Presenter
Tony Ollmann, CPA, CCA
Director
Director
Baker Tilly
About Baker Tilly
>
Established in 1931
>
One of the top 20 largest accounting and
>
One of the top 20 largest accounting and
advisory firms in the United States according
to Accounting Today’s 2013 list of “Top 100
Firms”
>
More than 1,400 professionals
>
Baker Tilly Virchow Krause, LLP is the largest
US Baker Tilly International independent
US Baker Tilly International independent
member firm
>
Baker Tilly International is the eighth largest
public accounting network with representation
public accounting network with representation
in more than 131 countries
>
Convenient, seamless resource for worldwide
needs
4
needs
About Baker Tilly
From concept and funding to controls and compliance, Baker
Tilly has more than 250 dedicated construction and real estate
industry professionals to assist with your facility development
j
t th
h ll t
f th d
l
t lif
l
project through all stages of the development lifecycle.
Overview
Today’s topics:
What are change
orders?
Auditing construction
contract change
orders
Audit risks
Change order red
flags
Change order testing
Case studies
Learning objectives
>
Learn how to identify change orders
>
Learn how to decompose a change order
>
Determine the underlying change order driver
>
Understand the risk associated with different types of change orders
>
Develop strategies for auditing change orders and managing
construction professionals
What are change orders?
§ 7.3 CONSTRUCTION CHANGE DIRECTIVES
§ 7.3.1
A Construction Change Directive is a written order
prepared by the Architect and signed by the Owner and
Architect directing a change in the Work prior to agreement
Architect, directing a change in the Work prior to agreement
on adjustment, if any, in the Contract Sum or Contract Time,
or both. The Owner may by Construction Change Directive,
ith
t i
lid ti
th C
t
t
d
h
i th W k
without invalidating the Contract, order changes in the Work
within the general scope of the Contract consisting of
additions, deletions or other revisions, the Contract Sum and
Contract Time being adjusted accordingly.
Source: AIA 133 Standard Form of Agreement Between Owner and Construction Manager
What are change orders?
Change orders are referred to in a number of ways:
>
Ch
d
>
Change orders
>
Change directives
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RFI
>
Engineering change notice
>
Field change request
All amount to the same thing an owner’s
All amount to the same thing, an owner s
authorization to change the terms of the prevailing
contract
AIA change directive documentation
§ 7.3.3
If the Construction Change Directive provides for an
adjustment to the Contract Sum the adjustment shall he
adjustment to the Contract Sum, the adjustment shall he
based on one of the following methods:
.1
Mutual acceptance of a lump sum properly itemized
and supported by sufficient substantiating data to permit
evaluation;
evaluation;
.2
Unit prices stated in the Contract Documents or
subsequently agreed upon;
3
Cost to he determined in a manner agreed upon by
.3
Cost to he determined in a manner agreed upon by
the parties and a mutually acceptable fixed or percentage
fee; or
.4
As provided in Section 7.3.7.
Source: AIA 133 Standard Form of Agreement Between Owner and Construction Manager
Why do change orders occur?
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Owner initiated change to the project
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Contingency expenditure
g
y
p
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Change in construction conditions
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Change in specifications
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Change in building code
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Change in building code
Change in specifications
Due to completion of construction documents,
h
i b ildi
d
fi
d
t i l
changes in building code or refined materials
specifications additional labor and materials
are required to deliver the scope of work
are required to deliver the scope of work
Resulting from:
Resulting from:
>
Bids based on incomplete construction documents
>
Regulatory design review demands design changes
>
Equipment specified is modified or changed
Change in market conditions
The cost of procuring construction services,
li
d
i
t
t i ll diff
t
supplies and equipment are materially different
than the estimated costs
Resulting from:
>
Dramatic material shortages
>
Dramatic material shortages
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Labor shortages
Change in field conditions
Construction conditions are not what was
t d
t d t th
t
t
expected or reported to the contractors
M
i
l d
May include:
>
Unusually inclement or adverse weather
>
Unreported soil conditions
p
>
Environmental hazards
Owner initiated change orders
Represent new or additional work not planned
f
i th
ti
t d
for in the estimated scope
M
lt i
May result in:
>
Increase to the GMP
>
Change to the construction schedule
g
>
Use of contractor’s contingency budget
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Use of owner’s contingency budget
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Reduction to another part of the project budget
Change order audit risks
Audit risk categories
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U
th i
d h
d
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Unauthorized change orders
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Unnecessary change orders
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Redundant or duplicate change orders
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Overpriced change orders
Unauthorized change orders
Work that is performed and charged for without
h
i
b
th i
d b th
having been authorized by the owner
Wh d
thi h
?
Why does this happen?
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Miscommunication
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Procrastination
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Budget overruns
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Schedule delays
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Rework
>
Rework
Unnecessary change orders
Change orders that have been properly
d b t d li
t
l
t th
approved but deliver no apparent value to the
project
Resulting from
>
Existing scope
>
Existing scope
>
Unnecessary add on
18
Overpriced change orders
Change orders that have been approved but
i
d f
th
f
k
d
are overpriced for the scope of work proposed
O
i i
f
Overpricing comes from:
>
Inflated labor rates
>
Inflated hours
>
Exaggerated profit margins
Contingency budgets and allowances
Contractors contingency: Contractor’s budget
f
i
b d
t h
for in scope budget changes
O
’
ti
O
’ b d
t f
Owner’s contingency: Owner’s budget for
scope changes
Allowances: Segregated construction budget
dedicated for a specific use that may not have
dedicated for a specific use that may not have
a budget and contract or GMP time.
Change order red flags
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No rejected change orders
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Project end change orders
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No negotiated change orders
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Remodeling projects
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Project end change orders
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Significant value engineering
adjustments
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Ch
i
t
t
d i
>
Remodeling projects
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Too few change orders
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Change order value greater
th
10% f
i i
l b d
t
>
Changing contractors during
construction
>
Too few change orders
than 10% of original budget
>
Bids prepared at less than
100% of construction
d
t
>
Material substitutions
>
No contractor’s contingency
reconciliation
documents
>
Remodeling projects
Audit program
Change order audit program planning:
>
D
t ti
d
t l
>
Documentation and control
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Authorization
>
Price analysis
>
Scope analysis
Documentation and control
Change
Order Date Date 3% Total change
Order Date Date 3% Total change
Number Submitted Approved Contractor Description Change Order Reason Submitted Change Submitted Fee order amount
1 11/5/2007 Footing corrections, backfill and pumping Change in conditions $ 12,927.57 $ 387.83 $ 13,315.39 1 8/15/2007 Sand, 90 loads Change in conditions $ 5,450.00 $ 163.50 $ 5,613.50 1 11/5/2007 Undocumented change order Change in conditions $ 12,421.80 $ 372.65 $ 12,794.46 1 Change Order Adjustment Change Order Adjustment $ ‐ 1 7/27/2007 Lobby floor change Owner initiated change $ 3,986.00 $ 119.58 $ 4,105.58 1 Change in conditions $ (1,410.00) $ (42.30) $ (1,452.30) 1 Landscaping changes Owner initiated change $ 1,477.39 $ 44.32 $ 1,521.71 1 Owner initiated change $ 2,128.00 $ 63.84 $ 2,191.84 1 S it S Ch Ch i S $ 16 962 50 $ 508 88 $ 17 471 38 1 Sanitary Sewer Change Change in Scope $ 16,962.50 $ 508.88 $ 17,471.38 1 Change Order Adjustment Change Order Adjustment $ ‐ $ ‐ 1 Substitute granite for marble Owner initiated change $ (358.00) $ (10.74) $ (368.74) 1 Plumbing changes Owner initiated change $ 8,811.00 $ 264.33 $ 9,075.33 1 Revisions resulting from state plan review Code Compliance $ 8,584.00 $ 257.52 $ 8,841.52 1 Change Order Adjustment Change Order Adjustment $ ‐ $ ‐ 1 Change Order Adjustment Change Order Adjustment $ $ 1 Revisions resulting from local code compliance Code Compliance $ 61,317.00 $ 1,839.51 $ 63,156.51 1 Change Order Adjustment Change Order Adjustment $ ‐ $ ‐ 1 Eliminate vinyl trim and substitute vinyl for stone Owner initiated change $ (4,157.00) $ (124.71) $ (4,281.71) 1 Owner initiated adds and deletes Owner initiated change $ 4,088.00 $ 122.64 $ 4,210.64 1 Code compliance from reviews Code Compliance $ 6,150.00 $ 184.50 $ 6,334.50 1 Owner initiated adds and deletes Owner initiated change $ (19,417.00) $ (582.51) $ (19,999.51) 1 Owner initiated adds and deletes Owner initiated change $ 7,691.00 $ 230.73 $ 7,921.73 1 Change Order Adjustment Change Order Adjustment $ ‐ $ ‐ 1 Additional cultured stone Owner initiated change $ 6,936.00 $ 208.08 $ 7,144.08 1 Design oversight. No towel bars Design deficiency $ 1,585.00 $ 47.55 $ 1,632.55
