Previous Construction Audit Tips

This is a collection of the construction audit tips that I have been publishing on LinkedIn.

Construction Audit Tip #1

• A GMP does not mean a guaranteed final bill, it means that actual costs will be billed with a fee not to exceed a value

#GMP

Construction Audit Tip #2

• Calculation errors on bonds & insurances are a common finding even when there is an invoice from the carrier. Always recalculate the final values from the policy terms which should be available under "Open Book" conditions.

#ConstructionBond

Construction Audit Tip #3

• A subcontract that allows 10% overhead and 5% profit equates to a total of 15.5% markup. This is because 5% is applied to the 10% or vice versa.

#SubcontractorOHP

Construction Audit Tip #4

• The Guaranteed part of GMP is for the total cost and not any single line item

#GMP

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Construction Audit Tip #5

• The contractor’s pay application is intended to be an invoice, not a project report.

#ConstructionPayApplication

Construction Audit Tip #6

• Auditing objectively produces more accurate results than auditing for recovery. A major miss in either direction could potentially invalidate your findings.

#FairAuditing

Construction Audit Tip #7

• “Time and a Half” labor is 1.5X what the employee should be paid. This multiplier is not applied to all parts of the burden which means that the billing rate should be less than 1.5X.

#LaborOvertime

Construction Audit Tip #8

• The contract order of precedence should always be considered. This includes the Main Contract, General Conditions, Exhibits, Clarifications, Exceptions, & DIV 01 of the design docs.

#ConstructionContract

Construction Audit Tip #9

•  A percentage on a GMP estimate is not an agreed upon value unless it is contractually defined as one.

 #ConstructionGMP

Construction Audit Tip #10

• Always verify insurance and surety rates with actual documentation showing the terms and any rebates or refunds. 

#Insurance+Sureties

Construction Audit Tip #11 

• Like all audits, a Construction auditor’s function is to provide a systematic & independent examination of data.
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• Even if the goal is recovery, objectivity is the auditors ethical responsibility. 

#AuditEthics

Construction Audit Tip #12

• Having a final bill that is less than the GMP does not confirm that a contractor has correctly billed the project.  Both owners and contractors have used savings as a justification to not audit.

#FinalConstructionCosts

Construction Audit Tip #13

• Evaluate credits to make sure that they are correctly priced and that they include the contractually required multipliers like OHP and Insurance.   

#ChangeCredits

Construction Audit Tip #14

• In a final audit, the total amount paid to the subcontractor should be compared to the commitment. The CM should be asked about all over and under billings.

#SubcontractorPayments

Construction Audit Tip #15

• Demolition contractors will often salvage some materials that can be sold for recycling or reclaiming purposes.  This revenue should belong to the project by either being part of the base contract or by a deductive change order.

#SalvageValue

Construction Audit Tip #16

• All deductive changes to subcontractors should be reviewed to make sure that credits from reductions to the project scope result in a deduct to the contract value or GMP.

#SubcontractorDeductiveChanges

Construction Audit Tip #17

• Workers Comp rates are based on craft type, geography, and the contractor’s history. Using a blended rate is inaccurate and often more costly.

#ConstructionWorkersComp

Construction Audit Tip #18

• An owner change (OCO) with subcontract costs should have a matching change or commitment to the subcontractor (SCO).

#OwnerChanges

Construction Audit Tip #19

• When a change includes a deduct and an addition, compare the credit unit rates to see if they are disproportionate to the addition unit rates. 

#ConstructionCredits

Construction Audit Tip #20

• When PTO is included in labor burden, verify that personnel are not charging a flat 40 hours per week.  At a minimum, weeks with Holidays should have less than 40 hours.

#CMStaff

Construction Audit Tip #21

• All allowance usage must be reconciled with actual costs & supporting documentation. This includes both the allowances in the main contract & the subcontracts.

#ContractAllowances

Construction Audit Tip #22

• If the bond is auditable, recalculate the costs based on the actual rates shown in the policy.
•  Also determine if there are any potential rebates, credits, or adjustments.

#ConstructionBonds

Construction Audit Tip #23

• Cross check vehicle charges with vehicle allowances that may be billed as monthly line items or as part of a person’s labor burden.  
•  Make sure that these vehicle charges are not being covered in more than one place.

 #ConstructionVehicles

Construction Audit Tip #24

• In an "Open Book" contract (GMP or CMAR), all records related to the project are available to the auditor so long as they are not contractually defined as fixed or a lump sum.  
• Concerns about proprietary info can easily be solved with an NDA.

#ConstructionRecords

Construction Audit Tip #25

• Auditing construction is not the same as financial or corporate compliance audits. 
• Without training or experience, it is unlikely that the typical auditor will know the differences.

#AuditKnowledge

Construction Audit Tip #26

Typical sources of hidden profit:

• Labor Burden
• Insurances
• Bonds (Sureties)
• Internal Rentals
• Internal Purchases
• Multi-Tiered Subcontractor OHP
• Related Companies

#HiddenProfit

Construction Audit Tip #27

• Auditing or reviewing monthly pay applications does not diminish the need for a closeout audit.
• The two may work in tandem, but each has its own focus and benefits.

#PayAppReview

Construction Audit Tip #28

• Material substitutions should be examined to verify that they were approved and that the project costs accurately reflect any cost savings. 

#ConstructionMaterials

Construction Audit Tip #29

• An important step in a construction audit is to compare actual costs the contractor has incurred against what they billed.
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• This can be a critical basis of the analysis even when the costs exceed a GMP (or NTE).

#ActualConstructionCosts

Construction Audit Tip #30

• A good construction cost audit should be more than looking for mistakes. 
• The result should verify and validate what the total and contractually allowable project costs are (or were).

#ConstructionCosts

Construction Audit Tip #31

• Materials "bought" internally from a contractor's yard/warehouse does not relieve them of the requirement for supporting documentation. 
• Be sure to know if you contract allows internal handling charges and markup.

#ChangeOrders

Construction Audit Tip #32

• Contractors are often given the blame for large volumes of changes.
• Excessive number of changes is more likely a result of design quality or an indecisive owner.

#ChangeOrders

Construction Audit Tip #33

• The contract may have a requirement that fixed labor rates need to be approved. 
• If this step was skipped, the auditor is within their bounds to ask for detailed documentation to support the rates.

#LaborRates

Construction Audit Tip #34

When possible, create a matrix of all personnel and hours per day, week, and/or month worked. 

This can be used to analyze:

• Hours worked are realistic
• Validity of OT
• PTO part of burden vs being charged as hours

#LaborHours

Construction Audit Tip #35

• The auditor should reconcile ALL subcontractor changes (SCO) including the ones internal to the CM/GC. 
• Attempting to perform this task by sampling has a high potential for inaccurate results.

#SubcontractorChanges

Construction Audit Tip #36

• Auditing Rental Equipment – Verify that the time increments being charged are appropriate for the duration.
• Are hourly rates being applied for a whole day?
• Daily rates for a week…
• Weekly rates for month...

#EquipmentRental

Construction Audit Tip #37

• In a final audit - The final calculations should be based on the audited totals from the cost report rather than from sum of each pay application. 
• This is not only more efficient but reduces the risk of missing mistakes that occurred from one pay app to the next.

#PayApplication

Construction Audit Tip #38

• The execution method, contract terms, project controls, volume of records, and applicable statutes are more important to the construction auditor than what is actually being built.
• If those factors are equal/comparable, there is minimal difference in auditing an industrial facility, hospital, data center, stadium, treatment plant, offices, university, airport, resort, etc. 

 #ConstructionAuditFocus

Construction Audit Tip #39

• Be cautious if using Subcontractor lien waivers as a validation of costs.
• Their purpose is to waive any future lien rights to the property for the amount shown as paid. 
• The waivers almost never show the total amount to paid to date and they do confirm that the amount paid was correct.

#LienWaiviers

Construction Audit Tip #40

• The value of a signed change order may be adjusted when mistakes have been made for items such as math, duplications, contractually allowable items, and scope.  
• The premise of "Mutual Mistake" may be used to correct changes that clearly were in error.

#ChangeOrders

Construction Audit Tip #41

Verifying the final GMP is just as important as verifying the final costs as the final GMP is what governs the maximum value that is allowed to be billed. 

#FinalGMP

Construction Audit Tip #42

• Review the contract to verify if costs for IT, computers, and software are allowable or if it is included in home office overhead (part of fee).
• It cannot assumed to be allowable if the contract is silent and there is no reference anywhere in the documentation or estimate.

#ComputerCostsConstruction

#ConstructionAudit

About the Author

Jake Ortego is the President of JA Cost Engineers and Advisors, Inc. whose goal is to bring clarity and insight to construction projects to prevent and avoid overruns, delays, and dispute. He has provided presentations for the Association for the Advancement of Cost Engineering (AACEI), the National Association of Construction Auditors (NACA), Institute of Internal Auditors (IIA), the CONSTRUCT conference for AEC, Pennsylvania School Board Association (PSBA), Association of Government Auditors (AGA), and the Associations of Airport Internal Auditors (AAIA)

Click here for his series on Construction Contract Tips

Here are links to a few of his other articles (Click to see them):

• Answers from the Construction Auditor to the Contractor
• Defining Roles in Your Project
• Technology Ruining AEC?

As wells as articles from the Principals at his firm:

• Why Are We All Speaking Different Contract Languages
• A Lesson of Planning a Construction Project – My personal shared experience.

And some additional references at his website

https://www.ja-cea.com/reference-material.html