Construction Auditing Can Help Eliminate Surprises

As everyone in the construction industry knows, completing a project on time and within budget is one of the toughest assignments in America.

Unplanned change orders, fluctuating material costs, unpredictable weather, labor shortages and many other factors make completing a project as planned an uphill battle-and one that a growing number of contractors are losing.

According to the Construction Industry Institute, one of every three construction projects today is over budget or behind schedule. Moreover, in a recent report titled “Assessment of Owner Project Management Practices and Performance,” the institute states that only 61 percent of projects meet cost targets, and only 66 percent meet or complete earlier than the planned schedule. These and similar statistics provide evidence that the gap is growing between construction-industry performance and the U.S. industry in general.

For construction companies, this means project owners are holding their feet to the fire like never before. Across the industry, constructors are being forced to plan and execute better than ever.

Many forward-thinking construction companies are executing projects better, and one way they are doing this is through project auditing. Some do it in concert with the project owner, while others do it independently. Essentially, these construction companies are more closely examining the processes that fall within a project’s different phases. To assist them, many of these companies turn to accountants who understand construction business practices and accounting/tax implications.

In general there are four phases in any construction project: project definition, planning, execution and completion. A thorough review, or audit, of each can play a valuable role in the successful completion of each phase.

Project Definition

During the definition phase, it is important that construction companies establish realistic objectives. These objectives will guide all decisions, therefore, it’s important they meld with overall corporate objectives. This is a critical stage because when there is poor scope definition, final costs will probably be higher than expected from change orders and longer project time.

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 like these:

• 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 (safety, engineering, marketing, accounting, regulatory compliance, etc.) 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 are paying special attention to administration and scope controls. Their goal is to make sure the project management team has an effective organizational structure and sufficient staffing. The auditing process also can look closely at schedule controls to ensure certain work can be tracked and compared to milestones and that the schedules allow for timely reporting.

It is important for auditors to evaluate cost controls during the planning stage as well. The goal is to ensure that cost-control systems provide efficient cost reporting 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 and makes sure that subs and vendors are providing only the work described in their contracts. This auditing also provides oversight for the personnel, equipment and vehicles that are onsite at the height of a project.

A couple of other areas also require special attention during this phase. The timekeeping system used by subcontractors should be monitored regularly. Also, it’s important that project managers guarantee that 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 project owner and subcontractors. For example, there may be bonuses or penalties that have not yet 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 construction companies that have audited their project step by step, the completion process is infinitely more simple and transparent for all parties involved.

Auditing serves another important function as well: It documents a project’s peaks and valleys. This information 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’ve never closely audited their processes, they have no history and no information bank to draw on. That means the future will continue to be full of surprises-and that’s what construction companies fear the most.

Construction Business Owner, October 2009