In this article, I will provide some insights into the role of auditors in fostering an environment of trust and transparency to support owner organizations in delivering capital projects using Lean Integrated Project Delivery (Lean IPD). This article is an attempt to encourage owners and service providers (“vendors”) alike to recognize the evolution of the role of audit on capital projects, and in the process, alleviate any concerns about transparency in audit operations.
The most important ingredient of an IPD project is trust within the team. However, building that trust is challenging, given involved parties have different goals, operating models, and expectations. In order to build trust and foster collaboration, owners require involved parties to sign a single contract (Integrated Form of Agreement), which legally binds stakeholders into a risk-reward partnership to create a one for all, all for one mentality and relationship among the stakeholders.
While the legal binding is instantaneous, effective communication and operational transparency take more time to breed within the team. It is therefore vital to have full transparency into what the parties are bringing to the table, including financial stability, technical experience, and the right team to manage and deliver on the project.
To perform due diligence, owners often work with consulting and auditing firms to conduct independent assessments and audits.
Below are a few examples of tasks or practices that support team building, transparency, and trust among the stakeholders.
Tip #1: Hire an independent entity to do project audits
In the pre-contract execution stage, owners are often juggling multiple priority items such as budgeting, scoping, procurement and contracting, and onboarding, which requires time-sensitive document reviews, contracting discussions, and selecting teams/members. These activities are predicated on a fair and unbiased assessment of potential or selected partners’ chargeable rates on the project, therefore, owners often retain an independent entity to perform audits to assess labor rates, overhead cost structure and profit margins. This independent entity provides an objective report that includes facts, observations, analysis, and recommendations, which is shared with contractors and the owner for transparency and to foster a common understanding.
What are the advantages for project owners of bringing an independent third party to the table?
The independent entity can help
- Establish a fair labor rate consistent with prevailing wages,
- Analyze payroll records, costs, burdens, and overhead structure,
- Consider all positions, understand and document involved parties’ expectations,
- Work with all stakeholders to bridge any gaps to establish trust right at the onset, and
- Provide industry benchmarking data to negotiate overhead and profit rates.
Image: Google-Deepmind via Unsplash
Building trust through compliance
As the project progresses, there are other opportunities to continue to build and/or strengthen trust within the IPD team and other stakeholders through 100% transparency and visibility into project costs and operations. The audit clause of the IPD contract allows the owner to conduct time-bound audits at various stages of the projects to identify improvement opportunities, process gaps, implementation challenges, and non-compliant costs.
These audits can be performed in two ways:
- Traditional, or
- Ongoing cost and compliance monitoring.
Traditional audits are typically conducted at 10% or 20% completion, 50% completion, and 90% substantial completion. These audits typically include:
- Reviews of project management processes and practices,
- Assessments of selected samples of contractors' billed costs as approved pay applications and change orders,
- Reconciliation of billed costs against actual costs as recorded in the contractor’s job cost report, and
- Verification of documents to ensure the owner is approving costs in compliance with the contract.
The ongoing monitoring, on the other hand, utilizes an analytical tool or platform that allows the auditor to:
- Plug project cost data obtained from pay applications, change orders, the contractor’s job cost report, approved rate sheets, and other documents into an analytics tool.
- Test cost data via a series of contractual rules (contractual requirements) and statistical measures to identify risky or potentially non-compliant transactions on an ongoing basis.
This method provides a near real-time health assessment of the project and allows for proactive identification of issues and non-compliant costs and mitigation of gaps or issues; it also generates cost trends to identify outliers and anomalies and facilitates data and risk-based decision-making. The best use of this technique is for larger multi-year projects with multiple risk reward partners OR a portfolio of small to mid-cap projects that requires multi-level reporting.
Tip #2: Work on a mindset shift
As the projects are getting more complex, delivery teams are increasing in size and becoming more diverse and dynamic. One of the key attributes of a diverse, dynamic and high-performance team is that the team values the perspective of an agnostic third-party, i.e an audit team independent of day-to-day operations, and incorporates lessons learned within the context of an environment that practices continuous improvement. This inclusiveness requires a mindset shift.
A mindset shift is a gradual process which starts on day 1 of an audit. As a good practice, audit leaders take time to connect with the vendors at the kick-off meeting to understand their challenges and perspectives and provide transparency in an audit work plan–testing schedule, schedule/milestones, reporting and logistics–to mitigate ambiguity and surprises and to create an environment of collaboration. Followed by a kick-off meeting, the auditor provides ongoing status updates, one-on-one conversations with vendors to discuss specific observations, and work with the vendors to resolve audit findings. This series of actions further reinforce transparency in audit operations which encourages and influences stakeholders to consider the auditor as a part of their extended team. Overall, clear messaging, impartial questioning and testing, and a common understanding that we are all there to support the success of the project play an important role in supporting a mindset shift.
Tip #3: Have a robust audit clause
One of the key terms of the IPD contract is the audit clause, which typically defines the requirements, expectations, and timing of audits. Quite often, project owners tend to “Frankenstein” their contracts, which means that they pick and choose clauses from different versions of various types of contracts, which then results in misalignment of terms and ambiguity creating room for misinterpretation. At a minimum, this clause must include a list of all possible documentation, in lieu of adding additional documents language. Comprehensive (over prescriptive) language mitigates independent assumptions and interpretations of project performance and incurred costs requirements, minimizing confusion and mistrust. This clause must also include a definition of potential impact(s) if contractors are found non-compliant on the project.
Tip #4: Be open to experimenting with technology
While auditing principles and methodology are standardized and have largely remained consistent over the years, conducting an audit has evolved in the last five years. Audit teams now use advanced technology, such as Robotic Process Automation (RPA) and Artificial Intelligence (AI), to automate the auditing process.
This process allows the auditor to scan through various project documents, such as pay applications, change orders, job cost reports, using bots to extract key pieces of data required to assess and test transactions for compliance. This use of technology significantly cuts down audit completion time, allows ingestion of large volumes of project data, automates selection and testing of cost samples, and provides a more comprehensive assessment and validation of project costs.
Feature image: Lukas Blazek via Unsplash
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Gaurav is a Director in KPMG’s Infrastructure, Capital Projects, and Climate Advisory (ICA) practice with extensive knowledge and experience in serving all facets of project development, management, and delivery. He has more than 20 years of experience in serving client organizations in managing large capital projects and programs, including, strategy and front-end planning, governance and prioritization, process and controls, compliance and monitoring, audits, and technology and data analytics.
He has led multiple cross-functional teams to support organizations in industries such as technology, healthcare, higher education, power & utilities, and the public sector. Prior to joining KPMG, Gaurav served in multiple roles, including Business Development Manager, Project Manager, and Senior Engineer for the top 10 ENR EPC firms. He is a registered Professional Engineer(PE) and LEED-accredited professional.