Presentation on theme: "Fraud and Abuse in Construction and Major Capital Projects"— Presentation transcript:
1Fraud and Abuse in Construction and Major Capital Projects Presented byBob McDonaldDirector Construction ServicesCS 4-2
2Topics Elements of a construction project Risk factors Contractor costsTypes of contractsRed flagsOvercharge examplesReasons for auditing and selection of projects for auditContents of a Construction Audit ProgramQuestions
3Elements of a Construction Project ScheduleScheduleConstructionProjectQualityCost
4Construction Project Risks Project FeasibilityFundingPlanningEngineeringDelivery MethodContract typeRegional business conditionsContractorMeans and MethodsOwner involvementRegulatory conditionsSite IssuesLabor issuesLoss or damage issuesGuaranteesMaterial SupplyArchitect & Engineer
5Composition of Contractor Project Costs LaborMaterialsEquipment (Contractor owned & third party rental)Sub or Trade ContractorsGeneral ConditionsInsuranceBonds – Bid, Performance, Payment, WarranteeSmall tools, expendables & consumablesRelocation & travelHome office chargesPermits & licensesBig 585 – 90%When deciding what to investigate it’s always a good rule to follow the money. Labor is usually about 40% of any project so that’s about always fruitful. But labor may not be that easy to get at depending on the amount in subcontracts. Material is similar as on some projects the contractor or subcontractor supplies materials and on others the owner buys materials. Usually having the owner purchase materials directly is the most cost efficient but it does lead to scheduling, receiving and material issuance concerns later in the project.We’ll talk more about all of these items later.10 – 15%
6Types of Contracts Lump Sum, Fixed Cost, Stipulated Sum Design, Bid, BuildEPC (Engineer, Procure, Construct)Cost Reimbursable or Cost PlusCost Plus with Fixed or Percentage FeeCost Plus with Guaranteed Max (GMAX or GMP)Cost Plus with GMAX & Shared SavingsTarget PriceDesign BuildUnit PriceTime & Material
7Time ReportingA Project Manager dies on a fishing accident on his 40th birthday and finds himself greeted at the Pearly Gates by a brass band.Saint Peter runs over, shakes his hand and says "Congratulations!""Congratulations for what?" asks the Project Manager."Congratulations for what?" says Saint Peter. "We are celebrating the fact that you lived to be 160 years old.""But that's not true," says the Project Manager. "I only lived to be forty.""That's impossible," says Saint Peter, "we added up your time sheets."
9Contract Risk Cost Reimbursable EquipmentCharge exceeds purchase price or FMVExcess damage costsSweetheart dealsRent to own Taxes on fuelEquipment not on jobRental rebates not creditedSubcontractorsOver billingGeneral ConditionsDuplicate chargesInaccurate proratingInsuranceBonds – Bid, Performance, Payment, WarranteeHome office chargesCharging for non-reimbursable costsPermits & licensesFinesMathematical errors
10Determining Chargeable Costs Who is eligible to charge?What is a chargeable cost?When may the cost be charged?Where was the work performed?How much may be charged?The answers to these questions are answered by reviewing the contract.
11Example of Labor Overcharge ClassificationDifferenceCommentHealth and Welfare$1.85Contractor did not pay at rate usedPension1.20Association Dues.50Component of overheadSafety/educationSmall Tools /Truck3.00Contractor did not provideGas Premium1.00Gas cost is not generally considered a labor costSUTA/FUTA.83Limitations excludedWorkers/Compensation(1.55)Audited rate higherGeneral Liability Ins.2.56calculated as 15.5% of payroll actual cost was 1.415% of revenueTotal Hourly Difference$9.89
12BiddingThree contractors were touring the White House on the same day. One was from New York, another from Missouri, and the third from Florida. At the end of the tour, the guard asked them what they did for a living. When they each replied that they were contractors, the guard said, "Hey we need one of the rear fences redone. Why don't you guys take a look at it and give me your bids." First the Florida contractor took out his tape measure and pencils, did some measuring and said, "I figure the job will run about $900 - $400 for materials, $400 for my crew, and $100 profit for me."Next was the Missouri contractor. He also took out his tape measure and pencil, did some quick calculations and said, "Looks like I can do this job for $700 - $300 for materials, $300 for my crew, and $100 profit for me."Finally, the guard asks the New York contractor for his bid. Without batting an eye, the contractor says, "$2700."The guard, incredulous, looks at him and says, "You didn't even measure like the other guys! How did you come up with such a high figure?""Easy," says the contractor from New York, "$1000 for me, $1000 for you, and we hire the guy from Missouri."In addition to the obvious kick-back scheme there are a couple of other lessons in this joke. First, the calculation of the bid being comprised of 3 elements – materials, labor and profit, actually the way a some jobs are bid is materials, double it for labor and add 30% for profit and the unknown. Second, letting one contractor know what another bid is always a problem.
13Contract Risks Stipulated Sum, Lump Sum or Fixed Fee Improper construction methodsInsurance not purchasedUnauthorized subcontractors usedTax errorsContract work performed by owner’s employeesOwner supplied material not creditedMaterials outside specificationQuantities not installedChange orders in original bid“Front End” or “Top Loading”Bonds not obtainedChange orders not priced correctlyServices not provided
14Re-calculation clause omitted, missing or not applied Unit PriceErroneous estimatesMobilization/demobilizationImproper measuring/quantity verificationRe-calculation clause omitted, missing or not applied
15Use of incorrect labor rates Overstated time sheets Contract Risk T & MUse of incorrect labor ratesOverstated time sheetsUse of incorrect material mark upsSee Cost Plus
17Red Flags Contract supplied by the contractor Owner has no or an in-effective project management teamNo Right-to-Audit ClauseWeak Change Order LanguageOmitted Termination for Convenience clauseLabor rates attached to a cost plus contractMissing exhibits to the contractContract not executedBilling in a non-standard manner or format (s/b AIA G702 and G703)Bonding not requiredFailure to obtain lien waivers and reconcileUn-reconciled CIP account or incomplete reconciliationDisorganized work siteLack of clear lines of authority
18Overcharge Examples Defective Pricing in CO’s Unauthorized Items BilledHome office chargesOtherLabor OverchargesMaterials Not Used on JobGeneral ConditionsG/L Insurance – Experience ModifiersDuplicate ChargesEquipment Billed Not in UseBonds not purchasedBackcharges not accomplishedScrap not CreditedUnauthorized Substitution of Materials
19Goals of a Construction Audit Identify Cost Avoidance OpportunitiesManage RiskEnsure Controls Are Developed & MaintainedOwnerContractorIdentify Overcharges/UnderchargesAvoid Litigation
20How should projects be selected for audit? Size ($ value & physical size)Type of contractCost Plus & T&M versus Lump SumShared Savings FeaturesHigh profile or high risk projectsExperience of Owner’s RepresentativeExperience with the General Contractor
21Elements of a typical construction audit program Contract ReviewBid ReviewControl AssessmentContractor Billing Tests - Progress BillingsLaborMaterialsEquipment (Contractor owned & rented)Subcontractor charges
22Elements of a typical construction audit program Contractor Billing Tests (continued)Permits and licensesMiscellaneous charges (small tools & consumables)Overhead chargesContractor feeRetainage calculationPerformance bond & insuranceHome office charges
23Elements of a typical construction audit program Contractor Billing Tests (continued)Physical inspection and review of engineering inspection reportsRelocation & travelPercent completedControl Verification
24Elements of a typical construction audit program Financial ReviewLead schedulesReceivablesPayablesConstruction in Process (CIP)Fixed Assets