Assessment of Risks
1. Spending Level  
Project is $5 million or less per site. 1 Comment: Spending levels alone cannot determine the efficacy of assigning on-site project auditors. If the budgeted costs of the project are more than $50 million or there are complexities, the Owner should strongly consider engaging a project auditor for the duration of the project.
Project is between $5 and $10 million per site. 2
Project is between $10 and $25 million per site. 3
Project is more than $25 million per site. 4
2. Schedule Development  
Completion is based upon a detailed schedule using CPM (critical path method) or other method which allows for completion of design, competitive bidding, and construction. 1 Comment: Forcing a project completion date increases the owner’s risks, irrespective of the contracting methods utilized. Coupled with a dynamic design, accelerating the completion date can significantly increase costs.
Completion is based upon schedules for similar facilities that the owner has constructed. 2
Completion date is accelerated by the use of flexible contracting methods and constant schedule reevaluation. 3
Completion date is established by management, market forces, or other outside forces. 4
3. Contracting Methods  
Completed-design, Fixed price 1 Comment: Imposing fixed price contracting methods on a dynamic scope may be far more costly than adopting cost-plus contracting methods. Cost-plus contracts afford flexibility required to meet an imposed completion date and, if properly managed and controlled, can reduce costs.
Substantially completed design, guaranteed maximum price. 2
Significantly completed design, cost-plus with a guaranteed maximum price, with or without shared savings. 3
Design-build, fast track based upon cost-plus contracting methods. 4
4. Scope Definition  
Every type of project change, additive, deductive or transfer, requires some level of management approval. 1 Comment: In the absence of a tight scope definition and controls, the project manager has wide latitude to reduce the scope in order to meet the budget. If this occurs after the contracts have been issued, there is a likelihood that the owner will experience significant losses.
Any changes to the total project scope are approved by management, but the project manager has discretionary authority to transfer costs between line items. 2
Management approves only substantial changes, either deductive or additive. 3
Only major scope additions or overruns require management approval. 4
5. Design Stability  
Owner has existing basic facility design and systems selection. 1 Comment: The security against cost escalation afforded by fixed-price contracts lies in the completion of design prior to the contracting phase.
Owner has selected systems but facility design is undefined. 2
Owner must modify facility design to accommodate new systems. 3
Owner faces new systems selection and new facility design. 4
6. Oversight Capability  
Owner has experienced project managers to oversee all major capital projects. 1 Comment: Project managers are expected to manage budget, schedule, scope, engineering, construction, and coordination with operations. Is it realistic to expect them to be able to analyze contractors’ billed costs as well? Supporting the project manager with such analytical skills is a primary contribution of a project auditor.
Owner appoints project manager from operations as new projects arise. 2
Owner hires a temporary project manager under contract or a construction management firm. 3
Owner uses one outside firm for engineering, procurement, construction, and project management. 4
7. Project Complexity  
Project covers nonindustrial end uses and requires primarily civil contractors 1 Comment: Risks to an owner increase with project complexity. More specialty contractors are needed, multiple engineering and construction firms are used, and coordination becomes paramount. This not only stretches the owner’s project manager thin, it creates more costly conflicts and change orders. Project auditing capabilities are even more important.
Project encompasses an assembly plant and requires some electrical and mechanical installation. 2
Project encompasses limited stages of production and requires electrical, mechanical, building, HVAC and other major contractors or subcontractors. 3
Project encompasses multiple stages of production, there are complex equipment or process systems which affect building design, and multiple specialty engineering, equipment installation and construction firms must be coordinated. 4
8. Owner’s Experience  
Owner has ongoing construction of similar units. 1 Comment: Recent experience provides a basis for comparison. The cyclical nature of capital spending in manufacturing often precludes maintaining in-house experience from one capital spending cycle to the next.
Owner has built a similar facility in the last three years. 2
Owner has a similar facility built more than three years ago. 3
Owner is building a facility which is the first of its kind or owner is new to the line of business. 4
9. Appropriation Process  
Capital Budget is based upon a detailed estimate. 1 Comment: The validity of a capital budget is directly proportional to the amount of detail provided in the underlying estimate.
Capital Budget is based upon similar project costs, adjusted for changes. 2
Capital Budget is based upon costs per square foot or on a conceptual estimate. 3
Capital Budget is an allocation of available funds. 4
10. Design Discipline  
End-users of the facilities are encouraged to provide input into the design of the facility, are given deadlines to provide the input, and are prohibited from requesting design changes during construction. 1 Comment: The success of an owner in controlling costs is largely dependent upon providing input into the design phase and limiting it thereafter.
End-users are provided with separate capital funds to make minor changes at the completion of the project. 2
End-users have control over the owner’s acceptance and have the capability to insist upon changes prior to final payment. 3
End-users in various departments are empowered to make design changes throughout the project. 4
11. Site Development  
Facility is sited in an existing commercial development or industrial park. 1 Comment: Elimination of the necessity to perform excavation, site preparation, and underground utilities considerably reduces project complexity. However, projects requiring renovation of existing facilities often feature the added complexity of modifying an unknown scope, particularly with older manufacturing facilities.
Facility is an expansion of an existing facility. 2
Facility requires modifying, remodeling, or retrofitting an existing structure or equipment system. 3
Facility is being constructed at a “green field” site. 4
12. Contract Cost Controls  
All contracts and major subcontracts require cost-based change orders with full rights of audit. 1 Comment: The owner should insist on these provisions, as they provide an option to audit change orders, should change orders proliferate during the project. It is difficult to know at the project’s inception how many change orders will be required and at what increased cost. .
All contracts and major subcontracts include unit prices for additions or deletions of significant components. 2
Contracts and major subcontracts require fixed price change orders accompanied by details of quantities and prices. 3
Contracts/subcontracts do not address change order pricing and contractors request lump sum change orders. 4
13. Cost Reporting Systems  
Current reporting of committed, expended, and projected costs, with detailed variances. 1 Comment: Many owner’s capital accounting systems do not provide timely cost reporting which is sufficiently current to control project costs.
Monthly cost reports are issued in a standard format. 2
Cost reporting methods are left to the discretion of the project manager. 3
Cost reporting methods are established by the general contractor or construction management firm. 4
14. Tax Considerations  
The project is commercial and no tax incentives apply. 1 Comment: With project controllers or project auditors on site, the effects of design changes on tax incentives can be identified. Project auditors can effect tax planning methods throughout the project
The project is industrial, but there are no tax incentives. 2
The project is industrial and there are broad-based training, sales/use, property, and income tax incentives. 3
The project is industrial with tax and other incentives subject to judicial, contract administrative, and other limitations. 4
15. Auditing Capabilities  
The owner has an experienced capital auditing staff 1 Comment: Many owners impose the project auditing responsibilities upon the plant controller or location accounting manager. While this seems to be a logical approach, it does not recognize that project activities are at a peak during a time that the controller is expected to plan, direct and implement accounting responsibilities for the new operations.
The owner has an internal auditing staff with some construction auditing training and uses temporary on-site auditors. 2
The owner’s internal auditing function reviews the project, focusing primarily on post completion audits. 3
The owner has no auditing capabilities and relies on its project manager to manage schedule, budget, engineering, constructability issues, start-up, and analyze contractor “costs.” 4


....................................................................RISK ASSESSMENT SUMMARY

15 to 25 Low Project auditing capabilities would produce marginal results. Owner should build the option of cost-based change orders into its contracts in the event that significant price escalation occurs, whereupon contract auditors could be used.
26 to 35 Mild Owner should consider having an initial assessment performed to determine whether a project auditing function can add value.
36 to 45 High Owner should strengthen existing project auditing capabilities. An on-site project auditing presence will likely reduce costs.
46 to 55 Very High Owner should employ a project auditor or project controller. Project auditing should yield cost reductions of several multiples of the cost. Post completion audits would be valuable.
56 to 60 Great A project auditor, even a team of project auditors, will be needed to perform limited damage control. Unless there is an overriding need for the facility, the owner may wish to reconsider its project planning. Post-completion audits may yield limited recoveries but the owner will experience irretrievable losses of a substantial magnitude.

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