Page 27 - Internal Auditor M.E. - June 2019

TO cOMMenT on the article,
eMail the author at Tauseefahmed.aca@gmail.com construction audit

Variation / Omissions Cost Assessment main contractor should incorporate these claims while claiming
for a relevant activity. In case of approving or certifying any
Under clause 13.3 of FIDIC Red Book, each variation shall be variations, the approval and certification should not be more than
evaluated in accordance with Clause 12 (Measurement and the approval / certification received. The same should be applicable
Evaluation). in cases of advance payments, advance payment guarantees,
An auditor should enhance his knowledge over the contractual performance guarantees or retention against variations, however
requirements and special conditions appended to the contract, some exceptions always remains as the conditions of the specific
prior to reviewing variations. A contract would invariably provide project desires. The auditor needs to understand those conditions
a mechanism for variations and method of payment thereof. and fairly document the same.
Any works done via engineering instructions (EIs) or approved
variation orders are included in payment application.
Key Risk Areas
By review of EI log or correspondences and minutes of meetings, 1) Unidentified or late identification of Variations:
the auditor should review situations where, works are done
without approval. In this scenario contractor has executed works Absence of procedure or skill to timely capture the variation
on his own discretion and can be contractually rendered as having
no right of payment.
2) Unidentified impact over Extension of time:
For verification of cost assessed by management, the auditor may
select a representative sample of cases. Rates used in the variation Absence of procedure or skill to assess impact of variation
orders can be verified against bill of quantity (BOQ). There might on critical path
be cases where BOQ rates are not being used for e.g. similar
items are not available in the BOQ, then, generally a new price is
agreed. In case, works must be executed without delay while rate 3) Late notifications:
is not agreed, then a provisional rate or amount is approved or on Lack of control over contractual requirement may have
account payment is permitted. An auditor should also look for impact over approval of variations as late notifications can
situation of disagreements on prices and rates and review the same. be considered as noncompliance, therefore can create a risk
of rejection of valid claims.

Extension of Time Impact
4) Incorrect valuation:
Clause 8.4 (Extension of Time for Completion) and Clause
20.1 (Contractor’s Claims) of FIDIC Red Book are applicable in Absence of a robust procedure over variation cost
extension of time claims. assessment.
Variations, usually increases the scope and may have an impact
on completion time. Auditor needs to ensure that management
has implemented a procedure to review impact of variation works Conclusion
on critical path. In such cases, timely notifications are served, and Variations may be initiated at any time prior to issuing the Taking-
extension of time approval is requested, which should be followed Over Certificate for the Works, either by an instruction or by a
by cost claims for extension of time.
request for the Contractor to submit a proposal. The Contractor
Clause 20.1 of FIDIC Red Book stipulates a timeline of 28 days shall execute and be bound by each Variation (Clause 13.1 FIDIC
within which Contractor shall serve a notice to the Engineer, Red Book).
describing the event or circumstances given rise to the claim.
The auditor should review EIs, correspondences and minutes of An auditor must establish an understanding over contractual
meetings for delayed and unserved notices, in order to ensure that requirements for variation. The audit program should be
timely action is taken to avoid risk of unserved or delay notices prepared around this requirement, considering key risk areas. The
and risk of liquidated damages. In similar perspective, a claim is materiality should also be considered while allocating resources
served by the Contractor within 42 days (Under Clause 20.1). for the scope. During Planning phase, auditor should allocate
weightage to the variations’ review and scope to be covered.
The parties have right to use different timelines with mutual This is followed by review of policies and procedures and basic
consent.
mechanism established to capture variations, valuation, work
execution and claim.
Back to Back contract
Tauseef Ahmed, Fca, aca (icaeW), cia, cFe, ciSa, audit Manager,
The auditor needs to gain knowledge of subcontractors claims. The arabtec Holding PJSc

JUNE 2019 INTERNAL AUDITOR - MIDDLE EAST 27