Cost Assurance

Cost assurance and audits on infrastructure projects and contracts

Part 4: The people perspective

Continuing output from the Multidisciplinary Steering Group on Cost Assurance and Audits on Infrastructure Projects and Contracts

 

​THIS time we examine the people perspective. We highlight the multiple viewpoints and conflicting priorities of multidisciplinary experts required to deliver infrastructure projects and contracts, and the role that all the people involved must play for effective cost assurance and audits. This output includes high-level guidance on the following:

  • Alignment with strategy and objectives
  • Behaviours and people
  • Training, experience and capabilities
  • Collaboration and trust
  • Reporting
  • Lessons learnt and continuous improvement

People are at the heart of a successful project, and contracts must be formulated to drive collaboration and trust between teams and alignment between the client and the supply chain. Whilst a contract may drive the wrong behaviours, at the same time it should be recognised that teams with the right behaviours can overcome challenges and work together successfully. A strong leadership team will provide direction and support so that everyone can thrive, knowing that their work and the role that they play is valued.

During my career, I have been fortunate to train, audit and work with people across commercial, finance and project teams. This has afforded me a unique perspective of what motivates each party in delivering and governing projects. Today, regardless of contract form, organisations need a robust cost assurance strategy for capital projects and for long-term value. This cuts across culture, risk, cost drivers, cost systems, processes, sustainability and maximising value through innovation. At the centre of all these are people.

On infrastructure projects, the push for transparency and efficiency are fuelling the use of cost-based contracts, such as NEC forms, requiring open-book accounting principles – a relatively new concept. Like all change, people need time and training to come to terms with the protocols for managing and governing these contracts. Once mastered, these contracts share risks, rewards and are beneficial for all parties by fostering trust, collaboration, and long-term strategic alliances.

Cecelia Fadipe FCMA, Chair, Multidisciplinary Steering Group on CostAssurance and Audits on Infrastructure Projects and Contracts

Alignment with strategy and objectives

The right type of contract should facilitate the alignment of strategy and objectives between clients and contractors. Although the two parties (the client and the contractor) sign one contract, the strategy and objectives of those individual organisations may be in conflict or subtly different, and so lead to unsatisfactory outcomes and ways of working which will impact cost assurance and audit.

At the start of the project, the two parties should agree on a common strategy and set of objectives which would then be reviewed periodically and when there is a perceived conflict, so that these can be amended. Experienced individuals should be able to support the achievement of the client’s needs whilst at the same time following the strategy and objectives of their organisations. Where this is not possible, these individuals should be confident enough to challenge the status quo and have sufficient seniority and authority to allow a change in the overall strategy which benefits both organisations.

Cost assurance should not be seen as a ‘nice to have’, but a mechanism for aligning strategy and objectives amongst the parties in a contract. Aligning cost assurance objectives industry-wide with coordination between other public sector clients has the capacity for cost assurance for taxpayers at a macro level, while ensuring an acceptable level of profit with minimised risk of disallowances.

By their behaviours, skills and experience of contracts, projects and collaboration (or lack of it), people are at the heart – and can sometimes be the root cause – of the disputes we see. The lack of understanding of how the contract works or simply not correctly implementing it creates behaviours between the employer and the contractor which can cause conflict with all aspects of a contract, but particularly cost management and assurance. Having said that, people’s motivation and behaviours will equally drive the resolution of disputes.

Ensuring that people are aligned in terms of their understanding and operation of the contract, with behaviours that reflect that, will drive efficient cost management and assurance on a project. Equally, where disputes occur, understanding the key drivers and priorities of people is crucial. There can sometimes be a disconnect between commercial stakeholders, the project and/or operations teams and third party advisors (experts, auditors) in respect of the objective for resolution and what the path to resolution looks like.

Claire Randall Smith, Partner, Eversheds Sutherland

Behaviours and people

The success of the cost audit activity is as reliant on the positive and collaborative behaviours of all parties involved in the audit as it is on the technical competence of those involved. If the contract has been administered proactively throughout its lifecycle there should be few true surprises for either party arising from a formal audit and in the case of frameworks.

By learning from past lessons and working together, areas of disallowed costs should also diminish over time as points of principle or precedents are established. That said, corporate behaviour must support an effective cost audit process and protocols. This is dependent on investment in effective cost capture and reporting systems, practitioner training and the use of the most appropriate forms of contract for the delivery of the works. Senior leaders must recognise the footprint they leave and be fully supportive of their teams that are leading the audits and role-model the behaviours expected to deliver the best outcome for the client, supplier and key stakeholders. Many of the observed issues that negatively impact cost assurance audits result from:

  • The work type being delivered being unsuitable for a cost-reimbursable approach.
  • Insufficient in-house resources available to administer a cost-reimbursable contract.
  • Inconsistent approach to sampling, for example, pragmaticism v minutia details.
  • Failure to agree on the process and protocols at the beginning of the contract.
  • Ambiguity in understanding the make-up of fees within the delivery teams.
  • Failure to administer the contract and in-built functionality within cost systems.
  • The fluidity of teams during the project lifecycle impacting knowledge and assumptions.

Therefore, companies and clients need to consider these issues at the beginning of contracts and put in place controls that provide an environment in which positive and collaborative inter-personnel and business culture behaviours are incentivised and rewarded. Simple steps can be considered, such as the:

  • Introduction of pre-launch meetings focused on costs control.
  • Establishment of simple matrixes of disallowed/allowed costs.
  • Monthly cost audit meetings to address points of principle and update the cost matrix.
  • Fixed agenda items in progress meetings related to cost control.
  • Mid-year refresh of pre-launch meetings for new staff to reinforce contract provisions.
  • Consistent and continual communication during audits to avoid surprises.
  • KPI metrics to drive momentum in cost audit and timeliness of action closure.
  • Regular training and briefings to maintain and enhance competencies and capabilities.

Best practice from across the industry identifies that cost audit is successful where time is spent upfront establishing and reinforcing requirements, such as:

  • Mutual understanding of the provisions of the contract.
  • Importance of maintained and timely momentum in raising and closing out issues.
  • Importance of establishing robust cost control systems.
  • Need to communicate and address observed lessons.
  • Need to drive out the ambiguity in base contracts.
  • Importance of a jointly maintained disallowed/allowed cost matrix.

It is in all parties’ personal and corporate reputational interests to work together and maintain the momentum of cost capture and control. This will mean that:

  • For the supplier, monies are received on time and profit margins understood.
  • For clients, there will be no final outturn cost surprises.
  • For public sector bodies, this will support the demonstration of value for money.

People are key in making the costs collection, recording, reporting and forecasting processes sufficiently robust to comply with the overall commercial assurance requirements in accordance with internal and external governance, and in compliance with the requirements of the contract. Almost every discipline engaged in a project will have its part to play, to greater or lesser degrees, depending on the role and involvement in the cost process. In a contracting organisation, this may include the estimator, bid manager, project manager, commercial manager, quantity surveyor, supply chain manager, buyer, procurement manager, subcontractor package manager, works manager/foremen/ supervisors, site engineer, site agent, planning manager, environmental/ecological manager, quality manager and office manager.

One of the key considerations at the tender stage will be to decide on the cost coding and cost capturing system to be used for the project. Then the cost management and procurement processes will also need to be developed. A clear understanding of obligations under the head contract needs to be in place at tender and post contract.

Jim McCluskey FCInstCES, Senior Commercial Manager, Vinci

Training, experience and capabilities

The parties to contracts that are cost-reimbursable must have the necessary understanding and capability to administer the contract effectively and efficiently. For many companies, cost assurance activities may be in whole, or part, outsourced and therefore assessment of capability and upskilling programmes mustn’t apply just to in-house staff but to those employed from external companies to ensure there is consistency in methodology and output. Employees of the client/employer (inhouse or consultant) should be supported to ensure that their knowledge and skillsets reflect current industry best practice and are at a level expected of someone operating in their role. This may be achieved through a variety of pathways, examples of which are:

  • Mandated company training programmes.
  • Subject matter expert mentoring.
  • Targeted briefing notes.
  • Externally provided CPD forums and publications.
  • Use of role profiling minimum attainment level mapping.

Whilst a minimum level of capability is essential to being able to administer a cost-reimbursable contract, the successful commercial outcome is not down to a specific individual. Industry best practice recommends that time is spent before the commencement date in bringing all the parties to the contract together to formally record and map out their accountabilities, responsibilities, and obligations. This ensures:

  • A clear cost audit and assurance programme is established.
  • The level of resourcing is assured in line with the complexity of the works.
  • Everyone understands their roles.
  • The commercial mechanics of the specific contract are understood.
  • Any ambiguity over allowed and disallowed costs is clarified.
  • Tools and templates are developed.
  • Any gaps in skill-sets are identified and training and mentoring programmes established.
  • A handover protocol to cover change of staff on contracts of significant duration.

Lessons learnt from historic cost audits has shown that, over time, audits may be impacted by an individual relying on experience or personal perception and therefore regular reinforcement of the contractual provisions and protocols, or controlled briefings on points of principle, must be maintained to ensure that any unconscious bias is minimised, and decisions and activities reflect the current state. Ultimately it is essential that when operating contracts reliant on cost assurance audits, provision is made available to ensure that there are sufficient levels of investment for establishing and maintaining competent resources who are available during the lifecycle of the contract.

For a client’s own due diligence, cost assurance and audit plans should be undertaken by qualified surveyors and/or accountants. As a minimum, a professional designation should be involved in signing off audit outcomes. These disciplines both uphold levels of sufficient competency and the integrity of our profession.

Good behaviours between the parties to a contract are key in the day-to-day delivery of tactical tasks. To achieve this, behaviours should be set out in an audit plan which is preferably jointly agreed upon and should include clear roles and responsibilities.

Tom Leach, Head of Commercial Management, Southern Water

Collaboration and trust

When people talk about cost assurance audits the words ‘collaboration’ and ‘trust’ do not spring to mind. It is not the findings of a cost assurance audit that are the issue, but instead how those findings are dealt with and communicated. If it is seen that individuals are to blame, then there is little hope of open and honest communication between the teams, however, that is not to say that individuals should not be given the training required. A lack of experience in the team may mean that it is difficult to build collaboration and trust when dealing with difficult issues. So, what can be done to develop collaboration and trust?

Whilst a minimum level of capability is essential to being able to administer a cost-reimbursable contract, the successful commercial outcome is not down to a specific individual.

Where errors or issues are found during an audit, the facts should be quickly established, and a meeting held to understand the position and the implications of the findings. Why the error occurred also needs to be understood so that processes can be put in place and/or people trained. Any emotion and sentiment must be removed from any information that is being given. Instead, the focus should be on understanding the extent of the issue and how it can be addressed.

This feeds into how lessons learnt are embedded but it does not absolve individuals from their responsibilities. The behaviours of all – from the bottom to the top – of the various organisations need to be right from the start, and actions and messages given during meetings need to be consistently fed back to the teams in the respective organisations. The establishment of a cost assurance and audit process early in the contract will help to identify issues allowing these to be rectified quickly and easily whilst minimising the pain of rectifying.

There is a need to model collaborative behaviours throughout all levels of the organisation – including at the top. Also, when there is poor behaviour, others need to see that this will not be tolerated. Each organisation’s actions must be measured against the success factors not only for their organisation but for the other organisation as well. It is not enough to measure organisations on output alone, as it is the behaviours that are embodied by the teams that are critical to the success of projects and a common view as to what that success looks like.

The key elements in successful contract delivery are people and processes. Contracts such as those in the NEC4 suite will provide the right processes, however for these to be effective they need to be operated by people who not only understand them, but who will apply them with the right attitudes and behaviours. The processes in the contract will commonly be supplemented with project-specific requirements in relation to cost assurance and audits, or in relation to reimbursable costs, and the parties need to ensure that these are clear and concise. Contract users need to be given training and support in its practical application to ensure that the provisions are applied correctly and consistently. A key part of this will be helping users to adopt the right behaviours in how they interact with each other working in a spirit of mutual trust and cooperation.

Ian Heaphy FCInstCES, Director, INC Consulting

Both clients and suppliers need to be consistent with their expectations and behaviours avoiding dual standards. The right leadership is where leaders stand behind the decisions that have been made and clearly articulate them to their teams.

This includes support from leaders and organisations even when mistakes are made if the intention is right. Open book access to both client and supply chain systems and information gives transparency and builds trust between organisations. It also means information can be extracted as and when required, without the need to go back and forth between the organisations and therefore avoiding delays. However, with direct access to information, the interpretation of any data must be checked with the relevant person in that organisation. The fear of not understanding what has caused the issues that have been found during an audit can drive the wrong culture and behaviours where organisations become less transparent.

Delivery of effective cost and commercial assurance requires a diverse team that covers a broad range of disciplines, commercial, contract, legal, finance and data analytics. Moreover, whilst it is perceived as a data-intensive skill it requires strong people and social skills to ensure that all parties are treated fairly, respectfully and in a way that focuses on the risks and issues at hand and how best to address them and achieve continuous improvement. Cost and commercial assurance activities (including audits) are difficult to deliver properly without a robust set of principles, methodologies and governance structures in place.

Organisations undertaking assurance activities should consider how best to embed the elements above to ensure that assurance activities are undertaken consistently. The individuals leading these services should be adequately qualified with demonstrable ‘hands-on experience of managing stakeholders and the whole process from inception to completion.

A key aspect of effective cost and commercial assurance is the concept of ‘professional scepticism’, a term often used in the statutory audit world but often forgotten when undertaking assurance and audit activities in a non-statutory context without the formal parameters of having to abide by international auditing standards. Usually, it is not something that is able to be learnt purely in theory, but is a skill that requires experience to execute effectively, using evidence and data to support and justify the approach taken.

Imran Akhtar, Director, Turner & Townsend

Reporting

Cost assurance and audit, including reporting activities, should be viewed as a value-add activity to be undertaken during the life of the contract, enabling all parties to understand their respective financial outcomes with an enhanced level of certainty. It does not benefit the employer or the supplier to be the subject of a surprise at the end of the works and every effort should be made to identify, advise and close any issues, misunderstandings or ambiguities as soon as is reasonably practical. Changing economic outlooks arising from events such as Brexit and COVID mean that surety of outcome is essential, be it due to finite expenditure limits or reduced availability of finance in the market.

It does not benefit the employer or the supplier to be the subject of a surprise at the end of the works...

Both parties to the contract have a duty to maintain collaborative communication through provisions such as early warning notices. Industry best practice acknowledges the importance of ongoing dialogue during audit activities to address issues as they are identified, allowing time for resolution during the process to minimise the impact on the conclusion of the audit. Taking this approach minimises the level of withheld monies and ensures that points of principle can be established to reduce the level of disallowed costs both on current and future contracts.

This collaboration also maintains a positive relationship between the employer and supplier and reduces the risk of reputational damage that may arise if cost audit and assurance has not been proactively administered throughout the contract. This is especially important for public organisations where there is a duty to protect taxpayer monies and avoid the risk of advance payments, and for private companies where revenue and profit drive their ability to attract investment, pay downstream suppliers or recompense shareholders.

Whilst contracts do not mandate the type and frequency of cost audit activities to be undertaken, most companies will establish an in-house cost audit and assurance protocol based on a matrix aligned to the project duration and complexity of the scheme. The protocol will be established at the start and notified to the supplier by the employer, detailing as a minimum the dates, type of audit, sampling sizes (where appropriate), who will undertake the audit and its likely duration. The protocol(s) must also address common areas of concern such as data protection and security of sensitive information, especially concerning staff rates. Consistency of approach is therefore a critical component of a successful audit capability ensuring both the auditor and auditee understand what is expected behaviourally and technically. Consistency allows for the development of standardised processes and procedures, automation of reporting and common understanding, whilst minimising inconsistency that is inherent if audits are left open to interpretation. This is especially important in organisations that outsource cost audit and assurance activities and enables suppliers to better prepare for and support audit activities.

In my experience, particularly on large infrastructure projects, the team of people who negotiated and agreed to the contract are a completely different set of people to those involved in the audit of cost, perhaps months or years later. In order for the audit of cost to run smoothly and achieve the required outcome, the people involved must be allowed the time to properly engage in the process.

Often the employer/client will employ a team of auditors whose entire existence on the project is to determine it is only paying what it should under the terms of the contract. The contractor will probably make allowance for its project accountants and commercial staff to spend some time engaged in the audit process. Subcontractors who are subject to cost audits will probably be less familiar with the process and have less experienced people used to the process. Therefore, it is unlikely the employer/ client will get the attention to detail and quick response times from a contractor or subcontractor it would hope/expect if there is no dedicated team. This can lead to frustration and at times a breakdown in the process.

Often, in my experience, contractors and subcontractors are not displaying these behaviours to be difficult, it is because they do not have the budget within the contract sum to dedicate the same level of resources to the process. If the cost was set out in the contract sum and was part of the tender evaluation process to have such a dedicated resource it may not be such an issue. Unfortunately, audit and cost assurance allowances can be some of the first costs to be reduced when the procurement teams are looking for savings – either as a direct cost or through a reduction in the fee percentage. If this does happen, the process can become frustrating to the people involved and relationships can suffer.

Gary Bone, Contract Specialist, Blake Newport

Lessons learnt and continuous improvement

The learning of lessons and continuous improvement is a topic that is often discussed but is something which few organisations manage to implement successfully. There are many unanswered questions, such as:

  • Why is that so when there are several very experienced individuals working on a project?
  • Why do we keep learning the lessons but often fail to successfully apply them?
  • Does the type of contract enable and encourage lessons to be learnt and implemented?

Often at the start of project, lessons learnt are held with other projects by drawing on a range of people and their experiences. These usually involve a few high-level meetings with a wide range of people and are held with those individuals who were there at the end of the project. People who were there at the beginning of the project – those putting in place processes and procedures – are hard to find at the end of a project or rarely sought out to understand some of the issues that the team may encounter early on and how they might be overcome. It is often the case that past lessons are sought out at the beginning of a project and the lessons of a current project summarised at the end. Instead, it would be more beneficial to see lessons learnt as an ongoing process throughout the project lifecycle.

Some may argue that the contract does not allow for time to be spent implementing controls for lessons learnt, but the benefits to the project both in terms of outcome and cost would surely outweigh the cost of carrying out and implementing those lessons. The level of detail of the lessons learnt can often be remarkably high. What may be beneficial is to set up separate groups, each concentrating and drilling down in greater detail in their specialist area. There are individuals who with their specialist knowledge and experience personally drive-through and implement the lessons that they have learnt from previous projects. The application of this learning is often driven by the individual and not the leadership team resulting in best practice in pockets of the project. Another aspect is that the make-up of the team is constantly changing as the project develops and there is a need to revisit lessons learnt and to ensure that new team members are aware of and implementing these. There is also a tendency on larger projects for silo working and the sharing of processes and best practice is confined to areas.

People are the beating heart of any company – without their skill, commitment and drive, success is out of reach. The needs, drives and attitudes of the individual will impact how they perform in a particular role. ‘Soft’ skills are as necessary as technical knowledge for trust to be developed. People who are successful within the cost and commercial assurance field often have developed a very specific skill-set which is supported through finely tuned softer skills. They require a balance between tenacity and patience and being capable of developing long-term relationships both internal and external. They are typically driven by a desire to make things clear, transparent and to reconcile grey areas in a fair manner.

It is important that individuals remain independent and are able to recognise and challenge bias helping to build trust across companies and teams. This needs to be supported via the structure of a business which must allow that independence from group pressures. Processes and protocols within a business should encourage cost and commercial assurance throughout departments and encourage a degree of standardisation throughout their supply chain to provide transparency, however remain flexible to accommodate supply chains’ differing systems.

Kathleen Hannon, Cost & Commercial Assurance Team Leader, Scottish Water

Where lessons learnt are fed back to others in the team, those individuals rarely remember or apply the lesson if it is not relevant to them at that point. This is where the role of the leadership is particularly important in not just recognising these areas of excellence but in implementing and mandating the rollout of these across the team and project. A feedback loop of implementing lessons and then monitoring and changing/adapting these should be put in place. Individuals often need guidance as to where help and support can be found, whether it be implementing a new process or overcoming an issue, and therefore it is the role of leadership to actively drive those learning discussions.

In addition, it would be great if there was a repository of lessons learnt that could be easily accessed by anyone, including details of subject matter owners who can be contacted for further information and insight. People are keen to learn lessons from the past so how can the various contract forms help support the implementation of past lessons learnt on projects?

The fear of not understanding what has caused the issues that have been found during an audit can drive the wrong culture and behaviours where organisations become less transparent.

People are at the heart of a successful project and it is important that contracts are formulated such that it drives collaboration and trust between teams and alignment between the client and the supply chain. A successful cost audit requires that both parties understand the contract that they are operating under. Failure to understand the contract may drive the wrong behaviours and undermine the relationships either at a senior or operational level.

A strong leadership team will provide direction and support so that each individual can thrive knowing that their work and the role that they play is valued. Open and honest communication is vital so that neither party experiences any ‘surprises’ in terms of their revenue or liability. By agreeing on objectives and a common strategy from the start of the contract and by understanding and applying lessons learnt from previous contracts, a framework and processes can be set up. As the contract is administrated it is imperative that points of principle are agreed upon on a timely basis, so that any issues are resolved early in the lifecycle of the current project and that these principles are carried through into future contracts.

It is in all parties’ interests to have a consistent approach to the cost audit process and protocols for making them more efficient, whilst concurrently building collaboration and trust. If time is spent at the beginning of the contract setting out the architecture of the cost audit process and testing everyone’s understanding of the contract provisions, it should be a smooth, painless process that drives continuous improvement and robust commercial forecasting avoiding reputational damage to either party.

 

Victoria Hill Stanford FCInstCES, Head of Commercial Performance and Assurance, and Lisa O’Toole, Programme Commercial Manager North West & Central, Network Rail victoria.hillstanford2@networkrail.co.uk Lisa.O’Toole@networkrail.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

 

 

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