Auditing Unit Priced Construction Contracts 1112

8/10/2019 Auditing Unit Priced Construction Contracts 1112

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Auditing Unit Priced Construction Contracts

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. © 2012 Baker Tilly Virchow Krause, LLP



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About Baker Tilly

> Established in 1931> One of the top 20 largest accounting and

advisory firms in the United States according to Accounting Today’s 2012 list of “Top 100 Firms”

> More than 1,480 professionals

> Baker Tilly Virchow Krause, LLP is the largestUS Baker Tilly International independentmember firm

> Baker Tilly International is the eighth largest

in more than 120 countries

> Convenient, seamless resource for worldwide

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About Baker Tilly

From concept and funding to controls and compliance, Baker

industry professionals to assist with your facility developmentproject through all stages of the development lifecycle.

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Introductions

Tony Ollmann, CPA, CCADirector 608 240 [email protected]

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Overview

Today’s topics: Auditing unit priced construction

EXAMPLE TEXRisk Analysis

Audit Plan Development

Change orders

Case Studies

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Polling question #1

A. YesWere you able to attend.

C. Not yet, but I plan to viewthe recordings.

or wa c e recor ng oany of the previous

construction cost controland audit webinars?

.

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Learning objectives

> Recognize when to use unit price contracts> Learn how to identify unit price contract risk

>

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Key terms

> Unit price> Unit cost

>

> Material credits> Recycling credits

>

> Plans and specifications

> Material substitution

> Prevailing wage

> Certified payroll

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Unit priced contracts

Working definition: All inclusive price or rate tobuild/install a single unit of work. All inclusive price or rate should include:

> Labor

> Materials> Equipment

> Taxes

> Permits and inspections

> Overhead and profit

Engineering and design costs are typically excluded from unitprices.

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Examples:> $100 per foot of pipe installed

per cu c yar remove

> $450 per ton of steel installed

> $10 per square yard installed> 250 per electrical outlet installed

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Polling question #2

A. Master services agreementWhich of these.

C. Hazardous materialabatement

D. All of the above

cons ruc on serv ceswould use unit price

contracts?

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When are unit priced contracts used:> Total quantities may be difficult or undeterminable on bid day

o a con rac va ue may e cu or un e erm na e onday

> Unit scope is fully definable, repeatable and provides basis for

> Progress is measured in units completed rather than percentcomplete

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What type of work are unit priced contractsfrequently used for?> Underground construction: utility work, tunnels and infrastructure

> Master services agreements

> Highway and roadway construction> Rail bed and track construction

> Pipeline above and underground

> Utility construction: transmission lines, communication towers,

campus interconnects> Repeatable units of work

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Repeatable units of work:> Electrical outlets

g x ures

> Sprinkler heads

> Windows> Doors

May be found as supplemental rate schedules

within the subcontract to facilitate changes tothe building programming.

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Master service contracts> Flat monthly rate

re e ne scope o wor

> Often includes labor and consumable materials

> Major repairs fall outside of the standard service scope

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Unit priced contract risk analysis: contracttemplates

American Institute of Architects (AIA)> Contractor centric

rc ec cen r c

American Council of Engineering Companies

ACEC> Consulting/design engineer centric

> Owner centric

> Owner centric

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Unit priced contract term categories

> Contract templates> Cost of work

>

> Funding programrequirements

> Billing terms

> Third party resources

> Miscellaneous

> Insurance

> Progress reporting

> Site control

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Unit priced contract risk analysis: fundingprogram requirements

Public funding programs: TIF, grants, incentiveprograms, public bond> Davis-Bacon

> WBE/DBE/MBE participation

> Affirmative action compliance> Mandatory set aside

> Compliance audit

> Use restrictions

> Supplier restrictions> Contractor bonding

> Mandatory competitive bid

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Public funding

Risk Element Risk Mitigation Supporting Documents

Davis-Bacon compliance Verify contractors arepaying laborers’ salary and

Certified payroll report Collective bargaining

ene ts t at meet orexceed local CBA

agreement

WBE/DBE/MBEartici ation Verify the requiredartici ation % has been

Contractors certifiedstatusmet Subcontracts

Bid tabulations

Supplier restrictions Verify amount of work Subcontracts

Documents of businessownership

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Unit priced contract risk analysis: fundingprogram requirements

Private funding programs: Bond issues, bankloans, operating revenue, philanthropy

> Compensating balances

> Escrowed funds

> Performance bonds

> General few restrictions placed on the owner

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Polling question #3

A. Completed quantitiesWhich of these risks is

B. Unit of measure conversionerror

C. Labor burden inflated

not usua y assoc a ewith unit pricedcontracts?

D. Construction materialsubstitution

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Billing terms – risk elements

> Price escalation

> Undefined working units(How long is a day?)

> Target budget price

> Rate increases are inflated

> -> Volume prices (Is it gallons

installed or opened?)

> Overhead and profit are

expenses

> Different types of unit prices

> Sales tax mana ementapplied on top of unit price > Surcharges

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Billing terms


Annual price increases Verify new price calculations Unit price bid

to trigger price increases

Undefined working units Update contracts or statement

of work with revised definitionso ume pr ces ga ons use or

gallons opened)p a e con rac or s a emen o

work with revised definitions

Fuel surcharge inflation Calculate surcharge based onthird party metrics or standards

US Energy Information Administration

Fuel usage logs

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Case study: annual price adjustment

Facts:> Contract provides for a price increase based on the CPI

pp ca e reg on: es

> Price increase applied uniformly across each line of the bid

schedule

2011 Consumer Price Index

National Northeast Midwest South West

3.2% 3% 3.2% 3.4% 2.8%

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Contractor submits revised rate schedule basedon the CPI adjustment along with January 2012nvo ce.

Description 2011 UnitPrice

ProposedIncrease

2012Price

Semi-Annual Elevator SafetyInspection $375 $13 $388

Quarterly Preventive

MaintenanceRepairs and Maintenance ofConsumables $165 $6 $171

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Auditor’s price adjustment calculation

Price

of 2.8% Price

Semi-Annual Elevator Safety

Inspection $375 $10.50 $385.50

Quarterly PreventiveMaintenance $800 $22.40 $822.40

Repairs and Maintenance of. .

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January Invoice for Maintenance Services

Description2012Price

Since Last

Invoice2012Price

Semi-Annual Elevator Safetynspec on

Quarterly PreventiveMaintenance $828 2 $1,656

Consumables $171 5 $855

Total $2,899

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Case study: auditor’s notes

1. Contractor used the highest CPI rate insteadof the correct rate for their region

2. Contractor rounded rates up to the nearestwhole dollar

.unbilled services under the new 2012 rates.Overcharging by $99.

4. Net impact would result in $143 inovercharges or 2.3% of the contract value

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Polling question #4

A. 9One cubic yard is equal.

C. 54

o ow many cu c ee

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Methodology

> Reverse engineer the invoice to determine the billing method

> Review the engineer’s estimates

>

> Reconcile estimates with inspection reports and documentvariances

> Verif variances are authorized

> Compute billings based on authorized completion and contractbilling method

> Reconcile invoice and computed totals

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Cost of work – risk elements

> Units conversion

> Overstated quantities

>

> Accelerated schedule premiums

> Cost of rework (usually T&M)

> Inferior materials are substituted (Certified Materials)

> Manufactures certificates

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Cost of work


Overstated quantities Reconcile billed quantitieswith inspection reports.

Inspection reports Estimated quantities

er y ng computat ons. tatement o wor

Certified materials Verify materials purchasedwith material certificates.

Receiving tickets Purchase orders Manufacturers

certificate

Cost of rework Verify the cause of reworkthrough inspection reports.

Inspection/rejectionreport

the root cause.

Working conditionspremium

Reconcile premium dayswith site conditions to verify

Weather report Superintendent’s diary

authenticity of charge.

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Overstated quantities case study

Facts:> Scope: Dig a trench 500 x 6 x 6 feet

nspec on repor ver e x x oo renc

> Trenching price: $50 per cubic yard removed

> Trucking price: $250 per truckload> Each truck holds 15 yards of dirt. 60 truckloads were required.

> Owner was invoiced $60,000

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Overstated quantities case study

Invoice analysis Auditor’s invoice compilation

CostType

Quantity Rate Amount

Trucking 60 $250 $15,000

CostType

Quantity Rate Amount

Trucking 60 $250 $15,000

Removal 900 $50 $45,000

Total $60,000

=

Removal 666 $50 $33,300

Total $48,300

=

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Case study: auditor’s observations

1. Owner was overcharged by $11,7002. 50% more truckloads were required than the

original estimate

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Polling question #5

A. Superintendent’s fieldWhich source document

B. Owner’s site inspectionreport

C. Engineer’s acceptance

s e mos re a eprogress report?

report

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Cost of work


Units of work conversion Verify unit conversion accuracy Inspection reports Estimated quantities

Cost of accelerated schedule Verify that accelerating theschedule resulted from an

event outside the contractor’s

Work authorization Construction schedule

Weather reports.

Recycling and disposal Verify recycling receptacleswere leased for the job

Reconcile projected volumeof rec cled material with

Disposal service invoices Salvage credit vouchers

actualSite reclamation Verify site reclamation with site

visits and cost of reclamationanalysis

Site inspection reports Site photographs Time sheets Supplier invoices

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Case study: unit conversion

Facts: Underground utility replacement> Remove 500 square yard existing sidewalk $40 per square yard

emove , near ee o ex s ng cur per near ee

> Grade and seed 5,000 square yards $4 per square yard

> Surface 1,000 cubic yards of sidewalk $550 per cubic yard

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Engineer’s inspection reports:> Sidewalk removal – 4,800 square feet

ur remova – , near ee

> Grading and seeding – 1 acre

> Sidewalk paving – 1,000 cubic yards

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Contractor’s Invoice Auditor’s Computation

Type Quantity Rate Amount

Sidewalk

Removal

1,600 $40 $64,000

Type Quantity Rate Amount

Sidewalk

Removal

534 $40 $21,360

CurbRemoval

1,000 $15 $15,000

Grading &Seed

5,000 $4 $20,000

CurbRemoval

1,000 $15 $15,000

Grading &Seed

4,840 $4 $19,360

SidewalkPaving 1,000 $550 $550,000

Total $649,000

SidewalkPaving 1,000 $550 $550,000

Total $605,720

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1. Inspection reports did not use the same units ofmeasure as the estimates

. .Was this approved?

3. Actual grading and seeding was less than the estimate.

.$42,640 overcharge. 1 square yard = 9 square feet

5. Contractor billed for estimated grading and seeding and.

1 acre = 4,840 square yards

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Site control – risk elements

> Environmental regulations

are violated

> Site and adjoining property is

> Traffic control

> Obligations to repair existingfacilities

damaged

> Availability of land

> Land restoration

> Conflicting utilities

> Third party right of way

> Work disru tion> Hazardous conditions

> Discovery of new or unknownhazardous materials

> Rite of ways are violated

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Site control


Environmental regulations areviolated

Interview PM andenvironmental manager

Environmental siteassessment

compliance

,safety plan

Safety compliance report

Land restoration Site visit Right of way agreement

with restoration plan

Site management plan

Work disruption Interview PM Traffic management plan Utility services outage plan

hazardous materials

invoices with hazmat plan Meet with counsel to

discuss options

management plan Disposal certificates or

acceptable substitute Supt daily diary

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Case study: site control

Facts:> Major building remodel project

e s on an es a s e , ur an, an oc e campus

> Original building was constructed in 1973

> Architect, contractor and engineer suspect asbestos exists in the

> Amount of hazardous material exposure is unknown

> Total cost of remediation is unknown

s es os su con rac or s re a ne un er a un pr ce con rac

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Case study: site control

Risk Element Audit Plan

Unlicensed contractor Verify asbestos contractor is properly licensed

Asbestos remediation was not performedor incomplete

Obtain inspection reports certifying the site asasbestos free or contained after work is

completedIllegal hazardous waste disposal Obtain quantity of hazardous material disposed

of from disposal site documentation

Illegal hazardous waste disposal Reconcile disposal quantity with subcontractor’sfield log

Overcharging for services and disposalReconcile disposal quantity with subcontractor’sinvoice

Subsequent claims for hazardous waste Verify findings with project health and safetymanager

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> Subcontractor is properly licensed and experienced

> Every bag of hazardous materials was logged and accounted for

>

> Site inspection reports confirm construction site is safe

> No billing variances

waived this requirement due to the nature of the work

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Third party information – risk elements

> Reliance upon third party information

> Reliance upon third party construction resources

>> Government agencies

> Underground facilities

> Reviewing and checking underground data is included in the unit price

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Q i ?



Questions?

Questions?

Please feel free to ask questions in the screen to your right.

We will answer as many questions as time permits.

Visit bakertilly.com/construction-audit-webinar for recordings oftoday’s presentation and other topics in this series.

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C t t i f ti



Contact information

To receive CPE credit for today’s presentation, you MUST complete thesurvey e-mailed to you following the webinar.

.

Thank you for participating today!

Tony Ollmann, CPA, CCADirector

608 240 [email protected]

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Disclosure

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated

by the United States Department of the Treasury, nothing contained in thiscommunication was intended or written to be used by any taxpayer for the purpose ofavoiding penalties that may be imposed on the taxpayer by the Internal RevenueService, and it cannot be used by any taxpayer for such purpose. No one, without ourexpress prior written permission, may use or refer to any tax advice in thiscommunication in promoting, marketing, or recommending a partnership or otherentity, investment plan, or arrangement to any other party.

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned andmanaged member of Baker Tilly International. The information provided here is of ageneral nature and is not intended to address specific circumstances of any individual

. , .

2012 Baker Tilly Virchow Krause, LLP

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Auditing Unit Priced Construction Contracts 1112

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