Helping Procurement Professionals Optimize Capital Expenditures with Contract Compliance Audits
March 13, 2018 - By: SC&H Group
Organizations often ramp up capital expenditures (CapEx) projects in preparation for growth. Capital expenses represent one of the most significant resource deployment strategies utilized by an organization based on the volume of internal and external stakeholders involved, and the magnitude of dollars allocated to each project.
For instance, large capital projects, such as upgrading or constructing a new facility or factory, require coordinating, managing, and supervising numerous contractors and subcontractors. As a result, it can be difficult to:
- Ensure ongoing transparency, accountability, and communication
- Identify non-compliance and hidden contractor costs
- Ignore distractions caused by minutia and day-to-day fluctuations
Procurement professionals are the stewards of the agreements behind each contractor and subcontractor relationships. Significant time, energy, and resources are dedicated to negotiating the best possible terms, and deviations from agreed-upon conditions may have detrimental financial and operational results.
It is critical to effectively monitor and manage relationships − and the corresponding agreements guiding these relationships − to promote project success.
As overall capital expenditures are expected to increase again, and as CapEx projects remain a top priority among C-suite executives, procurement professionals must determine how to optimize spend while minimizing risk and maximizing value.
Construction Audits: A Solution to Mitigate Risk and Maximize Value
Contract compliance audits, specifically construction audits, can add value by mitigating risk and identifying excess spend. By performing an in-depth review of costs incurred − both during the construction phase and after project completion − procurement professionals can optimize ROI and ensure third-parties are operating within the terms defined in their contracts.
Construction cost audits can help procurement leaders and other executives stay focused and demonstrate that a definitive plan is in place to optimize ROI. Further, audits can validate costs incurred throughout the project’s execution are appropriate and authorized. With audits of certain contract structures typically identifying non-compliance, savings and cash recoveries can quickly add up, especially with larger, multi-year contracts.
A properly executed construction audit will also deliver additional benefits beyond cost savings without negatively impacting internal resources or the project timeline by:
- Significantly increasing transparency
- Promoting greater accountability
- Delivering assurance
- Providing recommendations to strengthen processes, internal controls, and contract language
Sample Construction Audit in Action: Understanding the Process
To fully understand a construction audit in action, imagine that your organization is building a new structure, such as a warehouse, factory, office building, or data center. During the construction phase, contract compliance audits can be performed at the midpoint and conclusion of the project to validate the costs incurred, authorized, and charged align with the terms of the agreement.
Construction contracts typically require general contractors and subcontractors to keep records of all labor, materials, equipment, and other costs incurred to complete the project. During the audit, these records may be requested for review. This level of detail and documentation is often not provided to project stakeholders during the normal course of business, so there is a real risk they are not seeing the full picture when approving invoices for payment.
The auditors become acquainted with the history of the project, roles, and responsibilities of the project team, and potential risks. Working together, the auditors and project stakeholders identify opportunities to mitigate overcharges and excess spending. The audit findings are then summarized in a report and presented to management, followed by a meeting to discuss the observations, contractor’s responses, remedies, and recommendations to mitigate risks and strengthen controls going forward.
Construction audit projects provide just one example of the benefits of contract compliance audits. Verifying third-party compliance while also addressing unforeseen delays, change orders, and overruns can help drive projects to completion while protecting savings goals, ROI, and earnings.
Exercising your contractual rights and performing a contract compliance audit allows you to access key underlying data and documentation to increase transparency, validate compliance, and protect project and organizational success.
SC&H Group performs construction audits globally for large, complex organizations, including many of the Fortune 500. Contact us to learn more about how we can help enhance transparency, identify overbillings, and optimize ROI on your CapEx projects.