Cost Assurance
Cost assurance and audits on infrastructure projects and contracts
Defining the roles and principles in cost assurance on major projects
PRESENTLY there is no global, UK, or industry-wide standard for cost assurance and audits on infrastructure projects or contracts. Lessons learnt throughout the project lifecycle on past projects are not always comprehensively captured. This means that risks persist for all parties in the value and supply chain – from the development of reliable estimates to budgets, award of contracts, cost reporting, competencies and right people behaviours to assurance and continuous improvements in the infrastructure and construction industry.
The Multidisciplinary Steering Group on Cost Assurance and Audits on Infrastructure Projects and Contracts was established in 2020 to start to address this gap, with representation from professional bodies (including CICES), lawyers, contract specialists, accountants, auditors, engineers, quantity surveyors, contractors and consultants. The group confidentially shares lessons learnt and best practice from real life experiences from projects delivered around the world in diverse industries and sectors. By creating a common voice and interpretation to help identify and resolve trends quickly, the goal is to identify early on emerging risks, key issues, and short, medium, and long-term options for addressing these.
Definitions
The terms cost management, cost verification and cost assurance are often used interchangeably, however it is useful to appreciate the differences in these terms, especially when setting up a robust control environment.
Cost management
Cost (or commercial) management is a key requirement to be implemented throughout the course of a project and programme to ensure the contract is administered correctly. Individuals in this role will often be quantity surveyors by background. Whilst the role will provide for the requirement to verify and provide assurance on costs, it will also include a broader review of cost and commercial matters which require detailed and specific knowledge of the works through day-to-day interaction with the contractors and suppliers engaged on the project.
Cost verification
Cost verification is a term often used to describe the checking of cost accuracy on a project. This will typically involve reviewing costs that have been presented by contractors and suppliers for payment within their application for payment (AFP) or invoice, and tracing the amounts back to source evidence to confirm that the cost has been applied for accurately.
Cost assurance
Cost assurance is often used to describe a broader review of cost which captures entitlement as well as accuracy. Entitlement of cost requires a broader view of the contract conditions that the contractors and suppliers are working against. Further, cost assurance also captures a broader risk-based approach to reviewing cost, including understanding the contractor’s/supplier’s control and risk management environment (with respect to cost) and using data and information to highlight trends, patterns and cost optimisation opportunities. Typically, this is a focused exercise that can be undertaken at any stage of a project and is undertaken by an independent team utilising a diverse range of skill sets (financial, commercial, legal, data and technology).
Key principles for effective cost assurance
The following principles are deemed to be critical when seeking to develop an approach to perform cost assurance on any project and programme. The principles broadly align to international auditing standards and are universally recognised and accepted as best practice aspects of a robust assurance and auditing approach.
- Risk based approach: The development of the cost assurance strategy and programme is informed by risk.
- Materiality: Testing and reviews conducted are done with consideration of materiality (i.e. significance). Significance may not only mean highest value but the individuals undertaking the cost assurance must use their professional judgment to evaluate this definition and its overall implementation.
- Independence: Ensuring independence is important to satisfy a typical three lines of defence assurance model and approach (see Figure 2).
- Controls assessment: Development of a risk-based approach and effective cost assurance strategy should take into consideration the contractor’s/supplier’s control environment and their ability to manage cost through proactive and reactive controls.
- Sample-based approach: 100% testing of all transactions is not feasible or productive to providing positive assurance for any given project. Adopting a sample-based approach should be combined with the developed understanding of a contractor’s/ supplier’s control environment as well as other requirements and conditions stipulated by the contract. The selection of the sample should be at the discretion of the individual(s) undertaking the cost assurance work through consideration of risk and preliminary analytical reviews of the data.
- Contract compliance: Ultimately entitlement is stipulated through the contract conditions, usually through dedicated contract wording (such as the schedule of cost components in a New Engineering Contract (NEC) environment) that needs to be clearly factored into the development of the testing and risk-based approach to be used.
Three lines of defence
Implementing a three-line-of defence approach is deemed best practice to developing a robust assurance approach (See Figure 2).
Cost assurance process
A typical cost assurance process is highlighted in Figure 3 which indicates key steps to be used in any cost assurance review.
Imran Akhtar, Director, Turner & Townsend and Paul Railton, Senior Manager, Orange Partnership
imran.akhtar@turntown.co.uk paulrailton@theorangepartnership.co.uk
The Multidisciplinary Steering Group on Cost Assurance and Audits on Infrastructure Projects and Contracts: Cecelia Fadipe (chair), CFBL Consulting Imran Akhtar, Turner & Townsend Stephen Blakey, Network Rail Gary Bone, Blake Newport Jennifer Greig, Ideagen/Pentana Audit Chris Haworth, Ridge & Co Ian Heaphy, IN Construction, NEC Contract Board David Heath, Atkins/SNC Lavalin Tom Leach, Southern Water Walter Macharg, Crossrail/TFL Jim McCluskey (CICES representative), Vinci Martha Mordecai, Bevan Brittan Lisa O’Toole, Network Rail (HS2) Paul Railton, The Orange Partnership Claire Randall-Smith, Eversheds Sutherland Matt Yates, Buckingham Group