Cost assurance in major construction programmes: Cutting through the gobbledygook

Construction does not understand, “Assurance”

As an experienced internal auditor you will have a favourite definition of assurance.  I like, “Assurance provides stakeholders with enhanced confidence”.

In the world of construction however, I have noted a widespread misuse and misunderstanding of the term.

I recently did a quick trawl of the major construction consultancies websites to see what they were saying about cost assurance.  Here are some of the things I read:

…enables us to identify risks efficiently and effectively and provide you with complete assurance

This is a brave assertion.  “Complete assurance” equates to a certification of costs.  In practice this is a promise which cannot be fulfilled without massive effort.  Compare this with the IAASB’s descriptions of “reasonable assurance”.

… a risk based audit of 100% of costs

This is a contradiction in terms.  The Institute of Chartered Accountant in Australia and New Zealand (helpfully) state, “A risk-based audit approach is designed to be used throughout the audit to efficiently and effectively focus the nature, timing and extent of audit procedures to those areas that have the most potential for causing material misstatement(s)” A risk based audit cannot by definition, therefore cover “100% of costs”.

…our high performance assurance recovers overcharges of 5% of costs and low performance assurance recovers 1%

The clear assertion here is that a measure of the effectiveness of assurance is the level of overcharging it finds.  The statement betrays confusion between “profit recovery” type activities and assurance.

Another website talked about Cashable findings, which suggests a similar confusion.
A success criterion of profit recovery activity is how much money it returns.  The use of these approaches, particularly in a collaborative relationship between contractor and client may damage the partnership between the two parties.  In the words of the NEC it is not in, “a spirit of mutual trust and cooperation”.

So what?

Construction programmes can be some of the riskiest activities an organisation undertakes.  They involve a coming together of many organisations (contractors, sub-contractors, consultancies):

  • With differing motivations, cultures and control environments
  • Which work on wafer thin margins
  • Operating through the supply chain at some distance from controls exerted by clients
  • Which may be conflicted by relationships elsewhere

Also construction programmes are by their nature inherently uncertain and therefore risky.  It’s easy to understand what a brick costs but earthworks, for example, are far more difficult to benchmark and assure.

Given the inherent riskiness of construction programmes, robust assurance is essential, especially over costs.  The lack of understanding of cost assurance in construction suggests that in practice it may not be consistently effective.

This can result in unpleasant commercial surprises for your organisation and questions over the effectiveness of internal control.

Implications for internal audits of construction programmes

If you have an audit of a construction project on your audit programme it is worth considering the effectiveness of embedded cost assurance.  Some questions you may consider asking of the providers of such assurance are:

  • – What professional standards are you working to?
  • – What is your methodology?
  • – How is the assurance activity quality assured?
  • – What experience and qualification in assurance do team members have?
  • – What IT tools do you use and how do they fit into your methodology?
  • – How do you capture and disseminate knowledge and findings?
  • – Do any potential conflicts of interest exist?  (For example does a construction consultancy work for the contractor it is auditing on other projects?)

Are you running a major construction programme and need help with cost assurance?
Talk to us today.