Philip Ramacca of David Landau & Associates on Construction Overbilling
Daniel Edward Rosen March 27, 2012, 8:30 a.m.
Construction guys know how to build. But do they know how to sit down and parse through dense paperwork loaded with complicated jargon and, sometimes, dishonest charges? Not always, which is why owners call on Phil Ramacca, a senior managing director of the internal audit and accounting advisory firm David Landau & Associates. Mr. Ramacca spoke to The Commercial Observer about why developers get hit hard by unnecessary or unscrupulous billing practices.
The Commercial Observer: How serious of an issue is overbilling?
Mr. Ramacca: We do this construction auditing all over the country. When we tell people about what we do and they’re not from the Northeast, we tell them that we find overbillings, on average, of 4 percent, and sometimes 7, 8, 9 percent. And they say to us, “Well, that’s a Northeast thing, isn’t it?” And we tell them, “No, it’s not. It’s all over the country.”
What, in particular, are real estate owners getting overbilled for?
Probably the most abused area is what they call “general conditions.” In a construction contract, when you have a general contractor, there is a clause called general conditions, and basically this covers all the little stuff that nobody wants to deal with. Even though it’s a catchall, the contractor still has to supply support that they actually incurred expenses against that. Sometimes we’ll find that they’ll put in for the general conditions, meaning they’ll submit an invoice for the dollar amount but they actually won’t have any support for what they spent the money on. Again, they don’t want to deal with it either, but at some point someone has to account for this stuff.
More rampant, though, is there are items that are solely identified in that general conditions clause—temporary power would be a great example. We were looking at a retail developer that was putting up a project in Arizona and the contractor put in $200,000 in general conditions for his temporary power, and then he put the electric line on the budget and, again, you see the same $200,000 for temporary power there. They were paying twice for the same item.
Do you think this is dishonesty on their part? Or do you think this is an honest error?
I think it’s a combination. I think sometimes they just really don’t have the back-office support to do it properly, and other times it’s just blatant, because they know they can get away with it.
The people that are responsible for reviewing these payment applications, when they come in from the general contractor, are typically people who are knowledgeable about construction. They kind of came up through the ranks on a construction site. They are great at looking at a pad and saying, “That’s the wrong cement, it’s not right thickness, that’s the wrong steel …”
They have great eye for that, [but] they tend not to have a great eye for, say, “Give me a pile of papers that’s three inches thick and I’ll tear through it and tell you where you’re getting the better of me.” They don’t have that mentality.
How do you advise a client to safeguard so that they don’t have to hire someone like, well, you?
What most of our clients have done, at least on the first project they engage us for, is they bring us in after the whole thing’s done. At that point, you’ve already paid most of the money to the contractor. It ends up being a big argument over trying to get some of the money back if they’ve been overbilled, not to mention the fact that the contractor felt everything was good all along. It gets confrontational very quick. However, if they do a detailed review on the first couple of payment applications and set the expectations then everything goes smoother from beginning. What developers need to do is on the first application, do a heavier review than they would expect to do for their whole project. The best tip I can give is to set the expectations early and let the contractor know that you’re looking at the paperwork you’re submitting. —Daniel Edward Rosen