Shifting scope on a retail strip center
Owner/developer building a $5 million retail strip center project.
With the project only 50 percent complete and all original financing disbursed, not only were liens being filed by subcontractors, poor quality construction was evident as well. The owner’s attorney requested a project review by an independent third party to find out what was going on.
RSM’s Construction Advisory Services group assembled a cross-functional team that included a CPA with extensive contractor audit experience and a professional engineer with extensive hands-on construction management experience. We began by reconstructing the project contract, cost and disbursement files. We then performed a comprehensive review of the contracts and scope documents, subcontractor invoices and pay applications. Our findings included:
- The construction manager served as both the carpentry and site work trade contractor, creating a conflict of interest
- The construction manager shifted scope from his trade contracts to other contracts without a corresponding price reduction in his contracts
- The owner paid for work twice and for work never done
- Pay applications and draw statements prepared by the construction manager were inaccurate and falsified, yet approved for payment by the title company and the bank
We provided the client with an accurate accounting of the actual costs disbursed and estimated cost to complete the project, along with evidence of the fraudulent billings. The client went on to pursue recovery of overpayments as well as criminal fraud charges against the construction manager.
- Be sure you understand the roles and responsibilities of your contractors.
- Title companies and bank inspectors do not always provide expected financial oversight.
- Don’t give your construction manager too much authority. Independently scrutinize contracts and contract changes.