Construction Financial Controls

8/9/2019 Construction Financial Controls

1/51

Construction Financial Controls and Contract Compliance

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,an independently owned and managed member of Baker Tilly International. 2010 Baker Tilly Virchow Krause, LLP


2/51

WebEx guide

> Everyone is muted to avoidbackground noise. Please usethe Q&A panel if you need tocommunicate with the host.

> Asking questions: In the Q&Apanel, ask questions by choosingAll Panelists in Send to field.Type your message in the Q&Apanel and hit send.

> If disconnected: Refer to youre-mail and reconnect. If audio isdisconnected ,click on theCommunicate menu in the upper

Chat

left to find the dial in numbers andaccess code or refer back to youre-mail for the dial-in #.

> Support #: If you have anytechnical roblems, call WebEx

Q&A Panel

Support at 866 229 3239.

> We will be recording todayspresentation.

Choose All PanelistsRefresh button

2


3/51

About Baker Tilly

> Established in 1931

>

the United States*

According to Accounting Todays 2011 list of

.

> More than 1,300 professionals

> Baker Tilly Virchow Krause, LLP is the largest. . a er y n erna ona n epen en

member firm

> Baker Tilly International is the eighth largestpu c accoun ng ne wor w represen a onin more than 110 countries

> Convenient, seamless resource for worldwide

33

needs


4/51

About Baker Tilly

From concept and funding to controls andcompliance, Baker Tilly has more than 250 dedicated

assist with your facility development project through allstages of the development lifecycle.

4

4


5/51

Introductions

Tony Ollmann Erik Schuchardt

CCA, Director CPA, Manager

608 240 2618 608 240 2439

[email protected] [email protected]

55


6/51

Overview

Todays topicsEXAMPLE TEX

Owners responsibilities

Understanding Construction Costs

Project Financial Controls

Leading Indicators ofControl Problems

How to Budget and Pay forConstruction Controls

6


7/51

Poll ing question #1

A. Yes

Were you able to attend .

C. Not yet, but I plan to view it

the first webinar in thisseries: ConstructionContract Fundamentals ?

Please respond using the polling section in the WebEx screen to the right.7


8/51

Learning objectives

1) Recognize source of construction costs

3) Identify gaps in your project controls

4) How to select projects for continuous monitoring

5) Recognize leading indicators of control failure

8


9/51

Construction project lifecycle

Construction progress to dateDesign and construction team has been selected (Facilities)

Contracts have been executed (Legal)

roun rea ng ceremony s comp e e

9


10/51

Owners responsibilities

Previously discussed:

Preconstruction activities (prevention)

>

> Contracting and negotiation> Contract risk matrix development

10


11/51

Owners responsibil ities (cont.)

During the construction phase

> Controlling capital expenditures

> Monitoring change orders

> Scheduling thousands of activities for hundreds of people> Maintaining an ethical and safe work environment

11


12/51

Owners responsibil ities (cont.)

Common construction riskmanagemen my s

> Our architect is analyzing and approving pay applications

> If the architect approved the change order it must be okay> We have a shared savings provision, our contractor has incentive to

minimize project costs

12


13/51


How would ou rate

A. My organization has strong

construction ro ectyour organizationsproject controls?

financial controls.

B. I have never evaluated ourcons ruc on pro ec

controls

C. Im not certain wh I wouldmonitor project controls

13

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


14/51


Designing and implementing project financialcon ro s requ res un ers an ng e o ow ng:

> Where costs originate

> Why costs change> Who can authorize change

> of change

14


15/51


Where do construction costs originate?

> Contractors budget or Schedule of Values

> Contract definition of allowable costs

> Pay applications> Project change orders

15


16/51


What is a Schedule of Values?

> Macro construction budget

> Line item budgets organized around 16 Divisions of Work

Divisions of work typically follow CSI standard formatDivision examples are:

Site work

Electrical

Mechanical>

by the subcontractors

16


17/51

Sample Schedule of Values

17


18/51


Which of the followin isnot a hard constructioncost?

A. Concrete and masonr work

B. Landscaping

C. Floor and wall coverings.

E. Equipment rental charges

18

Please respond using the radio buttons in the WebEx screen to the right.18


19/51


Cost Typeso cos s are e n rec cos s assoc a e w e cons ruc on pro ec

such as:

General conditions

ons ruc on managemen ee

Insurance and bonding

> Hard costs are the direct costs for constructing the facility.v s ons -

Materials, supplies and equipment

Subcontractor costs

Self-performed construction costs

19


20/51


Hard costs are usually supported by thirdpar y nvo ces, me s ee s, an rece v ngtickets.

Soft costs are more subject to interpretation

quantify allowable and non-allowable costs.

20


21/51

Understanding Construction Costs Soft Costs

General Conditions is the contractorsrecovery o pro ec managemen cos s.

s ou no e a rec recovery o econtractors corporate overhead costs.

21


22/51


What kind of costs should not be allowed as agenera con ons expense:> Project management software

> Software training

> Small tools> Company owner/principal labor and burden expense

>

> Insurance and deductibles

> Bonding

> Overtime costs for exempt employees

22


23/51


What kind of costs shouldnot

be allowed as ageneral conditions expense: (cont)> Bonuses

>

> Rework resulting from incomplete or unacceptable work product>Anything with its own line item in the budget

23

23


24/51


Generally accepted general conditions costs:ro ec manager, ass s an an super n en en a or cos s

(project management personnel)

> Vehicle costs for project management personnel

o ra er, u es an o ra er urn ure no o excee purc ase cos

> Per diems and project management travel costs

24


25/51

Understanding Construction Costs Soft costs

Construction management fee is the agreedupon over ea an pro pa o econtractor.

It is usually based on a percentage of the total .

Owners cost of the project.

25


26/51

Understanding Construction Costs Hard Costs

Hard costs usually include:rec a or

> Direct materials

> Construction equipment

> Facility equipment (boilers, air exchangers, air conditioners, etc)

26


27/51

Understanding Construction Costs Hard Costs

Hard costs usually exclude:ons ruc on managemen ee on c ange or ers

> Embedded profit margin in labor rates

> Equipment rate mark up over the fee

> Contingency budget

> Owner allowances

>Any costs already paid for in General Conditions

27


28/51


Change orders are Owner authorized

> Scope

> Schedule

> Project budgetChange orders occur for these primary reasons:

ev se es ma e

> Change in plans or specifications

> Compliance with building codes> Change in building conditions

> Resource constraints

> Owner requests

> Poor communication and planning

28

P j Fi i l C l


29/51


Construction Risk Poolsu con rac or s

> Schedule of value

> Pay application

> Job cost

> Change orders

> Contingency

29

P j t Fi i l C t l


30/51


Schedule of Valueser y ar me c

> Identify subcontractor contracting methods

> Confirm line item budgets

30

P j t Fi i l C t l


31/51


Pay Applicationer y ar me c

> Reconcile supporting documentation

> Obtain lien waivers

> Verify billing rates

> Compare observed progress with reported progress

31

Sample Pay Application


32/51

Sample Pay Application

32



33/51


Job Costompare ac ua cos s ncurre

with reported costs

> Verify no exempt employees are

purchases with plans andspecifications

> Verify labor burden contain onlycost

> Verify equipment rates> Confirm direct labor costs

operator hours

> Compare material purchaseswith ob site recei ts

> Verify direct labor hours

with time sheets

equipment logs

> Identify non-allowablechar es

33

Labor Burden Analysis


34/51

Labor Burden Analysis

Contractor Labor Rate Calculation

Contractor Name: Electric Occupation: Electrician Occupation: Forerman

Rate Applicability Period: June 2009 Straight Time Overtime Double Time Straight Time Overtime Double Time

ase age er our . . . . . .

Taxable Benefits

Subtotal Taxable Wages & Benefits $ 38.52 $ 57.78 $ 77.04 $ 42.37 $ 63.56 $ 84.74

Union Benefits

Pension $ 12.80 $ 19.20 $ 25.60 $ 12.80 $ 19.20 $ 25.60

Health & Welfare $ 9.39 $ 14.09 $ 18.78 $ 9.39 $ 14.09 $ 18.78

. . . . . .

JATC (2%) $ 0.77 $ 1.16 $ 1.54 $ 0.85 $ 1.27 $ 1.69

LMCC $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13

NLMCC $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01

Safety $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.03

Substance Testing $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04

AMF (.5%) $ 0.19 $ 0.29 $ 0.39 $ 0.21 $ 0.32 $ 0.42

NECA Service Charge (.5%) $ 0.19 $ 0.29 $ 0.39 $ 0.21 $ 0.32 $ 0.42

Total Union Benefits $ 24.71 $ 36.96 $ 49.21 $ 24.94 $ 37.31 $ 49.67

Subtotal Base Rate + Fringes $ 63.23 $ 94.74 $ 126.25 $ 67.31 $ 100.86 $ 134.41

Insurance

Workers Compensation (1%) $ 0.39 $ 0.58 $ 0.77 $ 0.42 $ 0.64 $ 0.85

Liability Insurance (.5%) $ 0.19 $ 0.29 $ 0.39 $ 0.21 $ 0.32 $ 0.42

Payroll Taxes:

State Unemployment (3.9% of $12,300) $ 0.23 $ - $ - $ 0.23 $ - $ -

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

Medicare (1.45%) $ 0.56 $ 0.84 $ 1.12 $ 0.61 $ 0.92 $ 1.23

F.I.C.A. (7.65%) $ 2.95 $ 4.42 $ 5.89 $ 3.24 $ 4.86 $ 6.48

Total Tax & Insurance $ 4.52 $ 6.12 $ 8.17 $ 4.93 $ 6.74 $ 8.98

34

Cost Per Hour $ 67.75 $ 100.87 $ 134.42 $ 72.24 $ 107.60 $ 143.40

Contract Hourly Rate $ 100.00 $ 150.00 $ 200.00 $ 100.00 $ 150.00 $ 200.00

Premium (Discount) $ 32.25 $ 49.13 $ 65.58 $ 27.76 $ 42.40 $ 56.60



35/51


Change Orderson rm au or za ons

> Review C/O log for duplicates

> Confirm C/O is not in budgeted scope

> Verify change order pricing

> Reconcile change order with actual cost incurred

35


36/51



37/51


Contingency Budgeteconc e wner s con ngency w au or ze uses

> Credit Owners contingency with scope reductions, material substitutionsand value engineering savings

on rm con rac or s con ngency w wner s con ngency

37

Leading indicators of control problems


38/51

Leading indicators of control problems

Excusesan n a ocumen

> Competing deadlines

> Limited resources and staff turnover

> Dont remember why

> I didnt know we needed to do that

38

Leading indicator of control problems


39/51

g p

Repetitive Errorsncorrec ng ra es

>Arithmetic errors

> Verbal change orders without written authorization

> Late or missing documentation

39



40/51

g p

Project Trendssse m es one a es

> Job cost is consistently under-billed

> Change orders for code compliance

> Failed inspections

> Consolidated change orders

> Use of Owners contingency faster than Contractors contingency

40



41/51

Project Trendsro ec cos s ncreas ng spropor ona y o o progress

> Lump sum change orders

> Large no bid change orders

> Subcontractors are unpaid

> Change order requests dated near financial milestones

41



42/51

Project Trendsrequen c anges n pro ec personne

> Slow response to questions and information requests

42



43/51

A. Project teams construction

B. Size and complexity of theconstruction project

s ma ng me ormonitoring controls isdependent on:

.

controlsD.All of the above

43

Please respond using the radio buttons in the WebEx screen to the right.43

How to budget and pay for the


44/51

Rules of thumb to followon tor ng ours equa . t mes t e construct on cost.

> For instance, a $50 million project should have 500 financial control hours

> This assumes an experienced team, moderate construction schedule andan average building

44

How to budget and pay for the


45/51

Rules of thumb to follow (cont.)e cost o t e pro ect nanc a contro s s a rea construct on

cost like project management, engineering services andconstruction materials.

Options to pay for the construction controls:

> Capitalize the cost with other construction costs

> Charge back to facilities management

> Special budget resource request to fund the

>

> Part of annual internal audit budget

45

Construction controls program


46/51

Financial controls programrepara on o con ro sc e u es

> Reconcile project expenditures

> Direct labor analysis

> Labor burden analysis

> Change order analysis and pricing analysis

> Subcontract analysis

> Material purchases

> Verification of contracted scope

>

> Bonds and insurance analysis

> Quality assurance and quality control

46

Disclosure


47/51

Required fi rm disclosure and Circular 230 Prominent Disclosure

The information provided here is of a general nature and is not intended to address the specific

c rcums ances o any n v ua or en y. n spec c c rcums ances, e serv ces o a pro ess onashould be sought.

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the UnitedStates Department of the Treasury, nothing contained in this communication was intended or written

taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

No one, without our express prior written permission, may use or refer to any tax advice in thiscommunication in promoting, marketing, or recommending a partnership or other entity, investmentplan or arrangement to any other party.

47

Baker Tilly Webinar Series


48/51

Coming up in the Understanding Construction

Practices Webinar Series:

Wednesday, November 9, 201112:00 p.m. Central

Register at bakertilly.com/construction-audit-webinar

48

Additional resources


49/51

> 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

49

Questions?


50/51

Any Questions?

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

We will answer as many questions as time permits.

50

Contact information


51/51

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

.about three weeks.

Thank you for participating today!

ony mann r c uc ar CCA, Director CPA, Manager

[email protected] [email protected]

51

Documents

Construction Financial Controls