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Management of Construction Contracts

Check List No. 7 – Statement of Final Account

by Gursharan Singh

1.0 Introduction

1.1 All activities have a beginning and an end. The physical completion of any contractual works is generally signified by the issue of a Certificate of Practical Completion [‘CPC’] whereas the financial completion is signified by the issue of Statement of Final Account [‘SFA’]. The prompt finalization and issue of a ‘SFA’ is also a sign of efficient financial management of any construction contract as delays may create opportunities for financial claims from either party. The problems may arise due to non-availability of key personnel who may have left the company or may have been assigned to other duties at other locations and/or inability to locate/identify all the relevant documents pertaining to the works. The finalization of the ‘SFA’ and agreement of all relevant parties may be prescribed that the ‘SFA’ be finalized and agreed by all involved  Nevertheless it is important that the ‘SFA’ is finalized and issued within the shortest period of completion of all construction works. 

2.0 Objective

2.1 It is important that the ‘SO’ ensure that all the relevant financial & legal contractual obligations have been complied by the main contractor including his sub-contractors/suppliers. This objective can be achieved by the preparation of a ‘SFA’ that would list all the important financial aspects pertaining to the construction contact and thus provide the necessary assurance that all payments and recoveries have been taken into account before the contracting parties are relieved of their financial/legal obligations except for those that may be required to be satisfied after the works have been physically handed over to the client.  

3.0 Statement of Financial Account 

3.1 The more important of relevant documents that should be included in the ‘SFA’ and their importance are listed below.

[a] ‘SFA’ should be approved by Client & Contractors.           

[b] All entries should be correctly accounted.

[c] Prime Cost for Specialized Items are subject to additional charges that may be payable to the main contractor. These additional charges may be based on basis of ‘Lump Sum’ or as a ‘Percentage’ of the cost of works of the specialized works. However, this may not be payable for ‘Profit’ in the case where the main contractor is not the sub-contractor for the specialized works but undertakes the works directly. The final works may need to be re-measured.                   

[d] Works that are categorized as ‘Provisional Sums’ must be re-measured to arrive at the actual cost of the implemented works.

[e] Variation/Change Orders will be issued to account for any differences between the original ‘Prime Cost’ and ‘Provisional Sums’ provisions to ensure the accuracy of the values included in the ‘SFA’.

[f] All Progress/Interim Payments are correctly accounted.

[g]] Deductions should be reflected to ensure recovery of any advances..

[h] Supplies of any materials/facilities/services should be valued and accounted to ensure recovery.

[i] In the event of imposition of any L & A D penalties after the issue of a ‘Certificate of Non-Completion’ it should be ensured that the amounts are recovered and correctly accounted.

3.2 The settlement to the main contractor of any dues outstanding in the ‘SFA’ should only be approved and released after the contractor has complied with all prescribed conditions of the contract. Special reference is made to mandatory and regulatory requirements that would include the following:

[a] Certificate of Fitness [or Occupation] for occupancy/usage for purposes intended.

[b] Any other Approvals/Licenses/Certificates that may be prescribed for mandatory compliance by the relevant regulatory authorities/agencies. The mandatory certificates that may be required will vary from country to country and local authority and type of works. It is important that these are identified and complied with.

[c] Receipt of Warranties/Guarantees that would commence from the date of usage or Certificate of Fitness as applicable.                                                           

[d] Recovery/Settlement of any Deposits/Advances made to the relevant Authorities where the Receipts are not in the name of the Client and the ‘Original Receipts’ are not in custody of the client and follow-up action is the responsibility of the contractor/sub-contractor/consultant appointed for the implementation of the contracted works.

[e] Capital assets that are provided by the client for the implementation of the works or procured under the contract but not incorporated or form part of the works should be handed over to the client.

3.3 In cases where the Contract Value includes a provision for any ‘Contingency Sum’ it should be ensured that the ‘Contingency Sum’ is omitted from the ‘SFA’. However, if any part of it is used to finance the cost of any variation/changes to the contract value then it must be adjusted. Any substantial usage of the ‘Contingency Sum’ provision should be highlighted to the client.

3.4 Most contract conditions provide for variance of rates for specified components of inputs that are subject to sudden price fluctuations that are beyond the control of clients and contractors. These components generally include fuels, building materials [cement & steel products - local & imported, labor, etc in the implementation of works. Such claims should be subject to documentary evidence and be examined for correct computation.                                                                    

4.0 Responsibilities of Client [Including his appointed S.O./Tech Professionals] 

4.1 The client should ensure that

[a] ‘SFA’ is prepared and agreed by all relevant parties promptly.

[b] The contents of the ‘SFA’ incorporate all relevant financial elements.

[c] The ‘SOW’ has been completed to the satisfaction of the ‘SO’.

[d] Approvals and Signatures should be of duly Authorized Officers only.

[e] The relevant financial institutions [banks/insurance] and others as applicable, are informed as required.

5.0 Responsibilities of Financial Professionals of Clients and Contractors/Suppliers

5.1 The financial/accounting professionals of both the clients and contractors/suppliers should not accept the contents of ‘SFA’ as recommended by the technical professionals. They should independently scrutinize the comprehensiveness, contents and the basis and methodology of computations of financials aspects. They should seek the advice and clarifications from the technical professionals and seek other external advice if necessary where any aspect is not understood.                                                                                    

6.0 Fraudulent Opportunities - Implications of the Contents of the ‘SFA’

6.1 Some of the contents of the ‘SFA’ may have legal and financial implications. Further it may provide fraudulent opportunities/possibilities to those with authority. The contents that are susceptible to fraudulent opportunities/possibilities would include the following:

[a] Date of Issue of ‘SFA’ that may be incomplete and issued before that would benefit the contractor at the expense of the client.

[b] The works listed in the ‘SOW’ may not have been fully implemented to the satisfaction of the ‘SO’ resulting in losses to the client that may arise subsequently when the incomplete outstanding works would need to be remedied at the client’s cost. 

[c] Non-issue of approvals in respect of Mechanical and other installations subject to prescribed tests to enable their being commissioned by relevant authorities.

6.2 It may be appropriate here to illustrate the above with an actual example that the writer observed during an audit of a mega infrastructure power generating project costing in excess of USD2.0b where the ‘SFA’ was not finalized promptly on completion of the project and the departure of the assigned foreign technical consultant who had left the country and whose services could not be obtained subsequently. The disputed quantum of various ‘Variation/Change Orders’ was negotiated and was finally settled after a lapse of two years at an additional cost of USD12.0m against earlier quantum of USD0.4m This was a clear case where delay of finalizing and agreeing with the ‘SFA’ resulted in the client losing in excess of USD1.6m. It could not be ascertained whether the delay was due to ‘collusion’ or other reasons. However the client opted not to proceed with litigation to have the amount in dispute reduced for reasons of poor documentation and absence of the foreign technical consultant who would have been the key witness for the client.

6.2 The audit professionals [internal/external] of the clients and contractors/suppliers should ensure that the technical and technical professionals comply with the prescribed procedures. In addition the auditors should also subject the components with financial implications to in-depth audit during audit of selected construction/procurement contracts.

7.0 CONCLUSION

7.1 The contents of the ‘SFA’ would have financial implications that may include additional costs and other aspects that are susceptible to fraudulent practices. The risks will increase with the quantum of contract values and perceived corruption, weak ethics and selective enforcement by regulatory authorities especially in the developing/under-developed countries. Thus it is emphasized again that the clients should give serious attention and commitment to the contents of the ‘SFA’. Finally the relevant documents should be in safe custody until such time when all outstanding issues have been settled and legal obligations satisfied.                               

7.2 It is in everyone’s interest if the technical professionals of all parties ensure that their efforts and recommendations are based on the objective that any weakness in the ‘SFA’ are avoided and where unavoidable, the differences of opinion are settled promptly and amicably.

7.3 The list of contents provided in this article may not be comprehensive as there could be other documents that are relevant and important in some countries and thus should be given due attention for inclusion in the ‘SFA’. The contents of the ‘SFA’ should be reviewed after completion of each contract and make necessary amendments to it and procedures/internal controls for future projects on a continuous basis.

‘SFA’ should be Comprehensive & Relevant to the Works and Prepared Promptly

*****************************************************************************Readers - Please note that the contents of this article are for general information. No reference is made to any specific contract terms and conditions in respect of any contents in the ‘Statement of Financial Account’ and its financial/other implications as these would vary in the contract formats, from country to country, site and the scope of works. Technical and Financial [Accountants/Auditors] Professionals should upgrade their knowledge continually to be effective and efficient for Management of Construction Contracts.

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Note: It is important that Companies involved in the Construction Industry be aware of the various contract documents that would assist in the effective management of the contracts from the inception stage to the stage when the works are completed and used for their intended purpose. The documents relevant to the various aspects would vary but they may be summarized under the following headings:

1. Tender/Tender Table Documents                  2. Contract Document Proper

3. Variation Orders                                           4. Extension of Time

5. Certificate of Non-Completion                      6. Statement of Practical Completion

7. Statement of Final Account

Articles on following Check Lists have been published in the ‘AuditNet’ Newsletters.

[a] Check List No. 6 - Certificate of Practical Completion - December 2005

[b] Check List No. 5 - Certificate of Non-Completion - November 2005

[c] Check List No. 4 - Extension of Time [Delays] - October 2005

[d] Check List No. 3 - Variation [Change] Order - June 2005

[e] Check List No. 2 - Contract Document Proper - July 2005

[f] Check List No. 1 - Tender/Tender Table Documents - September 2005

[g] Introductory Article – Construction Management Check Lists - July 2004  

This is the last article in the series of [8] articles titled ‘Management of Construction Contracts’.

GURSHARAN SINGH C.M.I.I.A.
[Trainer – Audit Officer]
116 Jln Hujan Manik, O.U.G. Jln Kelang 58200 Kuala Lumpur, Malaysia, Malaysia
Tel. No. [H] 603-79824492 [H/P] 019-2927178

The writer welcomes comments from readers with the intention of mutual enhancement of knowledge.

E-mail: gursharan38@gmail.com: >sharwant38@yahoo.com< >gsk38@hotmail.com<

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