Webinar Examines Contract Terms to Mitigate Fraud During Payment Processes
June 11, 2009

When it comes to financial review and auditing of construction documents, there are terms and clauses that can be included to help mitigate fraud. That was the message conveyed during a webinar hosted by Grant Thornton today that was titled "Construction Contract Terms to Mitigate Fraud During the Payment Process." Presenters were Jim Schmid, CPA, CFE with Grant Thornton, and attorney Dennis Schultz, Esq., with Dawda, Mann, Mulcahy & Sadler PLC.

"This is an important topic because there has been an evolution in construction contracts over the past 20 years," explained Schmid. "They are becoming more cost-based [ones where you] bill based on cost up to a guaranteed maximum price. These require that the owner assumes more responsibility for monitoring cost."

To provide a better understanding of the different contract clauses, the presenters focused on problems and solutions that can occur within different areas including pay applications and their supporting documents, as well as change order processes.

In discussing payment application forms and supporting documents, Schmid said there are a number of common problems. These can include unusual, inconsistent or incomplete pay application forms; a lack of cost back up; a lack of field documentation; and missing attachments (such as a lien waivers).

In order to mitigate such problems, presenters encouraged the use of payment forms such as the AIA G702 and G703. G702 allows the contractor to apply for payment and the architect to certify that payment is due, while G703 breaks the contract sum into portions of the work in accordance with a schedule of values required by the general conditions.

Schultz also suggested that contract terms specify daily construction reports.

"In the event that there is suspicion that the building is improper … outside or inside auditors will need the daily construction reports to determine, for example, whether a piece of equipment for which a billing is being submitted is 1) on the project, and 2) that there is construction activity reported in the daily construction report that reasonably can be tied to the utilization of that piece of equipment," Schultz said.

When it came to the discussion over some of the accounting problems related to change orders, Schmid said the number-one concern is work being performed before the price is negotiated.

"This is simply going to happen … no matter how adamant you are … it's going to happen," Schmid said. "While you need to have the scope defined before you can do any work, you can still be arguing over price while the work is being done. If this is happening make sure [you] are stipulating that [you are] collecting field information on that change order activity so that as you continue the negotiation of price … you can maybe settle on something related to cost and you've gotten all the cost documentation in place that will give you an estimate of that actual cost."

Other change order problems can include a lack of field documentation related to actual cost; inconsistent or missing change order scope definitions; and inconsistent format for preparing price quotes.

Grant Thornton is planning two additional webcasts to be held in the future. These will focus on subcontractor bidding control processes and contract closeout and final payment processes.

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