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CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Accounting Controls and Cost Savings Opportunities CUPP AND HUDSON, LLP. Construction.

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Presentation on theme: "CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Accounting Controls and Cost Savings Opportunities CUPP AND HUDSON, LLP. Construction."— Presentation transcript:

1 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Accounting Controls and Cost Savings Opportunities CUPP AND HUDSON, LLP. Construction and Capital Project Consulting

2 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting What is a Capital Maintenance Project? What roles do accountants and auditors have within capital projects? Financial Reporting Financial Planning and Analysis Project Accounting Process and Controls Reviews Three Philosophies of Plant Maintenance 1.Repair when needed 2.Preventative Maintenance 3.Predictive Maintenance The Ultimate goal of any Maintenance Program B ACKGROUND

3 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Challenges surrounding Capital Maintenance Projects Schedule Planning and Budgeting Coverage/Quality Contracting Services/Project Structure Typical Audit Observations/Issues Opportunities for Improvement T OPICS FOR D ISCUSSION

4 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting C HALLENGES O VERVIEW SCHEDULE COST QUALITY

5 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting C HALLENGES O VERVIEW NEEDS ASSESSMENT PROJECT PLANNING DESIGN AND SCHEDULING PROCUREMENT AND CONTRACTING PROJECT EXECUTION CLOSEOUT LESSONS LEARNED

6 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Finite Number of Days to Complete Dictated by Regulatory Requirements Existing Contracts Market Conditions C HALLENGES S CHEDULE/ T IMING

7 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Project duration varies between 3 and 9 weeks Maintenance may involve multiple unrelated tasks Supply pipe cleaning Weed Removal Remodeling facilities Replacing system components or installing equipment Balancing plant operations Timeframe provides significant constraints for planning activities Prioritization of work Sequencing of work activities Exceeding established schedules dramatically increases project cost C HALLENGES S CHEDULE/ T IMING

8 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting OVERVIEW Unplanned Outages Unplanned outages are 3 times more costly than planned Spare parts must be available resulting in higher carrying costs or expedited delivery fees Breaks in production/inefficiency Increased overtimecraft labor reacts to needs and are typically only 20 to 40 % productive Profitability depends on [the ability] to deploy resources effectively among multiple activities and sometimes between facilities or divisions. Guy Barlow, Director of Industry Strategy Oracle Primavera C HALLENGES P LANNING

9 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting C HALLENGES P LANNING Assessing plant/facility needs and risks Cost estimation and work package developmenteverything is bound by the budget Planning and sequencing of the work Contingency planning Execution WHAT IS IN NEED OF REPAIR, OR CRITICAL CAPITAL PROJECTS? HOW MUCH CAN GET DONE WITH THE AMOUNT ALLOTTED? WILL YOUR PROJECT BE CONSTRAINED BY THE SEQUENCE OF WORK? DOES MANAGEMENT HAVE CONTINGENCY PLANS IN PLACE? ARE CONTRACTORS AND MANAGERS CLEAR ABOUT THE PROJECT GOALS?

10 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting C HALLENGES P LANNING Contractor management Materials management Tools and equipment management Cost tracking and change control

11 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Performance measurements are developed and clearly communicated Planned maintenance is established as the focus of the operation Maintenance becomes a competitive advantage Both manufacturer and maintenance contractor desire a mutually beneficial relationship Maintenance best practices are established and tracked C HALLENGES P LANNING

12 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting The project budget is in continual flux Budget should be ready for multiple contingencies Costs must be continually tracked against contract totals and projected estimates (real-time reporting is critical to proper management of the project) C HALLENGES B UDGET PLAN FORECAST REPORTREVIEW UPDATE

13 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Cost Tracking Is the work logically segmented to help manage the project and capture data for the future? When contingency funds are used, are new projects established to track the spend? How are labor costs reported? How are items such as scaffolding, hand tools and equipment costs charged to work packages? C HALLENGES B UDGET

14 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Does your organization track deferred projects and are records sufficient to determine why the project was deferred? Do maintenance and operations personnel cooperate to ensure maintenance projects properly align with production goals and plant needs? Has your organization developed performance expectations for key equipment and support systems? Are systems sufficiently integrated to track performance expectations/metrics and identify potential problem areas? C HALLENGES C OVERAGE

15 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Equipment Performance Reduction in product errors/Increases in productivity Quality work reduces downtime and operating costs Machinery/Systems last longer Workplace Performance Identify leaksgas/liquid (worker safety and potential EPA violations) Tracks Emissions from equipment Looks at overall plant performance and performs root cause analysis C HALLENGES Q UALITY

16 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting A 4 week plant outage nears completion. Corporate management reviewed the forecasts for quarterly results and identifies the outage as an area where they can cut costs and improve their numbers. Management requests a cost reduction of 20% on the remaining work. One of the remaining projects includes a key system estimated to take 40 hours to perform maintenance work. An aspect of this project involves replacing three rotary joints. Another aspect of this project includes replacing a Dryer Section Drive and Coupling. The Dryer Section Drive is in inventory from a previous outagethe project was previously deferredand the coupling just arrived from the supplier after 5 weeks of fabrication. S CENARIO

17 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Senior Maintenance and Operations Management decide this is a project where costs must be cut How will they accomplish a cost reduction? CUT HOURS OFF THE PROJECT BUDGET Management looks at the dollars in front of them rather than potential long-term ramifications related to productivity, quality and future downtime S CENARIOCONTINUED

18 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Preliminary reviews of the rotary joints indicate that the carbon rings (seals in the joint) have worn down to only 1/8 thickness. This is below manufacturer specifications, but operations feels these could run until the next outage (they are not yet leaking). This will save the two hours and defer the parts and labor costs associated with the work. S CENARIOCONTINUED

19 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Maintenance personnel had hours budgeted to fabricate/prepare the new coupling to fit the new dryer section as it was designed. While accessing the dryer assembly, maintenance workers noticed a exhaust fan that failed to shutoff. They decided to replace the fan costing 4 additional hours. To make the desired cuts, maintenance personnel welded the old coupling back on the new dryer section. This achieved the desired cost savings for the quarter. S CENARIOCONTINUED

20 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting The outage ended and the plant went back on-line. The stress from the startup cracked the carbon rings and the joints started leaking. The result was a 10% decrease in production speed. The leak went unnoticed for two more shutdown periods. The old coupling on the new Dryer Section remained on for three more outages. Due to minor errors in installation, the old coupling was slightly misaligned. This caused the bearings in the Dryer gearbox to seize. Repairs will be needed on the Dryer Section and the Coupling requires replacement. In addition, the unused new coupling in inventory still will not properly fit without additional fabrication hours. S CENARIOCONSEQUENCES

21 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting The efforts to reduce costs during the original outage resulted in repairs costing 10 times more than the costs originally cut/deferred. PROBLEMS: 1)Poor planning and controls 2)No tracking of deferred projects 3)Work was not properly prioritized, no contingency planning 4)Personnel added unnecessary scope during the outage S CENARIOCONSEQUENCES

22 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting P ROJECT S TRUCTURE Owner Maintenance Contractor Craft Labor Subcontractor Scaffolding Provider Equipment Provider Engineered Equipment Craft Labor Subcontractor Maintenance Contractor Equipment Provider Engineered Equipment

23 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Will contractor A be reviewing and approving the work of contractor B? Is the scope of work under A in conflict with Bs scope of work? Is the scope of one contractor covered under another agreement? Who is responsible for lost or damaged equipment or tools? Are costs tracked by contract as well as work package on the project? C ONTRACTING

24 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Clear scope of work Coordination/Reporting Hierarchy related to other subcontractors or vendors Accurate estimate of manpower required Detailed procedure for performing the work (work plan) Listing of tools and equipment necessary to perform the work Any non-standard tools/equipment needed A detailed parts/materials listing Location of parts/materials staged in the work areas or in kit form Listing of permits required or provided Sketches/Drawings Point of contact for questions (technical or contractual) Special notes or instructions Schedule for execution for each craft Safety requirements (hazards inherent in the scope) and protective equipment required by workers C ONTRACTING

25 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Areas of Audit Focus Rates and overtime Per diem and allowances Scope changes Performance requirements What the contractor and owner must provide Audit rights Invoicing and records requirements C ONTRACTING

26 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting CONTRACTING AND SALES TAX (STATE OF TEXAS) The company did not take advantage of sales tax exemptions because of contracting choices (lump sum versus separated contract) If non-taxable items are mixed with taxable and it is difficult to distinguish between the two, the assumption is that the full contract value is taxable PROPER CONTRACTING FOR TAX EXEMPTION Agreement/pricing must separate costs for labor and materialsor the contractors invoicing must make the distinction Contractors should be required to purchase materials on the basis of resale (owner can self-assess sales tax burden) Consider time and material or cost plus contracts T YPICAL A UDIT O BSERVATIONS

27 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting SALES AND USE TAXES (TEXAS) 1.The company purchasing an item from an out-of-state vendor to Texas (or put on a common carrier by the vendor) is generally not taxable by the other state 2.An out-of-state purchase of an item that the Company takes delivery of (or title passes to) in that state is probably taxable by that state 3.Labor performed out-of-state could likely be subject to taxation in that state 4.Despite the tax consequences from other states, Texas may still impose taxes. However, Texas does allow credits for tax paid to other states T YPICAL A UDIT O BSERVATIONS

28 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting SALES AND USE TAXES (TEXAS) Manufacturing exemptions were not taken on qualifying maintenance work packages. The following are considered non- taxable (not a complete list): Production Equipment including actuators, cooling towers, generators, heat exchangers, transformers, switches, breakers, capacitor banks, regulators, relays, control room equipment, computerized control units, pumps, compressors, hydraulic units, boilers (and related components) Pollution control or waste water reduction systems Replacement parts related to equipment covered under the manufacturing exemption T YPICAL A UDIT O BSERVATIONS

29 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Owner is billed for materials, tools and equipment that walk off the job site Reporting process is excessively manual requiring financial data from craft management Outage may be 70% complete and actual material costs are not yet entered into the project budget for major projects Contractors manage large portions of the project and provide oversight to other contractors The project budget is not up-to-date and provides an insufficient management tool T YPICAL A UDIT O BSERVATIONS

30 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Billing errors from major project contractors Craft laborers classifications changed (up or down) during the outagefor example, they were billed out as a helper but ended up billing as a journeyman Specialized subcontract labor included in contractor labor billings and billed separately as a subcontractor Equipment costs including an operator. Has operator also billed through contractor payroll Equipment left on site (after use) continues to be billed T YPICAL A UDIT O BSERVATIONS

31 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Finance and Accounting Management need to be involved in the planning process Establish work packages that supports cost tracking, historical data accumulation, advantageous tax strategies and contract/purchase order spending Integrate systems with key vendors (enables automation rather than manual entry of information) Ensure the existence of a proper delegation of authority for scope changes, work order approvals and project sign- off Maintain the illusion of oversightthe thought that of extensive review is as powerful as the review itself Do not accept vendor/contractor billings without scrutinyassist operations in developing performance metrics aligned with organizational goals O PPORTUNITIES FOR I MPROVEMENT

32 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting Establish accounting controls that support (or will support) a proactive maintenance program Encourage system-based solutions rather than spreadsheet quick fixes Ensure accounting/finance is involved in the contracting process Sales tax strategy Audit rights Clear and reasonable billings terms Rates and markups provided Work to incorporate the maintenance plan into your organizations competitive advantage rather than merely a necessary evil O PPORTUNITIES FOR I MPROVEMENT

33 CUPP AND HUDSON, LLP. Construction and Capital Project Consulting QUESTIONS? Contact me at Or visit our website at


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