Auditing a cost plus construction contract: A good business practice

You have just received a project requisition for $400,000 from your contractor and you have 10 days to review and pay or he is walking off the job. The requisition is as thick as a phone book and includes everything from cell phone bills, a bundle of 2x4's and marble that is being stored off-site. Some of the items have the construction manager approval, but others do not. Your boss wants to know if you are ready to approve the funding. How do you know if the information provided is complete and in accordance with the contract? How does one maintain control when at times the flood of information can be overwhelming? Once a construction project begins, this fire drill of approving and paying the construction draw happens monthly and starts to breathe a life of its own. To the project executive, the money spent on a monthly basis becomes almost a secondary issue. While support may be available for the trades, all too often, the last thing the project executive has time for is to explain an AMEX statement without any description of the charge that hit general conditions. To the project executive, the focus is time and quality of construction. The weather, back-ordered materials, and a rogue sub-contractor who is fighting over a change order become his enemies. We financial types are faced with a different set of audit concerns. * How do you know that the amount being charged is in accordance with the contract? * Do I have all of the back-up required to support the draw and in particular general conditions? * Do we fund an allowance without support? * Where are the time sheets and how did they calculate burden? These are just a few of the questions that one may ask when being tasked with the review of a project requisition. Often, the first step is the most important. Upon execution of the contract, set the expectation. Tell the prime contractor and every sub-contractor on the job that every cost is being audited. Hold a kick-off meeting with the project team and provide the attendees with what must be included in a requisition for it to be accepted and paid timely. Make sure that the project manager and the accounting department that is responsible for assembling the requisition is on board and if you find a problem in the first draw, send it back and tell them to get it right. If you do not set the example from the beginning, I guarantee the problem will be carried right through project completion. Furthermore, if you accept and pay a requisition that is incomplete from the beginning, they will only get worse. The majority of audits we conduct are completed at the end of the job. Generally, we find anywhere between 2% - 10% of the of the general conditions result in overcharges. A few of our projects have resulted in even higher exception rates. Most of the exceptions relate to general condition categories such as payroll, burden, duplicate payments, insurance, small tools, office overhead, etc. However, one should not overlook the possibility of material substitutions, construction defects, and discrepancies on change orders. Unfortunately, in some circumstances the contractor will not have the funds to reimburse the owner for overcharges encountered and the close-out will not occur smoothly. In some cases the close-out may not occur at all and the owner will be left with an incomplete project manual, incomplete list of final lien waivers and a sour taste regarding the final delivery. A great deal of the problems that are encountered during an audit can be avoided with a good plan. If you want a seamless requisition, payment and project closeout, more owners are looking toward conducting an ongoing audit of each application for payment. The review process will more than pay for itself. The last thing that the owner, and for that matter, the contractor, wants is for an audit to tarnish the delivery of a project that was built on-time and within budget. The right to audit is included in the standard AIA cost plus agreement. The cost of exercising this option helps alleviate any ownership concerns that money is being accounted for properly and typically pays for itself several times over. Mark de Stefanis, CCA, is president of Construction Cost Recovery, Inc., White Plains, N.Y.