Q&A with HPM’s Audit & Contract Services Team

Audit & Contract Services Explained

Over the years, owners of more than 3,000 construction projects valued at more than $50 billion have benefited from HPM’s auditing expertise, with well over $200 million being recovered by clients. HPM performs construction audits across the United States in multiple sectors, but just what do these audits entail? Vice President of Audit, Vince Chapman answers FAQ’s below:

Question: How is what you call audit different from hiring a CPA firm to perform an audit?

Answer: It is unfortunate that we use the same term, “audit”, to describe our services, as the differentiating factors are vast.  Firstly, our personnel (meaning myself and all of my direct reports) only audit construction contracts.  While I have been in the construction business for 42 years, my most junior auditor has been auditing only construction for 18.  Each of our auditors have been senior financial officers with construction companies. This experience working for construction companies and auditing construction companies is unique. We are hired by many of the largest companies in the world. Our experience auditing highly complex projects with sophisticated contractors sets us apart from any other auditor.

Question:  What is the order of magnitude of cost for a final audit on a $80mm to $110mm GMP project?

Answer: For most $100mm projects, where the CM does not have any GMP subcontractors, the expected audit time commitment would be two persons (we almost always work in teams of two or more) for two – three weeks. While our billing rates are dependent on person and title, approximately two persons for a week equates to $30,000. Therefore, the ROM NTE budget for an audit of this size is somewhere between $60,000 and $90,000.

Question: If I wanted to hire you on the front end to look over my contract and possibly help me with some negotiation of terms with my CM, what would that cost?

Answer: We regularly help owners draft their RFP in a way that is most advantageous, clear and consistent with the terms of the expected construction contract. We also give owners advice on possible changes to imprecise language in their contracts or contracting strategies based on our expertise. This service can range from approximately $8,000 to $20,000. If we were to also to help the owner in negotiating the ultimate GMP agreement with the CM, the additional cost could range from $15,000 to $25,000.

Question: Historically, what percentage of your construction audits find any issues of real value?

Answer: It is exceedingly rare that our audits do not find material reportable issues that exceed our audit fee. While we do not guarantee specific results, perhaps only one project each year and a half does not find overcharges greater than or equal to our fee. Though each project is unique, a typical result would be audit findings of between four and ten times our fee.  On smaller projects in the $10mm to $25mm range, our audit findings are typically 1% to 1.5% of contract value range.  As projects grow larger, the percentage of audit findings to contract value decreases. On a $100mm project, we would expect the findings range to be between .7% and .8%. On the contrary, we performed two audits in CO this year on projects exceeding $100mm each, where the audit findings were about 2% of contract value.

Question:  What percentage of your audit findings are collected by the owner?

Answer: That is a great question! For many reasons, it is rare that an owner collects 100% of our audit findings. Notably, there is an element of subjectivity to some of the audit findings, given the nature of trying to interpret contract language and intent.  We are currently wrapping up a final audit of an $80mm hospital this week, in which the CM has agreed to 100% of three $750,000 issues, and we are disputing the remaining issue of $150,000. Though the result in this example is unknown, this case study is indicative of a normal audit. Standard audit collections to audit findings comes in at about 70%.

Question:  How much of what you find are legitimate errors and how much is intentional?

Answer: While we do find inadvertent errors, it is apparent that true random errors would balance out over time. Overcharge errors would be offset by undercharge errors. Because we find overcharge errors on essentially every project, those errors are not random and likely deliberate. Not all errors of this type are the result of on-site PM staff actively trying to overcharge. Many, if not most, of the dollars in audit findings are errors from systems put in place by the CM’s corporate management.