United States

Construction risks for tribal communities

TRIBAL NATIONS QUARTERLY  | 

While growth within the gaming and hospitality industries overall has remained slow over the past year, particularly in Las Vegas, we have seen more aggressive expansion through construction and capital projects in the majority of tribal communities. With construction being one of the most complex projects a gaming or hospitality property can undertake, effective management of schedule, cost and quality is critical to project efficiency and successful completion.

Primary types of projects
The two primary types of projects are “stipulated sum” and “cost reimbursable with a guaranteed maximum price.” Stipulated sum projects are beneficial if the design is simple and similar in nature to other facilities that the project owner has built in the past. In these cases, the project owner is already familiar with the project components, and knows what to expect in terms of cost and schedule as the construction progresses.

If a project owner chooses to undertake construction of a facility with a new design, the most beneficial form of delivery method is the cost reimbursable with a guaranteed maximum price method. The owner is protected under the cost reimbursable agreement, as the guaranteed maximum price establishes a not-to-exceed value. Additionally, this form of delivery is more favorable from a scheduling standpoint, as it can be completed in a shorter time frame than a stipulated sum project. Therefore, the hotel or casino can generate revenue more quickly using a cost reimbursable with a guaranteed maximum price agreement.

Parties hired for construction projects
Typically, a construction project owner will engage an architect, engineer and a general contractor when planning new construction. If the owner has an employee or employees that are experienced in construction and project management, those staff members will manage the project. If not, the owner will engage a project management or owner's representative that will manage the project to ensure it is built on time, within budget and in accordance with specifications.

Construction auditor's role
An outside auditor complements the services normally provided by the owner's representative and the architect. As mentioned, the owner's representative usually has a construction management background, and manages the overall performance of the project. An outside auditor will provide a financial and internal control prospective to the project. The owner's representative reviews costs to make sure they are reasonable, while the auditor validates costs by examining source documents, such as insurance policies and employees fringe benefits. The auditor ensures that costs incurred are allowable in accordance with the contract.

Common types of fraud and risk
The latest construction fraud survey conducted by the Association of Certified Fraud Examiners found that the most common type of fraud was overbilling, followed by corruption.

The McGladrey construction risk auditors benchmark the overbillings identified during the course of each year; the current findings are as follows:

Labor 31 percent
Insurance and bonds 26 percent
Billings in excess of cost 14 percent
Other 29 percent

Labor is always a high-risk area for overbilling, as it includes fringe benefits, improper rate classifications, staffing not provided for in the contract and bonuses. Insurance and bonds have recently seen a substantial increase in overbillings because of changes in the insurance programs. While we have seen a decline in the instances and the dollar amount of billings in excess of cost, this is still an area we always validate in the course of an audit. 

Recommendations
The Institute of Internal Auditors has stated that a construction project audit can bring added value to your organization. Historically, McGladrey's construction audit practice has had a very positive return on investment, which is about 10 to one. We believe conducting a construction audit is part of a manager's due diligence and responsibility in managing an organization's funds.