TECHNICAL CONSULTANTS’ SERVICES
CLAIMS FOR REIMBURSABLE EXPENSES – FRAUD or NEGLIGENCE
1.0 Introduction
1.1 Professional Services of Technical Consultants’ generally attract three types of payments. These are divided into the following categories:
[a] Professional Fees;
[b] Reimbursement of Logistical and Administrative Expenses and
[c] Procurement of Specialist Services from Other Professionals.
1.2 Articles in respect of ‘Services’ and ‘Professional Fees’ have been published earlier. The titles of these published articles is as follows:
[a] Services of Technical Consultants - For Infrastructure and Building Contracts;
[b] Services of Technical Consultants for Joint Venture Mega Projects;
[c] Scope of Services vis-à-vis Claims;
[d] Professional Fees Computations;
[e] Professional Fee - Dangers of Fee Negotiations
[f] Professional Fee Computation - Re-Designed Projects.
2.0 Scope of this Article
2.1 The Scope of this article is limited to the aspect pertaining to ‘Claims’ that are payable and are in addition to the ‘Professional Fees’ of the main Technical Consultants. These claims are generally divided into two categories as follows:
[a] Expenses for Administrative and Logistical; and
[b] Fees & Expenses that are payable for on-site Supervisory services or to Other Professionals Appointed for their Special Expertise.
2.2 The provision for these claims is generally incorporated in the standard agreement formats that are normally prescribed by the relevant regulatory authorities. However, as stated, these are for ‘standard’ and for common use. Thus it is of extreme importance that the involved parties [Clients & Consultants] and their representatives are aware and understand the rights and responsibilities of each other in respect of the claims. It is important that all the involved parties ensure that all the types of claims are relevant to the services, justifiable, correctly computed, claimed and settled in accordance with industry practices or as agreed by the involved parties.
2.3 This article will provide explanatory notes and actual examples to highlight the aspects that should be given due attention by the management, financial and audit [internal/external] professionals of the relevant parties to protect their respective interests.
3.0 Expenses for Administrative and Logistic Items
3.1 The types of expenses that can normally arise and may be claimable are listed below:
[a] Accommodation [Suitable - Fixed or Mobile];
[b] Furniture & Fittings and Office Equipment [Computers, Printers, Fax, Plan Printer, Copying Machines, Hand phones/Walkie-Talkies, Overhead Projectors, etc;
[c] Stationery & Printing and other relevant Items;
[d] Transport Vehicles and Travel Claims [Local & Outstation/Overseas if applicable];
[e] Courier /Postage Service;
[f] Progress and Other Reports; and
[g] Other Miscellaneous Expenses that may be reasonable.
3.2 The above facilities are essential for smooth implementation of the contracted works. The cost of procurement of these could be either incorporated in the cost of works under ‘Mobilization’ category of the construction contract pricing or the procurement authority delegated to the appointed consultants or they can be provided directly by the client. It is important that the client be aware of these aspects, among others, and of the following:
[a] The best option should be for the client to provide or procure directly the facilities and capital items as it is the most cost-effective and cost-efficient method and as it would be subject to the client’s internal controls and audit. Some of these may be available within the client’s organization whereas others may need to be externally procured. The procurement methods should also be compared for the best option as some capital assets can be procured by outright purchase, rented or leased or outsourced.
[b] As a general rule clients should not include the costs in the contract value as their inclusion could result in opportunities for manipulation of prices including for any variation orders that may have adverse financial implications to the client. The increased ‘contract cost’ quantum could result in increased professional fee to the private consultants where appointed on the ‘percentage-fee’ system. Also it will also result in increase in payment of levies to regulatory authorities where imposed [as in the case of CIDB Levy in Malaysia].
[c] The client should not delegate the responsibility of procurement to the appointed consultants as this will increase the ‘monitoring’ workload for the client that can be avoided Further delegation of procurement function would increase the extent of fraudulent opportunities and possibilities that may not be discovered until it is too late for any recovery or remedial action.
[d] In cases where the procurement is delegated to the consultants the client should ensure that the claims are fair, reasonable, necessary, at costs that are most economic and most important that they are provided for, approved, justified and supported by documentary evidence.
[e] The client should ensure that ownership of capital assets, where procured through inclusion in the contract or through the consultants, are vested with the client from the beginning or revert to the client on completion of the works. This aspect should be incorporated as a condition in the contract terms and conditions and also the appointment agreement of the consultant. However, in cases where the procured capital assets are not be of any further use of the client he can decide subsequently on their disposal including their donation to any charitable organization.
[f] Clients should always bear in mind, among other considerations, the following additional important aspects in respect of some of the above items:
‘Accommodation’
[i] The location of the facility should enable convenient access to the work site;
[ii] The facility can be either constructed or rented/leased;
[If constructed then the building should be so designed and sited as to permit alternate and continuous use after the completion of the works]
[iii] The structure can either be fixed or be in the form of transportable cabins.
[The disadvantage of a fixed facility, unless designed for alternate usage and sited for subsequent usage, is that it must be demolished on completion of the works and the rented/leased facility must be returned to the owner. The advantage of transportable cabins is that it can be re-used subsequently for other projects. The costs for the three options should be compared and the most optimum mode adopted.]
‘Furniture, Fittings and Office Equipment’
‘Stationery & Printing and other relevant Items’
[i] ‘Equipment’ items should be maintained properly;
[ii] These items should be properly accounted and recorded in asset/inventories/stock records;
[iii] They should be kept in a safe place as they are subject to abuse, misuse and theft.
[Here again some items may be rented or leased].
‘Transport Vehicles’
[i] Vehicles should pr provided only if the working site is in non-urban areas;
[ii] Type and number of vehicles should be compatible with the need of the works.
[Four Wheel Drive vehicles where normal vehicles are not suitable for access to work site]
[iii] Comprehensive usage and maintenance records should be maintained and monitored.
‘Courier /Postage Service’
[i] Information can be conveyed through phone, e-mail, fax, post and courier. Client should monitor the claims to ensure that the most economic method relevant to the information is used. There is tendency to use the ‘courier’ method which is the most expensive mode, with justification that the documents must be provided urgently. However the usage of this mode should be minimized by the client who can devise a procedures whereby info can be conveyed electronically and the hard copy delivered subsequently via dispatch or by post.
‘Progress and Other Reports’
[i] Reports formats should be simple in content and in binding.
[ii] Only outstanding matters should be reported. Settled matters should be omitted and new matters added.
[iii] Number of copies should be limited for distribution only to those involved and those who need to be informed. Additional copies can be made on a need basis for specific requests.
4.0 Fees & Expenses that are payable for On-Site Supervisory Services
4.1 Malaysian laws require engineers who are appointed to provide consultancy services to include in their scope of services the ‘supervision’ function during construction of the designed project. Exception is allowed only with the prior written approval of the relevant Local Authority where the project is sited.
4.2 The appointment of any On-Site Supervisory Staff should be subject to existing procedures that are usually used by the Human Resource Department in any appointment. The selection and appointment encompassing the terms & conditions and remuneration package of on-site supervisory personnel and other specialists should be done by the clients’ HR Management. However, the relationship between the appointed on-site supervisory personnel and consulting firm should be that of employee-employer. This will ensure that the claims for the supervisory personnel are substantiated with comprehensive documentary records such as time-sheets and any payments to any regulatory authorities.
5.0 Other Professionals Appointed for their Special Expertise
5.1 Similarly it is possible that there will be need for other consultants with specialized expertise for specific aspects of the project. Examples of such specialized services would include soil investigations, environment impact studies, transport studies, audio services, landscape and internal decoration, etc. The appointment of such specialists should be done directly by the client and subject to evaluation procedures. However it should be provided in the appointment letter that these specialists would report directly to the appointed consultant for their services. Further the claims by these specialists should be subject to prior approval of the consultant before being submitted to the client for payment. Here again the claims should be subject to client’s internal controls and audit to ensure claims are justified and commensurate with the need of the project.
6.0 Recommendations
6.1 The responsibility to appoint on-site supervisory personnel and specialist experts should never be delegated to the appointed designed consultants but their input and advice should be obtained before any appointment.
6.2 Certain services would be subject to payment of ‘taxes’ [such as ‘Service Tax’ or ‘GST’ or ‘VAT’]. Clients should confirm that the claimants are approved by the relevant authorities for collection of these taxes and this aspect should be verified with documentary evidence. It has been observed that such taxes have been included in claims even when the claimant is not subject to and authorized to claim them.
6.3 It is important that the submitted claims should be subject client’s internal controls and checks that are normally performed by the finance/accounting department and the claims should also be subject to audit of the client’s internal auditor. It should be confirmed that the number and level of appointed on-site personnel are commensurate with the need of the project and of the level of required expertise.
6.4 Finally it is important that the client be pro-active and is directly involved in procurement and subsequent utilization/management of any required assets and services. Delegation of this function should be avoided as it is an important preventive measure and internal control as delegation would create fraudulent opportunities and possibilities that could have serious financial implications for the client.
Delegation without Active Monitoring is an Invitation for Fraudulent Opportunities
GSK/Nov 06
GURSHARAN SINGH C.M.I.I.A. [Trainer
–Audit Officer]
116 Jln. Hujan Manik, O.U.G. Jln Kelang 58200 K Lumpur, Malaysia
Tel. No. [H] 603-79808549 [H/P] 019-2927178
E-mail: gursharan38@gmail.com, sharwant38@yahoo.com
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