A version of this article originally appeared in the November 2020 Bulletin for Northwest Public Power Association.
As the COVID-19 pandemic continues to impact the energy industry, planning has become difficult for both owners and contractors due to inconsistent emergency-management orders across counties, states, and construction-type. Projects are subject to constantly evolving work requirements, resources, and timelines.
As you navigate COVID-19’s effects on your company, following the five key steps below and getting a construction audit could result in improved compliance, better cost and schedule management, and improved risk mitigation.
Owners and builders are still navigating compliance and safety requirements as the COVID-19 pandemic continues.
Funding sources and the ability to obtain loans may be impacted even with rates being at all-time lows. Construction costs are likely to increase as projects are changed or delayed. For example, material, safety, and labor costs will likely rise due to productivity decreases, and schedule delays will require additional funds due to supply chain disruptions and additional safety implementation requirements.
There have been multiple changes to the ways builders are managing projects, including:
- Transitioning from onsite project management to a remote-work environment
- Altering the phasing and sequencing of work to support safe working conditions
- Favoring prefabrication and modular construction as opposed to onsite assembly
Potential changes to regulatory framework also could open opportunities to make inspections, approvals, and reviews technology-based.
Five Steps to Improve Compliance
1. Review Contracts
Review your contract for applicable COVID-19 provisions, such as notice requirements and delay- and change-order pricing.
Assess whether or not the contract language is still applicable based on updated working conditions, and update contract documents accordingly.
You can also reference the National Association of Home Builder’s COVID-19 Basic Infection Prevention Measures, in additional to local and state requirements, to help allow for best job-site safety practices are being implemented both within the contract documents and in-practice. Remember, job-site safety is critical for the success of both owner and construction manager.
2. Review Insurance Coverage
When you review your insurance coverage, work to understand if COVID-19 loss options are available to mitigate losses.
Assess subguard insurance coverage—also known as Subcontractor Default Insurance (SDI)—if applicable.
Engage with your legal and risk-management advisors to analyze your policy and increase coverage. This will be key to understanding the differing insurance terms and conditions that may provide coverage in certain circumstances.
3. Confirm Accuracy of Progress Billings and Schedule
Make documenting project status a priority, and communicate the revised project schedule and completion dates. This will help maintain accuracy.
Keep regular and detailed records of project cost and construction progress. Depending on the contract terms, you may need to include:
- Project-to-date job cost distribution report
- Labor distribution report reflecting employee name, employee hours, and dates worked
- Construction schedule of actual timeline, versus baseline timeline for project-to-date activities
- Monthly conditional and unconditional lien waivers for all contracting parties
Always update and implement both staffing-resourcing plans and equipment-usage plans to verify alignment with revised schedules.
4. Separate and Track Costs
If your project has been impacted by COVID-19, you need to separate and track COVID-19-related cost impacts and assumptions. This documentation will help you negotiate change orders and submit claim substantiations.
Implement a framework to compile, document, and submit increased costs relating to:
- Safety program implementations
- Impacts from schedule delays
- Reduced productivity
- Labor shortages
- General site conditions
5. Communicate Proactively
Be proactive and clear about COVID-19 strategy communications. Discuss and document possible impacts and responses amongst key project stakeholders.
Your company could take the following actions to help ensure its considering various pandemic impacts:
- Set up a monitoring system to keep track of COVID-19 outbreaks in your project areas
- Implement safety measures to promote safe working conditions that will support the success of your project
- Order and expedite critical materials to support and make sure project timelines aren’t delayed by potential supply chain disruptions
- Expand allowable-alternates list so project management can quickly resolve the potential impacts of supply chain disruptions
- Prepare contingency plans for key vendors and subcontractors
Undergoing a Construction Audit
Performing a construction audit can also help your company mitigate risk while adopting better cost- and schedule-management. During a project’s planning phase, construction auditors can identify and resolve problems that may cause future delays and cost overruns.
Once construction starts—or if your project has been impacted by COVID-19—there are still opportunities for internal controls to be evaluated and improved. Perhaps most critically, contractor payment applications and change-order submissions can be reviewed in detail to identify potential noncompliant changes and analyze contract compliance.
A construction audit generally focuses on three key areas:
- Validating contract compliance
- Assessing performance against key performance indicators, objectives, and requirements
- Identifying improvement opportunities to better align construction practices with industry best practices
Construction auditors are trained to verify funds being spent are allowable and necessary. They do this by conducting project risk assessments and determining compliance with contract cost, scheduling, and other terms.
Construction audits could provide more objective analysis and detailed information to assist stakeholders with the following:
- Performance and operations improvements
- Costs reductions
- Public accountability
Audit objectives should be clear and concise and address various performance aspects of the program including:
- Cost of labor, materials, equipment, and other direct reimbursable costs
- Indirect project charges
- Preconstruction expenditures
- Effectiveness of reporting
- Subcontractor selection
- Change order management
- Cash-flow planning
- Policies and procedures
- Claims exposure
- Funding requirements
- Risk reduction
- Forecasting and trending
Major capital projects can be risky, but organizations could recoup investments of time and money by leveraging the knowledge and feedback provided by qualified, experienced construction auditors and energy-dedicated industry professionals.
It’s important to note not all construction audit reports result in conclusions that improve efficiency and reduce business risk exposures. Some audits are simply designed to validate contract charges are within the total construction budget—or the scope or projects are included somewhere within the approved master plan.
However, a limited-scope construction audit might not result in the best potential outcome or help an organization substantially reduce its risks.
We’re Here to Help
If you have any questions regarding the impacts of COVID-19, project compliance, or a construction audit, please contact your Moss Adams professional.