Q - We have an in-house internal auditor who took construction auditor training; do we still need an outside construction auditor?
A - Yes, regarding Preconstruction Contracts. Most internal auditors trained with a one or two-day course will not be able to analyze, critique and advise the client concerning language in the proposal or preliminary contract. KBC has extensive knowledge concerning contract weaknesses and how to increase cost reduction language in many areas of the construction contract. We will also advise our client how to convince the contractor to revise their proposed contract.
Secondly, regarding on-going and "close-out" audits, most internal auditors will locate obvious over-billing areas, but will miss 40 to 60 percent of total over-charged dollars. An Auditor with a few hours training with less than three years experience will help, but can not compare to auditors who have been fully trained and audited many projects in a variety of industries for 10 to 30 years.
Remember, construction training sessions hit the main areas of the construction contract at a high level. The contractor who writes the contract for 90% of all construction is always making changes and adjustments or they won't be in business. Unless the in-house auditor is constantly keeping himself or herself current on construction billing practices, the Construction Owner will waste substantial funds.
Q - We have an internal auditor who just started construction auditing a few weeks ago, but needs more training. Will you help train him or assist in the construction audit?
A - Yes we offer complete client flexibility. We suggest contacting Mr. Kelly to discuss your goals and objectives so he can structure a program or approach which will be both efficient and cost effective.
Q - We want to use our Internal Auditor for the construction audit. Will you audit behind or after our internal auditor?
A - Yes, we will audit behind in-house internal auditors and in-house construction departments. Our audit would normally start at substantial completion and before the "Close-Out Audit." Several fee structures, including contingency can be arranged.
Q - So your firm will work on a contingency basis. Isn't that risky?
A - When we started our firm 17 years ago we started by providing contingency audits for projects, which were at substantial completion. We learned quickly where profits can be buried and learned how to conduct negotiation meetings. This knowledge and experience now allows our auditors to confidently audit any type of construction project and conduct meetings with a sensitive, but tactful manner.
Preconstruction audit services, audit training/assist and on-going audits must be performed on a fix fee or hourly rate basis. Please note most clients prefer an hourly rate on a total "not-to-exceed" basis in order to control audit fees.
Q - What does an outside firm offer that our in-house auditor can't?
A - Objective independence. Internal auditors can be influenced by political pressure by audited departments, such as from the Capital, Design and Construction Department.
Our firm uses fully documented facts with a tactful approach to help our clients. Additionally, using the client's firm's CPA firm will create a conflict of interest.
Q - We are just getting started setting up our management team. Can you advice us concerning basic management and controls?
A - Yes we can review your organizational chart, management structure, job duties and control elements to ensure an effective control framework.
Q - We have a "tight" Guaranteed Maximum Price construction contract that we have used for several years, isn't our risk limited?
A - Our auditors have reviewed and audited hundreds of construction contracts. All have holes and language that can cost the construction owners tens and hundreds of thousands of dollars. AIA contracts protect the Architect and most modified AIA contracts protect the Architect and contractor, not necessarily the Owner. Completely revised AIA contracts still have many risks depending upon the construction industry and construction activity.
Q - Our project team has a Construction Manager's owner's rep, an internal Construction Department and an experienced contract administration/payables person; do we still need an outside construction audit firm?
A - Yes, larger owner's representatives, internal Project Managers and accountants can identify over-billed construction costs. However each position had a separate function and none include identifying and preventing construction cost over-billings at a 1% error rate. Sometimes many hours are needed to document the case for a major over-billed situation involving tens of thousands of dollars. We use special techniques developed over many years of auditing. KBC professionals audit well beyond "Audit Check-Off Lists."
Q - Our outside team includes the Construction Manager or General Contractor, and the Architect, aren't they responsible for accurate monthly Payment Applications?
A - Yes, they have some limited responsibility. The Architect has very limited responsibility in all AIA contracts. Basically they provide a cost over-view to ensure key cost elements are proportional to the progress of construction. The Construction Manager's main responsibilities are selecting the "best" subcontractor; coordinating scheduling and controlling quality according to the Bid Packages and costs to meet the owner's budget. They are under constant time pressure. Detailed cost management and audits are NOT their responsibility. Over-billed slippage of 1% to 3% is not uncommon. The Owner takes on another financial risk when the Construction Manager "self-performs" work on a cost basis.
Q - Our organization has been using the same Construction Manager for many years. How would you work with our Construction Manager?
A - We are sensitive to the Construction Manager's time and their concept of quality.
We do not conduct multiple interviews and ask dozens of questions. After our initial meeting to introduce ourselves, our basic audit methods, and what our documentation requirements are, we rely on the cost documents: applications, invoices, change orders and contracts.
Our professionals submit audit reports and full documentation to either the Construction Manager or to our client to forward the report to the Construction Manager. The client determines this arrangement prior to starting the audit. Meetings are needed infrequently. Our audit reports are NOT judgment or opinionated. We report the facts with full documentation, quotes from the construction contracts, control recommendations and status of implemented agreements.
We critique all contractor audit replies. The client-owner can accept or reject all recommendations.
Q - Our CFO and Director of Internal Audit want a "Close-Out" audit. How do you conduct this kind of audit?
A - We prefer to start the "Close-Out" audit two (2) Payment Applications before the final application. Why? When we find substantial over-billings, we want our Client to have sufficient retainage in order to receive full credit from our recommendations. If retention or retainage is inadequate the client may have difficulty receiving credits and returned funds, necessitating substantial legal fees to collect over-payment.
Note, our audit techniques go beyond just reviewing Final in Full Lien Waivers and final contractor "Cost Statements."
Q - Which Construction Audit is the best for our firm: Close-Out, On-Going, Preconstruction?
A - This depends on your goals, staffing and future construction requirements. Our experience has shown a full-complete construction audit starting at Preconstruction will produce the most cost savings and "net value." Unfortunately, making control recommendations which prevent excessive costs and expenses cannot be measured. So we generally recommend preconstruction review of controls, analysis of proposals and contracts; performing on-going audits with reports every three (3) months, and a "Close-Out" audit. The second best situation is a training/assist approach by assisting the in-house auditor for a few months, then reviewing audit work, findings and reports by internet communication. This method may not identify 20% of over-billings.
Q - So what dollar benefits can we anticipate from your firm?
A - As we stated previously, cost reduction recommendations are hard to measure. We can provide estimates with a more accurate estimate near project completion. Frequently, using Guaranteed Maximum Price, GMP, contracts, and labor cost recommendations will have the largest dollar impact.
Labor intensive cost construction provides the most risk and greatest rewards.
Overbilling of 5% to 10% of total labor dollars is not uncommon and our audit hours can be minimized. Cost reductions to General Conditions, materials and equipment categories will be nearer to one percent.
If we start the audit after GMP construction contracts are signed, expect 1% to 3% over billing to be identified with recovery varying between 40 to 60%.
Lump Sum, Fixed Cost contracts, should only be performed using a "Close-Out" audit approach.
Results vary substantially, but there are always findings, recoveries and cost prevention exceeding KBC audit fees.
Q - Your company is very small, what are your advantages?
A - Being small allows us to be flexible and build construction audits around the Owner's specific needs. We only select clients that require our special abilities in construction knowledge: construction organization, construction proposals/contracts, contractor profit methods, and special situations. Our auditors have performed hundreds of construction audits on very complex construction in a great variety of industries. The projects we select must be highly complex or unusual with a minimum size of $5 million.
Q - How do we start the process with your firm?
A - Send an email letter to James.Kelly@kellybusconsultants.com or call Jim Kelly at (314) 729-1150.