The Importance of Construction Controls
By Bo Mocherniak
I'm sure you've read or heard recent media stories about the massive, complicated $800-million construction project to renovate Toronto's 100-year-old Union Station, including constructing a new subway platform while continuing to operate and serve the public. It is an extremely complex project, and investigative media reports include stories of cost overruns, contract disputes, and the absence of a working schedule. There are even stories of one crew building a wall that another crew had to demolish in order to complete their own work. Embarrassing as this can be, I'm sure we can all tell a few stories like this.
I don't want to get into the details of this unusual capital project, but I will say that a project of this size is bound to amplify the kinds of issues seen in all large construction projects. In fact, more than half of large construction projects either fall behind schedule or exceed their original budget.
There's an old joke that my own renovation contractor used to tell. "There are three parts to any construction project: Cost, quality and speed. You can have any two." The size and complexity of major construction projects have always presented a challenge for project managers in terms of balancing costs, quality and schedule. For instance, trying to meet an aggressive deadline might prompt an increase in the speed of service, which could result in reduced quality. Similarly, using new technology or materials to gain a higher quality might result in unforeseen cost over-runs.
Project managers play a key role in driving the completion of a project on time and within budget. However, project managers are often focused on completing the project and may miss other risks and potential areas of concern, such as errors and even fraud. Issues such as unintentional errors or overpayments-commonly referred to as contract leakage-are common on large design-build, guarantee maximum price, or fast-track capital projects. Strong project oversight can help identify and manage risks, develop and maintain financial controls, identify overcharges and avoid litigation.
Effective oversight is a critical driver in the execution of successful projects. Having successful construction controls in place is critical to mitigate the risks related to the management, execution and control of all large construction projects.
When beginning a project, it's important to plan every step of the way. I'd like to share a checklist items we use in construction project audit methodology. This checklist can be useful in helping you move your own project along more smoothly.
1. Understand the project controls currently in place: Review existing studies, internal audits and process descriptions. Collect, review and analyze all key project documents, including all of the project contracts. Conduct a site visit and interview project control stewards. Review all pay applications and the billing activity to date.
2. Identify major risks related to fraud, waste and abuse: This can be a long list, but it's critical. Focus on things such as: pay applications, billing support, equipment use charges, stored and obsolete materials, purchased materials and equipment; labour rates and usage, engineering costs, drawing submittal control, diverted and/or salvaged material, subcontractor bid manipulation; change order control, use of contingency funds, control of the budget and the schedule-of-values, and field reporting.
3. Design test-based controls, assess risk and address specific concerns: Trace the job cost report to pay applications and invoices. Compare the pay applications to field records (daily reports, equipment logs, time cards). Testing can sometimes be done by outside parties such as accounting firms, and sometimes the fact that testing procedures are in place will act as a preventative control itself.
4. Monitor project costs, report results and propose best practices: Look for concealed mathematical errors, missing supporting documents, charges for costs not allowed, duplicate charges and so on. Compare actual results to budgets and follow up on significant variances.
Regardless of the size of the project, at every stage, from pre-construction to close-out, you are bound to face different obstacles. Effective controls can help make sure that your construction project is built on a solid foundation.
With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP. He can be reached at firstname.lastname@example.org.