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
"In the event that there is suspicion that the building is
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
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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