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Association of Cost EngineersNEC: 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 PROVISIONSNEC 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