Owner audit rights under a GMP contract, and how to use them

A GMP contract is an open book contract. The owner pays the actual cost of the work plus fee, up to the ceiling, and in exchange the owner gets the right to see what the actual cost was. That right is written into nearly every CM at risk agreement. Under most AIA A133 based agreements it is a specific clause with a specific retention period.

Few owners use it. Audits are expensive, they sour relationships, and by the time an owner thinks to audit, the project is over. This post is about treating audit rights as a routine tool rather than a last resort.

What the clause usually covers

The typical audit clause gives the owner, or the owner's accountants, access to the contractor's records relating to the cost of the work. That includes subcontracts, purchase orders, invoices, payroll records for self performed work, equipment logs, and the accounting entries that roll them into the pay application. It usually requires the contractor to keep those records for a period after final payment, often several years.

What the clause usually does not cover is the fee. A fixed fee is not a cost and is not audited. A percentage fee is checked by checking the cost it applies to. The clause also does not usually reach the contractor's estimating files or the bid tabulations behind buyout, though some agreements extend to those. Check your contract for the exact scope.

Three levels of using the right

The lightest use is the monthly backup request. Every pay application is supposed to come with backup: subcontractor invoices, lien waivers, and supporting detail for general conditions and self performed work. Asking for that backup and reading it is an exercise of the audit right that costs nothing and signals that the owner is paying attention.

The middle level is the targeted review. A contingency draw without supporting documents, a general conditions line that bills faster than time, a subcontract awarded well above its GMP line. Each of these is a reason to ask for the specific records behind one number. A targeted review takes an afternoon and answers one question.

The heaviest use is the closeout audit. Before final payment and before the savings split is agreed, an owner may engage an outside construction auditor to review the cost of the work in full. On a fictional $70 million justice center, such an audit might examine the final schedule of values, every change order, all contingency draws, all allowance reconciliations, and the computation of shared savings. It is the one time the owner can test the whole account before the book closes.

Why the right needs a ledger behind it

An audit compares what was charged to what should have been charged. The contractor's records supply the first half. The second half has to come from the owner. If the owner has no independent record of the GMP baseline, the contingency opening balance, the allowance amounts and the change order causes, the auditor is reduced to checking the contractor's arithmetic against itself.

An owner ledger kept from the start changes the audit from a search into a reconciliation. The auditor can take each contingency draw and ask whether it matches the owner's record of what was approved. Each allowance reconciliation can be checked against the original allowance. Each change order markup can be checked against the fee basis in the baseline. The audit becomes fast because the questions are already written.

What to ask for, in order

The contingency log with backup for each draw. The allowance reconciliations with invoices. The buyout log with subcontract values against GMP lines. The general conditions actuals against the staffing plan. The change order log with cause and markup. That order goes from the fund most likely to have been drawn loosely to the record most likely to be complete.

Keeping the relationship intact

An audit request does not have to be adversarial. A construction manager who has kept good records has nothing to fear from a review and often welcomes it because it closes the account cleanly. The tone comes from the owner. An owner who has asked for backup every month and tracked the funds from the start is not springing anything at closeout. The closeout audit is the last step in a process that has been visible all along.

Costwitness keeps the owner side record that makes that process possible: the baseline, the funds, the draws, the reconciliations and the flags raised and closed along the way. What to audit and when is a decision the owner makes with counsel and the project team.

In the product

Contingency ledger, GMP baseline, Monthly owner report. Free tool: Pre-GMP Readiness Score, Shared Savings Calculator.

Keep reading

Earlier: Freezing the baseline: why the GMP should be versioned, never edited. Later: Contractor fee basis: fixed fee or percentage, and why it matters at closeout. All articles on gmp contracts.