Case Studies – Consult Construction

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CASE STUDY

PROJECT PROFITABILITY
Distress
Indirect Tax Optimisation
Tendering and Contracting
Review of Internal Controls

Overview:

Company is working since long time in the construction business in a particular geography and has successfully completed numbers of projects. But Company is working traditionally and there are no proper controls or proper systems in place. And gradually looking to their expansion in multiple geographies, company feels the need to establish a proper budgeting system as a tool to control the operations.

Challenges:

We started to work and found that client had no proper reporting system, like –

No Daily / Weekly Cash reporting system
No Billing Engineer at site
Delay in certification of monthly bill of the Sub-Contractor that too with some hold amount
Mistakes in calculation, lack of clarity over extra items & its rate, missing statutory invoices etc. and other client related billing issues
No clarity on payments received from the client as the same are not cleared on a bill to bill basis. Adhoc deductions made by the client without furnishing proper justifications.
No regularity in receipt of the supplier bills on time.
Lack of certification by site incharge on supplier bills
No Proper staff co-ordination with site and HO
No controls over Payables and Receivables

Accounts department is not able to close the accounts due to above reasons

Solution:

We had identified the issues by taking up the same on a step by step basis by visiting the site regularly. We implemented a proper reporting system to start of in addition to ensuring other related controls. We also emphasized on appointment of a billing engineer. Several efforts were also made to bridge the information gaps between branch and head office. This smoothened the reporting and document movement along with its accounting and reporting.

We also started calling regular site meetings with the site people and educated them on the relevant control related issues. Post control implementation we regularly visited the site to look at the changes in ground level practices and smoothened minor aberrations in our control framework design.

We were thus able to prepare project wise periodical performance to know the exact revenue and profitability status at the end of each billing cycle. We also introduced the system of identifying the gap between current asset and liability at the cut off date.

Business Impact:

After our intervention, now the organization has started getting proper performance reports and knows the actual performance of the project. True reporting has helped them in taking proper decisions for present and future needs of the business. The decision making of when to buy fixed assets, or when to hire / dehire extra staff has become to a great extent optimum. The working capital and cash flow is now very much under control.

Overview:

Company is working since long time in the construction business and has successfully completed various projects. Company has been growing very fast and has taken number of projects at the same time in various regions. Nowdue to increasing volume, the Company does not have control over projects and has started facing fund crisis resulting into inability to pay its employees and creditors and time.

Challenges:

Now the challenge before us was to identify the root cause of this problem and suggest improvements for the future.
Some of the relevant issues which were discussed with the management and where management agreed to having some problems are as below –

Extremely low contractual rates in some of the projects
Constant Revisions in scope of work by some of the clients
Delay in certification of Extra item rates and subsequent rate amendments
Delay in client bill certification leading to delay in release of funds
Reductionin scope of work in some of the projects leading to idle resources
Constant Changes in location of Equipments & plants by the client
Lack of skilled staff and separate manpower for major work areas like Stores, Accounts & Billing engineer
No budget monitoring after the initial preparation exercise
Lack of proper planning while execution leading to delay in work progress
No existing system of supplier and sub-contractor bill certification
Unplanned procurement of material and services
Adhocfund distribution
Delay in payment of statutory dues
Site execution by both supply and measurement gangs at a single place
Unrecoverable advances to sub-contractors
Excessive Capitalization ofPlants &Equipments
Under/Mis-utilization of equipments

Accounts department is not able to close the accounts due to above reasons

Solution:

After analysis of the materiality involved in each of the above issues, we identified certain key areas. We also strengthened the budgetary control mechanism and were able to pinpoint andidentify the exact reasons for the fund crisis.

Some of the areas where we insisted for improvement were appointment of certain employees in critical control positions, setting up a follow up & communication system with concerned, setting up cash budgets, design payment release checklistswhich lead to improved control over creditor payments and consequently overall funds.Proper tracking of the individual resources, be it equipments, subcontractors, materials was done based on which the management was able to identify the project wise periodical performance report. Hard decisions like foreclosure of some of the projects were also taken.

Business Impact:

After our intervention and involvement with the management for over a year or so, organization observed various improvements. This was able to pull them out of a financial crunch and eventually grow stronger in the long run with minimum destabilization.

Indirect Tax Optimisation – Company Size – Rs.350 cr

Overview:

Company is taking civil construction projects in several states across the country. Nature of work ranges from Civil and Interiors to Catering and Hospitality management. The variety of work and presence under multi state VAT makes it extremely complex for them to assesses their tax liabilities under different VAT Acts. Management is wary in accepting some projects due to tax reasons.

Challenges:

The basic challenges identified by us were – Knowledge of provisions of Multi state VAT for wide spread business – Availability of experienced local professional for compliances throughout India – control the landing cost of project with regards to tax element – encourage client to change project strategies to gain more cost benefits – build up a control system which will ensure additional tax savings options with the client – tax structuring in very short span of time.

Solution:

We excelled ourselves on Multi state VAT provisions by making state wise templates for the client. Rigorous systems were put in place to get up to date with changing laws and differing state practices in works contracts. We built up a network of highly qualified VAT professionals across the country for properly managing local compliances. We advised in a number of ways in which the client could save taxes including splitting of contracts, alternate procurement strategies, and precautions on contractual terms etc.
Every time with each state, we made an extra effort for more and more tax optimization strategies project wise. All the risks involved in adopting a strategy were also identified and documented on day zero.

Business Impact:

With the passage of time we could result in bringing tangible benefits in the range of 3-5% of the project value due to optimisation of taxes in the most acceptable legal manner. With our association, client’s approach has changed drastically resulting in positive cash inflows.

Tendering and Contracting – Company Size – Rs.250 cr

Overview:

Company is a religious organization incorporated to set up a large scale township for its religious followers. This would comprise of construction of both residential as well as commercial complexes. However looking to its background the company had a very weak tendering, contracting and billing systems in place. The company faced major problems while foreclosing the works of defaulting contractors working under it.

Challenges:

Some of the issues which surfaced during our review were as below: –
Lack of revisions in the tendering documents created a decade ago to match with the current requirements – Lack if willingness on the part of the Tendering team to modify the existing documents – Pending legal issues based on the current contracting drafts in place – Sister concern framework whereby a lot of works were being executed through a sister concern – Lack of autonomy to the accounts department to question the bills certified by the Engineering department – Need to restructure the construction operations from Legal, commercial and statutory angle.

Solution:

We could study the existing contracting and tendering documents. With the help of our team members we could do a legal, commercial, technical review of the tenders and revise the same. We could present the necessary changes and convince the tendering team on the benefits of those changes. Besides agreements and contracts with sister concerns were simplified to a great extent. We could also do an indepth scenario analysis to take care of the structuring part. As in multiple structuring options were formulated based on which the management was very easily able to identify the best structure.

Business Impact:

The organization is better equipped to contractually face the defaulting contractors. A lot of balancing provisions have been introduced which has led to the contractor’s bringing down their quotations due to lesser risk exposure. The overall contracting structure has been simplified to a great extent. The new structure is found to be very tax optimum and has been able to match with the organization’s operational requirements.

Review of Internal Controls – Company Size – Rs. 500 cr

Overview:

Company is working in multiple commercial, residential and industrial projects both India and overseas. However the current control framework seems to be obsolete looking to increasing volume, spread to multiple geographies and technological developments. The company feels the need to overhaul the systems.

Challenges:

When we commenced the assignment we had following observations: –
Lack of proper Documentation and clarity within the team at different projects – Obsolete ERP system – Rigid mindset of the team as far as change in concerned – Decentralised systems in place – Lack of proper Internal Audit – Loose documentation and lack of workflow – Lack of basic monitoring over the financials and similar control related lapses.

Solution:

Review of existing Controls and documenting the same – Drafting of revised procedures in tune with the growing operations of the entity – Analyzing present modules and providing technical inputs for framing the specification / Requirements for new system – Rigid integration of present modules and new Project management system – Data capturing to generate the reports, MIS.

Business Impact:

After our team member’s involvement, the organization was able to develop robust systems in tune with the requirements of the business. A lot of foresightedness was built into the system with a view to ensure scalability of operations without any major modifications. The organization was also able to achieve real time financial analysis of all their projects.