Direct Construction Cost Audit Toolbox

8/10/2019 Direct Construction Cost Audit Toolbox

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Direct Construction Cost Audit Toolbox

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


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Direct Construction Cost Audit Toolbox

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About Baker Tilly

> Established in 1931

>

advisory firms in the United States accordingtoAccounting Todays 2012 list of Top 100Firms

> More than 1,400 professionals> Baker Tilly Virchow Krause, LLP is the largest

member 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, BakerTilly has more than 250 dedicated construction and real estateindustry professionals to assist with your facility developmentpro ec roug a s ages o e eve opmen ecyc e.

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Introductions

Tony Ollmann Erik Schuchardt

CCA, Director CPA, Manager

608 240 2618 608 240 2439

[email protected] [email protected]

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Overview

Toda s to ics:EXAMPLE TEX

Direct Labor

Testing Direct ConstructionCosts Direct Materials

Construction Equipment

Change orders

Toolbox Content

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Polling question #1

. Yes

B. No

C. Not yet, but I plan to view

Were you able to attendor watch the recording ofany of the previous

the recordings.construction cost controland audit webinars?

Please respond using the polling section in the WebEx screen to the right.

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Learning objectives

> Identify and analyze project direct costs for contract variances

> Validate construction costs with source documents> Identify hidden contractor profit margin

> Document findings that may lead to owner credits

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Key terms

> Direct costs

> Hard costs

> Material credits

> Rec clin credits

> Owner direct purchases

> Direct labor

> Project buyout

> Aggregate

> Construction equipment

> Plans and specifications

-

> Prevailing wage

> Certified payroll

> ater a su st tut on

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Understanding construction costs

Cost types

> project, such as:

General conditions

Construction mana ement fee

Insurance and bonding> Hard costs are the direct costs for constructing the facility.

CSI divisions 2-16

Materials, supplies and equipment

Subcontractor costs

Self-performed construction costs

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Hard cost decomposition

> Direct labor

> Direct materials> Building equipment

> Construction equipment

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Polling question #2

. True

B. FalseRigorous project controlsand good contractingpractice enable an owner

to transfer constructionrisk to the contractor.


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Examination methodology

Read all contract documents

Evaluate billing method

Identify and request source documents

Develop testing and analytics program

Execute program and document results

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Direct labor examination

Determine

Actual costsRate

schedule

Lump sum /

fixed amount

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Direct labor actual costs

> > -

Source Documents

> Original schedule of values

> Current schedule of values

> Safety certifications andlicenses

y

> Schedule of authorizedemployees

> Collective bargaining agreement> Contractors job cost detail

mp oyee me s ee s

> Certified payroll

ng an payro processdocumentation

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Hig h-Level Description of Process

The Payroll and Billing Department primary responsibilities are:1. Collecting data from the field and preparing it for posting to the time and billing system

2. Verifying the accuracy of the field information

3. Researching and correcting data errors prior to posting

. .

l imited to: labor rate table, equipment rate table, and cost codes tables.5. Producing customer invoices with supporting documentation

Su ervisor re ares Pa roll forwards field PM reviews all field Pa roll in uts PM Accountin osts field electronic time sheets

and equipment logsthen transmits toPayroll

information to project

management (PM) forreview

data and corrects

errors as necessary

edits into Payroll

system.

data to payroll and job

costs system

Potent ial Ris ks

Invoices are being incorrectly calculated and overbilled

Timesheets and equipment logs are not reviewed and controls are circumvented

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a or an equ pmen ours are n a e resu ng n overc arg ng


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Questions f rom Controls Interv iew

1. How are timesheets collected from the field and entered into the payroll system?

2. How is overtime authorized?

3. Do Project Managers have frequent changes to the payroll edit reports?4. What does it take to add a person to the crew list?

5. How is data about equipment hours entered into the system from the field?

6. How are invoices compiled?

7. How are billing errors detected and corrected?

8. How are construction materials recorded and controlled?

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Summary of Key Cont rols

Preventative

1. PM Time Sheet and Eq uipment l og revi ew. Project managers review time sheets andequ pmen ogs en correc any errors pr or o ayro pos ng e a a o e me an ng

system.

2. RestrictedData Entry: The Human Resources department restricts access to the HRIS to

prevent unauthorized creation of employee files.

3. Invoice Review: Invoices and supporting documentation are reviewed by the project manager

.

Monitoring 1. Invoice suppo rt ing d ocumentation.Invoices submitted to owner include Labor and

Equipment Detail reports, material invoices, supplier invoices and other third party invoices to

support the charges billed on the invoice.

Process Inf rast ructure Descrip tionProcedures & Practices Time Sheet Collection and PayrollSystems Equipment billing system

Enterprise time and billing system Payroll system

Reports Time sheets Equipment logs Labor Detail Report Equipment Detail Report (Owned and Leased Equipment)

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Project Progress Report


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Polling question #3

. True

B. FalseHiring of day laborers ona lump sum contract isan audit risk to the

owner.


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Findings

Findings Concerns Actions

Su erintendents are Ghost em lo ees are Determine materialit , ifauthorized to hire daylaborers

hired in the field andsupported with falsifiedtime sheets

cost exceed materialitydeny payment foremployees not processedand a roved b HR

Superintendents preparefield time sheets

None, if project managersreview time and approveit for billing

Billing processes aremanual

High probability ofarithmetic errors in all

project reporting

Assume all sourcedocuments are unverified

and footings areunreliable. Test a highpercentage ofcalculations.

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Test Program

ID Employee and Hours Testing

1 Verify employees2 Prepare employee time sheet schedule

3 Reconcile time sheets with I-9 forms

4 Reconcile employee time sheets with certified payroll

5 Reconcile job trailer sign in sheet with employee time sheets

6 Reconcile safety training log with employee time sheets

7 Reconcile authorized employee schedule with employee time sheets

8 Verify labor hours

9 Overtime hours

10 Verify all employees charging over 40 hours per week are non-exempt

11 Verify no single employee has been given overtime preference

12 Verify overtime wasn't incurred to meet financial milestones

13 Verify overtime incurred wasn't due to poor labor management

rem um me ours

15 Reconcile premium occurrence dates with field journals and reports

16 Straight time hours

17 Reconcile total certified payroll hours with total time sheet hours

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Direct Labor Control Schedule

Date Work Order # Name Class Union Worked Hour ST Hours OT Hours DT Hour ST Rate OTRate DT Rate ST Labor OT Labor DT Labor Total

2/27/2011 66662 AARON 2150 33.50 0.00 31.50 2 79.05$ 110.878 142.702 -$ 3,492.66$ 285.40$ $3,778.06

-. . . . . . , . , . . , .

4/3/2011 66662 AARON 160J0 2150 12.00 10.00 2.00 - 79.05$ 110.878 142.702 $790.54 $221.76 $0.00 $1,012.30

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Findings


Day laborers are paid out Ghost employees may be Deny payment as an

Exempt employeescharged in excess of 40hours per week

No cost incurred over 40,owner has beenovercharged

Request credit for excessDL charge

Overtime is charged bythe same few people andalways just a few hourser week

OT is unnecessary andcollusion has occurred

Request cost justificationfor OT. Was OT ownerapproved

OT spikes every monthend or project milestones

Project is mismanagedand is using OT to catch

up before progress

Implement ownerapproved use of OT.

Review project schedule

or behind to justify OT.

Certified payroll has fewerhours than DL cost

Owner is charged for DLnot paid to employee

Request credit forovercharge. Fraud

indicator requiringexecutive oversight

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Test Program

ID Labor Rate Testing1 Verify labor rates2 Prepare a schedule of labor rates by employee classification

4 Reconcile schedule of labor rates with certified payroll5 Verify labor burden rates6 Verify direct labor charges

um raw a or costs

8 Sum labor burden costs9 Reconcile calculated labor costs with actual labor charges

10 Report all variancesBilling rate analysis

12 Decompose labor rate into raw labor and burden13 Measure burden against CBA and known metrics14 Report any embedded billing rate profit margin

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Union Rate Schedule

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Labor burden build up

Contractor Labor Rate Calculation

Contractor Name: Occupation: Superintendent

Rate Applicability Period:Straight

Time Reported

ase age er our . 7 . 7

Taxable Benefits (Vacation -As applicable

Subtotal Taxable Wages & Benefits $ 42.37 $ 42.37

Benefits

401K assume 2% of wages $ 0.77

Safety $ 0.03

Substance Testing $ 0.04Skills Training $ 1.00

Reported 35% $ 14.83

Total Benefits $ 7.61 $ 14.83

u o a ase a e + r nges . .

Insurance

Workers Compensation (2%) $ 0.85

Liability Insurance (1.5%) $ 0.64

Payroll Taxes:

State Unem lo ment 3.9% of 12 300 0.23

Fed Unemployment (6.2% of $7,000) $ 0.21

Medicare (1.45%) $ 0.61

F.I.C.A. (7.65%) $ 3.24

Reported 50% $ 28.60

Total Tax & Insurance $ 5.78 $ 28.60

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os er our . .Contract Hourly Rate $ 85.80

Premium (Discount) $ 30.04


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Polling question #4

. Superintendent preparescrew time sheets

B. No prevailing wageWhich of the followingare direct labor audit risk

public fundingC. Single person skilled crew

flags?

D. Labor burden is billed on

top of fully loaded billingrate

E. B & D

F. All of the above


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Fi di


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Findings


Incorrect billin rates Owner has been Re uest a credit for were used incalculating DL cost

overcharged

billing difference

Billed labor burden Owner has been Reconcile labor burdenexceeds estimatedburden

overcharged with contractor andrequest credit forunsupported variances

Contractor cannotproduce a certified

payroll

Owner is beingovercharged for DL

cost

Request and reconcilepayroll records with DL

costs

prevailing wages andemployees are paidless than prevailing

risk if this occurs

counsel for guidance

wages

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Di t l b R t h d l billi


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Direct labor Rate schedule billing

Audit program differences from actual cost testing:

> > All other procedures to verify employees, hours and overtime should

be applied

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Di t t i l i ti


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Direct materials examination

e erm ne

billing method

Actual costs Lump sum /xe amount

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Direct materials actual costs


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> >

Source Documents



> Receiving tickets

>A/P ledger

y

> Purchase order> Material specification

> Trucking tickets> Scale tickets

> Materials take off > Contractors job cost detail

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Test Program

ID Direct materials testing1 Prepare control schedules2 Owner direct payments for materials

,

4 Trucking and scale tickets5 Purchase order testing6 Compare competitive supplier bids with P.O.

econc e purc ase or ers w t mater a ta e o

8 Reconcile purchase orders with field receipts

9 Vendor credits and discount testing10 Confirm with supplier discount and incentive programs11 Verify early payment discounts are pass through to owner

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Test Program

ID Direct materials testing12 Material usage testing13 Verify destination of delivered materials

. .

15 Reconcile P.O. with material take off16 Compare as built to P.O.17 Compare inspection reports to P.O.

Sales tax testing

19 Verify proper sales tax treatment

20 Direct owner purchases testing21 Verify no DOP are in the contractor's job cost ledger22 Research why any material purchases are in the contractor's job cost ledger

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Polling question #5


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Polling question #5

. Reconciling P.O. toreceiving tickets

B. Confirming supplierWhich audit proceduresshould be performed on a

C. Reconciling materialspecifications to purchases

ump sum pro ec

. unused materials

E.All of the above.


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Weak receiving controls No ability to track Inform facility

additional material costs

and suggestimprovements

Suppliers report material Owner is overpaying for Request owners credit inreturns, however no

credits appear on pay app

materials the amount of unused

materials

Suppliers report volume Owner is overpaying for Verify discounts result in

program with contractor .

20% of the trucking

tickets are missing from

Owner is overpaying for

gravel, dirt and aggregate

Request trucking tickets

from trucking company orpro ec e eny paymen or

unsupported costs

Several trucking ticketsshow time and mileage

Some of the truck loadshave been delivered

Deny payment forcharges until

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significantly different thanthe others

somewhere other than thejobsite

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DOP vouchers do not Owners A/P de artment Escalate to A/P to re uestutilize vendor paymentdiscounts

is forfeiting discounts dueto slow pay

priority voucherprocessing

Project plan requires 5% Owner over purchased Negotiate a return to

purchased

Door styles aresubstituted with a less

Owner is over paying formaterials

Negotiate credit formaterial substitution

expensive door type

Revised plans used 20%

fewer windows

No c/o was found

authorizing change,

Negotiate credit change

order ,

labor adjustment

Local preference wasignored

Project financing requiredlocal supplier and

Escalate to corporatecounsel for direction

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con rac or pre erence

Equipment usage and rental


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Equipment usage and rental

> >

Source Documents



> Equipment logs

> Repair invoices

y

> Contractors job cost detail

u v

> Billing rate schedule> Equipment rental agreements

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Owned and rented equipment analysis


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q p y

Construction equipment used on the project may be charged to

the ro ect several wa s:> Pre-established rate schedule

> Rental invoice from third party equipment dealer

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q p y

Test Program

ID Equipment testing1 Prepare control schedules2 Equipment usage logs3 Rental invoices4 Repair invoices

5 Equipment usage testing6 Reconcile usage logs with operator logs

'

8 Equipment cost testing9 Reconcile rental invoices with pay application

10 Reconcile repair invoices with pay application

12 Verify rental agreements are not lease or lease to buy agreements

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Test Program

ID Equipment testing13 Fuel, repairs and consumable testing14 Verify fuel is charged only on operating days

16 Equipment rate testing17 Verify billing rates comply with rate schedules

18 Verify billing rates are competitive with published equipment rental rates

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Equipment Terms Hourly Daily Weekly Monthly Standby Operator

Pick

up

truck

Equipment Rate Decomposition

Dailyrentalrate $ 8.99 $ 64.00 $ 303.80 $ 1,099.90 n/a n/a

Fuel Included

Consumable

surcharge Included

Transportation

surcharge N/A

Insurance Included

Equipment Terms Hourly Daily Weekly Monthly Standby Operator

Cat

D6

Daily

rental

rate $

66.60

$

479.52

$

2,157

$

9,170

$

4,585

n/a

Fuel $

3

$

24

$

120

$

480

$

240

Consumable

surcharge 5% $

3.33

$

23.98

$

107.85

$

458.50

$

229.25

Maintenance

surcharge Actual

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Transportation

surcharge 50% $

33.30

Insurance Included

Polling question #6


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. True

B. FalseIRS mileage reimbursementis a fair way to calculate

g way ve c e ue cos s.


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E ui ment hours E ui ment is arked at Questions the char essignificantly exceedoperator hours

the job site to generaterental revenue

and request a credit forunderutilized equipment

Repair costs include Owner is double charged Request credit for

adjustments

Fuel charges are billed onholidays

Owner is charged for fuelwhen equipment is idle

Request adjustment tofuel cost charge

Rental agreement lookslike a finance purchase

agreement

Owner is overpaying torent equipment

Request rental rateadjustment to reflect

commercial rental rateswner s pay ng or

of equipment FMVwner as e ec ve y

purchased the equipmentego a e equ pmen uy

back arrangement

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Construction auditors toolbox


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> Work paper index

> Work ro ram> Analysis templates

> Contract resources

> Estimating and pricing tools

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Work paper index


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Work paper index Section

ReferenceI. Contract review and analysis

A. Construction contracts I.AB. Contract risk analysis I.B

C. Contract revisions, exhibits and schedules I.CII. Testing & Analysis

A. Direct labor testing II.A1. Source documents

a. Time sheets II.A.1.ab. Labor rate schedule II.A.1.bc. Contractor s job cost ledger II.A.1.c

.a. Labor burden analysis II.A.2. a

b. Time sheet reconciliation II.A.2.b3. Findings II.A.3B. Pay application testing

1. Source documentsa. Monthly pay application II.B.1.ab. Lien waivers II.B.1.bc. Supplier invoices II.B.1.cd. Subcontractor invoices II.B.1.d

2. Analysisa. Pay application roll up II.B.2.a

3. Findings II.B.3C. Direct materials testin.D. Construction equipment testingE. Change order testing

III. ReportingA. Interim findings reports III.AB. Closeout audit report III.B

IV. Communication

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. .

B. Email and memo to file IV.BC. Supplier confirmations IV.C

Work program


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1.0 Preparation of Control Schedules

. econc a on o ro ec xpen ures

3.0 Direct Labor Analysis

4.0 Labor Burden Analysis

5.0 Equipment Rental Analysis

6.0 Job Owned Equipment Analysis

7.0 Bonds and Insurance Analysis

8.0 Change Order Analysis

9.0 Change Order Pricing Analysis

10.0 Material Purchases

11.0 Verification of Contracted Scope of Work

12.0 Quality Assurance & Quality Control

13.0 Independent Field Inspection

14.0 Subcontract Analysis

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Analysis templates


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> Pay application control schedule

> Source document control schedules> Labor burden and billing rate analysis

> Equipment rate decomposition

> Change order control schedule> Cost responsibility matrix

> ontract r s matr x

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Contract resources


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> American Institute of Architects (AIA documents)

> Consensus documents> Association of General Contractors (AGC)

> Construction Owners Association of America (COAA)

> Legal counsel

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Analytical tools


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> ACL

> Idea> Primavera P6 (schedule management)

> Meridian (earned value analysis)

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Pricing and estimating tools


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> RS Means

> National Electrical Contractors Association NECA Handbook> U.S. Department of Labor

> Local Department of Revenue

> National Electrical Code (NEC) cost book> BNI Cost Book

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Polling question #7


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. Verify it isnt asubcomponent of anothercost

What should you do witha cost that is undefined

.

clarification from contractorC.A and B

. expense and require thecontractor to document

why its reimbursable

Please respond using the polling section in the WebEx screen to the right.52


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Additional resources


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> www.bakertilly.com/construction-audit-webinar

> htt ://www.theiia.or /> https://www.thenaca.org/

> http://www.caacci.org/

. .

> http://www.auditnet.org/> http://www.csinet.org

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Questions?


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Any Questions?

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

We will answer as many questions as time permits.

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Contact information


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To receive CPE credit for todays presentation, you must complete the survey

.about six weeks.

Thank you for participating today!

Tony Ollmann Erik SchuchardtCCA, Director CPA, Manager

[email protected] [email protected]

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Disclosure


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Pursuant to the rules of professional conduct set forth in Circular 230, aspromulgated by the United States Department of the Treasury, nothing contained

u w w u y y x ypurpose of avoiding penalties that may be imposed on the taxpayer by the InternalRevenue Service, and it cannot be used by any taxpayer for such purpose. Noone, without our express prior written permission, may use or refer to any taxa v ce n s commun ca on n promo ng, mar e ng, or recommen ng apartnership or other entity, investment plan, or arrangement to any other party.

, ,managed member of Baker Tilly International. The information provided here is ofa general nature and is not intended to address specific circumstances of any

individual or entity. In specific circumstances, the services of a professional should. ,

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Direct Construction Cost Audit Toolbox

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