Across the country, many tribes have started to renovate older facilities or construct new ones. These large capital projects have great potential to make positive impacts on the entire tribe; however, they also carry significant risks. It’s critical for tribes to have controls in place so projects are completed on time and on budget, with no unexpected cost increases.

Strong controls include an audit function at the beginning, midpoint, and close-out phases of the construction project. The following case study illustrates the value of having controls in place for construction projects and the substantial savings that can result—in this case, more than $1 million.

Background

The tribe entered into a guaranteed maximum price (GMP) design-build construction agreement to construct a new nine-level tower hotel, hotel connector, and casino expansion. The original contract value was for $60 million with an estimated schedule of 24 months.

The tribe didn’t have policies and procedures established for early project development, contract procurement, billing and change order review and approval, and project management. After the project design was completed, the project stakeholders requested many additional changes, which delayed the project and added considerable additional cost. The tribe used the entire project contingency budget by the project’s midpoint, plus an additional $6.2 million in change orders. With few controls around schedule or budget, the project slipped four months behind schedule.

Construction Audit Impact

At this point, Moss Adams construction auditors were brought in to perform a midpoint and close-out construction audit to review the project costs and claims for the tribe.

The midpoint audit revealed several findings with substantial dollar impacts to the tribe:

• The general contractor (GC) charged the tribe $300,000 for a “subcontractor management program.” This program was in lieu of the GC obtaining bonds or subguard insurance that would have protected the tribe and GC through a legitimate third-party insurance company. We found the GC wasn’t doing anything extra to limit the risk of nonperforming subcontractors; as a result, this charge was ultimately denied.
• We identified duplicated and unallowable charges in excess of $400,000. Several change orders were found to include duplicated scope items that should have been included in the original cost estimate.
• There were additional design costs included in change orders for work that was caused by design and constructability error. Since the project was a design-build and the architect was under contract with the GC, all design and constructability costs incurred as a result of these issues weren’t allowed.

The close-out audit revealed several findings as well:

• Final total billed costs exceeded GC-incurred project costs by $180,000 with no justification.
• Final costs included an $86,000 overbilling for individual equipment items in excess of the contract’s capped value language. Also, the contractor billed more rent than the actual equipment cost, which wasn’t allowed.
• There were additional questioned charges related to direct vendor charges and labor totaling over $50,000.

Final Outcome and Lessons Learned

At the conclusion of the project, the tribe recovered excessive project charges and prevented other overcharges. The tribal council agreed it should have recognized the need to implement strong internal controls much earlier in the project.

Implementing these tips can help your project be completed on time and on budget:

• Make sure your tribe has strong internal controls over all construction projects, starting with written policies and procedures.
• Have all construction contracts undergo not only a legal review but also an auditor review to ensure the appropriateness of scope and costs.
• Use a project manager to review the progress of the project and make sure the project team includes an audit function—either internal or subcontracted to a construction audit specialist.
• Conduct an audit of project invoices for accuracy and compliance with contract terms before paying them. Don’t be afraid to ask for support and documentation for costs that appear unusual.
• Be especially careful for costs such as overhead, project management, insurance, or fringe benefits. These are often misused in an attempt to generate extra profit.
• Be wary of change orders. Make sure the costs are truly necessary and aren’t provided for in the original contract. 

Adopting these controls, coupled with a complete construction audit that includes initial, midpoint, and close-out audits can help keep large tribal construction projects like this one on schedule and within budget, providing substantial cost savings.

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To better understand how a construction audit can benefit your projects, contact your Moss Adams professional.