Facilities and Real Estate Services (FRES)/Construction Audit is responsible for determining whether necessary operational and financial internal controls are in place and operating properly across FRES, primarily the departments of Design and Construction, and Operation and Maintenance. Working closely with FRES Senior Management audit projects are identified through the annual Risk Assessment Process.
Types of Audits
Construction Contract Audits
Compliance with contract terms is the focus of this audit. A detailed review of the contractor’s invoicing activity is completed to insure only allowable costs have been reimbursed. Cost recovery opportunities identified in the audit are pursued with the contractor. Audit findings are presented as follows:
- Contractor Related — cost recovery opportunities for contractually unallowable costs reimbursed
- Project Specific — typically non-functioning internal controls creating contract non-compliance
- Global — project specific observations which are applicable to a variety of capital projects
A process audit is designed to evaluate the efficiency and effectiveness of a particular workflow and the associated function of the internal controls within the process. Examples of available process audits include:
- Bid Process — evaluate compliance with University and Departmental Policies and Procedures
- Funding Process — confirm funding sources are being utilized in the manner intended
- System Implementation — serve as a team member to insure controls are being developed
Vendor Procurement Audits
Operations and Maintenance provides a variety of services to the university dealing with multiple vendors and contract structures. The price of individual transactions is varied.
- Data analysis — objective review and quantification of General Ledger or Work Order transactions
- Contract Audits — major FRES contracts are reviewed to evaluate compliance with contract terms
- Process reviews
Letter of Intent (LOI) — This letter is issued to authorize a contractor to proceed, based on intent to award a contract for a specified project or scope of work. LOI’s should identify a period of validity and be executed by the proper signature authority of both firms. The LOI acknowledges that the final executed contract shall define the reimbursement criteria of the expenses incurred. An LOI should only be effective upon receipt of proper insurance coverage.
Construction Services Agreement (Lump Sum) — A type of contract executed based upon an agreed upon scope of work and a fixed price. Lump sum contracts increase the risk to the contractor based on the price commitment. This type of contract is generally used when a full set of construction documents is available for bidding.
Construction Management Contract (Guaranteed Maximum Price, GMP) — A type of contract which requires reimbursement thru verification of project costs. This type of contract is typically used when construction documents are not complete, but the project schedule requires the award.
General Conditions — A section of the contract which identifies procedures for the management of the construction project. This includes allowable expenses, change order pricing, invoicing instructions, insurance requirements, indemnifications, etc. General Conditions are further defined in Division 1 of the Project Specifications.
Change Order — A formal modification to the contract which affects the original contract terms. Changes issued for price, time, scope of work are the most common types of modifications. Change orders require execution in accordance with the contract signature authority.
Cost Event — A tracking mechanism for potential project charges which if approved will be reimbursed to the contractor by either the contingency or an Owner’s change order. The cost event number is a consistent number used for tracking the activity between a general contractor and a subcontractor as well.
Back-charge — A deduction to a contract value resulting from another contractor completing work for another party. For example a second cleaning expenses, or repair to accepted work, resulting from damage from others. The risk to the owner is that the credit is not “passed on” therefore the owner will reimburse the expense twice.
Application for Payment — The common name for the monthly reimbursement request submitted by the contractor. The executed contract should contain guidance as to the requirements for submittal deadlines, required documentation support and invoicing format. The AIA G702 and G703 formats are widely used industry wide.
Schedule of Values — A standard illustration of a project’s contractual budget. Line items are established and the monthly billings are tracked on this schedule.
Retainage — Is a percent of the work completed and invoiced that is typically withheld from monthly payments. The executed contract should address the agreed upon percent and the conditions for reducing this percentage as the project nears completion. A relatively standard retainage agreement is a withholding of 10% of the work completed up to 50% completed on the project. Retainage is a liability that should be properly recorded in financial statements.
Pay when Paid — Typically on a construction project each layer of contractor will hold off paying expenses on a specific project until they have been reimbursed for the work they have completed on that project. Due to the inherent delays in reimbursements reaching the subsequent layer, attention should be paid to prompt processing of construction invoices, but only after the proper reviews and authorizations have occurred.
Labor Rates — The cost per hour for a specific employee can be calculated differently by contractor, project, and position. In order to reimburse the contractually agreed upon allowable expenses the owner must request a breakdown of all the charges in the hourly rate. The contractor should be required to provide this information during the contract negotiation stage.
Union Agreement — Official contract stating pay-rates and benefit packages for a defined period of time, specific to each construction trade. Union agreements define minimum pay scales and are typically available upon request.
Budget Value — Largest dollar value contracts may provide the largest cost recovery opportunity typically resulting from contract non-compliance or the creation of contractor profit centers.
Relationship with Contractor — New contractors may interpret standard contract differently or the owner may get too comfortable with contractor and become more trusting/accepting of project costs.
Contract Type — Cost Plus contracts typically provide a greater area of audit due to the documentation requirement of actual costs.