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Most construction projects as well as relationships between owners and contractors begin with the best intentions. However, sometimes the going gets tough and a significant strain on the well-intended relationship can be felt and questions can arise. Will there be additional cost? Will we meet the occupancy timeline established? Will quality be compromised to meet target dates?

Many people hiring a construction manager/general contractor vary in their level of understanding and experience regarding construction projects and the inevitable fluidity of the process. Yes, there is an estimate, and the more complex the job, the more likely something unforeseen happens to upend the originally quoted price. Often, people ask, “Did I pay too much?” or “Did we estimate/bid the job appropriately?”

Hiring an architect or construction management professional to supervise the technical aspects of a construction project is an industry best practice. However, in the battle of cost, schedule and performance (and safety, and regulatory compliance), how much time is left to review, in detail, the monthly flood of contractor, subcontractor and sub-tier subcontractor payment applications, invoices, delivery receipts and other common construction factors?

Like all service professionals, contractors need to nurture good client relationships to grow and develop their businesses. Yet, communication is always a challenge, even in healthy relationships. So how does the contractor foster the owner’s trust that the project is on track and on budget, while working to ensure they are earning their fair share as well?

A construction contract compliance audit or job cost audit can give peace of mind that resources are being carefully managed. This allows the business owner to focus on the myriad of technical project issues arising daily and it adds to the contractor’s confidence that an independent voice is explaining the work completed throughout the project lifecycle.

Pre-Contract Reviews

Inviting Certified Construction Auditors (CCAs) and CPAs to conduct a pre-contract review follows the adage that, an ounce of prevention is worth a pound of cure. A good contract creates incentives that allow all sides to be successful.

Additionally, it sets up clear guidelines and processes for things like contract change orders and use of contingency dollars. A few of the questions that should be addressed by both parties when writing a construction contract should include, but certainly are not limited to the following.

  • Is there a clearly defined construction audit clause?
  • What type of contract is being negotiated (e.g., lump sum, guaranteed maximum price [GMP], time and material)?
  • Each of these have their own pros and cons related to risk and reward.
  • Are there requirements for minority and women-owned business participation?
  • What are allowable costs in the fully loaded labor rates (e.g., small tools, parking, etc.)?
  • How are pre-construction expenses accounted for?
  • How is cost of work defined? What is included in general conditions?
  • How is the subcontractor buy-out process handled?
  • What are the rules for self-performance?
  • Are there rules governing equipment rental?
  • Is there a shared savings clause and is it easy to understand?

Few owners participate in more than a handful of construction projects. However, a project auditor may be auditing several projects simultaneously and will provide more experience identifying potential pitfalls and deviations from the contract terms, whether that be in favor of the owner or contractor.

In the end, inviting a CCA and/or CPA with construction contract compliance audit experience to do a pre-contract review will create a first line of defense for both parties, informing a good contract that will set up all sides for success.

Monthly Payment Application Reviews

Once the contract is in place and ground is broken, the contractor typically submits a monthly payment application (Pay App) to the owner. The American Institute of Architects has created a series of documents that seek to standardize the monthly pay app process. Yet, in many cases contractors fill out these forms in their own way that matches their accounting methods. Each pay app should be supported by evidence, such as subcontractor invoices and delivery receipts.

The monthly construction costs should be reconciled and summed to support the amount requested in the pay app. If variances are noted, the construction auditor should identify these discrepancies early in the pay app life cycle to assure the situation can be rectified before a small issue grows into a much larger and more painful negotiation point between the parties.

By reviewing the payment application each month, a construction auditor can help both parties ensure that project costs, general conditions, resulting fees earned, etc., have been appropriately calculated, supported and reported.

While a construction auditor is typically hired by the owner, the purpose is to validate costs incurred on a project against agreed to contract terms, not to have one more person harass the contractor. A contractor (prime or sub) who is not paid for services performed creates a legal liability for the owner and could imperil project success. Identifying issues as they happen through timely auditing of the monthly pay apps reduces the risk that issues remain unidentified and spiral out of control.

Would the contractor rather know now that there is a billing error in the equipment rental rate calculation and refund $500 in the subsequent pay app, or wait until project completion and face a refund of $10,000? Budget and billing problems do not get better with time. Identifying issues and working to actively correct problems will maintain trust and strengthen the relationship between owner and contractor.

Change Orders

As is the case with most jobs, as soon as the ink is dry on the design plans, there is a change. Preparing the site for construction may lead to the discovery of an abandoned pipe or rocky soil that requires extra effort to remove.

Perhaps the owner realized that a change to the building was needed to make it more accessible, but the end result leads to a dramatic change to the electrical design. Or, perhaps LEED certification is desired to take advantage of various incentives, but now, this requires a new approach to the mechanical systems (i.e., heating and cooling). Costs can quickly escalate in these scenarios as the contractor mobilizes extra resources to keep the project on track and will expect compensation.

A good contract will create proper change order and contingency usage processes that protect the contractor from unforeseen costs, but also protect the owner from losing control of the budget. For instance, no time and material tickets should be authorized without spending limits. Thresholds should be set for when a project change needs to be formally bid. Standard caps on allowed profit above cost should be put in place to prevent excess. Time may be of the essence, but the owner should always be aware of and authorize any significant departures from the original plan. “No surprises” is perhaps unrealistic, but should be the goal for all parties involved.

Every construction project is unique and has its own complexities. Understanding and addressing these up front and structuring the construction contract to address common pitfalls can only help to reduce the risk for the owner and contractor. In the end, a successful project is in everyone’s best interest.


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