Project auditing

Improving project management through independent project auditing

The primary focus of most internal company audits is contract administration. An internal company project audit commonly includes reference to important activities such as payment requisitions, change management, lien waivers, and material affidavits. It should identify cost recovery opportunities and contain a report on the management of project risks. 

However, an effective project audit does not stop here. If your internal company project audit merely covers the aforementioned topics, then it is not a comprehensive analysis of the status of your project, nor is it a confirmation that the current progression of your project remains aligned to your business objectives.

On time completion, quality of construction, health and safety, environmental compliance, and delivering to end-user operational requirements are all factors with variable impact on business revenue and/or return on investment. These elements, along with the previously mentioned financial topics, form an integral part of an effective project audit. Where the necessary skill-set to conduct a project audit does not exist within a company’s organization, then that company needs to look for such expertise externally from an independent source. 

The benefits associated with sourcing an external independent project auditor do not cease with the acquisition of the skillset necessary to conduct an effective audit. There are notable additional benefits associated with independent project auditing including the introduction of fresh thinking, the presentation of new ideas, and the receipt of unbiased opinions as to the overall management of the project.     

In short, we at Linesight consider the following areas to be the cornerstones of a comprehensive and effective independent project audit:

• Health and safety compliance
• Quality of design
• Productivity of the project team 
• Project management organization and structure 
• Procurement and contracting strategy 
• Cost management 
• Project schedule management 
• Environmental compliance

We recognize that capital stewardship can be compromised when contractual risk allocations are inadequate or when poor quality reporting leads to uninformed decision making. Our project audits have a positive contribution to overcoming these challenges. By providing independent and impartial advice, we empower project executives to improve project controls and to achieve satisfactory regulatory compliance. Adopting an independent project audit approach will ultimately produce better results and will avoid the temporary reassignment of internal staff to undertake auditing functions that they are not necessary skilled or experienced in.

Emerging trends in project auditing 

In recent years, there has been greater emphasis placed on the accountability of project executives in their management of capital expenditure. However, all too often, project executives are requested to make uninformed decisions as they are not in possession of the relevant or accurate information. This severely diminishes their ability to make decisions that mitigate project risks. 

Independent project audits solve this issue by including quantitative risk analysis (QRA) as an integral part of the approach to project auditing, which go a long way to ensuring that the project executive is kept fully informed. The benefit of an independent risk assessment on a project using QRA is regularly overlooked and the risk management of the project contingency is seldom a high priority. The approach of applying a 'standard percentage of contract value' for the establishment or ongoing management of a contingency fund is insufficient; a quantitative approach to establishing an accurate contingency provision is the best approach. More and more companies are realizing the benefit of QRA.

Delivering projects within budget has always been a priority. The reliability of cost estimates is a key consideration. As the project progresses from conceptual design to detailed design and on to procurement and construction delivery, the continual management of the budget is essential to achieving financial success. A project audit approach challenges not only the accuracy of the cost estimates relied upon to establish the project budget, it challenges the overall achievement of ‘value for money’.

By using techniques such as accurate benchmarking, earned value analysis, and value management principles, it is possible to affirm the true value for money being achieved. In circumstances where value for money is not being achieved or the project is behind schedule, it is possible to develop an action plan to guide the project back in the right direction.    

When to call for an independent project audit?

Undertaking a project audit is no simple task. It requires a strong understanding of the intricacies of design, construction delivery, general accounting practices, white-collar crimes, and even local politics. The need to audit often stems from the responsibility to reconcile expenditure, to establish accountability or to achieve an independent certification that value for money has been achieved. Needless to say, the appointed project auditor not only needs to possess the necessary skills but he needs to be experienced in the type of project being audited.  

At all stages of a project cycle, conducting a project audit will usually pay for itself. Project audits conducted during the early stages of a project often identify weaknesses in the project organizational structure and project control systems. In the earlier stages of construction delivery, a project audit will result in improved efficiency and will allow for the effective mitigation of risk. The time to call for an independent project audit is now. Even if the internal company auditing process is alive and well, the benefits of conducting an independent project audit should not be overlooked.

Maximizing the benefits

In order to realize the maximum benefits available under the current tax law, the IRS recommends that a suitably qualified professional performs a ‘Cost Segregation Study’ using the ‘Detailed Engineering Approach’. The Detailed Engineering Approach consists of an on-site physical inspection of the property and detailed examination of architectural/engineering drawings and specifications for potential asset reclassification. The next stage involves the detailed study and verification of cost data, the itemization of property units that qualify for shorter-life classification and the identification of direct labor, material, and indirect costs. Finally, there is a reconciliation of the total costs to capitalized project costs.

Good independent project auditing will always return a strong yield to the investor.  

Patrick Ryan is a member of the National Association of Construction Auditors (NACA) in the US and Managing Director of Linesight based in our New York Office.