Why Senior Management Must Evaluate a Construction Project's Financial Risk
During your tenure in Senior Management you may be held responsible for a multi-million dollar construction project without having any in-depth experience in construction or new facility activation. This article and the three follow-on articles will help you evaluate the risks your organization faces and help you identify the questions you must ask your Facility and Construction department leaders so that you can assess, and then manage, the potential risk of a construction, or facility activation, cost overrun.
Construction Projects and New Facility Activation are expensive and highly susceptible to cost overruns. Projects that overrun their budgets suffer an average overrun in excess of 30%.[*] The message is clear, if you suffer a construction cost overrun, the size of the overrun will likely be material to your business and your Board of Directors.
Owners that avoid construction cost disasters do so with proper resources, planning, and supervision. Management must ensure that its in-house capabilities, and 3rd party support, synchronize with the approach ("Approach") planned for the Project.
The Approach selected for your Project must accommodate the Project's unique circumstances such as design complexity, completeness of design documents, availability of skilled labor, funding capacity, in-house expertise, and schedule. The Approach used by your organization can range between fixed-price and cost-plus. It can be further complicated with special attributes, such as guaranteed-maximum-price, design-build, fast-track, or engineer-procure-construct.
Selecting the optimum Approach for your Project will reduce its financial risk, but will not fully control the financial risk. To gain maximum control of your Project's financial risk, senior management must rely of the following tools:
- Risk Assessment: Identify the Project's financial risk by performing an environmental assessment, benchmarking Project controls, and identifying possible control shortcomings.
- Mitigate & Monitor: Prepare and implement a detailed plan for controlling each risk identified during the Project Risk Assessment.
- Close-Out Audit: Construction Audits identify billing discrepancies (i.e., contract versus billings), internal control weaknesses, and Save Owners money on both current and future projects.
Watch for future blogs from ResX, PC that will discuss in greater detail each of the three tools used by senior management to control construction project financial risk.
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About ResX Construction Audit Services:
Our construction industry services are founded on the following:
- A deep understanding of construction contracts
- Extensive experience with, and knowledge of, normal construction industry practices
- The ability to quickly acquire data from the field and identify anomalies through benchmarking the field activities against your contract and industry norm's
ResX, also provides independent forensic accounting services for 1) complex litigation, 2) contract compliance, and 3) fraud. We are based in Michigan and serve clients throughout the United States.