Whether it is a city hall, police department, school or a treatment plant, there are a number of common risks that a capital project faces regardless of its type, location or timing. These risks fall into the following categories: cost estimation, revenue projections, project staffing, development of a project plan and procurement strategy, and, the enforcement of management policies and procedures and contract requirements.

An audit department can better identify these risks and recommend workable solutions, if it includes the following proactive assignments in its work plan:

• Before project approval, determine if the public entity has a sound financial plan with realistic cost and revenue forecasts, before it seeks project approval from its legislature or citizens.
• Before project performance, determine if the public entity has a project management plan and a multidisciplinary team of professionals in place necessary to develop a procurement strategy and management approach that will kept the project on schedule, meet quality standards and maximize cost effectiveness.
• During project performance, determine if the public entity is taking steps to ensured compliance with its project management policies and procedures, and contract billing provisions.

Before project approval

Cost Estimates - Often public agencies use only historic bid prices of similar work with little or no additional consideration for future price increases that will be experience over the life of the project, especially the time period when actual construction begins. This short sightedness can be further complicated if the public entity limits its estimated price to “hard costs”, like concrete and steel and excludes the “soft costs” needed to complete the project including the cost of detail designers, consultants and staff that will be needed to carry the project through to completion.

Other costs frequently not considered include the financial risk for unknowns or likely problems such as contaminated or poor soil conditions, administrative and construction delays or the cost of mitigating demands made by the public due to construction noise or the need for project modifications to address adverse impacts to abutters. Although many of these costs can not be precisely estimated or fully defined in the early stages of the project, it is imperative that a risk-based cost estimate along with appropriate contingency budgets are added to cover the cost of negative events that could be experienced at a later date.

Revenue Projections - The identification of achievable funding resources and realistic cash flow projections are also essential to ensure that funds will be available to meet the intended project scope of work and timetable. Fully identifying these funds can be complicated particularly if the public entity has to rely on public and private funding sources outside the public entity. The public entity may be anticipating the use of external Federal or state funds were the funds are dependent on legislative enactments, authorizations and reauthorizations over a prolong period of time. Capital projects frequently use the commercial financial market which is costly and is dependent on the public entity’s financial rating which can be further impacted if issuing financial instruments in times of rising interest rates.

Before project performance

Project Staffing - Often a public entity does not have a permanent cadre of administrative and technical staff or a set of policies and procedures needed to execute and manage multimillion dollar contracts. The management model selected for use on a capital project is critical. Any delegation of public entity authority to a “for profit” construction management firm needs to be closely examined and continuously monitored by knowledgeable public entity staff. Organizational arrangements and communications should ensure that the public entity officials are aware of all aspects of on-going issues, the progress of the work and quality of the workmanship.

Project Plan - The project management plan needs to be in place. It should describe the overall management structure, assign roles and responsibilities of team members, and provide procurement guidance, design and construction quality control/assurance guidance, cost containment strategies, a master schedule, change order and claims management, and other project related guidance.

Procurement Strategy - Before contracts are awarded, the public entity also needs to develop a procurement strategy that will maximize cost effectiveness. Unless a specific contract method is legislatively mandated, the selection of procurement method (competitively bid or negotiated) and contract type (cost-type or fixed price) should be analyzed and careful considered by the public entity. Each method of procurement and contract type has advantages and disadvantages, which should be clearly understood by the project management team. In addition audit department should ensure that contracts have an audit access to records clause and the basis for payment is well defined in the contract documents.

During project performance

Policy & Procedures - It is imperative that the public entity’s project management team assures that the project gets what it pays for, remains on schedule and achieves a high level of quality. Accordingly, the project management team should be actively enforcing the public entity’s implementation of management policies and procedures (developed in the project management plan).

Contractor Billings - Additionally the project management team should be reviewing contractor billing and other financial representations for consistency with contract terms and conditions. This is difficult to implement because the project management team usually views keeping the project on schedule and achieving the level of quality specified in the contract, as higher priorities. This approach is risky, particularly if the project management team relies exclusively on contractor financial representations without further examination.

Audit Approach

Performance audits - Traditional performance audit work can address most of the risks related to the viability of the project’s financial plan, the organizational structure used to manage the project, and the enforcement of the procurement, contract administration and construction management polices and procedures; however, the audit department may chose to consult with external audit/engineering experts to review existing audit procedures or assist in developing new audit procedures.

Contract audits - In addition, the audit department will need to conduct contract audits and analysis to assure that the public entity is paying fair and reasonable prices and is only paying for the value received from its contractors. Much of this audit work will likely require review of the corporate financial and project cost records including consultant billings, construction progress billings, change order and claim costs charged by the contractors working on the project. It is best to review these multi-year agreements as soon as possible to ensure that supporting documents are on- hand and contract funds remain unspent if financial adjustments need to be made.

Audit Staffing - In some cases the local government audit department may not have the resources to carry out all of these engagements. This will likely require the department to modify its audit approach by augmenting its audit skill sets or using external auditors, and in some cases procurement specialists or engineers to support the type of audit work required during this period. Regardless of staffing, at a minimum it should consider conducting an independent survey to apprise and prioritize the risks faced by the public entity.

Benefit of Audits - Advising management and oversight bodies of these risks should provide a basis for the public entity to refine its approach will help ensure that the project remains on time, within budget, with the highest level of quality possible, while meeting regulatory requirements and public expectations. This is a major challenge that if well planned and executed a local audit department can add value to the public entity and its citizens.

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