This is a very good question that is often asked by many. The simple answer is that audits are not necessarily redundant (though they may contain some redundant elements). By design, audits are intended to be independent of an organization’s normal processes, controls, policies and procedures. Rather than duplicate what has already been done, an audit is intended to review and evaluate information from a much different perspective than the people who are primarily responsible for the project.
In addition, audits are typically conducted by evaluating information that is different from what has already been submitted as part of the billings or change orders. Audits also provide an organization with the ability to “look behind the iron curtain” and obtain information that may not otherwise be available.
We recognize that most organizations provide varying degrees of oversight for their construction projects and we believe that such oversight is important. Sometimes, effective oversight can prevent problems. Other times, it may not.
Unfortunately for Owners, the negative results of an audit (overcharges, fraud, problems, etc) are often indicative that project oversight is either inexperienced, ineffective or otherwise lacking. In addition, even with effective oversight, controls can be circumvented or unscrupulous contractors can take advantage of unsuspecting owners. Moreover, what is most surprising (and disturbing) to Owners is when audits identify problems on projects where good controls and effective oversight was believed to exist.
The best time to perform an audit is a matter of perspective and desired objective. Traditionally, audits have been performed near the end or at the conclusion of a project. We do not necessarily disagree with that approach and generally believe that a “final accounting” should always be performed at the conclusion of a project (when the final billing is submitted) regardless of the level of audit involvement.
Proactive Owners are becoming more and more involved at the beginning of projects and throughout the duration of the construction process. Pre-contract and interim audit reviews can add significant value to the process (though audit “findings” may not be as readily quantifiable). We believe that effective audit results can be achieved throughout all phases of the process and encourage the use of the audits to not only identify problems, but to also serve as a deterrent. Accordingly, we are proponents of having auditors involved early on in the process rather than waiting to the end. Regardless of the level of audit involvement, we always recommend that a final accounting be performed at the conclusion of a project. A final accounting is a process to summarize all of the relevant aspects of the project (Base contract amount, change orders, billings, cost of work, fee, allowances, savings, bonus, etc.) to ensure that the final numbers are accurate.
Cost recovery of problems identified as a result of over billings or overcharges are a commonly expected outcome. Not all organizations are focused solely on that single-minded objective. Rather, proactive management and prudent managerial business practices will provide more emphasis on prevention, rather than recovery. While audits can be used as an effective tool – it is always more desirable to prevent money from “going out the door” than it is to attempt to recover audit findings through a post-project audit process. Also, some organizations use audits to provide assurances that their processes and controls are working as designed (and are therefore sometimes disappointed with significant audit findings). Regardless, audit results (good, bad or indifferent) are “by-products” of the audit process and such results can provide significant value to an organization.
We do not have a “magic formula” for how much an audit may cost. Like construction projects themselves, there are many variables. From experience, we do use certain parameters to develop what we believe are realistic budgets for the effort that we believe will be required to complete a typical construction audit. For example, effort can often be equated to the size of a project (in terms of construction cost) – which might warrant an initial estimate between .1 and .2 tenths of 1% of the total construction cost. But, other factors should also be considered, which may impact the initial estimate. From there, a relevant range may be targeted or established. While we understand an organization’s desire to develop known and reliable cost estimates, we believe our clients interests are better served by providing realistic effort-based estimates (that could go up or down) than by providing higher costing fixed prices, which are based on unknowns and contingency scenarios.
No. They vary widely in scope and depth. Consequently, the proposed cost to perform audits by competing firms can vary widely based upon the anticipated effort required to complete their specific set of procedures (scope). Competing firms are often asked to propose their “own” scope (which is subjective) and the related price to perform such audit would be predicated upon “their” scope. These different scopes usually result in great price disparity. If competing firms were given a “fixed” or “specific” audit program (scope), we believe the disparity between prices would be less.
Asking competing firms to provide pricing for a fixed audit scope may result in a mixed blessing because many organizations rely (and rightfully so) on the experience and recommendations of the competing “expert” service providers. Simply performing a set of “standard audit procedures” or following a “generic audit program” does not guarantee effective audit results.
It is equally important that the audit specialist has the appropriate experience and business acumen to discern what procedures may or may not be appropriate in the circumstances and to provide strategic advice to management in the execution of an audit. Eventually, it often boils down to either what approach or what firm an organization feels most comfortable with. But, to infer that all audits are the same, that all service providers are equal or that all auditors possess the same experience and skill set would be shortsighted.
No. In many cases though, audit findings (and cost recovery of same) does pay for the cost of an audit. Sometimes, multiple times over. If that were always the case, it would be a great investment and what organization wouldn’t want to commission an audit? Realistically, if your organization is recovering significant dollars from your contractor(s) on every construction project, your organization may have far greater problems than what an audit may identify. We have never seen a project’s stated goal as being “let’s have problems so that audit can recover them”. Quite the contrary, most organizations take painstaking steps to avoid problems. The frequently asked question (and related dilemma) is: “We do not believe we have a problem so why should we waste money on an audit?” While the answer is seldom simple, we believe it makes sense to conduct audits as a standard and prudent business practice. Not only does it serve as a deterrent, it also let’s your contracting counterparts know that your organization pays attention to the details and it also expects to be treated in accordance with the spirit and intent of the construction contract.
High risk areas include, but are not limited to, labor, labor burden, change orders (multiple facets), allowances, subcontractor buyouts, fee and bonus calculations, insurance (multiple aspects), accounting and substantiation of costs. Other areas include multipliers and fixed cost components or markups that are not normally subject to audit. While there are all types of other problems that can and do occur on a random basis, the areas listed above represent those areas that we believe have a higher propensity for problems.
Any time an audit produces “findings” (whether money can be recovered or not), there are often lessons to be learned. While organizations are undoubtedly interested in prevention and control, less emphasis seems to be placed on the value that an audit can provide and what can be learned from the process. We believe that far too many organizations underestimate the value of the audit process. We further believe that the owner’s ability and decision to conduct audits provide them with the unique ability to independently obtain, evaluate and disseminate information that may not ordinarily be available. Audits are a strategic and powerful tool that should be used by management to verify all pertinent aspects of the business arrangement. Strength and leverage in the negotiation process (that is supported by verifiable fact) is just one example of how an organization can apply lessons learned from an audit. And, perhaps no tool may be more powerful to an owner (from a negotiation standpoint) than in the area of pre-contract auditing. For emphasis, we will again reiterate the importance of entering into a good contract. But, for too many owners, reliance in achieving that stated objective is often accomplished without auditor involvement or input.
Yes. While the possibility of completely eliminating problems is unrealistic, we believe proactive management can significantly reduce the likelihood that overcharges, over billings or other material errors will occur. At the most elementary level, we believe management must dedicate resources early on in the process. Specific strategies should be aimed, first and foremost, at the procurement process, which we believe is the single greatest risk to an organization. Furthermore, it is important to understand that procurement processes involve multiple facets, multiple firms and occur over a period of time. Separate consideration must be given for the principal designer (architect/engineer); construction contractor (general contractor/construction manager) and trade contractors (subcontractors and suppliers). The key elements of the procurement process must also be effectively addressed. These include establishment of selection criteria, selection and refinement of the procurement method, selection of contract type and development of specific contract terms. Perhaps most importantly, an owner must recognize and understand the risk of failing to participate in the procurement process of the contractor’s bidding and award of subcontracts.
The second strategy to minimize or reduce the likelihood of problems occurring is the establishment of effective contract administration practices. Failing to fully embrace this element of overall project control can undermine the effort put into the procurement process, no matter how thorough or effective it may be. Our belief in these core fundamental principals are so strong that we believe we can provide far greater value to an organization by being involved at the beginning of a project rather than through a post-project audit. This does not suggest that audits are not worthwhile endeavors (as we believe they are). Rather, we believe the effort up front pays far greater dividends. Successful projects are often characterized by having skilled personnel who are both active and effective in these upfront areas. Unfortunately, our experience in performing audits has too often produced audit results that directly point toward ineffective management practices early on in the process.