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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
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WebEx guide
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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
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needs
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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.
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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
Todays topicsEXAMPLE TEX
Owners responsibilities
Understanding Construction Costs
Project Financial Controls
Leading Indicators ofControl Problems
How to Budget and Pay forConstruction Controls
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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
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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
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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
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Owners responsibilities
Previously discussed:
Preconstruction activities (prevention)
>
> Contracting and negotiation> Contract risk matrix development
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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
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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
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Poll ing question #2
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
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Please respond using the polling section in the WebEx screen to the right.
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Understanding Construction Costs
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
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Understanding Construction Costs
Where do construction costs originate?
> Contractors budget or Schedule of Values
> Contract definition of allowable costs
> Pay applications> Project change orders
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Understanding Construction Costs
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
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Sample Schedule of Values
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Poll ing question #3
Which of the followin isnot a hard constructioncost?
A. Concrete and masonr work
B. Landscaping
C. Floor and wall coverings.
E. Equipment rental charges
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Please respond using the radio buttons in the WebEx screen to the right.18
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Understanding Construction Costs
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
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Understanding Construction Costs
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.
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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.
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Understanding Construction Costs Soft Costs
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
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Understanding Construction Costs Soft Costs
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
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Understanding Construction Costs Soft Costs
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
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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.
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Understanding Construction Costs Hard Costs
Hard costs usually include:rec a or
> Direct materials
> Construction equipment
> Facility equipment (boilers, air exchangers, air conditioners, etc)
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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
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Understanding Construction Costs
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
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P j Fi i l C l
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Project Financial Controls
Construction Risk Poolsu con rac or s
> Schedule of value
> Pay application
> Job cost
> Change orders
> Contingency
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P j t Fi i l C t l
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Project Financial Controls
Schedule of Valueser y ar me c
> Identify subcontractor contracting methods
> Confirm line item budgets
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P j t Fi i l C t l
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Project Financial Controls
Pay Applicationer y ar me c
> Reconcile supporting documentation
> Obtain lien waivers
> Verify billing rates
> Compare observed progress with reported progress
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Sample Pay Application
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Sample Pay Application
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Project Financial Controls
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Project Financial Controls
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
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Labor Burden Analysis
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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
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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
Project Financial Controls
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Project Financial Controls
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
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Project Financial Controls
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Project Financial Controls
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
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Leading indicators of control problems
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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
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Leading indicator of control problems
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g p
Repetitive Errorsncorrec ng ra es
>Arithmetic errors
> Verbal change orders without written authorization
> Late or missing documentation
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Leading indicator of control problems
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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
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Leading indicator of control problems
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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
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Leading indicator of control problems
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Project Trendsrequen c anges n pro ec personne
> Slow response to questions and information requests
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Poll ing question #4
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A. Project teams construction
B. Size and complexity of theconstruction project
s ma ng me ormonitoring controls isdependent on:
.
controlsD.All of the above
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Please respond using the radio buttons in the WebEx screen to the right.43
How to budget and pay for the
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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
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How to budget and pay for the
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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
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Construction controls program
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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
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Disclosure
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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.
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Baker Tilly Webinar Series
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Coming up in the Understanding Construction
Practices Webinar Series:
Wednesday, November 9, 201112:00 p.m. Central
Register at bakertilly.com/construction-audit-webinar
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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
.about three weeks.
Thank you for participating today!
ony mann r c uc ar CCA, Director CPA, Manager
[email protected] [email protected]
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