This article has been edited and published by Shashwat Kaushik.
Table of Contents
The auditor of civil works and projects needs certain special expertise and checking estimates and tendering of the work are the basics in an audit to proceed further. If the estimate is on the higher side, it gives an undue advantage to the contractor to claim more than necessary. Therefore, it is essential on the part of the auditor to check the authenticity of the prepared estimates. Similarly, an audit attempts to check all tender documents with reference to the supplied estimate. Tendering becomes fair in cost and quantity with the correct estimation. Now, the preparation of estimates may be detailed as follows.
Checking tender documents
Checking tender documents in an audit needs expertise and judgement in scrutinising the estimate and tenders. The tender conditions should not be to the advantage of the civil works contractor. Estimates should be as accurate as possible with the available specifications of rate and cost. The agreement should also include the liability of the contractor to bear the cost of substandard work if noticed during the defect liability period after completion of the work. Work order conditions should match the conditions of the tender. An audit is to have all information on the Indian Road Congress specification as well as the Ministry of Road Transport and Highways specification. This handout contains all the techniques to be applied to check the tenders and estimates. Mostly, certain points are the independent opinion of the author, who has many years of experience in audit under the Indian Audit & Accounts Department.
Preparation of estimate
One of the prerequisites to estimating the cost is to refer to the government approved Schedule of Rates (SoR) and the approved booklet of Analysis of Rates for all government civil works/projects. There are no specific guidelines for privately executed works. In government projects, an engineer works as an estimator. Before the work of estimation commences, the work/project is administratively approved. After the completion of administrative approval only, the estimation is done based on the SoR, analysis of the rate and other government directives. The estimate is prepared in duplicate and sent to the next higher authority, the estimating officer for approval. The approving authority keeps the first copy with him after entry in a register and the second copy is handed over to the estimator. So far as estimating by private entities is concerned, they never resort to any specific guidelines. Rather, they find their own means of estimating, tendering, awarding and executing.
Tips for auditing the estimate
While auditing the estimates, the audit team usually gets a copy of the estimate from the estimator. That means the copy is the second copy and not the original one. It is possible that this copy may get manipulated with quantity or cost, and hence, the auditor needs to check the original one retained with the approving authority. If the same is not produced in the audit, the issue may be kept under objection.
Next, the audit is to check the estimate with reference to the SoR. Item wise check is necessary to certify that the estimate has been prepared with accuracy. Where an item is not in the SoR, the audit is to check some other base records or past year data and, by their best judgement, arrive at the cost. While applying best judgement, it is the duty of the auditor to disclose the logic behind this decision to adopt some value for some item/items included in the estimate. The audited entity and get their consent on the adoption of the cost of that particular item.
The auditor should examine the estimate, quantity- wise, with the final bill to see the quantum of deviations. Certain public work codes in some states or even the Central Public Works Accounts Code specify the principles for dealing with deviations. If the deviation is 10 percent or more, the work needs to be re-estimated before the final payment of the bill, and that should be during the execution of the work. If the re-estimate is not approved, final payment to the contractor can’t be made. All deviations may be pointed out in the audit.
Similarly, an auditor may see that, in some cases, the quantity and cost included in the estimate match pie- to- pie with the final bill. These are, of course, cases of fraud, as at no point in time will the executed items match. In such cases, audits should adopt some different means. The audit may examine the date of commencement of execution and the date of measurement to decide and conclude. The register of check measurement may be verified in an audit, from which the auditor can know who measured the work and who checked and measured the work. The dates may yield some results for the audit to conclude as regards the fraudulent execution. Even items of executed quantity can be matched with the estimate to see if the execution is done correctly or not and even an audit may link the execution with the government specification to find the difference.
Tendering-tips to audit
So far as checking tender documents is concerned, the audit has some specific guidelines regarding how to check the tenders. Tenders, in many cases, are meant for the transparent selection of contractors. But it deviates at most points. Tenders are normally received in a sealed envelope and should be invited in the most open, transparent and public manner by advertisement in the local newspaper or with some out of state published papers. The value for which tendering is to be done has been fixed by various governments to their advantage and mostly it is for Rs 50,000/ or more. Somehow, the auditor faces a lot of difficulties in checking the tender documents. Tender fixing at many points results in a single tenderer, otherwise called tender fixing, being awarded the work. The tips for this audit may be selectively indicated as under.
Firstly, the audit needs to start from the requisition or demand based upon which government administration approved the civil work or purchase to be effected on a tender basis. This is the basic document and keeping that in mind, the auditor should call for an estimate to scrutinise the item and cost included in the estimate as per the prescribed schedule of the government. For checking the tenders of any private entity, the auditor may not stick to these formalities. One issue comes up for strict scrutiny in the audit. Say for example, that two villages are in different places and need a bridge for easy transportation. Of the two villages, let us suppose that one village has 15 households, including the house of a minister and a second village has 50 households. Of these two, the administration should approve the construction offer for the second one. However, the auditor may notice that approval has been given for the first one because of the influence of the minister. The auditor should diligently and sincerely comment on such cases, calculating the cost benefit to the masses.
The auditor then checks the conditions of the tender. It may be verified that the contractor furnishes all details/documents as per the terms of the tender along with the Earnest Money Deposit (EMD), which is normally one percent of the tendered cost. It is a common mistake that the auditor makes in the case of a copy of PAN. The name indicated in PAN should tally with the name of the contractor. But, in some cases, the contractor furnishes the PAN of some other agencies. Such cases are liable to be rejected in the tendering stage. The contractor should furnish a copy of the licence, and at times it may be caught in the audit that a certain blacklisted contractor also participates in the tender. The auditor should check all orders of the state government issued on black listing at least in the two years preceding the date of tender. Any case of a blacklisted contractor participating in the tender process may be carefully rejected.
Tender fixing is one of the iniquitous actions that results in the filing of one tender by a single person. It may be understood that single tender cases are influence oriented acts of intimidation. One contractor threatens all in line for not participating in the tender process to have a favour to get the work. Certain rules are framed in this respect by the governments of different states. Somewhere, it is the case to reject the single tender and to go for re-tendering and in the case of re-tendering, the same contractor appears; there is no excuse to disallow that contractor. Negotiations with the contractor typically start to show when the tendered cost is higher than 5% of the estimated cost. However, regardless of the percentage over the estimate, this repeated single bid contractor needs to be addressed for negotiation in order to save money, and it is possible that a contractor will be chosen. The auditor may check to see if all such cases are in line with the economy and effective perspectives that such awards to the single bid are approved by the next higher authority of the tender floating executive.
The land on which the project or work is to be executed must be owned by the public/private or private executing agency. The logic behind this is that the estimation of execution must be done on our own land, or else the land is to be acquired beforehand. It has been observed in many cases that even without acquiring land, tendering for execution is done and legal complications are there in many cases to complete the execution. For constructing a bridge, say, approach roads are needed, in the absence of which bridges may not operate. Land for approach roads is to be acquired before going for the construction of the bridge. Expenditure on the construction of the bridge may be commented as unfruitful in audit in the absence of the approach road leading to this valued objection.
Any tender is valid for 90 days from the last date of receipt of the tender. The period may, however, be revalidated with the consent of the tenderer. These 90 days may be utilised for the processing and final award of the tender in some specific manner. Executive Engineer may take 20 days, Superintending Engineer 15 days, Chief Engineer 20 days and for all cases of government tenders, 20 days have been earmarked for finalisation of the selection. A balance of 15 days may be utilised by the executive engineer to finalise the agreement for the issue of a work order to the contractor. In certain cases, the auditor may see that tenders are not finalised within the 90 prescribed days and even a cost increase may be claimed by the contractor. Such cases may be commented on in an audit, including excess costs to the exchequer due to delayed finalisation of the tender award.
The audit may check comparative statements in all cases to locate the awards in favour of the lowest quoting contractor. In some cases, it may be seen that L1 (the lowest one) has not been issued with a work order for some recorded reason. The reason for rejecting L1 may be reviewed in an audit to determine the factual position. An award to the contractor is required to be issued to the selected contractor after the recovery of security money equal to one percent of the awarded cost of the tender.
The auditor may watch the penal provisions of the agreement entered into with the contractor. If the contractor does not complete the work as per the agreed timeline, a penalty may be imposed on the contractor, subject to a maximum of 10 percent of the value of the work. This provision is again described as discretionary under various legal provisions, but in any case, if the penalty is awarded, it should match the agreed percentage. The audit may find that, in some cases, a token penalty is irregularly imposed on the contractor. These cases may be suitably pointed out in the report. On abandoning the works by one contractor, any excess cost incurred due to retendering should be dealt with in an audit, verifying that 20 percent of the remaining excess cost of the work is realisable from the first contractor as a penalty. Suppose the awarded cost of the work is Rs 1 lakh and the cost executed is 60,000/ after which the contractor left the work. The balance cost of the work was retendered, say for Rs 80,000/-. The total cost of the work now amounts to Rs 1.4 lakh. The excess cost then is Rs 0.4 lakh, and so 20 percent of Rs 0.20 lakh, i.e., four thousand, may be imposed on the first contractor as a penalty.
While auditing tenders, the auditor should call for all finalised tender files to be checked at 100 percent. Audit should not miss checking the cases of execution where tenders have not been made because the value of the work is less than Rs 50,000/-.These cases are the moot points to grab institution funds illegally but in a legal manner. The Register of Security Deposit and Register of EMD, along with all refunds to the unsuccessful bidders, may be checked in the audit. In no case should the EMDs of all bidders be accounted for in the cash book on the date of receipt. The EMD of the selected bidder may be taken into account along with the security deposit after the work is finally awarded to the contractor.
An audit of civil works is partial if the audit does not certify the validity of the cost estimate and the tender papers. So, to conclude in any such audit assignment, the auditor should check all tit-bits of the tender and the details of drawing the estimate for the tender. “More the inflating estimate, more the assurance to the contractor to have the undue advantage.” This may be borne in mind throughout the duration of the audit.