Association of Cost Engineers NEC: Option C Cost Audits
NEC Option C Cost Audits NEC Audit Provisions • NEC Payment Provisions • Audit Objectives • Audit Plan • Audit Considerations • Implementation of Audit Plan • Rolling Programme of Cost Audits • Potential Audit Problems •
Solomons Europe Limited • Solomons Europe is a Chartered Quantity Surveying Practice Established in 1998 • Provide support to UK’s Major EPC and Industrial Services Contractors
Solomons Europe Limited • Specialise in
NEC AUDIT PROVISIONS NEC ECC Option C Target contract with an Activity Schedule
NEC AUDIT PROVISIONS • Contract Clause – No express reference to cost audits in the NEC – 52.3 Contractor allows the PM to inspect accounts and records required to be kept at any time within the working hours
NEC Payment Provisions • (50.1) Project Manager assesses the amount due – Price for Work Done to Date • Defined Cost + Fee
NEC Payment Provisions • Defined Cost = – Option C: • Payments due to Subcontractors… and • The cost of components in the Schedule of Cost Components
NEC Payment Provisions • Payment timescales – 51.1 PM certifies a payment within one week of the assessment date – Hence, high level review of any application with more thorough audit in the following weeks – Any audit findings are then incorporated into next PM assessment of amount due
Audit Objectives • Audits ensure costs paid are • Accurate • Allowable and • Appropriate
Audit Plan • Managing Reality Book Two: Procuring an Engineering and Construction Contract: – Appendix 3: Audit Plan
Audit Plan • The audit process should be detailed in the Works Information
Audit Plan • Audit Task Sections – Monthly Report • People • Equipment • Plant & Materials • Charges • Manufacture & Fabrication • Design
Audit Considerations • Generally – Specific contract provisions – Have payments actually been made? - access to bank statements – Allocation to correct cost codes / WBS
Audit Considerations • Subcontractors – Pre-appointment • Order placed in accordance with any Works Information requirements
Audit Considerations • Subcontractors – Post-appointment • Properly administered – Change control – Assessment of PWDD – Payments made within timescales – Final accounts reflect contract
Audit Considerations • People – Place of work: Working Areas: “used only for this contract” – Time capture procedure – Payslips (weekly & monthly) – Payroll burden: per Schedule of Cost Components
Audit Considerations • Equipment – Rates: reflective of current market rates (whether internal or not) – Idle plant – Purchased Equipment – Maintenance / repair
Audit Considerations • Plant and Materials – Orders – Goods received notes – Invoices – Payments – Check quants required v quants delivered
Audit Considerations • Charges – Costs necessary to carry out the works – Costs included in Working Area overheads / people overheads are not also included elsewhere
Audit Considerations • Manufacture and Fabrication – Outside the Working Areas – Should be agreed and form part of the Contract Data • “wholly or partly designed for the works”
Audit Considerations • Design – Outside the Working Areas – Should be agreed and form part of the Contract Data – Rates x hours + travel to Working Areas
Rolling Programme of Cost Audits • Plan to cover 10% of cumulative costs • Plan to audit each major cost element • Element audit schedule to reflect programme • Frequency of element audits reflect relative values – Some elements may warrant a monthly audit: e.g. prelims, staff costs
Potential Audit Problems • Vagueness of the Schedule of Cost Components • Non-availability of substantiating information may result in reduced payments
Potential Audit Problems • Ability to audit down the supply chain where no direct contractual relationship exists • Reluctance to provide “commercially sensitive” substantiating information / Data protection (!) • Where the supporting information is held
Summary • Vital for Contractors (and subcontractors) to keep full and organised records relating to costs to demonstrate validity and appropriateness • Audits are a pragmatic way of ensuring accurate allowable and appropriate costs are reimbursed
Summary • Successful audits create commercial confidence for both parties throughout the project • Successful audit outcomes assist early settlement of final accounts
Any further questions? Feel free to call or email any of us or contact us online at: www.solomonseurope.co.uk
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