Think you know how to R.E.V.I.E.W. defined costs?
Equipment costs
Assurance basics - Agency
Reimbursable style contracts are widely used today on major construction programmes.
NEC ECC Option C and E contracts tend to be the backbone (currently) of reimbursing high risk infrastructure projects in the UK.
Within these contracts, the basic clauses allow project managers (usually delegated to their cost managers) to inspect accounts and records of their choice in relation to cost items claimed. Z Clauses are commonly added to allow for third party or client auditors to drop in “as and when” to audit or verify supplier cost.
Those suppliers being audited need to be helpful and transparent that’s pretty much it.
The audit side occasionally becomes overly complex, with onerous volumes of records being requested, meaningless conclusions drawn from samples and mischarges extrapolated aggressively (and often incorrectly).
We try and keep it simple, using the acronym R.E.V.I.E.W, which offers pragmatic guidance on how to plan and deliver assurance work.
This paper is one of a series of tip sheets produced by TOP – this one focusses in on equipment costs.
R.E.V.I.E.W RECAP
In case you missed the last blog or just need a quick memory jogger, the acronym R.E.V.I.E.W. should help your thought process when reviewing any cost element. Much of this goes to the heart of smart or risk based auditing.
R - Rules of the contract
A cost type is only allowable if it passes the reimbursement rules of the “specific” contract.
E - Environment
Understanding the importance of the operational and financial control environment in which costs are managed and presented is critically important to your assurance work. Be prepared to speak with project and finance team members (both client and supplier), walk the site and review key contract documentation to better understand the project set up.
V - Visualise data
Intelligent data analysis and visualisation are key tools to better understand how and where money has been spent.
I - Identify risk and design tests
A thorough understanding of the cost area being reviewed should emerge through the first three steps above. This will help flush out specific project and contract risks that require review. This will be over and above core transactions that will provide the bulk of your assurance.
E - Examine and evaluate accounts and records
A good open working relationship with the supplier being reviewed is essential to obtainings ource documents backing up the cost claimed. Throughout your work, make sure you regularly check back in with your client project manager and cost manager too.
W - Write up findings, draw conclusions and report
All examinations should follow a robust and formal recording and reporting process. No ifs, no buts. Always leave an audit trail of work completed and assurances obtained.
EQUIPMENT
So, let’s start our REVIEW process for equipment. First a bit of background.
Yes, we are talking equipment here, NEC speak, whereas the rest of the industry still uses plant with minimal chance of it changing i.e. plant manager, plant yard, heavy plant crossing etc. NEC defines Equipment as items that are used by the contractor to Provide the Works. Plant and Materials are intended to be included in the works.
ECC contracts define what can be charged as equipment based on a number of different scenarios shown in the Schedule of Cost Components (SOCC). Typically, these include for equipment that is: listed in the Contract Data; owned by the contractor or hired from a group company; or cross-hired from third party plant hire suppliers. There is also the proviso that it is used within the Working Areas.
In terms of which scenarios apply, this will be heavily determined by the contractor’s procurement and asset management strategy. Certain contractors are keen to buy and maintain their own equipment (and make available to all live projects they are working on), whereas others will look to hire in everything from third party suppliers. In addition, there will be certain projects which due to their complexity require the sourcing of specific or special equipment, which will need carefully referencing in Contract Data.
When you are about to commence a review of equipment costs on any given project it is therefore always worth trying to understand what the initial equipment budget was and whether an equipment resource plan exists. This will help identify the initial expectation of the types of equipment to be procured, expected durations and perhaps the source of supply i.e. owned or intercompany or third party hire.
The defined cost demonstration for equipment can be complex.
Expect lots of transactions from the cost ledger which are high volume and low value. Effective visualisation of data is absolutely key here and is explained further later.
Where equipment costs are via a third party, expect demonstration to be heavily geared around records such as purchase orders, conditions of hire, invoices, proof of payment etc.
If costs are from contractor owned equipment, expect benchmarking exercises to take place to demonstrate open market rates (core clause 52.1). In addition to accounting records, there are likely to be site records further referenced in the scope (core clause 52.2) which often identify the need for monthly plant reports (incorporating utilisation and telematics data), allocation sheets/site diaries to confirm what equipment was needed and when.
Record your work, write it up and report. You never know who may need to access it after.
Too often we hear of equipment audits, with the view being it’s all ok. What was done we ask? What has been documented? Cue blank faces. At best, the cost ledger records were partially reconciled to a monthly equipment on hire report. The volume of data was excessive/complex we are then told!
If you need a hand, please give us a call.
