Performance & Prudence Auditing & Assessment

Performance and prudence audits and assessments are essential to the successful execution of large, complex construction projects because they support accountability; they also may be required by finance or regulatory stakeholders. Without audits and assessments, major project participants can be effectively working in the dark. Ideally, such evaluations should be both prospective—to minimize potential schedule and financial impacts—and retrospective. Performance and prudence audits and assessments may assess corporate policies, procedures, and/or processes. They may be limited to a single project management function or may be applied to the full spectrum of project management functions. 

Situation: A regulated utility is in year two of what was expected to be a three-year construction project for a large power plant. A number of unexpected developments have led to cost overruns and schedule impacts. The client requires an assessment of project controls, reviewing what has happened and why, as well as a prudence audit of decisions to date to enable more reliable forward planning and a successful regulatory prudence evaluation.

Service: Pegasus-Global determines that a project controls assessment of cost, schedule, and risk management is needed. We assemble those project controls standards that are most applicable to the organization’s profile of capital projects to set the generally accepted standards for project controls procedures, processes, and practices to determine whether the organization’s project controls functions meet those comparative standards. The evaluation then extends to a prudence review of the decisions made on the project, including the decision-making process and structure to determine if such decisions were reasonable and prudent based on what was known at the time to support good project governance.

Results: Pegasus-Global identifies potential gaps in how project controls were implemented on the project. We then provide the client with recommendations for improvement, including an understanding of the strengths and potential weaknesses of all project controls, for example where and why cost overruns or schedule delays occurred as well as more realistic projections for remaining project costs. This can be presented as an internal report, outlining findings and recommendations, including an implementation plan, or it can take the form of testimony in support of a regulatory proceeding. The end result places the client in a position for successful project execution.

Risk Review

Not surprisingly, risk management is a major component of megaprojects. Pegasus-Global founder, the late Dr. Kris R. Nielsen, was a pioneer in changing how the construction industry looked at risk and received ASCE’s highest award, the Outstanding Project and Leaders (OPAL) Award, for his contributions to risk management. This award recognized decades of work in assessing cost and performance through sophisticated computer modeling that drove to the essence of whether risk was justified and was being appropriately managed in terms of eventual cost. This concept of risk management expanded to include top-down risk assessments that spanned a project lifetime and were capable of changing with the progress of a project.

Today, we continue to help clients improve their ability to manage risks by helping them recognize potential gaps, risks, interpretations, and expectations of their engineering, procurement, and construction (EPC) contracts. When it comes to project execution, the contract too often becomes an afterthought—management and the EPC contractor may gradually develop different interpretations of the contract. Then, when a dispute arises, the parties may find themselves caught flatfooted. To resolve such situations, we use our global expertise and experience on other projects of a similar nature, plus knowledge of other contractual provisions on industry EPC contracts, to assist clients in establishing the framework to improve form contracts and monitor already executed contracts.

Situation: An owner is preparing to hire an EPC contractor to complete a natural gas combined cycle facility. The winning bidder in the RFP process is a contractor that has not previously done work for this owner. The owner’s executive management team has requested that the terms and conditions of the contract be fully reviewed and understood in order to limit the owner’s risk exposure to the extent possible.

Service: Pegasus-Global uses its decades of experience in reviewing and assessing EPC contracts to examine whether this EPC contract includes appropriate provisions typically seen in similar contracts. In addition to identifying potential risk exposure to the client, Pegasus-Global identifies standard provisions that either are non-existent in the current contract or are vague and open to misinterpretation. We also make recommendations to modify future contracts and suggest appropriate methods to manage identified risks in existing contracts.

Results: The client has a functional form contract that puts it in the best position to execute projects by minimizing potential risk exposure and recognizing potential risks. This allows management to actively monitor risks throughout execution of the contract.