Using Internal Audit to Reduce the Costs of Construction Projects

Using Internal Audit to Reduce the Costs of Construction Projects

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Companies involved in major capital projects are missing out on significant opportunities to reduce costs. This is not to say that construction managers are fiscally irresponsible, conversely they are very reluctant to spend money where it is not absolutely necessary. So much so that in an effort to contain costs, most organizations don’t budget funds for construction audits until the project is complete or nearing completion. However, this “Close-out” audit is only one component of a successful control and cost containment program. It is important that investing in internal audit early in the construction process may save thousands or hundreds of thousands of dollars throughout the project. “Full-scope” construction auditing optimizes the effectiveness of internal controls, reduces total project costs, and maximizes cost recovery.

Close-out Construction Audit

At the project’s conclusion, the owner requires assurance that the General Contractor/Construction Manager (CM) has completed the work in accordance with the contract. A close-out audit provides the owner confidence that the contracted obligations were fulfilled and the billing was accurate per the contract terms. While this is a critical step to verify compliance with the contract, it doesn’t solve other problems caused by a poorly written contract. In fact, contracts rarely protect all the interests of the owner.

Full-Scope Construction Audit

Involving construction audit services at the beginning, rather than the end of a construction project is far more effective because it mitigates risk before it materializes. Audit’s first responsibility is to protect the owner’s interest by creating favorable contractual agreements and improving the project control environment. Keeping Internal Auditl engaged throughout the construction project assures the effectiveness of the control environment and identifies inappropriate cost overcharges.

Protected Interest

In creating the contract, many owners place their trust in the knowledge of the General Contractor/CM and Architect to include all the appropriate provisions in the contracts. Most owners will then seek legal counsel to review the contract focusing on the insurance and indemnification sections. Additionally, the General Contractor/CM and Architect are often relied upon to track and control project costs. The result is an agreement which may not contain the necessary terms and conditions to adequately protect the interests of the owner, may not establish an effective system of internal controls, and may not establish a systematic means of monitoring contract compliance.

An effective “Full-scope” audit program utilizing the construction audit services of Internal Audit Department establishes an effective control environment, defines expectations for all parties, reduces the potential for conflict, reduces total project costs, and reduces the owner’s risk. Performing a “Full-scope” construction project audit is a best practice, and the earlier a qualified Construction Auditor is involved in the project life-cycle, the greater the benefits to the project owner.