1 MOSS ADAMS LLP | 1 Case Studies in Contract Close Out Audits May 2014.

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Case Studies in Contract Close Out Audits

May 2014

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The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

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Jeff Witt, CPA, CIA, CCA, CFE, MCSEJeff is a Senior Manager in Moss Adams’ Construction Audit & Advisory Services Practice with over 18 years of accounting experience. His focus is on performing efficient construction contract audits based on detailed planning and risk assessment that focus on those aspects of contract compliance that are of greatest risk to our clients. Prior to joining Moss Adams, Jeff was a Controller for a government contractor where he led the implementation and control of compliant systems for government contracting. He also served as a government auditor for the Defense Contract Audit Agency for 10 years.

Presenters

Steve Fineberg, CPA, CIA, Steve is a Senior Manager in his eighth year with Moss Adams’ Construction Audit & Advisory Services Practice and brings over ten years of relevant experience in capital project program controls, forensic investigation, accounting and financial services. Steve has managed numerous capital project performance audits including various engagements that were subject to Generally Accepted Government Auditing Standards (GAGAS) requirements. He has managed several large performance audits, and has served as a project manager with responsibility for leading all aspects of contract compliance testing.

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Agenda

• Discuss case studies related to common construction contract close out situations including:o Change orders

o Contract compliance

o Other closing issues

• Questions

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Common Causes of Problems During Contract Close Out

No 5. Improperly executed lien releasesNo. 4 Subcontract costs not adjusted for subcontractor change orders, including deductive change ordersNo. 3 Reconciliation of final job cost reports to final payment applicationNo. 2 Contract terms not followed during contract performance No. 1 Unresolved change order issues

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Case Study on Improperly Executed Lien Releases

Background• Conditional waiver on progress payment - This waiver

generally specifies that if the contractor has been paid, the waiver is an effective proof against any lien claim on the property.

• Unconditional waiver on progress payment - This waiver unconditionally releases all claimant rights through a specific date.

• Conditional waiver on final payment - This waiver releases all claimant rights to file a lien if they have been paid to date.

• Unconditional final waiver final payment – In general, this waiver unconditionally releases all rights of the claimant to place a lien on the owners property.

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Case Study on Improperly Executed Lien Releases (cont.)

Background (cont.)If an owner has a general contractor (GC) that fails to pay subcontractors, suppliers or laborers or neglects to make other legally required payments, those who are owed money can look to the owner of the property for payment, even if the owner paid the contractor in full.

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Background (cont.)• California Preliminary Notice (CA Civil Code sections

8100-8118) requires subcontractors to alert owner.• Owner will want to make sure it has lien releases before

any payments to GC related to these and others (some not required to provided notice to owner).

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Audit Steps• Auditors determined for which subcontracts the lien

releases were not obtained.• Auditors alerted owner and indicated that final payment

should not be made until resolved.Conclusion• Lien releases were obtained prior to final payment to

contractor, thereby protecting the owner.

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• In this case, some lien releases were not obtained (provisional or final) but the owner made payment to the contractor throughout the period of performance.

• This subjected the owner to unnecessary risk.


Case Study on Subcontract Costs Not Adjusted for Subcontractor Change Orders

Background• We frequently note that general contractors are careful

to pass through any subcontractor change orders for increased cost, but not so careful when it comes to deductive change orders.

• In this case, the general contractor submitted a final payment application. The payment application included the subcontractor costs and any additive change orders.

• There were no deductive subcontractor change orders included in the payment application.


Case Study on Subcontract Costs Not Adjusted for Subcontractor Change Orders

Audit Steps:• Obtained a listing of subcontracts and reviewed the

subcontract files, including the base award and any subcontractor change orders.

• Identification of certain deductive subcontractor change orders that were not included in the job cost detail and not included on the final payment application.

Conclusion:• The contractor confirmed that these deductive change

orders should have been passed on to the owner.• The contractor agreed to modify their final payment

application to adjust for these deductive change orders.


Case Study on Reconciliation to Job Cost Detail

Background• The contract was a Guaranteed Maximum Price (GMP)

contract where billings, including the final billing, were to be based on actual, allowable costs.

• Contractor included certain estimated costs, not yet paid, in an attempt to expedite final payment and contract close out.

• Reconciliation of the final payment application to the job cost detail identified the areas of difference (i.e., estimated costs). The estimated costs were not included in the job cost detail (JCD).


Case Study on Reconciliation to Job Cost Detail (cont.)

Audit Steps:• Reconciliation of final payment application to JCD• Identification of differences• Follow up with contractorConclusion:• Contractor provided additional information on

negotiation with subs that resolved most estimated costs.• The remainder was a negotiation item that resulted in an

adjustment to final reimbursable cost.


Case Study on Compliance with Contract Terms

Background• A number of specific contract terms were included in the

contract including:o Allowanceso Contingencieso Stipulated rateso Specific language concerning costs included in

burden rateo Change orders not negotiated as lump sum GMP

increases


Case Study on Compliance with Contract Terms (cont.)

Background (cont.)• The contractor did not account for some of these terms

in accordance with the contract including:o Non lump sum change order costs not separately

accounted for.o Allowances did not result in correct adjustment

to GMP.o Owner contingency usage was not approved in

accordance with the contract.o Duplicated costs resulted from billing at stipulated

burden rates and separately billing the related costs.



Background (cont.)• The contractor indicated it had verbal discussions with

the owners rep where the rep approved the departure from contract terms for:o Handling of change orders.o Non true-up of allowances.o Usage of contingency.

• However, there was nothing in writing to substantiate these claims and the owners rep indicated the contractor was mistaken.



Audit Steps:• Identification of contract non compliance issues.• Quantification of amounts involved.Conclusion:• Significant adjustments were required to:

o GMP limitso Allowable cost

Tanya Roldan

PLEASE REVIEW: Should this be? Significant adjustments were required for: OR Significant adjustments were applied to:


Case Study on Change Orders

Background• The owner (through their representatives), issued field

directives authorizing the GC to proceed with work that was the subject of a potential change order.

• There was no resolution of many of the proposed change orders.

• This was done to:o Keep the project on the original timeline.o Maintain the relationship with the contractor.

• Unfortunately, delaying dealing with potential change orders did not make the issues go away. They had to be dealt with prior to contract close.


Case Study on Change Orders (cont.)

Audit Steps:• Evaluation of documentation to support:

o Basis of proposed change orderso Cost estimate supporto Quantity analysis


Case Study on Change Orders (cont.)

Conclusion:• Exceptions were found for basis, cost estimates and

quantities.• Owner had to engage in a difficult negotiation process that

ultimately resulted in significant cost savings to the owner (versus just approving the proposed change orders).


Stephen Fineberg, Senior Manager(916) [email protected]

Jeff Witt, Senior Manager(503) [email protected]

Questions?

1 MOSS ADAMS LLP | 1 Case Studies in Contract Close Out Audits May 2014.

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