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What Types of Construction Contracts Should be Audited?

Updated: Feb 3, 2023


Construction audits should be focused on projects with contracts likely to post the most risk potential.


There are multiple construction delivery methods, each with their own unique contract terms and conditions. All have components that could be audited if unlimited resources were available to conduct such reviews. Since that it almost never the case, construction audits should be focused on projects with contracts likely to post the most risk potential.


Construction Delivery Methods


“The two most commonly used construction contracts are Design-Bid-Build and CM at Risk."

Construction delivery methods include Multi-Prime, Design-Build, and Integrated Product Delivery (IPD). However, the two most commonly used construction contracts are Design-Bid-Build and CM at Risk. Design-Bid-Build, commonly known as "fixed price", or "hard bid", is often used on smaller, less complex projects where the design is complete. Correspondingly, CM at Risk is used on larger, more complex projects. This approach often allows work to begin earlier, before the design is complete.


Guaranteed Maximum Price


Unlike Design-Bid-Build, CM at Risk contracts usually have a Guaranteed Maximum Price (GMP). The Owner must pay the Cost of the Work incurred plus a Fee up to the GMP value. The Contractor/Construction Manager is entitled to recover their costs for General Conditions, General Requirements, Subcontracts, and Insurance, as well as their Fee. The Contact will specify how these items are to be charged to the work - normal at actual cost incurred, a fixed sum, or a specific rate.


Risk of Owner Overpayment


While the primary focus of a Design-Bid-Build contract are the change orders, all costs billed to a CM at Risk contract should be subject to review for appropriateness. As a result, CM at Risk contracts have a greater risk of Owner overpayments than Design-Bid-Build agreements. Specific attention should be directed to labor costs, direct equipment costs, insurance billings, and information technology billings.


Correct Action


Audit plans should naturally gravitate to CM at Risk projects because of their (likely) greater dollar values. However, if having to choose between projects with similar values, but different delivery methods, auditing the CM at Risk agreement is likely to be the correct action.

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