Cost validation and audit
Purpose
It is important that on any construction project, the cost management team is confident that the client is receiving value for money from its suppliers, and that cash is not being expended ahead of progress. An audit will be required on a regular basis to ensure that the teams and suppliers are compliant with process.
The audit function of cost management is needed to confirm that the processes that exist within a project are sufficiently robust to enable payments to be made to suppliers that represent the true value of the work involved.
The cost validation process may also be needed to review whether cost plans and estimates have been prepared correctly, whether budget changes have been accurately assessed, and to check that final accounts have been prepared based on the project guidance.
Process
Prior to any auditing, the cost manager will need to ensure that all appropriate documents are in place. These documents may include:
- a schedule of cost components (for example, labour, plant, materials, staff, overheads, and so on);
- commercial contracts;
- definitions of what costs will be accepted by the client;
- a schedule of rates;
- bills of quantities;
- a basis for measuring progress throughout the project; and
- the process for agreement of the final accounts.
A scope of work awarded to a supplier will typically have a contract that includes an estimate of costs or an agreed fixed-price lump sum, time-phased over the period of the contract, and based on the plan or schedule, which will provide a cash-flow. The cost manager will be required to ensure that payments made on a monthly basis comply with the payment terms laid out in the contract. The value paid to a supplier should represent a fair reflection of work done to date when compared with the contracted plan of work. Any major variance away from this plan may need to be examined in more detail as part of the audit process.
Audits can be divided into the following:
- cost audits - the cost manager may need to substantiate with the supplier any major cost movements and how these are broken down;
- payment audits - checks will need to be made on any weekly or monthly payments to suppliers. This may take the form of checking an application for payment - has the data been correctly input or are there any obvious errors? Did the payment get approved and paid on time? Did the supplier pay their sub-suppliers within the contracted time?;
- final account audits - a supplier may need to provide evidence for variations that back up claims for additional costs and which the cost manager has yet to agree. This evidence may be in the form of delivery tickets, invoices confirming payments to sub-suppliers, approved daywork sheets or signed timesheets;
- ad hoc audits - these may result from concerns being raised about a particular cost management process not being followed correctly, perhaps following a routine audit with another team within a project or supplier. The senior management team for a project may also have concerns on a specific issue that they wish to follow up.
Other audits may be required across a project to give cost confidence to the client, whether relating to the amount of money being released to the suppliers every month, or to the final account projections provided by the client. An audit of the risks identified may also be needed to assess whether they are still valid, as a project moves through its lifecycle.
If there are any major discrepancies between what the client is expecting, based on the contract terms and conditions and project procedures generally, then a further review may be required. It may be necessary for the cost manager to report any issues to the project manager or to the client's finance team, if any irregularities are discovered.
Within any project, the process for cost validation and audit needs to be documented and communicated, so that all suppliers understand when and how audits will be conducted and for what purpose they will be used.