COVID-19 construction audit FAQ for internal auditors and owners

The COVID-19 pandemic is affecting construction projects in a variety of ways, including additional costs to protect worker safety, questions on who is responsible for these additional costs, and project delays related to local ordinances about business closure. This FAQ list highlights issues that will help site owners and internal auditors better prepare and manage COVID-19-related costs.

Who is responsible for project costs impacted by COVID-19?

The construction contract defines the budgets and responsibility for construction costs. Construction site-specific costs will generally be the responsibility of the project owner. Examples of these costs are: housing and transportation for job-site personnel, job-site safety and on-site COVID-19 testing. Back-office costs are the responsibility of the contractor. Examples of back-office costs are: work-from-home costs, accounting staff, company management, general COVID-19 planning and education, and human resources costs.

What are acceptable costs related to COVID-19?

• Hygiene and cleaning costs – Costs to keep the job site germ free and provide a safer work environment are going to be the owner’s responsibility.
• Project delay costs – These costs may arise from construction material shortages, labor shortages and smaller construction crews. While these costs are acceptable, they should be fully documented and negotiated. 
• General conditions costs – Most of these are time-related costs, and as the project schedule is affected by COVID-19 delays, the owner will likely incur the extra general condition costs. Examples of these costs are labor, equipment rentals, security and utilities.

What costs should be avoided?

• Anything that duplicates current practices without adding any additional value
• Delay costs that are not the result of a COVID-19 management plan; COVID-19 could be made a convenient excuse for rework, poor quality and inefficiency, and these costs should not be accepted by the owner or auditor
• General condition costs that are not time-related. Some costs are fixed and do not change regardless of schedule; examples of these include mobilization, office equipment purchases, temporary roads and layout yards

Should change orders caused by COVID-19 be managed differently than other change orders?

Yes. All additional costs should be segregated from planned construction costs. These costs may be treated differently resulting from changing legislation, tax law or insurance treatment; therefore, do not comingle contingency and allowance usage or change orders with COVID-19 response costs.

Are costs incurred due to COVID-19 reimbursable under most insurance programs?

No. Most insurance programs exclude pandemics. However, read your policy and exclusions carefully and seek out legal counsel to interpret coverage.

Does asserting force majeure terms automatically result in the owner accepting all consequential costs?

Not automatically. Good contractors will be coordinating with owners to define what costs are the result of force majeure conditions. Understanding the root cause of these costs will enable both contractor and owner to agree on the costs and subsequent action items. The kinds of costs that may lead to dispute will be those that would have been incurred if the COVID-19 pandemic had never occurred, for example, poor workmanship, rework and substandard materials.

Will surety or performance bonds protect the owner from contractor delivery failure?

Maybe. Many surety programs have custom covenants complying with state and local government requirements that will protect the owner from a pandemic-related failure. Consequently, reach out to legal counsel or insurance agents and review the coverage to determine if the bond program provides pandemic protection. 

Additional tips in the current environment

• Collaborate with your contractor – This is a new experience for everyone and together all parties will achieve a better solution than taking an adversarial position. Ask contractors for their COVID-19 response plan and plan to work with them so it meets everyone’s needs. The response plan should include the necessary job-site safety practices, a list of essential project employees, and standby rates for people and equipment if the job site is shut down. Don’t wait to develop this plan. Proactively work with your contractor to implement a course of action before it becomes a change order.
• Maintain good procurement procedures –  There will be projects where speed to completion is paramount. Don’t forego your procurement procedures for sake of speed. Find ways to compress the process that doesn’t include cutting out pre-qualifying contractors and suppliers or eliminating bid submittals.

Finally, unknown circumstances and new challenges present opportunities for unethical people and companies to take advantage. Fraud will increase in this environment, so don’t eliminate project controls, therefore exposing yourself to unnecessary risks.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.