【Haichuan EPC】Audit risks and preventive measures for EPC completion settlement!

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Audit risks and preventive measures for EPC completion settlement! Under the EPC model, the final settlement audit is a crucial step in ensuring the proper use of project funds and safeguarding the quality and efficiency of the project. However, due to the integrated nature of design, procurement, and construction in the EPC model, the audit of final settlement faces numerous risks. This article will analyze these risks and propose corresponding preventive measures. Due to the characteristics of the EPC model, the final settlement audit under this approach presents certain unique audit risks, and it is more complex compared to the traditional general contracting model for construction. The following are the main risk points in the EPC completion settlement audit: Specific audit risk point 1: Risk in the understanding and application of contract terms. Unclear definition of the contract scope: Is the scope of work specified in the EPC contract clear? Was the scope of work accurately determined at settlement? Is there any situation where work within the scope of the contract is treated as changes, or where work outside that scope is not properly included? Vague terms regarding changes and claims: EPC contracts usually have strict procedures for making changes. Do the terms clearly specify the triggers for changes, the approval procedures, and the pricing principles? Disputes may arise during auditing over what constitutes a valid change. Dispute over price adjustment mechanism: Are the factors for price adjustment specified in the contract? Are adjustments made strictly in accordance with the agreement during implementation? Is there any abuse of the price adjustment clause? Performance assessment and fines: Was a performance assessment conducted? Do the assessment results meet the requirements of the contract? Were the performance penalties to be deducted fully accounted for in the settlement? Are the assessment data accurate and reliable? 2. Risks of design changes and optimizations: Confusion over design responsibilities: Under the EPC model, the general contractor is responsible for the design, and audits need to clarify this distinction. Owner-initiated change: A legitimate change resulting from changes in the owner’s requirements. General contractor’s optimization/deepening design: It is part of the contractual obligations and is usually not charged separately. Modifications caused by design errors/defects of the general contractor: This is the responsibility of the general contractor, and the associated costs should not be passed on to the owner. Necessity and relevance of the change: Is the proposed design change truly necessary? Is it directly related to the project objectives? Is there any situation where design flaws or poor cost control are concealed under the guise of changes? Insufficient basis for price change: Is the price change based on the pricing principles stipulated in the contract? Are the documents supporting the change costs sufficient and accurate? 3. Risks related to the authenticity of the procurement process and costs: Related-party transactions and inflated prices: Does the general contractor use affiliated companies for procurement? Are the purchase prices fair and transparent? Is it significantly higher than the reasonable market level? Audits require in-depth examination of purchase contracts, invoices, payment vouchers, market quotes, etc. Management of materials supplied by the owner/designated brands: In the case of materials supplied by the owner or equipment of designated brands, are their quantity, quality, and delivery timing in line with the requirements? Is the calculation of related storage and coordination costs reasonable? Is there any waste of materials supplied by the client due to the responsibilities of the general contractor? Difficulty in writing off equipment and materials: EPC projects involve a wide variety of equipment and materials; is the actual amount used consistent with the amounts specified in the design budget and the contract specifications? Is there any misreporting, fraud, or serious waste? Is the write-off system sound and effectively implemented? Treatment of tariffs/ VAT on imported equipment: Are the calculations, payments, and deductions of relevant taxes and fees in compliance with **regulations? Are there any situations where responsibilities that should fall on the general contractor are instead passed on to the owner? 4. Measurement and approval risks during construction: Lack of documentation for concealed works and ongoing processes: EPC projects focus on the end results, so the documentation related to the construction process may not be as comprehensive as in traditional approaches. Are the acceptance records for concealed works and the video materials complete? Are the visas issued in a timely and proper manner? The credibility of information added afterwards is high. Visa validity dispute: Does the visa comply with the procedures specified in the contract? Did the visa-related matters actually occur, and do they fall outside the scope of the contract or require adjustment? Are there visa on favor or retroactive visas? Disputes over quantity measurement: For the portions to be settled based on actual quantities, are the criteria used for measuring and calculating those quantities sufficient and accurate? Audit reviews are difficult. Reasonableness of idle time/construction acceleration costs: Are the claimed costs for idle time and construction acceleration indeed caused by the owner’s actions or by risk events specified in the contract? Is the basis for calculation reasonable? Is there inefficiency caused by problems in the general contractor’s own management? 5. Subcontracting management risks: Accuracy of subcontracting settlements – Are the subcontracting settlement documents submitted by the main contractor accurate and complete? Have the subcontracted works been actually completed and are they of satisfactory quality? Is there any practice of inflating subcontracting costs to obtain funds? Scope of subcontracting and qualifications: Does the scope of professional subcontracting and labor subcontracting comply with legal regulations and contractual provisions? Are the subcontractor’s qualifications compliant? Is there any illegal sub-contracting or assignment? Subcontract price pass-through: Does the general contractor pass on unreasonable high subcontract prices to the owner? 6. Risks related to the completeness and compliance of as-built documents: As-built drawings/as-built documents: Do the as-built drawings accurately reflect the final completed state? Do the completion documents meet the requirements of specifications and the contract in terms of completeness, accuracy, and timeliness? Lack of information severely affects audit efficiency and conclusions. Completeness of acceptance procedures: Are the acceptance procedures at each stage complete and compliant? Is the acceptance report genuine and valid? Risk of open items under a fixed price: Although EPC is based on a fixed price, the contract usually specifies certain open items. The audit must strictly determine whether these openings are valid, and whether the resulting cost calculations are accurate and reasonable. Understand audit response strategies and key points: Thoroughly understanding the contract is the cornerstone of EPC audits. It is necessary to thoroughly understand all key clauses, including the scope of the contract, the rights and obligations of both parties, the price structure, procedures for changes and claims, risk allocation, acceptance criteria, and breach of contract provisions. Pay attention to changes and claims: this is the main way to break through the fixed price. Thoroughly examine the reasons and responsible parties for each change/claim, as well as procedural compliance, the basis and rationality of pricing, and the adequacy of supporting documents. Thorough verification of procurement costs: Conduct focused audits on key equipment and bulk materials, examine procurement contracts, bidding processes, invoices, payments, inventory movements, and usage amounts, and carry out market price comparisons. Strengthen on-site inspection and verification: Visually inspect the actual project structure, compare the as-built drawings with the physical conditions, especially in areas involving concealed work, and verify the installation and operation status of equipment. Pay attention to the review of process documents: Examine project management logs, supervision logs, meeting minutes, correspondence, inspection records, etc., to reconstruct the project implementation process and verify the authenticity and background of settlement matters. Leverage professional expertise: For complex design changes, equipment performance, special manufacturing processes, etc., seek professional judgment from experts in design, cost estimation, and equipment. Pay attention to the performance evaluation results: carefully review the performance assessment reports to ensure that the evaluation process is fair and the data is accurate, and use this information to deduct from or adjust the settlement amount. Strengthen audit of subcontract settlement: Conduct extended audits on subcontract projects with large amounts to verify the authenticity of subcontract costs. The core of the EPC completion settlement audit lies in upholding the principle of a fixed total price. The audit risks primarily relate to the clarity and enforcement of contract terms, the authenticity and rationality of design changes, the fairness of procurement costs, the accuracy of construction measurement, the standardization of subcontract management, and the completeness of process documentation. Auditors must possess a thorough understanding of contracts, expertise in engineering, skills in cost assessment, and a keen ability to identify risks. By employing thorough audit methods, they can effectively detect and address such risks, ensuring that the settlement results are accurate, lawful, and reasonable, thereby protecting the legitimate rights and interests of the client.