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Utilizing a Pre-Construction Contract Review to Minimize the Potential for Construction Billing Disputes

In Division 1, many of us tend to focus on how to resolve disputes after they have come to light.  This article, written by Curt Plyler, CFA, CCA of Fort Hill Associates, identifies a method for our clients to avoid disputes later in the game by doing the key legwork before construction even begins.  

Curt and I met at the meeting in Nassau, and he was kind enough to forward this article to me for our use in the Dispute Resolver.  Thank you, Curt!

Here's the article:

As a project moves from an idea towards construction inception, the Owner, Contractor, and their attorneys work together to create a construction contract designed to meet their mutual interests. Much effort and expense goes into this process, which is necessary given the potential risk exposures. However, once the Contract is set for execution, an essential step to minimizing future disputes is often omitted. A Pre-Construction Contract Review assists in identifying and mitigating many issues often arising from the Contractor’s billing practices.

Why Conduct a Pre-Construction Contract Review?


A Pre-Construction Contract Review enhances the efforts of the Owner’s representatives, attorneys, architects, and project managers in ensuring the underlying financial intent of the Contract is met. The additional intelligence provided by this review maximizes cost transparency, and as a result, the Owner’s fiscal responsibility. Most importantly, a Pre-Construction Contract Review establishes the proper expectations at project inception. A Contractor will seek to be compensated appropriately to complete a project not fully defined under a fixed price contract.

As a result, Guaranteed Maximum Price (GMP) contracts are often utilized by Owners to get a better price on this type of construction project. The Contractor is normally paid the Cost of the Work plus a fee. Defining ‘cost’ is paramount. Assuming no language to the contrary, if the Contractor charges the Owner anything other than the cost incurred for labor, leased equipment, insurance, information technology, and etc., the underlying intent of the Contract has been changed. The Contractor can still utilize predefined rates to bill certain elements of project cost. However, the Pre-Construction Contract Review will validate the rates to be utilized to charge the project are representative of the actual cost incurred.

Step 1: Auditor Review of Contract Language

Ideally, a Pre-Construction Contract Review is done prior to Contract execution. The Contract is designed to eliminate ambiguities, but the complexities of a large construction project often leave the various parties with different understandings and assumptions related to project billings. The Auditor’s work complements the work done by both group’s attorneys. The attorneys are focused on a Contract to minimize their respective party’s risk, and the Owner’s Auditor (external or internal) seeks to minimize the potential for future billing disputes. These disputes often involve billing methodologies that alter or differ from the intent of the Contract. In most instances, the first step normally entails the Auditor reviewing the draft Contract language and identifying areas of concern.

Step 2: Review Labor Billing Methodology

Labor is the largest component of General Conditions and can be easily manipulated in the Contractor’s favor. The Contractor is entitled to recover the cost of payroll taxes, insurance, and customary benefits. These costs are often recovered through a labor burden billing based on the base wages. Since these costs will vary depending on who is assigned to the job, an estimated labor burden is often billed to the project. The Contractor’s estimate tends to be conservative, and each of the labor burden components is normally slightly overstated as a result.

A Pre-Construction Contract Review proactively examines the proposed job roster and reviews employee payroll records. This review ensures the base wages billed are the actual wages paid to the employees. Additionally, the labor burden is reviewed to ensure it is representative of actual cost for both regular and overtime hours worked (many labor burden components are not applicable to overtime hours) for the Contractor’s hourly and salaried workforce.

Other Contractors utilize labor billing rates, inclusive of base wages and labor burden, to charge the project. These billing rates may or may not be representative of actual Contractor cost. The Contractor’s payroll records should be reviewed during the Pre-Construction Contract Review to ensure these rates are representative of actual cost incurred.

Step 3: Review Contractor-Owned Equipment Rates

Many Contractors lease various pieces of their own equipment to the project. During the Pre-Construction Contract Review, the following items should be determined and/or validated:
• Fair market value of each item of equipment upon arrival on the project site
• A derivation of the components of the rate to be charged for each item of equipment
• The aggregate amount allowed to be charged for each item of equipment
• Any other charges to be billed separately and directly for equipment


It is recommended these rates be indexed to a respected industry source (for example, the AED Green Book). Additionally, the aggregate rental payments should not exceed a Predefined percentage of each item’s fair market value.

Step 4: Review Defined Rates for Other Items

Contractors will often insert Contract language allowing insurance to be charged at a stated rate, or they will bill the coverage at a rate despite Contract language stating only the premiums directly related to the project are allowed. As with the leased equipment and labor billing rates, it is very important to understand and validate the items comprising the insurance rate. It is not uncommon to find excess coverage and ‘home office’ insurance costs included in the rate.

Similar to insurance, many Contractors attempt to insert Contract language specifying a rate (a predefined percentage or an amount per labor hour of work) for information technology (IT), or they will charge a rate despite Contract language specifying actual cost incurred for direct project-related expenses. Any IT billing method utilizing a rate needs to be reviewed to ensure the components comprising this rate are reimbursable pursuant to the underlying Contract. These IT components should not be billed directly if included in a predefined rate. Additionally, any rate based on a charge per work hour should be restricted to regular time wages only.

Other items, including document reproduction and document retention, are often charged to the project with pre-defined rates. The Auditor should request the Contractor provide a list of all rates to be utilized in lieu of actual cost during the Pre-Construction Contract Review. All of these rates should be reviewed to ensure they are representative of actual cost incurred.

Step 5: Define a Budget for Daily/Interim Cleaning

Daily or interim cleaning charges can create issues of contention as a project progresses. In most Subcontracts, the Subcontractor is responsible for maintaining a clean job site. Thus, if the Contractor is not self-performing work on the project, the Owner may perceive a duplicate billing when daily/interim cleaning charges are billed to the project (if the Contractor is self-performing work, keeping that portion of the job site clean should be within their scope). The responsible Subcontractor should be back charged for any further cleaning required as a result of their work.

In reality, though, it is nearly impossible to determine the responsible party for cleaning in all instances, especially given the common areas used by multiple Subcontractors. During the Pre-Construction Contract Review, it is recommended the daily/interim cleaning budget be reviewed and agreed-upon. This budget should be capped to prevent abuse.

Step 6: Defining the Required Documentation

The Pre-Construction Contract Review is the ideal time to specify the documentation required to approve Owner Change Orders, payment applications, and allowance/contingency usage.
• Change Orders should be fully supported, including templates specifying allowable markups for labor, equipment, and materials.
• Allowance and contingency expenditures should be reviewed with the Owner prior to the incurrence of these costs. • Utilizing a ‘no cost’ Change Order to track usage provides the proper transparency to the Owner.
• Each payment application should be fully supported with Subcontractor payment applications, invoices for all expenditures above a predefined threshold, and a job cost report inclusive of a reconciliation for that month’s billing.
• Monthly labor and leased equipment reports are also recommended to ensure visibility is provided for individuals and equipment moving to and from the project.


Interim/Closeout Construction Reviews

The Pre-Construction Contract Review validates the basis for a Contractor’s billings to the Owner at project inception. On larger projects, periodic audit reviews are recommended every six to nine months of activity after project inception and the Pre-Construction Contract Review. These reviews are done for two reasons. First, it should be determined whether the Contractor has billed in a manner compliant with any understandings reached during the Pre-Construction Contract Review. Second, staff turnover -- both with the Contractor’s and the Owner’s project management teams -- often leads to misunderstandings regarding the agreed-upon billing methodologies. The findings in an interim or closeout audit should be minimal in the absence of large clerical errors.

Conclusion

From the Owner’s perspective, eliminating billing issues upfront eliminates negotiating for a partial credit later on in the project for a ‘difference of interpretation’. From the Contractor’s perspective, the upfront review eliminates the bad feelings that can arise if the Owner calls in to question the Contractor’s billing methodologies later in the project. Thus, the ‘rules’ by which the game will be played are clarified. The Pre-Construction Contract Review is fair for both parties, and successful financial oversight of the project will be significantly enhanced when these reviews are employed.

Curt Plyler is a Principal with Fort Hill Associates, LLC. Fort Hill is a consultancy specializing in construction contract audits and pre-construction reviews with offices in Raleigh, NC and Greenville, SC.

Contract Compliance Monitoring, An Essential Element of Cost Control on Capital and Construction Projects
by Kimberly Dulaney, Virginia Polytechnic Institute and State University
Curt Plyler, Fort Hill Associates, LLC

S
tate funding for higher education has diminished significantly in the last 30 years and, even more significantly, since the recession of 2008. With these cuts, colleges and universities have to be even more vigilant protecting the funds they spend on construction and capital projects. Each institution is now fighting for a diminished amount of resources from its state and looking at public/private partnerships, philanthropy, and other creative options to support these new constuction projects. The Commonwealth of Virginia is no different from the rest of the country. Virginia reduced higher education funding by approximately 53 percent from 1980 to 2011.

Although public funding may have decreased, universities and colleges are still expending a significant amount on new facilities to enhance campus life, as well as research, teaching, and athletic endeavors. These projects, in turn, help attract a brighter and higher quality student to campus. Focus on the costs of these projects naturally has increased, as funding has become tougher. Public visibility of the tax dollars utilized on these construction projects is shining additional light and scrutiny on these expenditures. For these reasons, universities and colleges are also utilizing new approaches to ensure cost control in order to perform the appropriate fiduciary duty for their state’s taxpayer. One such method being utilized is the construction contract audit.

Virginia Tech recently implemented construction contract audits to enhance the oversight of its projects, as part of an ongoing desire to implement best practices in its construction program. Term contracts were awarded as a result of an RFP and competitive negotiations coordinated by the Procurement Department.

Virginia Tech introduced construction contract auditing on two very large projects on the campus: the Center for the Arts ($95MM) and the Signature Engineering Building ($93MM). The results of the audits encouraged the University to take a more proactive approach by conducting preconstruction contract reviews on future projects, in addition to the traditional interim and closeout audits. The University recently began its first preconstruction contract review on the Upper Quad Residence Hall ($60MM).

Specialist firms are now being employed by many universities and colleges to monitor spending on their construction projects. These schools, in many cases, have spent thousands of dollars in attorneys’ fees to develop a fair pricing arrangement with their contractors. However, these contract terms have little meaning if the school does not closely monitor the contractor’s compliance with these compensation terms and conditions. The lack of appropriate monitoring can lead to the owner paying the contractor for items the contract would deem ”non-reimbursable.” These noncompliant payments are typically referred to as “contract leakage.” Contract leakage, though, is not necessarily a symptom of fraud or collusion. For example, a member of the contractor’s staff is responsible for preparing the application for payment from the contractor to the owner and is unaware of the exact contract terms. If there is doubt as to whether an item should be billed, the staff member may decide to include it in the billing and see if the owner requests a deduction. However, the owner’s staff member may be equally unfamiliar with the contract terms. The owner’s staff member may then decide to approve payment based on the fact that a project manager (PM) has provided his/her signature authorization. While the PM is responsible for reviewing the contractor’s application for payment, there are many other items of higher priority taking up the PM’s time. The noncompliant item in the billing seeps through, culminating in the process previously referred to as contract leakage.

Contract leakage can be relatively minimal to a large percentage of the contract value, but the following actions can reduce your exposure:

• Ensure the contract terms do not contradict one another and are not ambiguous in meaning. For example, if the contract states a $2 per hour uplift is to be applied to craft labor to cover the cost of small tools used on the project, there should not be additional verbiage allowing reimbursement for the actual costs of small tools.

• Review change orders to modify the scope of the original contract. A check should be performed to ensure the change order was not included in the original scope of the project.

• Review the individual transactions billed to the project. On a guaranteed maximum price contract (GMP or GMAX), payroll burden and benefit costs are routinely recovered using a convenience multiplier or “all-inclusive” labor wage rates. For example, the contractor may employ a 45 percent markup to its workers’ base hourly wages to recover these burden and benefit costs. At the conclusion of each year, the owner should determine the actual costs incurred by the contractor and compare to the multiplier or the all-inclusive wage rates.

In most instances, a payroll burden and benefits multiplier or an all-inclusive wage rate is based on conservative assumptions. For example, the multiplier may assume all employees contribute to their retirement account and/or receive health insurance coverage through their employer’s plan. In reality, though, some employees may not be contributing to a retirement account, or their health insurance may be covered under their spouse’s plan. These variances would indicate the contractor’s actual burden and benefits costs are lower than the amount being billed using the multiplier or all-inclusive wage rates. A best practice would be to insert contract language allowing an audit back to actual costs where multipliers or all-inclusive wage rates are being used for convenience and eliminating any intent to lock into specified percentage multipliers or all-inclusive wage rates. These burden and benefit multipliers and all-inclusive wage rates are usually derived by the contractor using conservative assumptions for each component of the multiplier or wage rate. Thus, a clause providing for an audit back to actual cost should present minimal risk to the owner of a variance in the contractor’s favor. Any contract can be subject to leakage if not properly administered. Audits can be performed on time and material GMP, lump sum (also known as fixed price or hard bid), and CM-at-risk contracts. A contract compliance specialist is recommended for owners engaged in ongoing construction projects for years to come. A third-party specialist firm is recommended when a major expansion is about to begin or is already underway, but is unlikely to be repeated within the next five to ten years. The owner employing a specialist firm will utilize the audit findings to monitor future projects or engage the specialist firm again to monitor billings at various stages of its next project. The specialist firm’s work with the next project will often begin with a preconstruction review. This approach attempts to identify conservative estimates employed by the contractor to price out the project that could later be construed as an agreement for future billings. In addition, contradictory contract language is identified and modified at this stage. The preconstruction review represents a best practice because it identifies leakage points before they occur, instead of requiring a messy reconciliation at project conclusion.

A construction contract audit is a prudent course of action to ensure your school’s funds are being deployed in an appropriate manner for your building projects. The benefit is more than a short-term return of funds to your campus. A construction contract audit program will build a knowledge base in your organization going forward to mitigate these risks and prevent their occurrences.

Contract Compliance Monitoring: An Essential Element Of Cost Control On Capital Projects
by Curt Plyler, Fort Hill Associates, LLC

With construction activity slowing nationwide, owners and developers of construction projects are increasing their focus on the cost of their projects as funding becomes tougher. While millions of dollars continue to be spent building and upgrading healthcare facilities, many financial executives in this industry are also utilizing new approaches to ensure cost control. One such method is the construction contract audit.

Many hospital systems are now employing specialist firms to monitor spending on their construction projects. These hospitals have spent thousands of dollars in attorneys’ fees to develop a fair pricing arrangement with their contractors. However, these contract terms have little meaning if the hospital does not closely monitor the contractor’s compliance with these compensation terms and conditions.

Lack of appropriate monitoring can lead to the owner paying the contractor for items the contract would deem “nonreimbursable.” These non-compliant payments are typically referred to as “contract leakage.” Contract leakage, though, is not necessarily a symptom of fraud or collusion. For example, a member of the contractor’s staff is responsible for preparing the application for payment from the contractor to the owner and is unaware of the exact contract terms. If there is doubt as to whether an item should be billed, the staff member may decide to include it in the billing and see if the owner requests a deduction. However, the owner’s staff member may be equally unfamiliar with the contract terms. The owner’s staff member may then decide to approve payment based on the fact a project manager (PM) has provided his/her signature authorization. While the PM is responsible for reviewing the contractor’s application for payment, there are many other items of higher priority taking up the PM’s time. The non-compliant item in the billing seeps through, culminating the process previously referred to as contract leakage.

Contract leakage can be relatively minimal to a large percentage of the contract value, but the following actions can reduce your exposure:

• Ensure the contract terms do not contradict one another and are not ambiguous in meaning. For example, if the contract states a $2 per hour uplift is to be applied to craft labor to cover the cost of small tools used on the project, there should not be additional verbiage allowing reimbursement for the actual costs of small tools.

• Review change orders to modify the scope of the original contract. A check should be performed to ensure the change order was not included in the original scope of the project.

• Review the individual transactions billed to the project. On a guaranteed maximum price contract (GMP or GMAX), payroll burden and benefit costs are routinely recovered using a convenience multiplier or “all-inclusive” labor wage rates. For example, the contractor may employ a 45 percent markup to its workers’ base hourly wages to recover these burden and benefit costs. At the conclusion of each year, the owner should determine the actual costs incurred by the contractor and compare to the multiplier or the all-inclusive wage rates.

In most instances, a payroll burden and benefits multiplier or an all-inclusive wage rate is based on conservative assumptions. For example, the multiplier may assume all employees contribute to their retirement account and/or receive health insurance coverage through their employer’s plan. In real life, though, some employees may not be contributing to a retirement account, or their health insurance may be covered under their spouse’s plan. These variances would indicate the contractor’s actual burden and benefits costs are lower than the amount being billed using the multiplier or all-inclusive wage rates. A best practice would be to insert contract language allowing an audit back to actual costs where multipliers or all inclusive wage rates are being used for convenience and eliminating any intent to “lock” into specified percentage multipliers or all-inclusive wage rates. These burden and benefit multipliers and all-inclusive wage rates are usually derived by the contractor using conservative assumptions for each component of the multiplier or wage rate. Thus, a clause providing for an audit back to actual cost should present minimal risk to the owner of a variance in the contractor’s favor.

Any contract can be subject to leakage if not properly administered. Audits can be performed on time and material (also known as reimbursable or cost-plus), GMP, lump sum (also known as fixed price or hard bid), and CM-at-risk contracts. A contract compliance specialist is recommended for owners engaged in ongoing construction projects for years to come. A third-party specialist firm is recommended when a major expansion is about to begin or is already underway, but is unlikely to be repeated within the next five to 10 years. The owner employing a specialist firm willutilize the audit findings to monitor future projects or engage the specialist firm again to monitor billings at various stages of their next project. The specialist firm’s work with the next project will often begin with a pre-construction review. This approach attempts to identify conservative estimates employed by the contractor to price out the project that could later be construed as an agreement for future billings. In addition, contradictory contract language is identified and modified at this stage. The pre-construction review represents a best practice because it identifies leakage points before they occur instead of requiring a messy reconciliation at project conclusion.

A construction contract audit is a prudent course of action to ensure your hospital’s funds are being deployed in an appropriate manner for your building projects. The benefit is more than a shortterm return of funds to your hospital. A construction contract audit program will build a knowledge base in your organization going forward to mitigate these risks and prevent their occurrences.

Preconstruction Contract Review
Minimize billing interpretation issues
By Curt Plyler, CFA, CCA

As a construction project moves from an idea towards inception, the owner, contractor and their attorneys work together to create a construction contract designed to meet their mutual interests. Much effort and expense go into this process, which are necessary given the potential risk exposures. However, once the contract is set for execution, an essential step to minimizing future disputes is often omitted. A preconstruction contract review (PCCR) can assist in identifying and mitigating many issues arising from differing contract interpretations.

Guaranteed maximum price (GMP) contracts are often used by owners and contractors to move forward on construction projects that are not fully defined. A fair price for a project should leave both the owner and contractor satisfied at project completion. In a GMP contract, the contractor is normally paid the cost of the work plus a fee. Agreeing on a definition for cost is paramount. A PCCR establishes proper cost expectations at project inception.

The contract is often rather simplistic in defining reimbursable and nonreimbursable costs, and the true cost incurred is not as clear as one might expect. The PCCR review supports and clarifies the efforts of the owner, contractor and attorneys in ensuring the underlying financial intent of the contract is met. The contractor will likely want to use predefined rates to bill labor, leased equipment, insurance, information technology, and other incurred costs for convenience and assurance that its costs will be fully covered. Using predefined rates is considered reasonable, but the owner should want a review to validate that the rates to be used to charge the project approximate the actual costs incurred.

Contract language

Ideally, a PCCR is done prior to contract execution. The contract is designed to eliminate ambiguities, but the complexities of a large construction project often leave the various parties with different understandings and assumptions related to project billings.

Your work should complement the work of the attorneys for the owner and the contractor. The attorneys are focused on the contract to minimize their respective party’s risk, and the auditor seeks to minimize the potential for future billing disputes. These disputes often involve billing methodologies that may not match the contract’s language.

You will review the draft contract language and identify potential areas of concern. Place specific emphasis on analyzing the contract language that defines reimbursable and nonreimbursable costs. Take care to ensure these definitions are consistent with other project documents, including the request for proposal, response to the request for proposal, contract assumptions and clarifications, and GMP workbooks.

Labor billing methodology

Labor is the largest component of the general conditions costs and should be reviewed in detail. The contractor is entitled to recover the cost of payroll taxes, insurance and customary benefits.

Labor burden costs are often recovered through a labor burden billing rate applied to base wages. Since these costs will vary depending on who is assigned to the job, an estimated labor burden is often billed to the project. You should examine the proposed job roster and review employee payroll records. The review ensures that the base wages billed are the actual wages paid to the employees.

Additionally, ensure that the labor burden is supported by actual benefit and payroll tax costs for both regular and overtime hours worked by the contractor’s hourly and salaried workforce. Labor burden components not applicable to overtime hours should be excluded from the burden rate.

Some contractors use composite labor billing rates that are inclusive of base wages and labor burden to charge the project. Review the contractor’s payroll records to ensure that the rates are representative of actual costs incurred.

Validate burden or billing rates:


• Confirm base wages earned by verifying each employee’s salary in the contractor’s payroll system.
• Refer to the contract, which should define the applicable labor burden or billing rate components:
• Determine that the burden and billing rates include the typically expected components: Social Security/ Medicare (FICA), Federal Unemployment (FUTA), State Unemployment (SUTA), and 401(k) matching costs. Statutory rates apply to FICA, FUTA, and SUTA.
• Request that the contractor provide supporting documentation to justify the cost of other components included in the burden or billing rates.
• Ascertain that items such as computers, vehicles and living allowances are excluded unless specifically allowed by the contract. If these items are reimbursable, the items should be billed separately, not as part of the labor burden or bill rate.

Contractor-owned equipment rates

Many contractors lease their own equipment to the project. During your PCCR, determine or validate:

• Fair market value of each item of equipment upon scheduled arrival on the project site
• The basis of components of the rate (e.g., fuel, oil, lubricants) to be charged for each item of equipment
• The aggregate amount allowed to be charged for each item of equipment, which should not exceed a predefined percentage of each item’s fair market value
• Any other charges to be billed separately and directly for equipment


The rates should be supported by a respected industry source, that provides average rental rates for construction equipment from hundreds of rental distributors nationwide, such as the AED Green Book1 and RSMeans.2

To use the AED Green Book and RSMeans, you will need to determine the appropriate:

• Category of equipment
• Model of equipment
• Rate (i.e., hourly, daily, weekly or monthly)
• Regional rate adjustment

Defined rates for other items

Insurance – Contractors will often insert contract language allowing insurance to be charged at a stated rate, or they will bill the coverage at a rate despite contract language that states only the premiums related to the project are allowed. Contractors procure certain lines of insurance for their whole business, and their stated insurance rates are often inclusive of excess coverages and home office insurance costs beyond what the owner requires.

Some owners may view these billing approaches as unfairly charging their project for unnecessary items. However, insurance rates built in this manner often allow the contractor to provide, and the owner to benefit from, the required coverages at a lower cost than if project-specific policies were procured. Like the leased equipment and labor billing rates, the owner must understand and agree on the items comprising the insurance rate in the contract.

Information technology (IT) – Similar to insurance, many contractors attempt to insert contract language specifying a rate—a predefined percentage or an amount per labor hour of work—for IT. Alternatively, the contractor will charge a rate despite contract language specifying the billing of actual cost incurred for direct project-related expenses.

You need to review any IT billing method that utilizes a rate to ensure both parties agree that the components comprising the rate are reimbursable. IT expenses incurred at the construction site are usually reimbursable.

Home office IT expenses often support the project site, and the contractor will want to recover at least some of the costs. An upfront discussion and agreement on which IT components are and are not reimbursable is valuable to both the owner and contractor. IT components should not be billed directly if included in a predefined rate. Additionally, any rate based on a charge per work hour should allow regular time wages but not overtime.

Other items – Other items like document reproduction and retention are often charged to the project with predefined rates. You should request during your PCCR that the contractor provide a list of all rates to be used in place of actual costs. Ensure that the rates are representative of actual cost incurred. For example, a contractor’s
recordkeeping costs may not be identifiable to a specific job. However, the costs can be allocated on the basis of revenue to the project’s percentage of the contractor’s overall annual revenue.

Budget for daily/interim cleaning

Daily or interim cleaning charges can be a contentious issue during the project. Most subcontracts require subcontractors to maintain a clean job site. If the contractor is self-performing work, keeping their portion of the job site clean should be in their scope.

If the contractor is not self-performing work on the project, the owner may perceive a duplicate billing when daily or interim cleaning charges are billed to the project. Subcontractors should be back charged for any further cleaning required because of their work. Sometimes determining the responsible party for cleaning is difficult, especially when common areas are used by multiple subcontractors.

During your PCCR, review the daily/interim cleaning budget and verify the owner’s agreement. The budget should be capped to prevent abuse.

Required documentation


During your PCCR, evaluate the documentation required to approve owner change orders, payment applications, and allowance/contingency usage.

• Change orders should be fully supported, including templates specifying allowable markups for labor, equipment and materials.
• Allowance and contingency expenditures should be reviewed with the owner prior to the incurrence of these costs. Utilizing a no-cost change order to track usage provides the proper transparency to the owner.
• Each monthly payment application should be fully supported with subcontractor payment applications, invoices for all expenditures above a predefined threshold, and a job cost report inclusive of a reconciliation for that billing.
• Monthly labor and leased equipment reports should be provided by the contractor to ensure visibility is provided for the individuals and equipment moving on and off the project.

Interim and closeout reviews

You should begin validating the contractor’s actual billings to the owner starting at project inception. On large projects, interim audit reviews are recommended for every six to nine months of activity after project inception and the PCCR.

The reviews should validate whether the contractor has billed in a manner compliant with the understanding reached during the PCCR. Additionally, staff turnover, both with the contractor’s and the owner’s project management teams, often leads to misunderstandings regarding the agreed-upon billing methodologies. Interim audit reviews should mean your closeout audit will only identify minimal findings in the absence of large clerical errors.


Conclusion

Financial oversight of a construction project can be significantly enhanced by a PPCR because of the elimination or minimization of potential billing interpretation issues. The owner benefits by avoiding a negotiation for a partial credit later in the project for a difference of interpretation. The contractor has clarity on the rules for billing. For both, bad feelings can be avoided that may arise if the owner questions the contractor’s billing methodologies later in the project.

1 Published by Associated Equipment Distributors, Oak Brook, Ill., or available at https://equipmentwatch.com/retail-rental-rates/
2 https://www.rsmeans.com/