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The Keys to Construction Audit Success
On July 25, 2016 / By Nate Stroeher

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As companies continue to face tighter budgets, shorter construction cycles and rising labor and material costs, it is even more important to implement clearly defined functional controls. The construction audit helps companies quickly identify control and process issues and implement long term solutions.

A well-designed construction audit examines past, present and future projects for cost overruns, schedule discrepancies, documentation deficiencies, incomplete or inaccurate contracts, and incomplete tasks. The construction audit reviews current controls and, based on the findings, documents controls deficiencies, creates new controls, and develops an implementation plan to mitigate risks for future construction projects.

The construction audit focuses on five distinct development phases: plan, bid, design, construct and operate.

1. Plan

The construction audit begins with the planning phase.  A high level review of the feasibility study and business case is completed to ensure they are based on accurate, complete and timely cost estimates. A review of the baseline project plan will examine the completeness and accuracy of project budgets, timelines, and labor requirements.

Primary Focus: Feasibility Plan

  • Are feasibility studies and business cases complete and accurate?
  • Does the feasibility study include known factors which will impact project schedule and cost?

2. Bid

All bids packages are reviewed to ensure contractors prepare cost and timing estimates based on complete and clearly defined bid packages. A bid review ensures contracts are awarded based on pre-set, defined, selection criteria with clear terms and conditions.

Primary Focus: The Bid Package

  • Is the RFP process clearly defined and are changes / revisions released to all bidders in a timely manner?
  • Is the RFP package complete? Are bids based on information accessible to all bidders?
  • Do selected bid packages address the entire project and are exact specifications referenced?

3. Design

The design phase ensures that a complete project scope, plan, and budget (including contingencies) are developed and approved before construction begins. Additionally, the design phase will establish the change order and draw processes (including approval levels and workflows).  A signed contract completes the design phase.

Primary Focus: Final Project Budget

  • Was the budget set and approved before construction began?
  • Does the budget contain the proper amount of contingencies?
  • Can revised budgets be easily tracked to the original budget?

Primary Focus: The Bid/Contract

  • Does the contract include exact bid quantities, timeframes, specifications, and prices?
  • Does the contract clearly lay out the change order process and approval requirements?
  • Is the draw process clearly defined and based upon measurable milestones?

4. Construct

The construct phase of the construction audit examines progress reports, adherence to financial controls (draw requests, approvals, contractor payment processing), and complete and accurate status reporting. Critical to any successful development is a well-defined and followed change order process. As part of the construction phase, adherence to change order creation, approval and processing is reviewed for completeness. Finally the construct phase ends with the close out process. Key elements include the creation and completion of the final construction punch list (and contingencies) and the collection and maintenance of warranty information.

Primary Focus: Project Payments

  • Are payments based on pre-defined milestones and made only after the proper draw requests have been approved and submitted?
  • Have all change orders received proper approvals?
  • Are change orders incorporated into the original budget? Are revised budgets distributed?

5. Operate

A property will be put into operation once the certificate of occupancy documentation has been obtained.  Final punch list items will be completed and the property will be transitioned to property management or turned over to a third party.

Primary Focus: Punch List / Punch List Contingencies

  • Has a final project punch list and contingency been created?
  • Are charges correctly tracked and allotted to the closeout process?
  • Is the final project budget complete?

The ultimate goal of the construction audit is to address the causes of past deficiencies and create repeatable processes and controls to minimize project risks going forward.

Trenegy encourages clients to use the construction audit as a mechanism to ensure sound financial controls are implemented and followed to maximize profitability and reduce project risks.