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The need for infrastructure improvements in the energy industry continues to be a challenge for energy
providers. Whether or not a utility has an internal audit group, the use of construction audit and review
techniques is critical in mitigating enterprise risk for large construction projects. Efforts in assembling a
construction compliance review team, no matter its size, may yield some project cost savings. When a
utility undertakes a construction project for power supply, buildings, or large transmission or distribution
projects, they should consider review techniques to ensure effective spend and allocation of resources
has been made. Establishing a robust internal control process over the construction segment can yield
risk mitigation and positive results no matter the size or spend of construction activities.
In order to create a collaborative environment between the internal audit or compliance professionals for
a review of construction activities, it is necessary to build construction chops, i.e. to demonstrate a
working knowledge of the construction process. It is imperative that internal teams are able to speak the
language of contractors. Without this knowledge, the team will be unable to ask probing questions of
senior leaders, construction project managers and personnel to determine proper application of controls
or areas for further review.
The following information provides details around the approach and steps taken to proactively use
construction audit reviews to evaluate and mitigate risks with projects. This process allows not only for
mitigated risks, it provides a high level of value along each step. These value added insights allow for
direct savings that can more than cover the cost of the audit.
In order to best utilize a construction review, consider the deployment of the efforts.
Each approach will provide value, however having construction compliance professionals involved from
project initiation will instill a spirit of “trust but verify” to the overall project and may lead to more compliant
behavior by contractors
The first step in the process is to perform a risk assessment of the common risk areas in a construction
project and ensure that high level risks are mitigated. Common areas to consider are
Some questions to ask in the project planning phase to help mitigate risks:
Time should be budgeted by the compliance project team to participate in ongoing construction
operational meetings. Expectations should be set of how the compliance team will provide feedback to
your organization’s construction project manager and the contractor and agreed upon protocols should be
established.
In Baker Tilly’s work in this area, one effective practice we have found is for the compliance team to audit
the first pay application to:
1. Verify arithmetic
2. Review supporting documentation for labor and equipment and compare to amounts billed on the
pay request
3. Confirm pay rates and burden calculations
4. Measure labor efficiency
This activity, while it is basic auditing, does serve to put the prime contractor on notice that areas will be
reviewed and the contractor’s documentation needs to support amounts requested, thus setting the stage
for future pay request documentation.
Any major construction project involves the dance of four main participants:
The common roles and responsibilities of each are shown in the following chart:
Providing
ProvidingValue
valueThrough
at eachEach
stepStep
of the project
The following table shows the value added outputs from properly utilizing a compliance team.
The industry rule of thumb is to budget audit hours of 0.001% times the construction project cost, i.e. a
$50 million project should have 500 audit hours.
The cost of the construction audit is a capitalizable project cost just like project management, engineering
services and construction materials. There are various funding options available to pay for the
construction audit, these can include:
Based on Baker Tilly’s experience in construction audits, an organization can expect findings and cost
savings in excess of 1% of the construction budget. This means a $50 million project should identify
$500,000 or more in findings. This assumes a well-managed project with good project controls.
Results that
Results that Matter
matter
Utilizing a compliance team as part of the construction audit process will provide greater assurance,
comfort and risk mitigation over large construction projects. In the continuum scale, greater use of
construction audit techniques will provide greater assurance that the cost side of the equation has
stronger controls and those controls are being utilized for your benefit.
Whether your organization makes use of internal audit resources, assembles a group of individuals from
within the organization, or outsources these services to an internal audit consultant, you should expect
positive results.
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