S1:E23 – Construction Cost Avoidance & Recovery
Season 1

 
 
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The majority of entities these days are building projects using cost plus delivery methods—if they are not employing a third-party to verify the cost of the project then construction managers are submitting reimbursement records without proper oversight. CRI Partners Matt Incinelli and Rob Broline combine forces in this episode of “It Figures” to detail the basics of construction cost avoidance services, the advantages of having them performed, and who benefits the most from engaging these services.


 

Intro:

From Carr, Riggs, & Ingram, this is It Figures: The CRI podcast, an accounting, advisory, and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Rob Broline:

Good morning. The topic for our discussion this morning is construction costs of lanes and verification services. My name is Rob Broline, a partner in the Melbourne, Florida office. And along with Matt Incinelli, who’s going to introduce himself shortly, I also specialize in these services. Been doing it for over 20 years, have poured hundreds of these types of engagements, which that’ll be what we’ll be talking about this morning. Matt?

Matt Incinelli:

Yes. My name is Matt Incinelli. I’m a partner in the Orlando office of CRI. I’ve been with the firm for 15 years and by and large doing these sort of services, construction cost, avoidance and verification services, performed roughly over 350 projects over the course of that time and something I really enjoy doing.

Rob Broline:

So, Matt, maybe you can please provide just a brief explanation overview of what is meant, what we mean by a construction costs these services, in terms of both avoidance and then verification.

Matt Incinelli:

Sure. So these services, first of all, are performed on a certain type of construction contract. So to simplify it, there’s two ways you build a building. One is you go out and you bid the project, and you select the lowest bidder, and you pay that lowest bidder the lump sum price to build that project. We don’t do a lot with that particular delivery method. The other, however, is what we call a cost plus contract or a guaranteed maximum price contract. And it’s set up where you bid the project more on qualifications, and then you work with the construction manager to establish a budget. And then the project is paid on the actual cost that the construction manager incurs, plus their fee.

And obviously, the construction manager is the one building the building. They’re also the one creating the accounting records that they turn in to be paid on. There’s a conflict there, and it’s best to have a third party look at those costs, verify them, and say to the owner, yes, this is what you should pay for the project.

Rob Broline:

So in terms of the types of services that we offer and perform in this area, can you talk about some of those, breakout some of those services, maybe beginning with the beginning of the process, dealing with the contract itself and kind of move through that for us?

Matt Incinelli:

Sure. So we do call this construction cost avoidance and verification services, which is a little bit of a mouthful, but there, there a purpose. The avoidance portion is we offer services where we come in and we look at the owner’s contract. And we get those contract terms correct, because that’s really where you want to start. You want that contract to be as tight as it can be, be clear on a lot of the financial terms. And so we’ll come in, and we’ll look at the contract, and we do that as a contract review.

We also look at the guaranteed maximum price as a service where we come in, and we look at some labor rates perhaps, or the insurance rates being utilized. We just looked at a lot of the components that we would determine or consider to be high risk components of the guaranteed maximum price-

Rob Broline:

Can you give us maybe a couple of examples, some of those high risk components that we see?

Matt Incinelli:

Yeah. So I think that a big one that’s always a topic of discussion would be labor burden and the components of labor burden and how much owners want to pay for certain items in there, like retirement or what the percentage should be for paid time off, or if it should be included in there. Just things like that, components of labor burden.

I think there’s a lot of other clauses in a contract, regarding markups for subcontractors and for the construction manager, that those need to be written correctly. Those would be examples of what we’d be looking for in the contract.

Rob Broline:

And what’s a key provision that we tell all of our owners that needs to be in there, that gives us even the opportunity to do the verification?

Matt Incinelli:

Yeah. So most contracts that are done under a cost plus or guaranteed maximum price will have an audit clause in the contract. And that’s for the reason we just said. These are designed to be looked at by a third party. If you don’t have that audit clause in there, we would absolutely recommend that be put in.

Rob Broline:

Do you want to talk any more about some of the other services then? Just kind of [crosstalk 00:04:44] round that out?

Matt Incinelli:

So we talked a little about the avoidance side, that’s the contract and GMP. The verification side goes into the actual cost of the project. We offer a couple of services on that front. Some of our clients like to have the pay applications reviewed, either every month or maybe just a sampling of them. And it’s just what it sounds like. We would go in and have a look at what’s been submitted in the pay application, do some testing, some sampling on the items in there.

We also do a set of procedures. We do them as consulting or as an agreed upon procedure. And we do it at an interim date and the project or a milestone date and the project, like 50% or 75%. Also, we recommend on every project that these procedures be done at the completion of the project.

And just real quickly, what that looks like is not a pay application review at all. We go in at those point in times, we go to the construction manager and we say, “Let’s get into your actual accounting system. Let’s look at your records in your system.” We generally pull a job cost detail. We select samples. We select subcontractors we want to look at, and we go to the site, generally, some of this is done electronically nowadays, but we generally go to the construction manager’s office, and we do that testing and that sampling on their job cost accounting system.

Rob Broline:

So when we talk about then a pay application review versus these closeout, looking at their records then, so we’re talking about going well beyond the pay application.

Matt Incinelli:

Yes, yes. Yes, we don’t want to really duplicate anything that the owner’s already doing. We want to make sure that we’re a non-redundant team member of the owners. So the pay application reviews are important, and they bring value to a lot of our clients, but the closeout and the interim look is more about doing something different, approaching it from a different angle. Again, more focused on the construction manager’s job costs accounting and their systems.

Rob Broline:

So we’ve really already covered, then, a lot of the benefits of these services, I think, rather well. Can you talk about who would be the target audience? Who needs these services?

Matt Incinelli:

So to give some background as to what kind of work we’ve done, we’ve done work for a lot of public entities, for school districts, for universities, for counties. On the other side, we’ve also done work for private corporations. Really, these services are beneficial to anyone who’s building a building or any sort of construction project under a cost plus delivery method.

I get the question a lot of times, is there a size at which we should look at our project? There’s no set number. Generally, we would look at something north of at least a million or two million dollars, and we’ve done projects into the hundreds of millions of dollars. So if you’re building the building, it’s under a cost plus, and it’s of a decent size, it’s a service you might consider.

Rob Broline:

And what are some of the specific… In terms of the benefits and the value of doing these services? We talked about this verification aspect, but you talk to those things. Some thing we talk about, the transparency, things like that, what are the other specific benefits and advantages to doing these services?

Matt Incinelli:

Sure. So clients find value in our services in a lot of different ways. I think the number one way is likely the assurance aspect of it. We are third party experts who’ve done hundreds of these projects. Many of our clients have taxpayers or bond holders or somebody behind them. And so being able to give them a report, a deliverable from a CPA firm with the kind of expertise that we have on their large project, that it’s been looked at, that’s been verified is really valuable to them.

In addition, there’s an accountability aspect. When the construction manager knows that the records are going to be looked at, they’re more careful about what they’re doing with those records. It’s kind of common sense. If you know somebody coming behind and looking at something, you’re going to keep it a little cleaner, a little tighter.

There’s a return aspect of this, which we’re very proud of our results in that. We did a study a couple of years ago, and roughly about 72% of the projects we’ve looked at over the last five years, there has been a return to the owner.

Rob Broline:

And can you remember, say even within the last… We were just talking before we were here, that just within the last four or five years, can you remember in the projects we’ve done in the last four or five years of not having achieved some kind of return for the owner?

Matt Incinelli:

No, we’ve had great success in finding funds for our owners. As a matter of fact, in that same study, we found that any owner that we had done three or more projects for, we had always returned a multiple of their fees. Now we don’t guarantee those returns. We can’t. We don’t know what we’re going to find in each project, but it was interesting to see over that history that we’ve had a great deal of success in not just being an assurance tool, but also over time being a value add to the bottom line, really, when it comes to these services.

Rob Broline:

Now, I believe that we’ve touched on this already, but maybe just to kind of go over this once more, make it clear to our listeners, why can’t the entity do this work internally?

Matt Incinelli:

I wouldn’t necessarily say an entity could not do it internally. However, it’d be difficult because we bring to the table years of experience. The construction industry, particularly in the contracting world of it, is a constantly evolving thing. There are new things we face all the time. Keeping somebody on the staff who has this sort of experience that we have would be extremely difficult. And again, it’s important to note that we’re not just taking the documents that the owner has received and checking through them. We are going to the construction manager’s office. We are looking at their files. We were asking the difficult questions. We’re getting heavily into the contract. It’s something that a lot of times, it’s not easy for an internal person to do, just because they have to maintain a certain relationship with the construction manager as well, just because they’re building projects and oftentimes building multiple projects with them. And also there’s an experience factor that certainly, I’d like to think we bring to the table.

Rob Broline:

Great. So maybe just any final thoughts as we wrap things up here this morning, final thoughts you have about this topic of construction cost avoidance and verification services?

Matt Incinelli:

Well, I just think that if you’re an owner or you’re an owner’s rep, and you’re building projects in a cost plus delivery method, you should give a lot of thought to these services. Again, for some organizations, construction is something they don’t do all the time. And so you have a large outlay of funds. And so having an assurance service, having an accountability over that large project, is something that I think is important, and oftentimes you’ll find tremendous value in it.

Rob Broline:

And I think you and I’ve talked about this before, but one of the things that we often do as well, sometimes as you pointed out, they don’t do these projects a lot. They might not know, but what type of contract do I have? And so we have offered and we offer this without charge, say, let us take a look at your contract. And maybe you could just comment on that and some final thoughts on that.

Matt Incinelli:

Absolutely. We’re always open to discussing anything contract related with anyone who has any questions. I think at the end of this podcast, we’ll direct you to our website. You can find us there, and we’re open to being contacted by email or phone at any time. We’ll take a look at the contract, we’ll answer questions. We’re certainly willing to be a resource to anybody who is going through the process of deciding either how to construct a project, or they’ve gotten to the end of the project, and they have some questions. They want to know if our services are something that they would require. That’s something we’re ready to answer.

Rob Broline:

Yeah. And as Matt said, we do thank you for listening to us this morning and spending time. Hopefully, it’s been of value to you. We point you to our website, which is cricpa.com. As Matt said, for further information about Matt and myself and the services we offer and be happy… Reach out to us to provide you with how we can help you and answer any questions you may have. We thank you for your time.

Outro:

If you want more CRI insights or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures, the CRI Podcast. You can subscribe to It Figures on iTunes, Spotify, or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.