Use Internal Audit to Reduce Costs of Major Construction Projects

Organizations involved in major capital projects are missing out on significant opportunities to strengthen internal controls and 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. Vonya Global believes 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 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.
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 Vonya Global engaged throughout the construction project assures the effectiveness of the control environment and identifies inappropriate cost overcharges.

In creating the contract (the binding agreement between the owner and all parties involved in the construction process), 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.

The American Institute of Architects (AIA) provides standard construction contracts, such as the:

• AIA A101 for stipulated sum projects
• AIA A111 and A121 agreements for cost reimbursable projects
• A201 which contains the related General Conditions to the agreement

However, even these contract provisions require modification to fully protect the interest of the owner. For example, the Accounting Records or “Right-to-Audit” clause should be strengthened, and the Changes or “Change Order” clauses often require clarification. These modifications improve the owner’s control over project costs, and allow for recoveries.

An effective “Full-scope” audit program utilizing the construction audit services of Vonya Global 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.

Internal Auditors – Playing a Strategic Role

"We believe Internal Auditors can play a more strategic role; whether they do in their specific organization is up to the Audit Committee, Executive Management, and the Internal Audit Department. We have released a report that will provide a starting point for a conversation between the three groups." - Vonya Global

Vonya Global announced today that the Final Report on the Strategic Role of Internal Audit has been released. In compiling information for the study, Vonya Global surveyed a cross-section of Executives and Internal Auditors from both public and private organizations in a variety of industries to evaluate their opinions regarding the strategic role of Internal Audit. The study set out to determine whether it is Internal Audit’s role to evaluate strategic risks and if Internal Audit is equipped to do so effectively. The primary goal was to provide a benchmark for Internal Auditors and Executives on the strategic role of Internal Audit.

The 2010 study is a follow up to a similar study conducted in 2008 and was designed to compare opinions in 4 areas:

1. Vision, Goals, and Objectives of Internal Audit
2. Mission and Value Relative to Strategic Risks
3. Process, Skills, Time, and Budget
4. Compliance Requirements

In 2008 it was revealed that a gap exists between Executive Management and Internal Auditors on the function of Internal Audit. The 2010 study set out to explore whether this gap still exists or if it has been closed. In addition, the new study provides a more detailed comparison between Executive Management and Internal Auditors.

While the 2010 Report on the Strategic Role of Internal Audit reveals that many gaps still exist between Executives and Internal Auditors, there are encouraging findings as well. One assumption going into the study was that Internal Audit plays a critical role in a company’s ability to meet its strategic objectives and there appears to be general agreement between Executives and Internal Auditors in many categories. The report provides details and quotes from the participants, such as:

"We make understanding the strategic direction and goals a priority in our risk assessment process so that we can link our audit plan to the strategies and goals of the company.”

"Internal Audit is at the table for senior management discussions, for input on operational challenges and control risks, for the implementation of new systems and replacement of outdated processes, and for risk management.”

“The only risks that management should fear are the ones that they do not know about - it is Audit's job to provide that information.”

The full report can be downloaded by following the link on the Vonya Global home page.