PG Contract Management

7/28/2019 PG Contract Management

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1P RACTICE G UIDE FOR AUDIT OF C ONTRACT MANAGEMENT

Audit Objectives Issues

P RACTICE GUIDE FOR AUDIT OF CONTRACT MANAGEMENT

1. Whether the organization has a policy forproject appraisal and to what extent it isapplied?

2. Whether the system provides for consultationat appropriate time with :-

Relevant disciplines, e.g. finance, technical,

planning and legal ; External bodies, e.g. other public authorities

and statutory undertakings.

3. Whether the need are verified by a person otherthan the person initiating the need?

4. Whether needs are given a preliminary rankingof priority within the appropriate category?

5. Whether the system provides for preliminaryassessments of the options available to meetthe identified needs together with broadindications of their likely costs?

6. Whether the feasible options are ranked inorder of preference, taking into account suchmatters as cost, disruption and timing and suchranking documented ?

7. Whether the tender documents dispatched totenderers are in accordance with the projectsapprovals and the requirements of the detailedbrief?

8. Whether the preferred tender is in accordancewith the projects approvals and the detaileddesign brief is not qualified in a manner whichwould invalidate such approvals or exceed thedetailed design brief requirements?

Whether there exists asystem in the organizationfor proper project appraisaland whether this system isfunctioning effectively ?


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2 P RACTICE G UIDE FOR AUDIT OF C ONTRACT MANAGEMENT

Whether the systems foradmitting contractors to theapproved list and forreviewing theirperformance and currentviability is functioningefficiently?

1. Whether procedures exist for the compilationand subsequent amendment of the approvedlist and frequency of overall review?

2. Whether public notice has been givenregarding the intention to compile the approvedlist?

3. Whether requirements have been prescribedin relation to advertising in local newspapersetc and the closing date for applications?

4. Whether applicants have been asked to supplyfull information from which their operationalcapacity, ability and financial standing couldbe assessed?

5. Whether Financial and operational appraisalsof contractors have been carried out? Suchappraisals should cover the followingcriteria :-

Financial

Examination of the latest three yearspublished accounts including theapplication of accounting ratios andtrend analysis;

Examination of external auditorscertificates;

Consideration of the contract value inrelation to the turnover of thecompany;

Bank or business information reports;

Consideration for the need to obtainperformance bonds.

Technical

Part icu la rs of recent cont racts


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completed by the contractor, theirnature and value;

Trade references and personal visits,

if necessary, by technical personnel; Assessment of the contractors

management, labour and plantresources;

Information from in house systemsfor monitoring contractors

performance.Whether the methods forthe selection of contractorsinvited to tender iseffective?

1. Whether the organizations policies state themethods to be adopted for the selection oftenderers e.g. open, competitive, selective,restrictive or negotiated?

2. Whether the policies st ipulate the

circumstances in which the formal tenderingprocedures, as opposed to quotations, willapply and state the contract value above whichtendering procedures are mandatory?

3. Whether Exemption procedures exist foremergency work and single source ofsu pply ?

4. Whether requirements are s tated inconnection with advertising in localnewspapers, the period of public notice to begiven and the closing date for application?

5. Whether final selection is based on a financialand technical appraisal?

6. Whether final selection of contractors is madeby members or authorized officers and suchselection are properly recorded?

Whether the system forregulating the tenderingprocedures and the letting

1. Whether the organization has a set of policiesor procedures concerning tendering and theletting of contracts and that they are formally


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reviewed periodically taking into accounttechnical, legal and financial advice?

2. Receipt of Tenders

Whether all tender envelopes received havebeen endorsed with the time and date ofreceipt and the staff receiving the envelopeor subsequent custodian do not open anytender envelope?

Whether delivery is not refused simply

because a tender is received late? Whether all matters pertaining to tendersare strictly confidential?

In the case of tenders received electronicallywhether sufficient safeguards in respect of allthe above issues have been incorporated?

Custody of Tenders

3. Whether an officer is designated as custodianof all tender envelopes received.

4. Whether the custodian keeps a register of alltenders received in time and keeps a similarrecord of tenders delivered late and notifies

late deliveries immediately to the officerresponsible for convening opening sessions.

5. Whether the custodian keeps all unopenedtenders in a locked cupboard until they arerequested on or after the date for receipt oftenders by the officer convening an openingsession?

Opening of Tenders

6. Whether all tender envelopes are opened atthe same time, not earlier than the timeprescribed for the receipt of tenders?

of contracts is functioningefficiently and effectively?


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7. Whether all tenders are opened by at leasttwo senior designated officers of differentdisciplines, neither of whom has been involvedin the tender invitation?

8. Whether tender openers sign the tenderdocuments including the summary of bills ofquantities as well as any correspondence fromthe tenderer?

9. Whether the organization has a policy fordealing with late tenders (received after thecut off date & time) and that this policy isfollowed?

Recording of Tenders Received

10. Whether a register of tenders received iscompiled containing:-

(a) for each contract:- contract name and reference

number;

the latest date and time for receiptof tenders and;

the names of the contractorsinvited to tender.

(b) for each tender opened:-

date and time received;

date and time of opening;

amount of tender and;

any qualification/ alternative offer/

unsigned tenders.(c) for each contract after the tenders

have been opened and recorded:-

the signatures of the tenderopeners;


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signature of person to whom theopened tender have been passed;

the names of those contractors not

submitting a tender; the name of the successful

tenderer recorded after evaluationand acceptance and;

the reason for considering any latetenders.

Tender Evaluation

11. Whether there are procedures for tenderevaluation which relate to:-

Security and confidentiality, andany changes in tenders assubmitted

12. Whether a formal record of the followingmatters is kept as required:-

the Engineers estimate;

arithmetical check;

rates & prices;

percentage adjustments;

balancing items; ambiguities/ qualifications;

alternative offers;

adjustment to tendered rates or pricesmade subsequent to tender;

all contacts made with tenderers;

running costs and; Technical officers recommendation.

Acceptance of Tenders

13. Whether Engineers report is available to theperson-authorizing acceptance of tender?


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14. Whether acceptance of tenders, including anychanges thereto, is properly reported and dulyauthorized?

15. Whether unsuccessful tenderers are informedto that effect and EMDs returned?

16. Whether procedures exist for the adequateretention of all unsuccessful tenderers?

Whether there exists aneffective system forreviewing the suitability ofConditions of Contract andTender documents?

1. Whether the organization has a policy as tothe Conditions of Contract to be used forworks?

2. Whether procedures exist for the periodicreview of Conditions of Contract and themaking of recommendations to theorganization concerning modifications tostandard forms?

3. Whether such procedures take account oftechnical, legal, and financial advice and anymodification to the Conditions of Contractapproved by the organizations legalservices?

4. Whether a system exists to report points ofweakness or uncertainty centrally forconsideration and action is taken as a resultof any such report by way of examination,correction and notification to users?

5. Whether specific points, where considerednecessary, are taken up with the Conditionsof Contract Standing Committee?

6. Whether the organization has determined thetype and content of documents for tenderingincluding, for example, specific requirementsrelating to bribery and corruption, power toaccept the tender in whole or in part etc?

7. Whether a checking system exists to ensurethat:-


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Tender documents do not containconflicting provisions;

Specifications do not contain

conditions of contract and vice versa; Bills of quantities are checked for

compliance with the Civil EngineeringStandard Method of Measurementand that any departures are properlyincorporated;

Tender documents contain adequate

particulars as to the nature of the siteand soils, such information excludingstatements of opinion;

The appendix to the Form of Tenderis completed as far as required by theManagement e.g.minimum amountof insurance, liquidated damages.

All sets of tender documents areidentical;

The correct documents are sent out;

Detailed instructions are given to thetenderer as to the organizationsregulations and other requirements

concerning the submission andconsideration of tenders.

Whether the Insurance andBonding proceduresprescribed in theorganization areconsistent with the best

practices?

Insurances

1. Whether the inclusion of an amount ofinsurance cover in contracts is in accordancewith the policy of the organization?

2. Whether any recoveries made by thecontractors under insurances are notduplicated by contract claims payments?

3. Whether contractors insurances are checkedfor adequacy of cover and current premiumsare paid prior to him entering on the site?


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Performance Bonds (Surety Bonds)

4. Whether performance bonds are required oncontracts according to the policy of the

organization?

5. Whether tenders are notified of theorganisations intention to require a suretybond?

6. Whether the bond is acceptable to theorganization i.e. a reputable financial

institution?7. Whether the surety bond is received prior to

the commencement of the work?

8. Whether the method of payment for the suretybond is clear, e.g. included in the contractorstender price?.

9. Whether the bond is notified, by theorganization, of any event likely to effect hisresponsibilities and obligations under theterms of the bond?

10. Whether the surety bond is held in safecustody during its currency and release of thesurety bond is in accordance with its terms?

Whether the system forproviding financialinformation enable costs tobe adequately controlledincluding reporting

procedures?

1. Whether the system provides for writtenmonthly reports on contract and projectexpenditure to the organization? (Much of thedetailed information will be submitted by theEngineer)

2. Whether the contract report by the Engineercovers the following:-

(a) Expenditure to date and a projectedfinal value compared with the originalcontract sum with a detailed breakdown

STAGE B CURRENCY OF CONTRACT


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over the following heads with any significantdifferences being subject to a detailexplanation:-

Measured works, Prime cost items,

Expenditure against provisionalsums,

Dayworks,

Contract variations excluding

dayworks, Contractual claims,

Contract price fluctuations.

(b) Contractual claims being listed as:-

Those accepted and valueascertained,

Those accepted but notascertained in full,

Those not accepted

(c) A request for additional financialprovision where it is likely that theauthorized sum for the contract will beexceeded beyond the authorizedtolerance.

3. Whether the project report by the ProjectControlling officer covers the following:-

(a) Expenditure to date and expected finalcost compared with the original estimatedcost for the project including, whereappropriate, all oncosts are listed underthe following heads of expenditure:- .

Site investigation,

Design,

Supervision,


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Fees,

Land acquisitions,

Compensation payments,

Direct works carried out by theorganization,

Materials and other servicesprovided by the organization.

(b) A request for additional financialprovision where it is likely that the

authorized sum for the project will beexceeded beyond the authorizedtolerance.

4. Whether the above reports are forwardedto the organization in conjunction withtechnical reports on the progress of thecontract works?

Whether there exists asound system of on- sitecontrol regulatingvaluations of work forInterim payments?

1. Whether statements are submitted by thecontractor and are strictly in accordance withthe Conditions of Tender or the organizationsrequirements?

2. Whether valuations of work for interimpayment are based on the Contractors

statement?3. Whether quantities are supported by site

measurement records?

4. Whether rates and prices are checked to theContract Bill of Quantities?

5. Whether valuations of ordered variations are

substantiated?

6. Whether amounts payable in respect ofProvisional Sums are supported by receiptsor other vouchers where appropriate?

7. Whether contract Price Fluctuations are


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calculated in accordance with Conditions ofContract?

8. Whether amounts payable in respect of any

claims submitted are substantiated byparticulars supplied by the Contractor?

9. Whether retent ion is determined inaccordance with the Conditions of Contract?

10. Whether amounts payable in respect of anygoods or materials on or off site and not yet

incorporated in the Permanent Works arecalculated as provided in the Tender, and aresubject to ascertainment of title?

11. Whether the arithmetic correctness ischecked?

12. Whether any amendments made by the

Engineer to Contractors statements areshown clearly?

13. Whether contractor s statements areannotated to indicate the checks carried out?

14. Whether the net amount payable is determinedby deducting any previous payments onaccount?

How effective is the systemfor the examination andcontrol of price fluctuationsand variations?

1. Whether the contract

includes the formula adopted by theorganization?

2. Whether the elements and proportions of thework attributable to the price indices areincluded in the tender documents?

3. In those cases where tenderers challenge anyelements prior to tender submission,whetherany ensuing revisions are communicated toother tenderers?

4. Whether the contractor submits any pricefluctuations claims?


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5. Whether there is a designated personresponsible for checking the claims received?

6. Whether the measurement data is consistent

throughout the contract?7. Whether all the agreed Contract Price

Fluctuation claims are properly certified?

8. Whether adequate records are maintained ofall calculations and amounts paid?

Variations

1. Whether variations are issued solely by thoseauthorized to do so under the contract?

2. Whether variations are ordered in writing?

3. Whether variations specify the particularConditions of Contract under which the order/

instruction is given?4. Whether copies of orders for variations are

sent to the:-

Contractor.

Engineers representative.

Engineer.

5. Whether a numbering sequence identifieseach variation?

6. Whether contractors confirmation notes (oforal instructions given by the Engineer andwhich involve a variation to the Works) areimmediately dispatched to the Engineer for

acceptance or rejection?7. Whether contractors written confirmations of

oral instructions, if accepted, are taken intoand form part of a numbered sequence?

8. Whether proposed major variations, andreasons therefore, are reported, and


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considered by organization before ordering(emergencies accepted)?

9. Whether variations specify the method ofpayment at the time of issue?

10. Whether any payments on account arecertified without the existence of an order (andalso without the contractors writtenconfirmation duly accepted)?

11. Whether payments for variations are identifiedagainst a discrete order or instruction?

12. Whether the Engineer informs theorganization, on a monthly summary basis, ofthe net effect of variations on the cost of theWorks and any necessary action required bythe organization?

13. Whether the daywork sheets endorsed toidentify the variation to which they refer, aresigned (when agreed) by the Engineersrepresentative and are sent to the organizationwith original supporting documents at eachmonthly valuation?

14. Whether the daywork payment rates andcalculations are correct?

15. Whether daywork sheets are used solely forprocessing payments for daywork and are notused merely as a means of recording timespent on claims items and valued elsewhere?

16. Whether the organization reviews thevaluations of variations periodically and testscompliance with the organizations valuationprinciples and the order in which thoseprinciples are to be applied in the valuation ofvariations?


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Whether the proceduresfor the receipt andevaluation of contractualclaims are consistentlyapplied within theorganization?

1. Whether consideration is given solely toclaims submitted by notice in writing from thecontractor?

2. Whether claims state the clause in thecontract under which they are being made?

3. Whether the receipt of each claim isacknowledged by the Engineer andforwarded to the organization?

4. Whether claims are numbered consecutively

as they arise?

5. Whether any claim for a rate higher than onenotified by the Engineer is properlysubstantiated?

6. Whether acknowledgements of claimnotification contain instructions as to any

records to be kept by the Contractor?7. Whether engineer notifies the organization

and the contractor of any decision in principlereached in connection with any claim?

8. On receipt of each claim (and withoutprejudice to the Engineers subsequent

scruting), whether the contractor is instructedto submit monthly interim valuations ofamounts he considers due together withsupporting particulars?

9. Whether the principle of the claim has beendecided by the Engineer before any paymentis made?

10. Following the Engineers decision in principle,whether interim payments are made onaccount of the claim, and that they are basedon the degree of substantiation produced todate and accepted by the Engineer?


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11. Whether payments in respect of claims arelisted separately in valuations?

12. Whether claim settlements identify the

payment of costs separately from those forprofit in the case of cost plus contracts?

13. Whether claims based on cost areascertained as costs actually and reasonablyincurred by the contractor?

14. Whether claims clearly identify any inclusion

for price fluctuation?15. Whether claims are settled individually and

that no duplication of payments occursbetween two or more claims?

16. Whether the Engineer reports on claims to theorganization, preferably at monthly intervals,

stating:- Claim number and brief details,

Decision in principle (if any),

Amount claimed to date,

Amount paid to date,

Estimate of total amount likely to

be paid against the claim?17. Whether claim settlements are reviewed

periodically by the organization and any pointsof difference taken up with the Engineer usingthe dispute procedures in the Conditions ofContract, if necessary?

STAGE C FINAL CONTRACT

Whether the systemensures that when the finalaccount is produced, it iscomplete and accurate?

INVESTIGATIONS

1. Whether the final account is supported bydetailed documentation showing how the finalaccount value is built up?


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2. Whether the rates and prices have beenchecked to the contract?

3. Whether the measured work items have been

re- measured on completion and aresupported by site measurement records?

4. Whether variations are valued in accordancewith the contract; dayworks being supportedby daily agreed records of labour, plant andmaterials?

5. Whether variations are supported by thewritten authorization to carry out the work?

6. Whether where applicable, amount payablein respect of Prime Cost Items andProvisional Sums are supported by invoicesaccompanied by proof that these invoiceshave been paid?

7. Whether on variable price contracts theContract Price Fluctuation calculations are inaccordance with the contract?

8. Where contractual claims are part of the finalaccount, whether their entitlement andevaluation are in accordance with the

contract?

9. Whether any retention monies or outstandingobligations under the contract are allowed forin determining any final amounts payable?

10. In determining the final amount payable,whether allowance is made for previous

payments, tax matters, credits and deletionof Prime Cost Items, Provisional Sums andContingency Items not used.

Whether the systemensures that liquidateddamages have been

1. Whether the liquidated damages incorporatedin contracts are in accordance with the policyof the organization?


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2. Whether the organizations policy on thededuction of liquidated damages is adheredto?

3. Whether the calculation of amounts ofliquidated damages represent the genuinepre-estimate of loss and there is a consistentmethod used in the calculation?

4. Whether a permanent record is held of thecalculation of the damage figure?

5. Whether the tender contains rates fordamages and the periods for which eachamount is to be deducted(for deviation fromworkplan)?

6. Whether the original due date for completionof the Works, or any Section, can beascertained from the contract?

7. Whether the Engineers assessment of anyextensions of time granted to the contractorprior to the original due dates for completionare notified to the organization?

8. Whether the Engineer considers time at theoriginal due date for completion and notifies

the organization of any initial extension of time?

9. Whether the Engineer considers time againat the end of any extension of time and notifiesthe organization of any further extension oftime?

10. Whether the organization records all decisions

as to time in the contract register?11. Whether the organization reduces the

appropriate amount of damages recoverableby virtue of completed parts or sections of theWorks?

recovered whereappropriate?


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12. Whether the correct amount of damages isbeing deducted according to the extension oftime and completion information on hand?

13. Whether there has been a correct repaymentof damages as a result of a revised period ofextension of time being granted?

14. Where damages are repaid with interest,whether the correct payment of interest ismade?

15. Whether liquidated damages are deducted bythe organization when paying the certified sumand not by the Engineer on his certificates?

16. Whether there is proper authorization for anydecision not to deduct for damages?

Whether there exists aneffective system in theorganization for collationand dissemination ofinformation on likelyfailures on the part ofcontracting agencies andfor termination of contractsconsistent with the tenderconditions?

1. Whether the organization has prescribedadequate procedures to monitor theperformance of contract and to take correctivemeasures in the event of likely failure of thecontracting agencies?

2. Where failures do occur, whether theorganization has enough safeguards that thecontractors have not been paid in excess of

the value of work done or services rendered,especially in the case of front end loadedcontracts?

3. Where termination of the contract is required,whether sufficient performance security isavailable with the organization to guard againstany excess payment in the case of front end

loaded contracts?

4. Whether the procedures in the organisationpreclude any further payments being made todefaulting contractors until the milestonesagreed upon have been achieved?


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5. Whether any Sureties are informed and keptinformed of the developing situation?

6. In the event of termination of contract,whether

the state of the Works is assessed as follows: The value of work done by the

contractor up to forfeiture.

The estimated costs, at currentrates, of any remedial work.

The estimated value ofuncompleted work at current rates.

7. Whether anything remaining on site (plant,materials etc.) which has become theorganizations property under the terms of thecontract is listed, valued, marked as being inthe organizations possession and madesecure?

8. Whether a decision on how the works shouldbe completed has been made in accordancewith the organizations approved procedures?

9. Whether a separate account has beenestablished and maintained of all costs involvedin completing the original contract works?

10. Whether the Engineer has prepared a finalaccount for the work undertaken by thedefaulting contractor up to the date of thetermination?

11. Whether the extra cost in completing thebalance work is recovered from the defaultingcontractor as per the approved procedures?


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STAGE D POST COMPLETIONWhether there exists asystem in the organizationthat provides for a reviewof the outcome from thecontracts?

INVESTIGATIONS

Whether re-appraising the project toexamine whether the benefits expected atthe outset have been achieved andwhether the criteria for the project werereasonable in the light of up-to-dateinformation?

Whether the performance of the contractoris assessed to determine if he providedgood value for money or if he should beoverlooked for future contracts?

Whether the consultants performance isreviewed in a similar manner, for example,fees charged, ability, competence, etc.?

Whether the organizat ions owndepartmental costs and the performance ofthe departmental staff involved in the projectis reviewed?

Whether their exists a system to ensure thatwhen the final accounts is produced; it iscomplete and accurate?


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Introduction

The Performance Auditing Guidelines issued by this office constitute

the authoritative basis for the conduct of Performance Auditing in thisdepartment. This includes the entire gamut of activities commencing with theformulation of strategic plans, selection of topics based on these plans,planning of individual audits, audit execution, finalization of reports andsubsequent follow up. During the conference of Accountants General held inthe year 2005, it was recommended that supplementary guidance was requiredto be issued to facilitate due implementation of Performance AuditingGuidelines when undertaking Performance Audits. It has now been decidedthat supplementary guidance will be issued at two levels, one will be a seriesof Supplementary Guidelines, and the other will be a series of PracticeGuides. This Practice Guide entitled Practice Guide on Audit of ContractManagement, is the third in the series. The Practice Guides are to be takenas facilitative rather than as mandatory in their application.

In the process of planning an audit, the framing of issues is a vitalstep, because it forms the very basis of the entire audit effort in the field, andequally important is the fact that only if issues are properly identified andformulated, will the field audit result in findings that are relevant to the auditobjectives. Contract Management forms a major component of a wide varietyof programs cutting across the diverse sectors of the economy. This PracticeGuide is intended to facilitate the identification of issues involved in contractmanagement. It is not necessary that all the possible issues relating tocontract management that have been identified in this Practice Guide beincluded in the issue analysis, because the significance of contractmanagement as an area of audit will vary from one audit to another, and sowill the scope and intensity of the audit examination of contract management.It is expected that this Guide will enable those concerned to frame the Issue

Analysis and Study Design Matrix more cogently insofar as the area ofcontract management is concerned.

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PG Contract Management