Auditing construction projects

Internal Auditor, Dec, 1997 by Henry R. Newmark

Now that overhead has been reduced, work processes have been streamlined, and margins have been improved, many large commercial organizations are reinvesting their reengineered savings in new or expanded facilities. However, it would be a mistake to assume that the changes that created the extra cash will automatically spill over to the construction program. In fact, recent studies indicate that management of construction projects is a general area of weakness.

Self-assessments performed by the construction industry have concluded that construction projects often do not meet the cost or quality objectives management has set for them. A Business Roundtable publication, More Construction For the Money, reports that "a large and increasing gap has opened between the performance of construction and that of industry as a whole." The Construction Industry Institute's/Assessment of Owner Project Management Practices and Performance presents several eye-opening statistics: "One of every three projects is over budget or behind schedule. Only 61 percent of projects meet cost targets, and only 66 percent meet or complete earlier than the planned schedule."

Obviously, the potential for improving the management of construction projects is significant. Internal auditors who understand the basic structure and processes of project management and tailor their audit work to the unique time and organizational framework of the project can play a meaningful role in the improvement process.

There are four basic phases in the life cycle of any construction project - project definition, planning, execution, and completion. Each phase presents unique risks, and internal auditing should be involved in every step.

DEFINING THE PROJECT

In the project definition phase, objectives are developed and the scope of the project is specified. The importance of this phase cannot be over-emphasized. The objective-setting process is considered by many experts to be the major determinant of success, and many construction industry officials have identified lack of scope definition to be one of the most serious problems on construction projects. Typical objectives for a construction project might include the following:

* The facility will increase plant capacity by 40 percent.

* The total project cost should not exceed $10 million.

* The project should be completed by March 31, 1998.

* The facility will meet all federal and state regulatory requirements.

These objectives guide many decisions throughout the project, and they must be developed carefully. Care should be given that the project objectives meld with the overall corporate objectives, as well as with those of departments impacted by the construction.

After the objectives are set, the crucial process off scope definition and cost estimating begins. In its report, Scope Definition and Control, the Construction Industry Institute focused on the pervasive problems associated with poor scope definition: "When there is poor scope definition, final project costs can be expected to be higher because of the inevitable changes which disrupt project rhythm, cause rework, increase project time, and lower the productivity and morale of the work force."

While project definition is primarily a technical activity, internal auditing can review the methodology used to develop the project's objective and scope and answer the following questions:

* Do the project objectives correlate with overall corporate objectives?

* Have all related organizations - Safety, Regulatory Compliance, Engineering, Marketing, Fixed Assets, and Accounting - provided input to or reviewed the proposed objectives?

* Has the project scope been defined in sufficient detail to permit development of an accurate cost estimate? For the scope to fulfill the necessary error tolerances, it must be complete, even down to preparation of detailed process flows, diagrams, and drawings.

Satisfactory answers to these questions indicate that the stage is set for successful project planning and execution, the next phases in the project's life cycle.

PLANNING

Project planning involves marshaling the resources and developing the systems and procedures necessary to control activity during project execution. The key word is control; and a successful planning effort will result in the development of three distinct control systems: scope controls, schedule controls, and cost controls. Internal auditing can evaluate the proposed control systems and ensure they contribute to the completion of the project on time and within budget. The review should address the following questions:

ADMINISTRATION AND SCOPE CONTROLS

* Does the project management team have an effective organizational structure, including a formal organizational chart, that defines reporting lines and appropriate delegations of decision-making and financial authority?

* Is staffing adequate to provide oversight of contractors and subcontractors so that adherence to the scope is assured?

* Have systems for handling project changes, field purchasing, safety, and security been developed?