractor.
- Owners should not wait until the end of the project to perform an audit. Having an audit performed early in the project is very cost-effective and ensures that the contractor is keeping records in an acceptable fashion. It also lets the contractor know that someone is actually
looking, which sets the tone and expectations for accountability for the rest of the project.
- The better the contract, the more effective the audit in protecting the Owner’s interests.
In summary, without tight financial controls and construction auditing processes in place for your major construction project, you’ll never know how much hidden treasure—by which we mean your money—is buried in a mountain of paperwork. A good audit provision in the construction contract and a well-executed audit program can result in substantial savings. This is one of many times when it really pays to bring in the experts.
The most common issues found in the auditing process are:
- Contractor overcharging for general conditions costs.
- Contractor charging for labor costs at rates higher than their actual cost of labor.
- Pass-through by the contractor of home office overhead charges not allowed under the contract.
- Charges to the Owner for repair and re-work costs not allowed under the contract.
- Payroll increases beyond what is allowed under the contract.
- General contractor “buying out” change order work from subcontractor after Owner has agreed to the change order cost, with the GC pocketing the difference.
- Team-building charges, parties, social events and marketing costs.
- Auto-registrations, automobile and equipment maintenance costs, and excessive equipment rental charges.
This article was originally published by Xpera Group which is now part of The Vertex Companies, Inc.