Construction Audits Can Help Eliminate Surprises

Completing a project as planned is an uphill battle – one that a growing number of contractors are losing. Audits can provide valuable project documentation while reducing unwanted surprises.

By Leslie V. Guajardo

Leslie V. Guajardo, CPA, CCIFP, is a partner at Padgett, Stratemann & Co. LLP in San Antonio. She may be reached at 210-253-1530 or Leslie.Guajardo@padgett-cpa.com.

As most in the construction industry know, completing a project on time and within budget is one tough assignment. Unplanned change orders, fluctuating material costs, unpredictable weather, labor shortages: For these reasons and many others, completing a project as planned is an uphill battle – and one that a growing number of contractors are losing.

According to the Construction Industry Institute, which is based at the University of Texas at Austin (visit www.construction-institute.org), one of every three construction projects today is over budget or behind schedule. A recent CII report, ”Assessment of Owner Project Management Practices and Performance,’’ states that just 61% of projects meet cost targets, and only 66% meet or complete earlier than the planned schedule. For construction companies, that means project owners are holding contractors’ feet to the fire like never before. Across the industry, constructors are under pressure to plan and execute better than ever.

Many forward-thinking construction companies are doing just that. One step toward successful planning is through project auditing. Some contractors audit in concert with the project owner, others do so independently. These companies are more closely examining the processes that fall within a project’s different phases.

In general, there are four phases in most construction projects: project definition, planning, execution and completion. A thorough review of each, or an audit, often with the assistance of an accounting firm, can play a valuable role in the successful completion of each phase.

Project definition During the definition phase, it is important to establish realistic objectives. These will guide all decisions; it’s important, therefore, that they meld with overall corporate objectives. This is a critical stage. When there is poor scope definition, final costs will likely be higher than expected because of change orders and extended project time frames.

Although project definition is basically a technical activity, auditing allows top managers to review the methodology used to develop the objectives and scope and answer questions such as:

•Has the project scope been defined well enough to provide an accurate cost estimate?

•Do the project objectives correlate with the corporate objectives?

•Have all related components (such as safety, engineering, marketing, accounting, regulatory compliance) provided input and reviewed the objectives?

Planning With proper auditing, key control systems can be developed during the planning process. Ordinarily, the most important control systems are scope controls, schedule controls and cost controls. During the planning stage, auditors typically evaluate the proposed control systems to make certain they will help bring the project in on time and within budget. They also pay attention to administration and scope controls. The goal is to make certain the project management team has an effective organizational structure and staffing is sufficient. The auditing process also can look at schedule controls to make certain work can be tracked and compared to milestones, and that the schedules allow for timely reporting.

It is important as well that auditors during the planning stage evaluate cost controls to make certain systems provide for efficient reporting of costs while also identifying problems early in the process.

Execution During the execution of a project, scope control usually is the most important of the control systems. During this phase, auditing often focuses on how well a project manager is controlling subcontractors, making certain that subs and vendors are providing only the work described in contracts. This auditing also provides oversight of personnel, equipment and vehicles on site at the height of a project.

A couple of other areas require special attention during this phase. The timekeeping system used by subcontractors should be monitored regularly. Also, project managers should make certain a subcontractor’s use of materials conforms to contractual agreements.

Completion Auditing is particularly important at the end of a project. At this point the general contractor has to settle all remaining issues with the owner and subcontractors. For example, there may be bonuses or penalties that have not been paid. Or there may be residual retainage funds that were withheld from progress payments.

Usually all unresolved cost and claim items are addressed as a group in a final negotiation with the project manager. For companies that audited the project step by step, the completion process is simplified and transparent for all parties involved.

Auditing serves another important function as well: It documents a project’s peaks and valleys, information that is crucial for any construction company hoping to improve its operations. Without the benefit of project auditing, construction companies can easily repeat their mistakes. If they have never closely audited processes, they have no history, no information bank, to draw upon. That means the future will continue to be full of surprises – and that’s what construction companies should fear the most.