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Contract
Review Savings & Recoveries |
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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 |
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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
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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
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Potential
Savings |
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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
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Issues for which avoidable
losses were incurred.
Appear in
Red in the examples
tables below
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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 |
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 |
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 |
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 |
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 |
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EXCAVATION,
GRADING, AND UNDERGROUND PIPING |
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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 |
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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