Objective
The purpose of capital project auditing is
the control, conservation, and management of the owner’s hard-earned
capital in a dynamic environment which poses great risk to those
capital resources.
Capital Projects Auditing defined
Capital Projects Auditing
is a comprehensive effort to assure that a company's assets
are preserved during major capital spending endeavors through a
coordinated, planned effort from the inception of the spending
program, through completion, and concluding with the commencement of
operations of the constructed assets.
Capital Projects Auditing is different from
Construction Auditing
Construction Auditing,
which focuses on engineering and construction contracts, is a large
component of Capital Projects Auditing and is indisputably a
valuable activity. However there are internal control, tax, and
operational aspects of a major spending program which construction
auditing does not address. Combining construction auditing with
proactive controls in all other areas of the capital spending
program yields cost reductions, and even recoveries, which dwarf
those available from construction auditing.
Capital Projects
Auditing is focused both internally and externally on all elements
of project cost and those of subsequent operations of the facility.
Capital
Appropriations Controls are the basic foundation for
project cost control
-
Additions
-
Deletions
-
Other Scope Changes
Project
Scope Control - without it internal and external forces
can expand the project
-
Design Review and Approval
-
Contractor/subcontractor
scope control - bid package plans and specifications
-
Field Change Notices
-
Work orders or other
controls over extra work performed by project team for operations
Tax
Impacts Many taxes and regulations affect the project and
ongoing operations after completion. A
comprehensive management effort can reduce project and
operational costs by several percent.
-
Sales and Use -
Preplanning is best, but a
cost
recovery audit after the project's completion will otherwise
produce benefits.
-
Property -
There may be exemptions for pollution control, R&D, or other
incentives
-
Income -
Segregation of personal property assets from real property
produces substantial savings
-
VAT, GST and
other taxes applicable to off-shore projects can add 15 to 20%
to project costs
 |
Construction Auditing is a key component of the Capital
Project Auditing Process which focuses on the role of
architects. engineers, project managers, construction
managers, general contractors, and major subcontractors |
Corporate
Finance and Accounting |
Project
Financing Methods
-
Industrial Revenue Bonds
-
Bank Loans
-
Operating Cash Flow
-
Sale/Leaseback
transactions
|
|
Project
Accounts Receivable
-
Scrap sales
-
Surplus equipment
and tool sales
-
Returnable
containers - gas cylinders, cable reels, formwork
-
Items returned for
credit
|
Fixed
Assets Accounting
-
Transfers from other
locations
-
Additions -
Construction in Progress
-
Deletions
-
Appropriation
documents should provide basis for close out to Fixed Assets
|
|
Project
Cost Accounting Systems
-
Timeliness and
Accuracy critical
-
Commitments
-
Expenditures
-
Projected costs to
complete
-
Comprehensive to
include corporate expenditures
|
Risk
and Insurance
-
Builders Risk
-
General Liability
-
Business
Interruption
-
Construction
Equipment
-
Bonding
-
Lien requirements
|
|
|
 |
Warranties
Spare Parts
Freight
Vendor reps
Performance
Environmental
Safety |
Backcharges
- Costs of correcting nonconforming work or equipment
Manufacturing
equipment procurement and operation - for manufacturing
plants this is usually 45 to 70% of total project costs
-
Compatibility with
existing systems
-
Installation Contracts -
Control over start-up services
-
Performance criteria for
final equipment payments
-
Spare parts - a big
source of savings
The
Capital Auditing Function |
Coordination and control of all
of the above is beyond the capabilities of any project manager.
Supporting the project manager with a project auditor or project
controller will prevent losses from issues which would otherwise be
unrecognized and unremedied. Having an on-site auditor also allows
other corporate cost savings and cost recovery opportunities to be
evaluated, seized, and realized.
Basic Elements of a Capital Project Auditing function
-
A
dedicated on-site presence
-
Support of corporate and project management
-
Flexible
project audit reporting systems with shortened response times -
imposition of typical internal auditing reporting cycles do not
work in a major project environment
-
Auditing
capabilities are written into contracts, major subcontracts, and
project procedure
-
Project
management and engineering make constructability decisions.
Project auditing test controls and verifies contractor costs. The
auditor supports the project manager with analytical capabilities.
-
Project
auditor/ project controller coordinates project activities with
appropriate corporate managers with the objective of identifying
and correcting opportunities which might otherwise fall victim to
interdiscipline gaps, i.e. accounting-construction,
law-engineering
-
Project
auditing is reinforced by internal auditing or temporary
accounting personnel as needs arise
-
Sufficient
independence in reporting
-
Adequate
training
The
Savings Potential
-
A
proactive project auditing function can reduce total project costs
by 1 to 2%
-
The
savings attainable are typically 3 to 5 multiples of the costs of
performing the reviews
-
The
concept can be applied to other areas of corporate operations
-
Examples of savings from major capital projects
These illustrations
depict some of the areas covered by capital projects
auditing which exceed the limits of construction auditing.
The examples represent some of the opportunities to lower
costs encountered by Cost Recovery Works, Inc. and
previous work by CRW founder and president Al Gray.
|
Review Subject & Scope
|
|
Results
|
Project Financing |
|
|
Portions
of a new manufacturing facility were eligible for
financing using exempt Industrial Revenue Bonds (IRB's),
which featured interest rates 1.5% lower than the
owner's cost of capital. Corporate treasury and law
departments had submitted an IRB project description
and had secured approval of the funding. The project
auditor investigated whether additional portions of
the facility would be eligible.
|
|
The project auditor
reviewed the existing IRB project scope and the
governing IRB regulations, compared the overall
manufacturing project to those documents, and
identified additional systems ( including coaf fired
boiler components similar to those in the picture)
that were eligible for the financing. The corporate
law department secured approval of the broadened
scope, resulting in more than $2,000,000 savings
at present value. |
Manufacturing Equipment |
|
|
Modern
process control valves, like those in this tank farm
photo, are frequently purchased under blanket
purchase orders with supply houses. Pricing is
comprised of multiple components which depend on
valve specifications, with discounts applied to each
component. Accurate pricing may be difficult to
achieve. Recognizing that purchasing personnel
lacked the time to audit the pricing of the valves,
the project auditor conducted a review.
|
|
The project auditor
selected a sample of valve purchases from the 5
designated project suppliers. The pricing was tested
for accuracy. The findings were that 2 of the
suppliers had overcharged due to the omission of one
or more discount factors. The suppliers refunded
more than $33,000. Savings to the project and to
manufacturing operations from correction of the
suppliers' billing systems exceeded $200,000. |
Equipment
Spare Parts
|
|
|

Various manufacturing
process equipment purchase orders contained
provisions for spare parts to be supplied. Since
payments to the supplier were based upon milestones,
final payment was conditioned upon equipment
start-up, and engineers approved invoices based upon
progress rather than delivery of components, the
project auditor recognized the potential for payment
of undelivered spare parts which were not required
for start-up. |
|
The project auditor
reviewed all process equipment purchase orders to
identify all purchases which included specified
spares within the contract price. Receiving
documents and storeroom records were reviewed to
ascertain that all of the required parts had been
delivered. Three suppliers had failed to deliver all
or part of the purchased spares. Recoveries of more
than $110,000 in missing spares were obtained. |
|
|
|
|
|