When I was a teenager, in the late 70’s and early 80’s my mates and I were all obsessed by cars.
Unfortunately this was not a golden age of motoring. Think Austin Morris, the Hillman Imp or worst of all the Datsun Cherry. Add to the fact that we could only afford very old second hand cars and you can appreciate that the car buying decision was a difficult one.
My mate Nobby would take his dad along when he wanted to buy a car. And Nobby’s dad would bring his hammer. In those days you could never tell if an old car was made of metal or had been bodged with filler and Nobby’s dad’s way of testing this was to walk around the car and hit it. If the car disintegrated then he would find out. As you can imagine this left many potential sellers quite upset, but Nobby’s dad was a big bloke.
Although I wouldn’t suggest that a hammer is always a necessary tool, it is sometimes good to know how to test things before you buy them.
The dangers of weak cost verification
Cost verification is a vital element of any target cost arrangement. You need to know that costs are charged in line with the contract and that they are free from any accounting and arithmetical errors.
Not all providers of cost verification services are the same however, and we have seen many examples of weak providers.
Where this is the case the risks are that:
• Issues and problems may be missed
• Inappropriate and inflated audit “findings” can create mistrust and damage relationships
• Contractor’s time may be wasted (taking their eyes off delivering the Contract)
• Management time may be wasted
• Money is wasted on ineffective audit
To avoid these risks there are some basic questions you can ask
1. Have the objectives of the review been set with due thought?
We see many examples where clients and procurement teams have bought in cost verification services as a knee jerk reaction to a project over-spending. Needs are often poorly thought through and we often see audits taking place which are overly complex and expensive, desperately looking to recover cash and apportion blame on the contractor. We can help set audit strategies which are pragmatic and cost effective. We can also advise on precisely when you should be auditing.
2. Are the auditors trained and experienced in financial audit?
There are rules which govern audit and assurance. They cover, for example, what is sufficient and reliable audit evidence on which to base an opinion and how to test for the misstatement of costs. These rules are contained in International Audit Standards and an effective audit of costs relies on the auditors understanding them. Quantity surveyors and engineers typically have no training in this area. (Although they do lots of other things brilliantly!)
3. Does the provider have a formal methodology?
To ensure consistency, there should be a formal methodology which auditors follow. It should demonstrate how the audit work is planned, delivered, recorded and reported on.
4. How does the provider capture and use knowledge?
An efficient and effective cost verification review will draw on an organisations previous experience and on successful and innovative audit approaches.
5. What IT tools does the provider use?
The use of forensic IT tools on its own doesn’t guarantee success. If they are not used in line with a formal methodology they create, “fishing expeditions” which are time consuming and unlikely to uncover all the potential issues. To handle the large datasets generated by cost reimbursable and target cost arrangements, however they are vital.