Preventing Fraud in and on Your Company

Preventing Fraud in and on Your Company

By Mike Crabtree

Fraud is an ongoing concern for practically every industry today. However, construction firms have historically been especially susceptible to an ever evolving number of fraudulent schemes.

While we would all like to believe that our employees are loyal and working for the benefit of the organization (and most of them probably are), there are still many reasons why your employees may commit fraud and several ways in which they might do it.  Even more so, collusion between employees and suppliers and even between owner representatives and subcontractors gives ample reasons to be on guard. Prevention and detection are crucial to reducing these potential types of losses. Every organization should have a plan in place as preventing fraud is much easier than recovering losses after a fraud has been committed.

Types of Fraud

Fraud comes in many forms but can typically be broken down into three categories: asset misappropriation, corruption and financial statement fraud.

Asset misappropriations are schemes in which an employee steals or exploits its organization’s resources. Examples of asset misappropriation are stealing cash before or after it’s been recorded, making a fictitious expense reimbursement claim and/or stealing non-cash assets of the organization.

Corruption schemes happen when employees use their influence in business transactions for their own benefit while violating their duty to the employer. Examples of corruption are bribery, extortion and conflict of interest.

Financial statement frauds are schemes that involve omitting or intentionally misstating information in the company’s financial reports. This can be in the form of fictitious revenues, hidden liabilities or inflated assets.

Fraud Prevention  

It is vital to an organization, large or small, to have a fraud prevention plan in place. The following procedures can help to minimize the potential for fraud in your organization.

  1. Know your Employees. Fraud perpetrators often display behavioral traits that can indicate the intention to commit fraud. It is important for management to be involved with their employees and take time to get to know them. Often, an attitude change can clue you in to a risk. For example, if an employee feels a lack of appreciation from the business owner or anger at their boss, this could lead them to commit fraud as a way of revenge. Any attitude change should cause you to pay closer attention to that employee and to look for ways to improve that employee’s experience.
  2. Make Employees Aware/Set Up Reporting System. Awareness affects all employees. Everyone within the organization should be aware of the fraud risk policy including types of fraud and the consequences associated with them. Those who are planning to commit fraud will know that management is watching and will hopefully be deterred by this. Honest employees who are not tempted to commit fraud will also be made aware of possible signs of fraud or theft. These employees are assets in the fight against fraud.
  3. Implement Internal Controls. Internal controls are the plans and/or programs implemented to safeguard your company’s assets, ensure the integrity of its accounting records, and deter and detect fraud and theft. Segregation of duties is an important component of internal control that can reduce fraud from occurring.

Documentation is another control that can help reduce fraud. Make sure all checks, purchase orders and invoices are numbered consecutively. Use “for deposit only” stamps on all incoming checks, require two signatures on checks above a specified dollar amount and avoid using a signature stamp. Also, be alert to new vendors as billing-scheme embezzlers set up and make payments to fictitious vendors, usually mailed to a P.O. Box.

Internal control programs should be monitored and revised on a consistent basis to ensure they are effective and current with technological and other advances.

  1. Monitor Vacation Balances. You might be impressed by the employees who haven’t missed a day of work in years. While these may sound like loyal employees, it could be a sign that these employees have something to hide and are worried that someone will detect their fraud if they were out of the office for a period of time.  Make sure that all employees periodically take paid time off…you may be amazed at what is discovered while others are doing their work.
  2. Consult Experts. Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) can help you in establishing anti-fraud policies and procedures. These professionals can provide a wide range of services from complete internal control audits and forensic analysis to general and basic consultations.  In fact, these services might be provided at little to no cost as a part of your regular audit and tax services.
  3. Set the Right Tone at the Top. Finally, the importance of setting the proper tone at the top of your organization cannot be over-emphasized when it comes to deterring fraud schemes. If employees see that upper management plays things “fast and loose” and has little regard for following ethical business and financial practices, they are more likely to feel like they are justified in playing fast and loose with the company’s money and assets themselves.

Instead, try to be above reproach with regard to how you manage your business and deal with your employees and vendors. When you set this kind of example at the top of your organization, it can trickle down to your employees as well.

Mike Crabtree has over 20 years’ experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated, design-build General Contractor in the Southwest region of the country.

The Punch List is Triune’s proprietary blog for discussing issues and providing insight specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.

 

Construction Contractors – Are you Compliant with the Davis-Bacon Act?

Construction Contractors – Are you Compliant with the Davis-Bacon Act?

By Christina Martinez

One of the hottest issues in the construction industry today is that of wage theft–theft of wages paid to workers who are employed on construction projects. With wage theft being a hotbed issue and with strengthened legislation for this type of theft, the spotlight is shining even brighter on The Davis-Bacon Act for enforcement of applicable laws and rules against non-compliant parties.

What is the Davis-Bacon Act?

The purpose of the Davis-Bacon Act (DBA)–created in the 1931 by the Department of Labor–is to protect communities from economic disruption from federal government contracts by leveling the playing field. It requires payment of “local prevailing wage rates and fringe benefits to workers and mechanics employed on federal government contracts in excess of $2,000 for construction, alteration or repair of public buildings or public works.” This prevents non-local contractors from coming into an area and underbidding local wages.

During contract performance, it is mandatory that employees are paid at least once a week with full wages and fringe benefits or cash in lieu of benefits.

Basic recordkeeping rules of Davis-Bacon for compliance

Companies must maintain payroll and basic records for all laborers and mechanics during the course of the work and for a period of three years thereafter. Below are several basic rules for compliance.

  • Name, address and Social Security number of each employee
  • Each employee’s work classifications
  • Hourly rates of pay including rates of contributions or costs anticipated for fringe benefits or their cash equivalents
  • Daily and weekly numbers of hours worked
  • Deductions made
  • Actual wages paid
  • If applicable, detailed information regarding various fringe benefit plans and programs, including records that show that the plan or program has been communicated in writing to the laborers and mechanics affected

Harsh Penalties for Non-Compliance

The Department of Labor’s Wage Hour Division [WHD]–the group responsible for administering and enforcing the DBA currently have contractors facing more audits and more severe penalties. WHD is generally less willing to negotiate and will quickly use the legal remedies at their disposal to punish non-adherence to statutes by contractors. Some of the penalties are:

  • Payment of back wages and fringe benefits to employees
  • Withholding of payments due the contractor on active Federal contracts
  • Contract termination (including payment for any additional Government procurement costs)
  • Personal liability for company officials
  • Prohibition from all government contracts for a 3-year period

Case in point, according to the US Department of Labor—WHD news release, February 9, 2014, an electric contractor had to pay over $350,000 in back wages earned on federally funded construction projects.  The company was non-compliant with the DBA, The Contract Work Hours and Safety Standards Act [CWHSSA], and Fair Labor Standards Act [FLSA] because they did not adhere to the requirement of paying workers time-and-a-half for hours worked over the 40-hour work week.

Strategies for Successful Compliance

  • Include key personnel in the compliance process–make sure that you have legal, contracts, human resources, accounting and finance, and project management involved. That way, compliance is an integrated effort from all parties involved in the process with knowledgeable input. The likelihood of errors and/or omissions goes down significantly.
  • Understand the requirements and implement processes to uphold the requirements.
  • Identify DBA requirements early on. It is necessary to know the required wages early in the bidding process to make sure the level of profitability is captured.
  • Knowing and complying with wage rates will help determine the true costs of wages. from the onset rather than dealing with penalties due to non-compliance on the back end.
  • As the general contractor, you are responsible for the compliance of your subcontractors. As such, consider including contractual protections such as audit rights or indemnifications in your subcontract agreements.

Adhering to the above strategies and paying attention to regulating laws and policies will lessen your odds of coming under fire from non-compliance in the future.

Christina Martinez is Triune’s Director of Marketing and Business Development.  Christina brings over 10 years of high level marketing experience to Triune. Triune is a leading, integrated, design-build General Contractor founded in 1997. Triune is headquartered in Dallas, TX – www.tmvllc.us

The Punch List is Triune’s proprietary blog for discussing issues and providing insight specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.

 

The Liquidated Damages Clause—When is it just a Penalty?

The Liquidated Damages Clause—When is it just a Penalty?

By Sarita Smithee

Construction contracts often contain a liquidated damage clause that provides for payment a stipulated amount in the event that work is not completed within a specified period. Owners often impose these clauses against contractors to ensure the timely performance by penalizing the contractor if the work is not completed on time.

Purpose of Liquidated Damages Clauses

Construction contracts include liquidated damages clauses for project delays because damages caused by delays are often difficult to foresee. Liquidated damages may be assessed by owners for failure to timely complete a project, or, less commonly, they may be claimed by contractors when owner delays increase the costs of project completion.

Typically, a liquidated damages clause specifies an amount per day that the owner is entitled to recover in damages if the contractor fails to complete the project by the contracted completion date. The term “liquidated” is used to signify the agreed amount of damages an owner will recover in the event of a delay, and eliminates what can be a lengthy and expensive process of proving the actual damages.

However, the inclusion of a liquidated damages clause does not always mean that provision is enforceable. Although competent parties generally have the right to make their own bargains, this right is not unlimited.

The enforceability of a liquidated damages clause depends on multiple factors

Generally, a liquidated damages clause will be be upheld if it was created by the parties in an attempt to estimate, in advance, the actual damages that would be suffered in the event of a material breach. However, if the only rationale for enforcement of the clause is that the project was not completed on time, the Court will likely view the clause as a penalty and unenforceable if it is challenged, absent some other evidence that late completion caused actual damages.

In evaluating whether a liquidated damages clause is enforceable, Texas courts have generally looked to the following factors:

  • Whether the amount stipulated in the contract was a reasonable forecast, at the time the parties contracted, of just compensation for the harm that is caused by the breach;
  • Whether the harm that was caused by the breach is one that is incapable or very difficult of accurately estimating;
  • Whether the amount of liquidated damages to be assessed was disproportionate to the amount of actual damages incurred;
  • Whether the liquidated damage provision applies equally to both material and minor breaches; and
  • Whether the liquidated damage provision was not intended to provide fair compensation for the breach but instead to secure timely performance of the contract.

Drafting considerations

Owners may attempt to address these factors by specifically drafting the liquidated damage clause to state that it is not intended to be a penalty. If the clause was negotiated by the parties, as opposed to boilerplate language inserted by the owner, this language can help the owner prove the parties’ intent.

If an owner uses the same amount for liquidated damages in all of its contracts, courts will often find that the provision was intended as a penalty and, therefore, unenforceable. The liquidated damage provision therefore should be tailored to the particular contract.  Similarly, if the same amount of liquidated damages will be triggered by either a material or minor breach, courts have held that the liquidated damage provision is unenforceable even if there has been a material breach.

A party who is seeking to craft a liquidated damage provision that would be upheld by the Texas courts should consider a pre-contract analysis as to what the potential damages could be if the work were not completed on time, and should  document it in the file.

Provisions should be crafted so that they do not apply equally to both a minor and material breach. A liquidated damage provision that applies equally to “the failure to perform any obligation required by the contract” should be avoided.

As noted above, the inclusion of liquidated damages clauses is commonplace in construction contracts. Knowing what is required for those clauses to be enforced is useful information for either party to a construction contract, whether attempting to enforce a liquidated damages clause or trying to defeat its enforcement.

Sarita Smithee is an associate with The Beckham Group in Dallas, Texas.  The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant.  The firm drafts and prosecutes/defends civil cases involving numerous types of contracts, and has just about seen it all.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.

 

How to Maximize Profits on Your Projects

How to Maximize Profits on Your Projects

Small changes add up to big dollars

By Bill Goodman

Every dollar counts, and every penny wasted is precious. Losing incrementally small amounts on your construction projects can add up to thousands of dollars very quickly by the end of a project.

So what can be done about it? Maximizing profit must be a top priority along with completing projects on time. It’s key to not only focus on daily tasks and responsibilities, but to make time for cultivating the financial tools and strategies that can help you meet your goals. Consider implementing these two proven strategies to maximize your bottom line and grow your competitive edge:

  1. Accurate General Conditions. General conditions in construction include the onsite administration, supervision, temporary facilities, temporary protection and soft costs required to get a project built. Estimating accurate general conditions for projects can be a simple task when the estimator is accountable for getting it right. Most estimators use unit prices that are rarely checked against the actual final job cost. For example, creating a budget for a temporary toilet seems easy, right? An eight month job should cost $100 per month, but when the field superintendent sees that there are 40 extra men on the job and more than one toilet, it means that more than one service a week is required. This might increase the actual job cost by as much as $200 per month. These extra costs will add up to lost cash.

The estimator’s primary job is to calculate an accurate estimate of what it will cost to build each project. After each completed project, the estimator must look at the actual job cost to see if he miscalculated, overestimated, or underestimated any of the project line items. Before pricing any project, the estimator should meet with the project manager and field superintendent to determine what will be required to run the project that’s being bid on. Estimators should also research to determine if they are charging the right price for the project needs and staffing, specifically temporary signage and barricades, fencing, temporary power, safety and first aid, and final clean up, just to name a few.

  1. Charge for All Amendments on Change Orders. Change orders are written documents amending the original contract agreement between parties observing an addition or change in scope, price, time, schedule, terms or work items on a construction project. Most often they require extra finances for the additional services required by the change.

If formal approval or authorization for extra work is postponed for days, weeks or months after the event occurred, then the customer is in a great position to settle or offer to pay a discounted price, change his/her mind or decide that the additional work should have been included in the original contract. To avoid this problem, present a complete cost breakdown for every proposed change order that your customer requests before starting the job. Use a standardized format, cost template and rate sheet to ensure that you include all additional costs ensued from added work. Every time extra work is performed, extra costs become evident. What are these extras costs? Some examples include processing paperwork and payments, writing change orders to subcontractors and ordering materials and equipment. Liability insurance and overhead cost may also go up. If the project has a payment performance bond, this should be calculated into the pricing. The general condition costs that are needed due to time extensions caused by the additional work or services should be included. Some items may have to remain on the job site for extended times, such as: construction trailers, temporary facilities, fencing, protection, etc. Do not short change your company by failing to ask for everything necessary to complete a job. Most commonly, change order requests are presented as labor, materials and hard cost plus markup, without extra required soft costs for many of the items noted above.

Making money is not easy in the construction industry. Look for every advantage that you can to boost your net profit margin, so that you are not giving it away.

William Goodman, Senior Project Manager for Triune, is a highly accomplished, multi-talented project manager with over 30 years of construction experience. He encompasses excellent skills in preparing schedules and managing job costs, budgeting, contract negotiation, design-build and pre-construction services.

The Punch List is Triune’s proprietary blog for discussing issues and providing insight specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.

 

6 Reasons Profit Fade

6 Reasons Profit Fade

6 Reasons for Profit Fade

By Wesley Middleton 

Profit fade.  This is a situation that your bonding agent doesn’t want to see.  Company owners and controllers seldom use this tool, despite the fact that it can be very effective in identifying situations and issues inside your company.  Preparing a fade analysis on a regular basis can help identify trends that may warrant further investigation.

What is a fade analysis? In a very general sense, it is simply a comparison of your original estimated gross margin on a job to your actual progression throughout the construction period to completion. Generally, a fade of 10% or more will result in a call from your bonding agent with questions about why it is happening.  The more variability in your contract over time, the more of a risk you appear to be to your bonding agent, and the less confidence they have in your ability to estimate and manage jobs.

A Note on Fade/Gain Calculations: Avoiding a Common Error

If you have an estimated profit of 2% and your profit drops to 0%, then technically you have a 100% profit fade. The calculation should be a percentage change of a percentage, rather than the difference between 2 percentages. Let’s look at another example: If your 2% gross margin represented $1 million and the job broke even, then you’d want an explanation of the 100% profit fade. The current schedule would only show a 2% fade.

Sources of Contract Fade

When preparing a fade analysis, it is important to break it down by project manager, estimator, category of construction work, or other categories that may exist in your company.  This can further isolate the cause of the contract fade.  Here are six important reasons that you may be experiencing contract fade:

  1. An estimator who is not competent at estimating jobs and is too optimistic in his estimates, or aggressive bidding by an estimator who is struggling to win contracts.
  2. Change orders that are unprofitable or simply have not been approved and recorded in the accounting system.
  3. An under-performing project manager who is not effective in managing the costs and people on the job.
  4. Jobs that are outside the company’s expertise, resulting in a learning curve that causes additional costs or job delays.
  5. The accounting department is not coding job costs to the correct job. Having the project manager and estimator review and approve the final job costs will help in this area.
  6. Cost shifting, otherwise known as fraud. It can be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud, or the accounting clerk could be doing the same thing. Either way, the same review process in #5 above would help prevent this from happening.

Seeing the Better Picture

Comparing the total actual costs to the estimated costs simply isn’t enough. Seeing the change in gross margin from year to year adds an additional level of analysis.  A well-planned deception of systematically “shifting” job costs from one contract to another between periods may not be detected by only comparing estimated costs to actual. Preparation of the fade analysis is better supported by a well-prepared WIP or contract schedule.

For a basic contract fade analysis template, click here. (link to: http://www.middletonraines.com/contract-profit-fade-analysis-download)

“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.”   wmiddleton@middletonraines.com

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune).  Any and all rights reserved.

 

Additional Insured and Indemnity Requirements in Your Contracts: Will Your Insurance Respond?

Additional Insured and Indemnity Requirements in Your Contracts: Will Your Insurance Respond?

Additional Insured and Indemnity Requirements in Your Contracts: Will Your Insurance Respond?

By Brad Burnham

Agreements between general and subcontractors have been changing in recent years.  Many, if not all, contracts have always had an insurance provision requiring the subcontractor to carry specific types of policies and limits of insurance.  More recently, requirements for Excess Liability (Umbrella) and Workers’ Compensation have been included and many general contractors now require very specific wording on the Certificate of Insurance.

Contracts may call for the subcontractor to specifically name the general contractor (GC) and/or owner as an “Additional Insured” and require very specific wording about the completed operations coverage and far-reaching indemnification.

The requirements may include the subcontractor assuming so much of the GC’s liability that the insurance company becomes unable or unwilling to provide the coverage needed, leaving the subcontractor out of compliance.  Some insurance agents will issue the Certificate of Insurance without understanding the scope of the coverage and without reading the client’s contracts and insurance requirements.  However, only the policy itself defines the coverage and will always supersede a Certificate of Insurance.  

Are you out of compliance with your subcontract agreements?

  • Look at your current contracts for the Insurance and Indemnity Provisions.
  • Ask a qualified construction insurance agent to explain how your current insurance program will respond to the contract requirements.
  • Send contracts to your attorney and insurance agent prior to signing them.

Why have the contracts changed?

  • More litigation in our society – a “find fault first” approach to occurrences
  • Rising defense and investigative costs
  • Risk managers (rightfully) assuring that any claims are paid by the party causing the injury or property damage

Overreaching Indemnification

By indemnifying, the subcontractor promises that it will stand by its work and protect the general contractor from all claims, including those for defective work, injuries and property damage.  General contractors generally will not hire subcontractors without the inclusion of such a provision, and they are not unreasonable.  What the subcontractor must avoid is a provision that obligates it beyond acts and omissions that it or its employees performed. Indemnification clauses that require the subcontractor to indemnify the GC for work beyond the subcontractor’s control are not reasonable and, in many states, not enforceable. A reasonable general contractor will agree that the indemnification clause should be limited to only those damages caused by the subcontractor or those under its control.

Brad Burnham is a Vice President and Partner with Hotchkiss Insurance Agency, LLC, headquartered in Dallas, Texas.   Brad leads a construction team of licensed agents and Risk Managers.  Contact Brad @ 972-512-7727 or bburnham@hiallc.com  Hotchkiss Insurance Agency, LLC  www.hiallc.com

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune).  Any and all rights reserved.

 

How To Price a Federal Government Construction Claim Part 4

How To Price a Federal Government Construction Claim Part 4

How To Price a Federal Government Construction Claim

General and Administrative Costs, Bond Costs, Profit and Miscellaneous Costs (Part 4)

By Kay Kendall

The [SPELL OUT FIRST] (FAR) defines direct costs as any costs that can be identified specifically with a final cost objective.  An example of a direct cost would be labor and concrete material costs incurred to construct a concrete slab.  The concrete slab is the final cost objective.

Indirect Costs

The FAR defines an indirect cost as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost object.  An indirect cost is not subject to treatment as a direct cost.  An example of an indirect cost is a contractor’s general and administrative (G&A) expenses.  These are also known as home office overhead.  The G&A cost cannot be identified with the concrete slab above because the home office personnel did not work directly on constructing the slab.

G&A costs are calculated by multiplying the contractor’s G&A rate by all other allowable direct costs in the REA or Claim.

When preparing a REA or Claim, the actual G&A rate should be used and the costs included in the G&A calculation should be in accordance with FAR Part 31 – Contract Cost Principles and Procedures.  Costs that are not allowable should not be included in the G&A rate calculation.   Examples of costs that are generally unallowable are interest expense, advertising for the promotion of sales, bad debt and contributions.  There are others, but these are some common examples.

Some contractors arbitrarily use a rate of 5% or 10%, or some other markup for G&A.  However, without making the actual calculation, the contractor will not know its actual G&A rate.  Maybe the contractor’s actual G&A rate is 18%, but it has just arbitrarily been using 10% or less in its price proposals.  The contractor is entitled to recover its actual costs.

When submitting REAs or Claims to the government, the actual G&A rate should be used.  The government can request an audit of the contractor’s REA or Claim, and in some cases – if the total REA or Claim is over the acquisition threshold, then it is required by the FAR to be audited.

Bond Costs

Bond costs are calculated on the total contract amount.  When contractors bid a project that requires a bond, they include the cost of a performance and payment bond.  The actual bond premium is based on the entire contract amount.  The bond premium is probably calculated on a scale.

Suppose a contractor is awarded a $5,000,000 project that requires a performance and payment bond.  The premium may be calculated on a scale similar to this one: the first $500,000 may cost $15.00 per $1,000, the next $2,000,000 $13.50 per $1,000, and the remaining $2,500,000 may cost $11.00 per $1,000.  The scale may continue for anything over $5,000,000, and the premium cost will be $9.00 per $1,000.  In this example, if the original project was $5,000,000 and work was added, then the correct bond rate to use in a REA or Claim that will increase the contract amount above the $5,000,000 is the $9.00 per $1,000.

Profit Calculation

Profit is a negotiable item.  Some government entities use the Weighted Guidelines to determine the rate of profit for the contractor on a particular change.  When all of the Weighted Guidelines criteria are maximized, the highest rate of profit that can be achieved using the Weighted Guidelines is 12%.  Although the Weighted Guidelines are not mandatory in determining profit, they are widely used by government agencies.  There are other methods for determining a reasonable profit.  The key is that the method must be fair and reasonable.

Miscellaneous Costs

Other miscellaneous costs should not be overlooked – for example, builder’s risk, general liability and workman’s compensation insurance.  If these costs are not included in the G&A and are charged directly to the project, they should be included in the REA or Claim.  If they are part of the G&A rate calculation, to avoid duplication of costs, they should not be included as a direct cost in the REA or Claim.

Contractors in some states or U.S. territories incur costs that are not incurred in other states.  For example, in Puerto Rico, there is a tax calculated on the total contract amount.  The tax is an allowable cost to include in the REA or Claim.  It should be calculated at the current rate on the total amount of the change, including bond and profit.  Technically, the tax should also be calculated on the tax, but on smaller REA and Claim amounts it is insignificant.

Conclusion

With the information in these articles, contractors have a guideline for preparing REAs and Claims.  Sometimes, the REAs or Claims can become complex.  In those situations contractors should seek a qualified professional to assist with the REA or Claim preparation.

Remember, until the issue becomes a dispute or a Certified Claim is submitted, the cost to prepare and support the REA is generally allowable to include in the REA.  A consultant experienced in government contracting can facilitate a successful REA or Claim.

In the event the issue elevates to an appeal or lawsuit, a construction lawyer with federal government experience should be consulted.  Federal government law and procedures are different than in the non-government arena.

Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients.  She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors.  She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.

Vince – the blogger Reality Bite: Again, you should never undervalue the worth of a qualified claims consultant and/or a lawyer well versed in federal construction law and procedures.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2015 TMV, LLC (Triune).  Any and all rights reserved.

 

The Necessity of Daily Cash Reports and Reconciliation

The Necessity of Daily Cash Reports and Reconciliation

The Necessity of Daily Cash Reports and Reconciliation

By Mike Crabtree

I occasionally do outside consulting work in order to help small companies ensure that their accounting processes are in good working order. Small construction companies often have limited resources, and accounting is not always high on an owner’s list of priorities, especially if operating at a “Mom and Pop” level. However, this can lead to problems.

Bank Account Reconciliations

Perhaps not surprisingly, one of the areas I am frequently asked to address is that of bank account reconciliations. People get involved in the day-to-day activities of operating a business and put off the monthly reconciliation of their bank account for a few days…or weeks…or months.

I was recently asked to come in and catch a company up on their bank reconciliations. The operating account hadn’t been reconciled in 15 months. They had a strong positive cash flow and were not audited, so reconciliations hadn’t been a high priority. After all, what could really be wrong?

The owner wasn’t directly involved in the accounting process, relying on a very young “bookkeeper” he had hired on the recommendation of a friend. She was very good at the day-to-day tasks, such as filing paperwork, processing lien waivers, writing checks, making deposits, etc. However, she didn’t really understand the mechanics of properly recording cash transactions, even at the basic level of understanding that a deposit should be a debit to the ledger cash account and a check should be a credit. Sometimes, she would forget to record a deposit.

Additionally, as is common with many small companies, the owner would frequently write manual checks when he was out of the office. Sometimes he would tell her, sometimes he wouldn’t. Sometimes she would record the ones she knew about, and sometimes she wouldn’t.

It didn’t take long before she realized she was in trouble, but she was afraid to tell her employer. She did make an attempt to reconcile the cash account at first, but because of the number of transactions that had occurred during the month and her lack of understanding, she gave up…and continued on as before.

Again, cash flow was strong, so no disaster occurred.

Eventually, the company wanted to get a bank loan for expansion (they had never before had one due to the strength of their cash flow), and part of the lender’s requirements was current bank reconciliations. At this point, I was called in.

Ultimately, I discovered that there were more than 500 improperly recorded or missing transactions directly related to the cash account, which also caused the books to be significantly off as a whole. After a significant amount of time and fees for my services, we were able to get his cash reconciled and the books in order. The company got the loan, but it was discovered that there was $150,000 less cash than thought. It was an expensive lesson.

Now, the bookkeeper in this situation was a good person, no fraud was committed; she just didn’t understand her job as well as she should have, got behind and was afraid to ask for help. I was able to teach her some basic “debits and credits” so that she could successfully go forward in the future.

The owner in this case was very understanding and kept her at the company (along with my phone number). However, this entire situation could have been avoided if he had required and reviewed the bank account reconciliation. Still, even a monthly reconciliation might have been inadequate given the number of transactions that occurred over a 30-day period.

This is why I recommended a daily cash report with short-term anticipated cash inflows and outflows as well as a reconciliation of cash. With internet access to banking activity available today, it is unnecessary, in fact unwise, to wait until your monthly bank statement to reconcile.

A daily comparison of your banking and book activity allows missed cash transactions or backwards postings to be discovered and corrected in just a few minutes. Situations like this one will never happen again, and management/ownership will always know its true cash position.

Mike Crabtree has over 20 years’ experience in the commercial construction industry.  He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune.  Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune).  Any and all rights reserved.