Think you know how to R.E.V.I.E.W. defined costs?

When reviewing priced subcontracts, first get an understanding of the levels of compliance to contractual obligations regarding subcontracting. This will include checking clause 26 acceptance and any additional requirements regarding value for money and procurement.

• Understanding the contract - it is wise to check the main contract and subcontract in all the usual places (SOCC, X and Z Clauses, Scope information) for potential amendments. Are there any additional clauses which change the valuation process? Are there any requirements to monitor KPIs (X20), Collateral warranties (X8) and do these impose any penalties if not achieved, are there any advance payment rules (X14).
• Original contract sum - expect Option A subcontract applications for payment to be supported by an activity schedule, showing which activities have been completed. This will enable you to verify that activities have been completed against the programme, and check the subcontractor is not receiving any cash flow advantages.
  
  Note, it is common to see assessments based on the percentage or proportion of the activity completed, however this is not the basis for the Price for Work Done to Date under the standard Option A.
  
  Option B applications for payment should identify the original bills of quantity and a cumulative measurement against each item. Check the quantities have been measured and reflect actual progress on site.
• Compensation events – there should be a clear audit trail within applications for payment and assessments for compensation events. The ECC contains strict procedural requirements which take a compensation event from notification to implementation.

Therefore, expect to see a compensation events register, identifying communications for notifications, instructions and quotations.

Check again you have read and understood the contractual requirements in relation to supporting costs, the time constraints imposed, and the requirements of both parties. Have you been able to evidence the notification of the compensation event; was it notified within the correct timescales; have quotations been reviewed and assessed in accordance with the contract; and are compensation events updated on the accepted programme?

• Early warnings - is there an early warning process in place? Is this monitored and are any notifications followed up with subsequent risk reduction meetings? Is there evidence of notifications being recorded and managed on a risk register (NEC3) or early warning register (NEC4)?
• Programme - is a programme identified in the subcontract data and have programmes been submitted for acceptance? Clearly, as the valuation is very closely linked to the programme, we would expect to see an accepted programme for the subcontractor.
  
  Good programme management is essential in Option A and B priced subcontracts, due to the number of specific compensation events clauses which cross reference the accepted programme.

It is important to understand how Option A and B subcontracts are prepared, controlled and reported in your project.

• Obtain a good background to the project and the subcontractor you are auditing. Consider a process review to understand preventative and detective controls to drive robust application for payment compilation or assessment. A tour of the site, the working areas, any storage yards and a good conversation with the site and subcontract works manager are all really useful to a) understand the sheer volume of works on site and b) how that package is planned, delivered, managed and reported on day to day.
• Understand what/how compensation events are valued assessed and instructed – fully compliant with the subcontract process? Or corners cut?
• Review the early warning or risk register for issues raised – this will give you a feel for what issues of significance are emerging. Any early warning should also be clearly recorded with supporting close out/risk reduction meetings evidence.
• Attend collaborative planning meetings and understand how the subcontract programme is managed and updated within the main contract programme.
• Understand the wider environment– is the subcontractor sharing labour and resource across multiple work packages on the same project and do they have more than one subcontract in place? If so, you may need to liaise with other project operational and commercial staff to see if there is an obvious risk of duplicate overcharging.
• How has the account progressed to date? What can the main contractor’s cost manager reveal? Has there been significant change? If so, how has this been valued? Has anything been paid for on account? Is there any disruption, delay, or significant change administered? Have deductions been accepted by the subcontractor or challenged?

Finally, where is your review going? Is it just basic support for the client’s project manager in routine and ongoing assessments of the main contractor’s account, or something wider? The client will clearly want to see that the main contractor has administered the subcontract correctly, as there is a risk of disallowed cost if, under clause 11.2 (26), it can be identified that costs were not paid to a subcontractor in accordance with its subcontract.

Cost data on Option A and B subcontracts is often the most straightforward data set to understand, analyse and sample.

With a decent robust application process set up from day one and all parties understanding their requirements, the priced work should be easily determined and assessed with minimal commercial resource required. As a result, we would not normally expect to see any complex data visualisation. However, some basic information as shared below would be a great starting point:

A simple chart capturing compensation event growth by subcontract package is a useful indicator of where you might want to focus your initial inspection/review efforts– it shows which package/work type has been under most stress for emerging change or events. Relevant for both Option A and B subcontracts.

• On Option A’s, a table highlighting completion dates v’s planned dates for each activity is helpful as it will allow monitoring and tracking of payment due, completion etc via the application. An accepted programme should be referenced, and confirmation obtained from the operations team that any claimed activities are complete.
• On both Options, the compensation events should be clearly recorded and supporting detail provided in accordance with contract timescales. It is useful to categorise compensation events by root cause, prior to further review – see data set below.

The previous sections will give you an initial understanding of the project environment, data types available and where costs may be mischarged against the identified rules.

At this stage you have really just been gathering your thoughts and what could be going wrong. It is important to then define the specific tests linked back to rules, so you can then investigate in detail (and draw robust conclusions).

You may want to carry our specific tests such as:

Option A

• Accuracy of activity completion status and valuation. Here your core testing will want to focus on the programme status and closely link this to the priced activity schedule.

Option B

• Verification that the quantity of work completed for each item in the original bills of quantities has been accurately measured and charged at the agreed rates in the subcontract.

Both

• Checks and balances on core compensation events, especially those which take the subcontract value significantly over the original contract sum/budget. Generally, we would expect total growth to be less than 20%. Where changes are excessive, then this should raise alarm bells and further investigations should be undertaken. It may have resulted from incomplete design at the procurement stage and money for value may be a concern. You may want to see that there is a robust checking procedure behind compensation events/instructions relating to additional works claimed. For example, checking additional site/works records e.g. allocation sheets/site diaries.
• Check compliance with unusual contract clauses/stipulations. You will probably want to look at specific clauses, or contract specific requirements you see as risky. E.g. X1 Price adjustment for inflation; X14 advance payment clauses, X20 KPI requirements and any penalties, performance bonds or collateral warranty requirements.
• For larger additional work items, it is crucial that compensation events have been priced as expected under the quotation method in the subcontract, as this will help drive value for money. For example, has the shorter schedule of cost components been used; are there any agreed rates in the subcontract data?

Remember sampling and review must be relevant to the wider population, so don’t just focus on a few compensation events in one particular month. As suggested above, a good tip is to summarise compensation events by category types, for example items such as significant additional unexpected works, works let on a daywork basis, weekend working, prolongation claims etc. Then sample across all category types.

Beyond this, request the records required from your subcontractor and inspect what is provided. If things appear wrong always try to understand why? What is the root cause of the issue? Control problem? People issue? Isolated error? Lack of contract understanding? Basic record keeping issue? When challenged further does the subcontractor response hang together? Should you be widening your sampling to better understand the problem?