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Contract Review Savings & Recoveries

Here are some examples of savings arising from capital project Auditing Activities. The examples include those encountered by internal auditors, CRW president Al Gray during his tenure as a corporate auditor, and CRW/ConstructionAudits.com.

Recoveries

 

Savings

Defined as immediate monetary resolutions of audit issues by means of a cash refund, discount, credit memo, offset against a concurrent claim from the other party, or receipt of materials or services as compensation.

Appear in Green in the examples tables below

 

Defined as immediate monetary resolutions of issues plus quantifiable, monetary savings arising from satisfactory resolution of the issue. Long term savings are generally reduced to net present value.

Appear in Blue in the examples tables below

 

 

 

Potential Savings

 

Losses

Issues for which savings likely occurred, or will occur, for which the ultimate resolution is undetermined or unsettled.

Appear in Black in the examples tables below

 

Issues for which avoidable losses were incurred.

Appear in Red in the examples tables below

 

GENERAL CONTRACT SAVINGS

Issue

Finding

Result

A Fortune 500 manufacturer had designated one contractor to construct its manufacturing plants and expansions to existing plants. Contracts were issued on a cost-reimbursable basis. The company decided to implement broad capital auditing programs at its sites.

One of the first reviews performed by the new auditing team was a thorough study of labor costs., including those billed for closed projects.

The contractor's project billing system for labor omitted key cost reductions and discounts. The contractor refunded the overcharge for a closed project and implemented billing system corrections for current projects.

$81,426 Recovery

$603,000 Savings

 

Source: AMG archives

The general contract for a manufacturing building was issued on a cost-plus Guaranteed Maximum Price Basis. The contractor proposed converting to a lump sum price.

The auditor reviewed the contract costs and component subcontractor billings at the request of management, finding a number of unused or overstated allowances.

Based upon the auditor's analysis the agreed upon contract price was lowered.

$259,530 Savings

 

Source: AMG archives

The contract excluded certain costs from the contractor's fee base.

The project auditor reviewed all accounts within the fee base to determine that they correctly excluded the disallowed costs.

Several expenditures properly classified as engineering were included in the construction fee base.

Management negotiated a settlement with the contractor

$34,214 Recovery

 

 

 

Source: AMG archives

The general contractor made a change in policy regarding salaried employee leave.

The auditor was asked by management to evaluate the revised policy and its impact on contractor costs and fees.

The impact of the policy was to significantly increase payroll reimbursement. A reduction was negotiated with the contractor.

$51,115 Savings

 

Source: AMG archives

A contract provided for utilization rebates, which were to have been refunded to the owner.

Project auditing found the provision in the contract and also found that the rebate had not been provided for the past two years.

The auditors provided the contractor with their work paper analyses of the amount owed, which the contractor promptly refunded.

$34,762 Recovery

 

Source: AMG archives

The general contractor desired to convert its cost-plus, guaranteed maximum price contract to a lump sum.

The auditor analyzed various project costs and provided details to engineering to enhance negotiations to a lower price.

The audit schedules supported a total of $357,450 in price adjustments. The negotiating team was able to secure a reduction of $98,625.

$98,625 Savings

 

Source: AMG archives

 

ENGINEERING SAVINGS EXAMPLES

Issue

Finding

Result

An engineering contract gave latitude to the contractor to engage third party engineers and bill them to the company's project.

The auditor conducted a review of the rates, contract mark-ups, and costs of the third party engineers.

Engineer assignment controls were revised and alternative billing methods adopted.

$262,000 Savings

 

Source: AMG archives

The engineers billing systems included modules for invoicing engineering materials, supplies, and certain services.

Review of the rates charged versus actual costs indicated that billed rates were overstated.

The billing systems were corrected to feature the lower rates.

$165,000 Savings

 

Source: AMG archives

The cost for engineering services were to be billed at actual wages plus a multiplier.

The auditor compared billed rates to those indicated by the payroll register and personnel files, finding excessive rates billed in the amount of 7%.

The engineering firm agreed to refund the overcharges and correct its billing system.

$115,000 Recovery

 

Source: AMG archives

An engineering contract covered multiple areas of work for the owner.

The auditor found instances where out-of-scope work was invoiced and paid.

The company and engineering firm negotiated a settlement.

$95,000 at Issue

 

Source: CRW archives

 

ELECTRICAL CONTRACT SAVINGS

Issue

Finding

Result

The electrical subcontractor had a fixed price contract to which were added cost-plus change orders.

The auditor's analysis revealed duplications of cost between the base contract and the changes.

The contractor agreed that a double charging had occurred and agreed to refund the overcharged mount.

$46,460 Recovery

 

Source: CRW archives

The electrical subcontractor had a fixed price contract to which were added lump sum change orders.

The contractor began performing T&M work at the completion of his initial subcontract.

Review of the subcontracts, scopes of work, and invoicing by the auditor indicated duplicate invoicing between the subcontract .

The contractor agreed that a double charging had occurred and agreed to refund the overcharged mount.

$31,100 Recovery

 

Source: CRW archives

 

CONCRETE SAVINGS AND RECOVERIES

Issue

Finding

Result

The concrete subcontractor furnished ready mix concrete from an on-site batch plant. The project auditor tested actual volumes of poured concrete versus billed quantities and found unfavorable variances which ranged from 8% to 12% on a consistent basis. The project civil engineer had a number of concrete trucks weighed before and after deliveries, computed theoretical weights, and verified the project auditor's finding.

The metering system was corrected, with the result that subsequent variances ranged from -5% to +5%. Correction of the light-loading problem saved more than $325,000.

Coupled with other procurement methodologies recommended by project auditing, more than $800,000 was saved on the cost of concrete.

$800,000 savings

 

 

 

 

 

 

Source: AMG archives

The concrete subcontractor invoiced weekly according to concrete tickets from the concrete supplier.

Review by the auditor indicated that some delivered quantities had been paid for twice and that there were some rate overcharges.

Coupled with other procurement methodologies recommended by project auditing, more than $800,000 was saved on the cost of concrete.

$54,000 recovery

 

Source: CRW archives

 

MECHANICAL AND PROCESS PIPE SAVINGS

Issue

Finding

Result

A chemical plant facility included the fabrication, erection, or installation of large process tanks.

The scope of a tank installation contract and final drawings were compared to detect scope deletions. The project mechanical engineer had approved the final payment. The project auditor decided to review the contract before the payment occurred.

A drawing revision after the subcontract was executed was found to have deleted several tanks which were in the scope of the agreement.

The subcontractor agreed to a reduction of the final payment of $95,000.

$95,000 Recovery

 

 

 

 

 

 

 

Source: CRW archives

A mechanical contractor was engaged by the company to perform fixed-price installation contracts and was later issued time and material orders for other work at the project site.

The auditor performed tests of all invoicing from the contractor and determined that there were duplications between the contracts and excessive labor charges.

Negotiations were held with the contractor to resolve contract issues.

$71,250 Recovery

 

 

Source: CRW archives

A mechanical contractor was engaged by the company to perform fixed-price installation contracts that were later switched to T&M.

The auditor performed tests of all invoicing, contract changes, and project costs.

An overcharge of $196,000 was found and deducted from subsequent billings.

$196,000 Recovery

 

Source: AMG archives

 

EXCAVATION, GRADING, AND UNDERGROUND PIPING

Issue

Finding

Result

The excavation subcontract called for construction equipment to be billed, inclusive of operator time, at rates of $65 to $125 per hour for each hour that the equipment was productively operated on the project site. A review was performed to ascertain compliance with the subcontract terms.

The review resulted in findings that the subcontractor was billing full daily utilization of each piece of equipment on the project site. Only one operator was paid to operate a water truck, roller, and motor grader. The subcontractor had overcharged more than $60,000 for unused equipment.

A negotiated settlement was effected.

$20,000 recovery

$40,000 loss

 

 

 

 

 

 

Source: CRW archives

A site work subcontract covered the first phase of a multiple-phased project and was awarded as a fixed price subcontract. Others were engaged on a T&M basis for the remaining phases. At the end of the total project the subcontractor invoiced for the unbilled work and the retainage.

The auditor's review of the various subcontract documents indicated that a portion of the first phase work was incomplete when the subcontractor demobilized. Other documents indicated that some of the work was completed by others. Also, there was no evidence that the subcontractor ever returned to complete the work.

The owner negotiated a settlement with the subcontractor

$70,000 at issue

 

 

 

 

 

 

 

 

Source: CRW archives

 

STRUCTURAL STEEL SAVINGS

Issue

Finding

Result

The steel fabricator for a new chemical plant claimed that its post-completion audit of the steel fabrication and supply contract indicated more than $140,000 of structural steel was unbilled. The project civil engineer agreed to the payment. The project auditor conducted his own audit of the contract.

The conclusions from the project auditor's study of the detailed steel drawings, bills of lading, and invoicing were that there were $65,000 of steel represented by unmatched receiving documents and that the $75,000 balance was not owed to the fabricator.

The general contractor matched receiving reports with invoices submitted by the fabricator. The fabricator agreed to drop its claims for further reimbursement.

$75,000 Recovery

 

Source: AMG archives

A large prefabricated metal building subcontract was transferred between subcontract administrators during the project. Requisition controls for the project were weak. The subcontractor was submitting compound change order requests, ie. one change order request covered multiple changes.

The consulting auditor found three instances where there were errors in requisition cutoffs, resulting in costs of changes being added to the subcontract balance twice. The subcontractor invoiced the full amount of the subcontract price for the affected line items. The duplicated costs exceeded $49,700.

The general contractor's subcontracts administrator contacted the subcontractor. Both concurred that an error had occurred leading to duplicated costs and agreed to adjust the subcontract pricing to eliminate the error.

$49,750 Recovery

 

Source: CRW archives

There were a considerable number of changes to the project's building steel subcontract.

Analysis of the changes by the auditing consultant indicated that the cost of displaced material was not credited in calculating change orders.

The change orders were adjusted to reflect the cost of deleted materials.

$27,000 Recovery

 

Source: CRW archives

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