Many companies engage in construction projects which can entail significant risks and costs. Companies have gone bankrupt by poor initial analysis of project benefits and a cavalier attitude to project management and costs. As a result, it is likely construction risks will be high and an audit may be scheduled in the Annual Internal Audit Plan. This article provides information on what should be considered when auditing construction projects.
Multi–Stage Audit Approach
These can be a valuable assurance tool, especially for auditing construction projects which will be planned and implemented over a period of time. The idea is that Internal Audit can provide assurance by adopting a life cycle approach to the project through ‘short and sharp’ audits at key project stages. This provides immediate feedback as the implementation progresses and any areas requiring remedial action can be addressed at the time they need to be addressed. It is generally acknowledged this approach can provide added assurance, identify problems as they arise, and improve outcomes.
Tip – Adopting a multi–stage audit approach by tracking the project as it evolves, and reporting on how to remediate issues as they arise, will win you much more respect than coming in after the project is complete and reporting the project was not managed well. A bit like the old audit saying about auditors going in after the battle to shoot the wounded.
There are many stakeholders involved in construction projects, including some from outside the company. Stakeholders may include:
- Master Developer.
- Project Manager.
- Prime Contractor.
- Regulatory Authorities eg. Municipal Authorities, Road and Traffic authority, Civil Defence, Land Department, etc.
Key project stages are usually:
- Design and Planning.
- Tender and Contracts.
- Monitoring of Construction.
Auditing Construction Projects
Auditors need to consider the following while auditing construction projects in their various stages:
Key considerations are:
- Major Risks are highlighted.
- Assumptions are matched with current actual conditions
- Internal ‘checks and balances’.
- Independent assurance by external consultants for significant projects.
Tip – There should be continuous review of all the above, including changes in the construction environment and market conditions.
Design and Planning
Key considerations for selection of consultants include:
- Method of selection.
- Qualification and experience.
- Insurances and bonds
- Specified payment milestones.
Tip – Many consultants put forward their company credentials and experience, but it is important to confirm that the specified personnel who will actually work on the project have the necessary qualifications, experience and track record.
Tender and Contracts
Key considerations are:
- Method of selection – the contractor should ideally be selected based on a tender. Audit review may include:
- Adequacy and compliance with company tender policies.
- Was the tender properly conducted with equal opportunity for all?
- Were both commercial and technical evaluations performed for all bids?
- Is a priced Bill of Quantities (BoQ) submitted by all bids?
- Does the tender scope cover the entire project? For example, if the developer is building the first phase of a project with a community centre, a mall and a mosque, will all these be completed and ready for occupancy at the same time?
- Are Contracts signed with all Contractors?
- Is a standard contract format such as FIDIC (International Federation of Consulting Engineers) followed as it will typically cover all eventualities involved in the construction process
- Are contractual terms consistent for all contractors?
- Are adequate retention conditions specified to ensure contractors are incentivised to complete the project as planned.
- Costing – fixed price, cost plus or guaranteed maximum price? If the contract is a cost plus or guaranteed maximum price, this increases risk and needs to be confirmed as the best approach.
Tip – It can be useful and cost–effective to employ an independent Probity Auditor to provide ongoing review of the project.
Tip – There should be adequate segregation of duties in the contract award process.
Monitoring of Construction
Key considerations are:
- In FIDIC construction contracts, Schedule 14 represents the construction timeline and highlights the timeline for completion of key activities. If Schedule 14 has been agreed with the contractor, the auditor needs to verify whether the project is on schedule or delayed. If there are any delays, enquire about actions taken to complete the project on schedule, who is responsible for the delay and whether there is recourse for any additional cost.
- Project progress reports are usually prepared by consultants on a monthly basis and circulated to all parties. The monthly progress reports contain, amongst other things, details about the actual versus planned progress and costs, variations, claims and disputes, non–conformance to contract specifications, and safety issues. A detailed review of the monthly progress reports gives a good view of the current project status.
- The auditor needs to review whether there is a formal Document Control System with proper control over all project documents such as contract copies, communication with contractors, consultants, etc. A detailed review of these documents is necessary to audit the project and understand its current status. Further, a document monitoring system should be in place to enable the company to ensure claims from contractors are correct.
- These documents should align with a recognised project management methodology.
- Prior to making payments to contractors, the following details should be confirmed:
- The performance bond, advance guarantee bond and required insurances are valid.
- The retention and advance recovery has been properly deducted.
- The consultant has approved the payment.
- Management has reviewed the Payment Certificate against the BOQ rates and quantities.
- Should a consultant or contractor be terminated for any reason, the auditor should review:
- The reasons for termination and mitigation plans put in place by management to ensure project continuity.
- Termination and mitigation plans been approved by management.
- Contract requirements and procedures have been complied with.
- The new contractor or consultant has accepted all required handover requirements before processing the final settlement for the terminated contractor or consultant.
- Verification of health and safety reports on compliance with health and safety requirements to ensure safety standards are maintained and people are not placed at risk.
Tip – Auditors should consider engaging Subject Matter Experts (SMEs) to provide expert input to the construction review process. An accounting qualified Auditor will have certain skills, but is unlikely to be an expert in construction.
Key considerations are:
- Regulatory approvals such as Certificate of Occupancy.
- The final drawings, testing reports, end user training, warranties and manuals for equipment have been handed over to the developer.
- Adequate spare parts for equipment are handed over.
- All non–conformances have been rectified to the developer’s satisfaction.
- All issues around time extensions, non–conformances and penalties have been approved and settled.
- All variations been approved and valued.
- The cost consultant provides a cost of break–up attributable to each construction element and the various components, so assets can be capitalised.
Tip – A survey may be conducted with the users of the project to verify whether the project meets their needs and to highlight any short comings.
Internal Auditors have a key role to review construction projects. They should become an assurance partner for the duration of the project and adopt a multi–stage audit approach. It is not much use to audit a project after it is completed.
HAKIM LALIPURWALA, ACA, CPA is Chief Internal Auditor at Easa Saleh Al Gurg Group.