In this chapter we examine:
- Why are peer reviews and independent auditing needed? Are they cost effective?
- Difficulties encountered in having independent reviews.
- The value at different stages of a project.
Peer reviews and independent project audits are a very cost effective and prudent form of risk management because:
- They are broader based and properly independent compared to internal audits.
- They can help minimise the risk of poorly conceived projects getting off the ground.
- They may provide early warning of potential issues that might not have been recognised internally.
- They reduce the risk of cost and programme over‐runs and disputes through identification and early warning of project issues.
- They can provide an opinion on all claims and disputes as well as operational matters.
- They can provide a level of sophisticated review not necessarily available on major overseas projects.
The review team should work closely with site management, and corporate management if necessary, with the prime objective being to prevent projects running into trouble.
The real value of independent reviews comes from starting them early in the project life and conducting them at least every four months, reviewing all aspects of the contract, with recommendations made for corrective actions to mitigate if problems are found. It is most important to follow up and build on previous audits.
The scope should be agreed with the client, including all basic areas that might put the project at risk:
- Health and Safety procedures and standards
- Design development and cost planning
- Progress versus programme; expediting measures
- Drawdowns versus budget and programme
- Cash flow management and financial reporting
- Costs‐to‐complete versus programme
- Project reporting
- Site resource capacity and capability, including key people suitability, staffing levels, consultants, plant and equipment
- People management, team spirit and employee satisfaction
- Subcontractor status and management, including their payments
- Compliance with contractual obligations
- Specification compliance
- Planning, building and authority approvals
- Issues at large, claims and disputes
- Communications and relationship management
- Meetings and documentation discipline
- Environmental requirements
- Quality assurance, including NCR's (nonconformance reports) and RFI (request for information) registers
- Corporate governance
- Completion and commissioning plans
- Staff compliance with the ‘first to know’ rule for the project director, especially with ‘early warnings’.
The team should start with design development and cost planning as this combined process is the most critical phase of a D&C project; when you make or break the project. These two processes must be run in parallel. It is pointless having the design consultants develop the design unless there is constant cost checking against the budget or Bid price. This is when independent peer reviews are most valuable. They have proven to be very effective and valuable in the design process.
After a successful design development and cost plan phase it should then be a matter of efficient head contract and subcontract management and tight programme control, subject to the usual types of variations and standard delays such as weather and approvals, etc. However, this is oversimplifying it, especially with Public Private Partnership (PPP) contracts where project managers commonly don't understand the obligations of the different parties, and the implications and liabilities arising from the contract, and therefore they often don't realise they are getting into trouble.
All of this is based on two major assumptions of course:
- That the estimators got it right in the first place and the directors have not chopped too much out to win the Bid.
- That the Bid passed all the risk management checkpoints and red gate reviews and was thoroughly checked for potential risks.
Major construction companies generally say they have these processes in place with their internal audit team and therefore don't need external audits, but they still have projects that get into trouble.
However, the problem is that internal audits tend to:
- Not look at the bigger picture
- Check historical figures
- Not critically examine forward programmes, resources and costs‐to‐complete
- Have loyalty or conflict of interest issues
- Not be completely independent and objective.
It is not always easy to convince construction managers that they benefit either way from peer reviews and external audits. The reviews and audits should be seen as ‘safety first’ low cost risk management. If explained properly to project directors they should be welcomed, because it becomes a ‘win–win’ situation for them, as detailed below.
- The upside is confirmation that everything is healthy and on track.
- Alternatively, if the external audit team unearths some problems and they are corrected or mitigated before they get out of hand then the project director still gets the credit.
- If an innovative solution suggested by a design review saves time and cost, the project team still gets the credit.
- The fees are highly cost effective in proportion to project value.
Professional pride and egos can be major barriers to having peer reviews or independent audits accepted by senior corporate or on‐site managers, but they should remember that ‘it's too late to try and shut the gate after the horse has bolted’. The question is how to convince headstrong, stubborn project managers that they should use external assistance to identify, capture, track, and mitigate risk.
Stakeholders in a project that can benefit from independent audits and peer reviews are:
- The client, with an overview of the entire project
- The head contractor
- Major subcontractors
- Principal consultants
- Any combination of the above.
The independent audit team must have extensive experience in the following areas, or in specific project disciplines as required.
- A wide range of major projects
- Design development/cost planning
- International forms of contract
- Contract management and cost control
- Performance programming and expediting
- Operations and asset management
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QS (quantity surveying) processes
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ADR (alternative dispute resolution).
So what point of difference do independent audits really offer in respect of risk management?
- Team members have the experience to ‘smell’ issues in the making and provide early warning.
- They will make their own assessment – irrespective of reports and programmes from the project team.
- The approach is hard‐nosed and objective on current status combined with a strategic look ahead.