Control your development costs with construction audits

Process typically saves 1 to 3 percent of total project budget

By Bill Willbrand

Brown Smith Wallace

Healthcare construction spending has been on the rise over the last decade and will continue to increase into next year. According to a joint economic forecast by the Associated Builders and Contractors, American Institute of Architects and National Association of Home Builders, the anticipated growth will be around 5 percent higher than the growth seen in 2016.

While the number of facilities being built continues to rise, more and more healthcare construction professionals are leveraging a powerful and valuable tool — construction audits for project owners — to control the costs of construction projects. This is a particularly valuable tool for those building for the first time and those that have not been involved with projects in recent years.

Performing a construction audit introduces control and a level of certainty in an uncertain environment. Construction audit professionals can give owners a level of control and certainty that is not possible without the use of professionals that have multiple years of experience in the field.

Here are a few tips that are very important to take into account when looking into construction auditing:

Fine-tune your contract

Implementing a construction audit can help project owners protect their investments. Construction auditors are ready and able to ask questions that no one else thinks to ask. Project owners typically recover much more in savings than the cost of the audit.

A construction audit also provides additional financial controls over an owner’s capital expenditures, ensuring the project investor’s money is being spent wisely. While each project is different, a construction audit typically saves between 1 percent and 3 percent a project budget via cost recovery and cost avoidance.

It is smart for building owners to consult with experienced professionals from the project’s inception. Involving a construction audit firm in the contract phase often results in increased savings through cost avoidance. Early involvement yields more savings than a standalone, closeout audit, which is focused on cost recovery.

Bringing in an auditor during the contract negotiation stage as part of the team alongside the attorneys and other advisers will also help an owner determine that its rights under the contract are protected and its risks are minimized.

Establish project cost oversight

Another benefit of a construction audit is that it will help to determine an accurate risk profile for the project. It is important to take a detailed look at the project size, duration of construction and the type of contract involved.

Construction audits are recommended for all projects above the owner’s risk threshold regardless of the type of contract. Construction audits are also valuable in reviewing self-performed work, shared savings clauses, change orders, large contingencies and/or allowances. At the same time, if the owner has become complacent due to a long-term relationship with a contractor, this might warrant a construction audit.

It is also a good idea to establish oversight on project cost structure. While there are people involved that look at the financial aspects of the project, including the construction manager and owner’s representative, their roles differ from that of an auditor.

The recent recession presented tight funding and lowered budgets so that owners began to rely on contractors, to a certain extent, as their cost experts. As a result, contractors and construction managers have gained more influence on the project scope.

A construction audit can support the financial well being of a project and confirm that the project is being well managed and monitored. As a result, the audit typically strengthens the relationship between the business owner and the contractor as they work to complete the project. 

Looking back can provide valuable insights

In the justification of any capital expenditure, there are assumptions made regarding the costs and benefits that will be realized. Taking a look back at the project compares those assumptions to what is later realized, which can help management identify areas where the process may be improved — or pitfalls to avoid — on future projects.

For larger projects, this generally occurs after one year of operation. Follow-up evaluations may be warranted for projects that experience changing performance over time.

 

Bill Willbrand is the partner-in-charge of real estate services for accounting, tax and business advisory firm Brown Smith Wallace. Willbrand leads the real estate and construction audit service teams.

More News