Auditing a Cost Plus Construction Contract: A Good Business Practice
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By: Mark de Stefanis, CCA
You have just received a project requisition for $400,000 from your
contractor and you have 10 days to review and pay or he is walking off the
job. The requisition is a thick as a phone book and includes everything from
cell phone bills, a bundle of 2x4’s and marble that is being stored
off-site. Some of the items have the construction manager approval, but
others do not. Your boss wants to know if you are ready to approve the
funding. How do you know if the information provided is complete and in
accordance with the contract? How does one maintain control when at times
the flood of information can be overwhelming?
Once a construction project begins, this fire drill of approving and paying
the construction draw happens monthly and starts to breathe a life of its
own. To the project executive, the money spent on a monthly basis becomes
almost a secondary issue. While support may be available for the trades, all
too often, the last thing the project executive has time for is to explain
an AMEX statement without any description of the charge that hit general
To the project executive, the focus is time and quality of construction. The
weather, back-ordered materials, and a rogue sub-contractor who is fighting
over a change order become his enemies.
We financial types are faced with a different set of audit concerns.
How do you know that the amount being charged is in accordance with the
Do I have all of the back-up required to support the draw and in particular
Do we fund an allowance without support?
Where are the time sheets and how did they calculate burden?
These are just a few of the questions that one may ask when being tasked
with the review of a project requisition.
Often, the first step is the most important. Upon execution of the contract,
set the expectation. Tell the prime contractor and every sub-contractor on
the job that every cost is being audited. Hold a kick-off meeting with the
project team and provide the attendees with what must be included in a
requisition for it to be accepted and paid timely.
Make sure that the project manager and the accounting department that is
responsible for assembling the requisition is on board and if you find a
problem in the first draw, send it back and tell them to get it right. If
you do not set the example from the beginning, I guarantee the problem will
be carried right through project completion. Furthermore, if you accept and
pay a requisition that is incomplete from the beginning, they will only get
The majority of audits we conduct are completed at the end of the job.
Generally, we find anywhere between 2% – 10% of the of the general
conditions result in overcharges. A few of our projects have resulted in
even higher exception rates. Most of the exceptions relate to general
condition categories such as payroll, burden, duplicate payments, insurance,
small tools, office overhead, etc. However, one should not overlook the
possibility of material substitutions, construction defects, and
discrepancies on change orders.
Unfortunately, in some circumstances the contractor will not have the funds
to reimburse the owner for overcharges encountered and the close-out will
not occur smoothly. In some cases the close-out may not occur at all and the
owner will be left with an incomplete project manual, incomplete list of
final lien waivers and a sour taste regarding the final delivery.
A great deal of the problems that are encountered during an audit can be
avoided with a good plan. If you want a seamless requisition, payment and
project closeout, more owners are looking toward conducting an ongoing audit
of each application for payment. The review process will more than pay for
itself. The last thing that the owner, and for that matter, the contractor,
wants is for an audit to tarnish the delivery of a project that was built
on-time and within budget.
The right to audit is included in the standard AIA cost plus agreement. The
cost of exercising this option helps alleviate any ownership concerns that
money is being accounted for properly and typically pays for itself several
About the author: Mark de Stefanis, CCA is President of Construction Cost
Recovery, Inc., which is headquartered in White Plains, New York. The firm
specializes in construction cost auditing cost segregation, and reproduction
cost studies for tax certiorari proceedings.
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