Rarely are there intentional mistakes or deception. Sometimes it’s unclear if a financial error was a “convenient” mistake or an honest one.
By Jim Rosenbaum
With church facilities under construction, you want to ensure that your money is wisely spent, while at the same time being viewed by your contractor as a cooperative business partner. Fulfilling your financial oversight responsibilities while fostering smooth working relations is a diplomatic endeavor. Maintaining this delicate balance demands accurate accounting of your contract obligations, your costs, billings and payments.
That’s where construction audit enters the picture. Since “audit” has multiple connotations, let’s define what we mean: A construction audit is a comprehensive review of the construction contract documents, plus an analysis and reconciliation of all billings and payments. If the construction contract is worded for your benefit, an audit also verifies actual costs, which is not a trivial matter.
The contract review is essential to understand the appropriate finance- related provisions and determine what is contractually stipulated, allowable and prohibited. In other words, the contract sets forth the rules for a project. The analysis and reconciliation of billing/ payment data is essential to verify that:
1. Costs and billings are allowable and permissible.
2. Billings are contractually compliant, numerically accurate, and thus payable.
3. Payments are accurate and timely (not paid unnecessarily early).
Evaluate billing accuracy
It’s important to understand the construction billing/payment context in deciding how to evaluate contractor billing accuracy (we use “contractor” to refer to a General Contractor, Construction Manager, or Subcontractor, as appropriate). At White Mesa we do not attempt to determine contractors’ intent; we merely perform the needed review and analysis. But we do gain insights into practices and possible motivations.
Rarely do we see what appear to be intentional mistakes or deception. Sometimes it’s unclear if an error was a “convenient” mistake or an honest one. However, in most situations, what we discover appear to be unintentional oversights or accidents, apparently caused by a contractor’s overloaded office staff working simultaneously on several projects.
The result is billing discrepancies that translate into payment issues. In fact, since there have been billing/payment irregularities in every project we’ve audited, we are convinced 100 percent of all construction projects contain cost/billing/payment errors. Typical audit findings (derived from these errors) average 1 to 3 percent of the construction cost. In some situations they have exceeded 3 percent, and in exceptional circumstances even more.
Findings originate from virtually every aspect of costs and billings, from the top to the bottom of the billing food chain. They all equate to significant dollar savings that project owners would prefer to use for other needs.
Every project needs review
From this perspective it is apparent every project needs an in-depth, complete study of all the billing and payment details. The question then becomes how to identify and resolve billing and payment mistakes in the most cost-effective manner. There are several important matters to keep in mind:
- Every project has identifiable cost/billing/payment mistakes.
- An audit provides the detailed review and analysis needed to establish proper financial oversight.
- With few exceptions, your volunteer or full-time staff will not have the expertise or time to conduct the kind of extensive review needed.
- Your architect, although all their fees are paid by you, will attempt to represent the interests of both you and the contractor simultaneously. As a general rule they also do not attempt the degree of detail and breadth of scope covered in a construction audit.
- If you employ a third-party project manager to oversee the contractor’s administration of the project they will not have the available resources to conduct an audit.
Obviously, the contractor will not be viewed as an appropriate party to audit its own work. This means that literally no one involved in your project has the time and expertise to perform the needed review, analysis and reconciliations.
The most workable, cost-effective option is to engage a third-party provider to conduct a construction audit on your behalf. There are significant advantages to this approach that make it a logical, straightforward decision:
1. You retain highly experienced individuals focused solely on the cost/billing/payment issues and dedicated exclusively to your interests in the project.
2. The findings, even at the 1 percent level, exceed the fees for an audit, so this service more than pays for itself. (At White Mesa, findings are usually several times higher than our fees, making for a benefit/cost ratio of 3:1 to 5:1).
3. The engagement is temporary, for the duration of the project. The additional resources are there only for as long as needed.
As you contemplate the need for an audit, here are some additional pointers to help make the financial dimension of your project more trouble-free:
- Use an attorney (preferably one with successful experience in construction law) to draw up the contracts.
- Use contract language requiring the contractor to document all costs.
- Ask for what you want in writing.
- Clarify beforehand any vague areas concerning price and cost.
- Insist on withholding retainage on all contractors until you and the architect are satisfied.
At the end of your construction project, one of the keystones to calling it a success is complete due diligence. Undertaking a thorough billing and payment verification will reap the rewards of increased trust and peace of mind for years to come. A construction audit is an excellent, virtually indispensable tool for making that happen.
Jim Rosenbaum is president of White Mesa Inc., Plano, TX, providing nationwide construction audit services for commercial construction projects of all types. [ www.whitemesa.biz ]