For owners in building projects involving construction management contracts with a guaranteed maximum price, it's wise to look over any payment applications carefully.
How do I know? A few days ago I chatted by phone with Phil Ramacca, senior managing director of auditing and accounting consultant David S. Landau & Associates.
DLA performs enough audits to conduct its own informal research and the company recently reviewed 100 different projects around the country. What DLA found is a lot of duplicated billing in payment applications covering subcontractor invoices for services that should have been covered by the construction manager in the general conditions part of the contract.
As most of you know, the general conditions usually cover security, jobsite trailers, temporary power for the site, etc.
"Every one or two weeks, the contractor will send over a payment application, with a lot of support for various line items," Ramacca said. "Here's for electrical, here's for plumbing, and all those are backed up in the application."
"But then we will see a line saying trailer rent or temporary power, and those are real expenses. But we know they are embedded in the general conditions."
"What ends up happening is that those folks checking the payment application have a strong mindset of percentage-of- completion, but they are not all that great with payment applications and numbers and contractors."
Others have pointed out similar pitfalls in cost-plus contracts or in general conditions clauses of contracts. Such as the possibility that the contractor will use cost savings that should go to the owner to cover cost overruns in general conditions or field overhead. Or the possibility that the contractor will self-perform some of the work originally priced out by the subcontractors.
These were pointed out a while back by architect Robert C. Foreman, a partner in Foreman-Seeley-Fountain in Norcross, Ga.
Ramacca says he finds sometimes that the contract is clear but that "the contractors will bill for things they are not entitled to."
One other area that Ramacca sees problems and says his firm has recovered money for owners: Contractor-controlled insurance programs.
"I think the level of complexity tends to confuse people," he says.
But that's a story for another day.