Why does my construction project need a construction auditor?
May 7, 2019
By Matt Gardner, CCA, CICA
Partner, Construction Audit Practice Leader
It goes without saying, your capital construction project is a huge financial investment. With that in mind, does your team have a proper understanding of executing and managing cost plus/GMP and lump sum contracts, and do they understand the underlying intent of the contractor’s cost and pricing requirements? In your construction contracts, are you:
- using standardized AIA contract language?
- agreeing to labor rates in your cost-plus contract?
- agreeing to lump sum general conditions?
- agreeing to percentage-based line items such as insurance and bond costs?
- validating contractors are held only to the agreed upon fee?
- agreeing to anticipated construction costs contractually on the front end of the project that limit your ability to effectively validate net actual cost?
Maybe your organization’s contracts have always been written one way, or this is the way you’ve always negotiated. But, by not revisiting your contract strategy, you could be allowing the contractor to make additional profit above and beyond the agreed-upon fee (intentionally or unintentionally), putting your capital construction investment at risk for significant overbilling.
Unfortunately, these contractual situations are common and limit the transparency to determine reasonableness of the costs in contractor billings. The owner and their team’s time is often better spent on daily responsibilities such as frequent visits to the job site, managing the relationship with the contractor, maintaining project schedule and budget, solving daily problems, and handling questions and scope changes, rather than reviewing and diving deep into contract errors and violations.
Each team member has a role to play and responsibilities to uphold, whether they are the contractor, project manager, architect, lawyer, owner’s representative, etc. But, how often does your current project team regularly engage in questions related to the intricacies of contractor billings such as:
- performance and payment bond credits/rebates
- limits and caps on SUTA and FUTA within labor rates
- buyout savings tracking and usage
- contractor owned equipment rental caps
- equipment/tool fair market value analysis
If you are unsure or say not at all, you’re not alone. It’s understood that your team’s time is already maxed out with their current roles. That’s where a construction auditor comes in.
What does a construction auditor do?
When you hire an experienced construction auditor, they should be infused into your existing team, not just an added layer. They provide the expertise and man-power needed to conduct an in-depth review of each contract and associated construction cost on behalf of the organization. A construction auditor looks at the same documentation as your existing team, but they are asking different questions and peeling back the layers to determine the reasonableness of project costs. Specific questions and inquiries are based on a culmination of instances encountered during reviews where a contractor has created additional profit above and beyond your agreed-upon fee, whether intentional or unintentional. A construction auditor acts as an extension to the existing construction project team and asks specific, detailed questions focusing on contracts and construction costs.
How does a construction auditor make a difference?
Most owners are familiar with what goes on specifically within their organization and often deal with the same contractors in a single industry with the same types of contracts. Construction auditors offer more diverse experience in dealing with different contractors and a variety of contract types across many industries, along with a deep understanding of how contractors construct their billings. Every audited project brings to light new ways contractors track, accumulate and bill projects. A construction auditor makes a difference in your project by bringing all of those experiences, lessons learned and best practices to your organization and identifying those more time-consuming or obscure contractor overbillings. They focus on making sure the contractors for your project stick to the original agreed-upon contracted fees and validate construction costs are based upon the actual cost incurred.
A construction audit routinely offers projects a return on investment in cost recoveries and cost prevention measures of three to five times the fees charged. Having a construction auditor focused on your contracts can bring owners a return of their time 10-fold, allowing them to focus on their important and time-intensive day-to-day activities.
If you think your organization could benefit from a construction audit, consider a complimentary construction cost review of your project (upcoming, current or past) or contract language. Click here to learn more.